NCR Voyix Corporation (VYX) Earnings Call Transcript & Summary

Well, thank you for coming back in. Again, my name is Dan Perlin. I head up the fintech practice here at RBC, and I'm delighted to have NCR, but really a friend who has been around for a long time in coverage probably for the better part of 10, 15 years, maybe longer than that, going back to the Metavante days. I'm just saying it's fun to see how this evolves. Mike Hayford, CEO; Tim Oliver, the [ CFO ] and soon to be CEO, I don't know, we'll say, how that works, but...

Designee.

Is that what you said designee?

CEO designee, which is slightly below training. We're still working on it.

So probationary period. So thank you both for being here. I really appreciate it.

So look, what I thought I would start with, just given where you guys are in this process, any update you can give us in terms of the strategic separation. You've made an enormous amount of progress, and it sounds like we might get some incremental information here in the next maybe couple of weeks or months. So anything there would be great.

So it's actually going quite well. We announced last September targeted a 2023 fourth quarter, everybody read into that, December 31st. And then about a quarter ago, we updated and said we're really shooting for the beginning of the fourth quarter, so October 1st. And if I break it into pieces, so the go-to-market side, how you build products, how you distribute, how you sell, how you support customers. All that go-to-market has been taking place, as you know, over the last 4 or 5 years. So we've already aligned by line of business. So that work was well on the way and that work is at this point, done. The team is ready to go and with the announcement that Tim taking over ATMCo and David under RemainCo, we've got the top leadership. We'll fill out the rest of that leadership with the executive leadership team and announce that shortly. But that's in place. The regulatory filings, so IRS tax ruling we need to get that. We don't see any issues with that. And then SEC filing, Form 10 went in a month or so ago. Form 10 is a filing document for a tax-free spin. So we're seeing a pure spin on the shares. We anticipate that going public, probably end of June. So by the end of June, that document -- and that will have some of the financial separation, so you'll be able to see remain -- SpinCo as well as RemainCo as well as the org and the teams will come out at that point. The last remaining piece is really the corporate functions of finance, HR, legal, IT separating those. Some of those with the long tail. I'd say IT, probably the simplest one is that -- or not the simplest one, much complex one is that we'll do TSAs. So we don't have separate GLs, we won't have separate HR systems. So we'll do TSA, again, very much targeted at October first week. Well, at this stage, sitting here in June, we don't see anything that would prevent us from getting to that date, so we're on track.

That's great. Can you just remind everybody when you think about the leverage for these 2 entities? And I know you have more detail when you drop the docs. But how you're thinking about each one being levered at the point of spin or when you spin one and then the holdco?

Yes. So we're around [ 3.6 ] right now. Tim thinks we'll get under [ 3.5 ] by the end of the second quarter. so we're dropping some -- so EBITDA is going up. We're having some quarters that were a little bit more challenged in the first half of last year. And then we said we're going to delever by $500 million before the spin. So we had 5 quarters to do that. The first 2 quarters, last quarter and the fourth quarter of 2022, we put $200 million of cash. So we have $1 million -- $100 million to go. And so we think we're really in good shape with the delivery. So I think going forward, we're going to be delever to where we thought combined and then each company is going to be slightly different leverage ratio.

That's right. RemainCo, keep a lot of the debt that's already outstanding. They won't need to place any new debt. We want to get them closer to 3x leverage when they go -- when they're left alone. They want to continue to invest in technology. They want to continue to invest in go to market. And so they need to see growth with that money. The other side, ATMCo can handle a little bit more debt. So it will be slightly north of 3.5 when we go out. We'll quickly get that paid down such that we start paying dividend out of that business relatively quickly after spin.

Okay. And the debt markets, i'm an equity guy, so I'm not always quite as in tuned. How does that look in terms of the ability to have that be funded quickly easily?

Yes, they're good now.

Appropriately -- like much better than...

It was okay, right, a year ago. The term loan A market wasn't really open. The term loan B market was expensive, which was odd and bond rates were -- the spread was very wide at that point in time. All of those things have gotten better since then and continue to get a little bit better. Let's see the portfolio of indebtedness we could take on is actually broadening out a bit. So whether we do secured bonds or unsecured bonds or term loan A or term loan B, they're all open now now. And so putting a portfolio together of $2.5 billion of new financing for its finco, doesn't seem a too herculean task at this point. That's going to have good cash flows. And people will see it in about a month's time that I think it can show relatively well in the rating agencies.

No, that's good to hear. And then just lastly, on this point, you've always said things are always on the table, right? Like you're moving forward with the spin, but like the debt markets are better now. So are things always on the table? Or are we -- and then...

I always think is kind of funny because the last this came out of the strategic review process. We concluded last September and decided to do the separation. And so each subsequent quarter on the earnings call, I literally say we're 100% focused on the spin, and we think the spin will unlock a lot of shareholder value and that's what the management team is focused on. Having said that, we and the Board remain open to all constructive ideas that will unlock shareholder value if we were to create more shareholder value. And it's almost like it's a rhetorical statement, right? As a public company CEO, the management team is always open to ideas especially to unlock value. And so we everybody knows you get pinged all the time, you're talking to people all the time. And so is exploring ideas, we just happen to say it every quarter. And given the environment, I'm surprised that we've only had certain rumors hit the media.

Digital banking.

Digital banking for one. And depending on where the rumor comes out, people believe it's true versus other places they -- but there can be half a dozen different rumors. We really think the spin -- we think we're undervalued where we trade today. We think the spin will clearly unlock that. One of the things that happened once we got on the road is we start talking about the 2 companies. People have to actually understand the 2 businesses, and they have to pay a little bit more attention to an ATM business, which really is not an ATM manufacturing company anymore. It's a payment network company, and it's a service-based company going to ATM and service only, high subscription rate, recurring revenue, increasing margin rate, increasing EBITDA rate and throwing up a lot of cash. So when you sit and describe that as a company, which we said mid-single-digit growth. If that's how Tim delivered, I would be very disappointed that Tim is the guy. I think as we get to the headwind of shifting to subscription and getting more and more customers signed up for the do more cross-sell with the Allpoint network, just get more and more scale. And again, that's -- that particular business is an environment that is getting less competitive in today's world. And we're in advantage of the balance sheet that we can do some things that others can't do. So I think that business is going to perform really well when you sit down and look at it and people look at it, they go, "Wow, that's a cool little company." And I say it's there today. It's going to be -- and then you go back to RemainCo, which is software SaaS platforms and retail hospitality, digital banking, it's a leader in all 3 of those segments. Platforms with upsell and growth capability, we think that will grow high single digits. And you sit and separate those, you go -- it's 2 different investment thesis, but 2 companies -- that was probably the thing thing that surprised us most as you start talking about ATMCo, people got way interested in that. And so we have people pinging us on a little bit of everything. But we look at the path to a separation of spin and [indiscernible] is going to have a good result for us.

Yes. And all the work we're doing now makes any other transaction easier, right? If something did come up, we're doing all the right stuff. And so it's very orderly, it's very well thought out. If somebody wanted a piece, we know exactly what that piece is worth at this point, and we know how to do that.

Yes. I remember distinctly when we were in Boston together, meeting with investors how interested they were in ATMCo. And I wasn't expecting that. I thought it...

That was one surprise coming out of there as people generally -- at least we felt discounted our value based on our ATM footprint, which is quite good, right? It's a leader across the board. It's a leader in ship share for full service ATMs. It's a leader in service. It's a leader in ATM as a service, leader in the Allpoint network. And it's fairly -- it's such an embedded solid business, it just keeps growing and stable. And now people looked at it, they go, wow, we didn't recognize it. And I always just say, okay, look at NCR ticker right now today, it's still there.

Yes. Exactly. It hasn't gone anywhere. All right. Well, thank you for that update. What I want to talk to now will start to get into the specifics of the business. But just in aggregate, as you sit back and you look across your total portfolio of assets in the current macro environment, how are those businesses performing? What do you think the end market looks like right now? Is it healthy, getting healthier? Or is it healthy? May be taking a pause, like how would you describe that to us?

Yes. So just at a macro level, we get into -- so 2022, we had a whole bunch of influences that were outside of our control, including people kind of forget January, February and last year was a pandemic. And so we were shut down in a number of countries, hit -- the Allpoint network in particular hit our businesses across the board. We dropped $100 million out of Russia very quickly in the first quarter. We had supply chain issues -- I mean so we had all these things hit us last year and then interest rates and then we had FX and then we always start looking at what's the economy if you look at the next 2 to 3 years, in particular '23 as we did planning. And so we didn't plan on a high-growth so whether you call it recession or call it relatively flat, we said some parts of our -- the world that we operate in is probably going to be a slightly negative GDP, others going to be slightly positive. So in that macro backdrop, so far, we've been positively surprised. We've had a little bit stronger -- we had a very strong first quarter in the ATM business, self-service banking. Allpoint volumes came back at the highest level they have been, even higher than 2019. So that has bounced back from the pandemic. We haven't seen -- some detected with the banks maybe get an alligator Amazon spending. We haven't seen that and it might be because of the products. So we have products that help banks become more efficient and save money. So as banks tend to look at places to save, it's not in self-service capabilities like we're sitting with ATMs. A lot of movement in ITM, so ITM stretches through tellers. The savings are getting are branch consolidations or [indiscernible] hours and brand helps us. So that has been really strong. Digital Banking. So digital banking, we haven't seen anybody stop digital banking program. Everybody's got the -- if you talk to anybody running a retail bank, whether it's big or small, it's all about moving customers to a digital platform, starting with mobile, going to a laptop. And then shifting -- second stage is going to self-service, ATM, ITM and self-service and then lastly, go into a branch. So they still like those 3 components, but they put them in those orders. We haven't seen an impact, probably came out slightly ahead on Silicon Valley Bank and First Republic Bank. Those footprints of ATMs ended up in people who are buying from us. So for Citizens, we did Silicon Valley signed an ATM as a service outsourcing deal right in the middle of that deal. So we ended up actually coming out ahead on that. And sometimes you come out ahead, sometimes behind. So baking, very solid. On the commerce side, retail continues that trend. We think people have to do an upgrade. Everything goes back to the point of sale, so everything gets tied to the point of sale. So getting people moving down a path to upgrade point of sale, going to what we call it the platform, giving them a migration path, which is not a big bang and then allowing the ability to upsell, cross-sell. We've seen hospitality, had a pretty good year in 2022. Some of that was bounced back from pandemic where the big chains were not opening franchisees, opening stores. So they continue to do that into '23. The enterprise side of that continued momentum. We did some things on the SMB side of our product and our distribution last year and that continues to pay dividends. So we actually '23, we're not expecting a huge year, but so far better than we had anticipated.

That's great. That's good to hear.

And then on the other side, on the P&L, if you go to the cost side that's a lot better. '22 is such a miserable year for all the reasons that Mike described. We suffered through a lot. We put plans in action back in the first quarter of last year to requalify chips to get cost out of the organization to try and figure out different ways to get our product around the world because transportation was killing us. And those changes now, the absence of the negative of those artificial pressures and now our reaction to them is driving really nice productivity. You're going to see it in our gross margin. I think you saw 2 points growth with gross margin expansion in the first quarter. You're likely to see that trend continue through the year, very nice expansion across here.

Yes. Now you had massive cost pressures to deal with. So again, it's interesting the timing of the spin because the business is pivoting on its own kind of legacy strategy that you're bringing forward at the same time that the debt markets are better, your leverage is coming down, opportunities are bound and then the cost structure gets better. So it's interesting that the timing of it is kind of coinciding as well as it is.

Yes, it could be fortuitous.

Yes. I mean could be. I did have a question though in terms of the pivot, right, to more of this recurring revenue? How much you've been moving and how much is left? So I think you said last quarter, you had $60 million, 300 to 400 basis point headwind in aggregate, not specific divisions but in aggregate. And so we just get the question all the time, like where are they in this journey Mike? Are we getting close to the end? Are we in the middle? Where are we?

Yes. So we -- the big moving parts right now are ATM as a Service on the ATM side. And so we used to be the long term -- taking the business, so as you know, 5 years ago, our recurring revenue as a company was around 40%. We're about 62%, 63% today. The ATMCo when it spins out will be in that range, 62%, 63%. And the goal is to get it to 80%. And we think line of sight to get 80% recurring is actually fairly -- it's very attainable. The uptick we've seen in ATM as a Service and saw the numbers in the first quarter, we think that will continue. So that's what's putting the drag on the top line growth. But we looked at a point, and we're -- not too distant future where now you're 80% recurring -- the bigger, more important aspect of that is instead of competing with ATM sales quarter-to-quarter or month-to-month or week-to-week. . You're signing 5 to 7-year contracts. Most of those are 5, some of those are 7-year contracts. So you're locking people up. It's a one-way direction. So once they go on our footprint, they're not going to leave you and not going to bid out every quarter. We do think the margins will go up over time with that, and that will become a very stable, steady business. So I think we would look at another 2023, 2024 as headwinds, and then it will start to flip around.

And it's different, Mike, right? Because we're through the soft -- on the banking side of the house, we're done with the software shift to recurring. It's all recurring. Now you can't buy our software unless it's on a subscription basis. So we have lapped that. And that's actually a net positive now. it's this hardware shift that we didn't comprehend we started thinking about software as a subscription basis. It's a big number at the processor point, most of these deals is about 22 months. So depending on how long with the lag is, how quickly we leg into the ATM as a Service, we'll discover what it does the top line. But you'll see the ARR grow double digits. So you see double-digit growth in ARR as we have lower single-digit growth in overall revenue. I think that will get us across that. We could sell it traditionally. Really nice growth rates this year. We came into the year thinking we'd be down revenue year-over-year because we shipped $150 million of ATM as a Service out of this year and into future periods. We said last quarter are actually going to be flat to up slightly for the full year even with that shift taking place.

Yes. It's an important distinction because I think people just look at the headline number and see 1 thing. And then there's a whole strategy pivot behind it...

Well, look at ARR and look at profitability because margin rate is going to go up, right? It's less hardware and more other stuff, profitability is going to go up.

Yes. Yes. I think keep in mind. So when we shifted our software footprint in banking, which we -- again, Tim started that 5 years ago, we completed a couple of years ago. That was a shift. So instead of booking software from perpetually, we spread it over 5 years. ATM as a Service is a shift and an upsell. So a 5-year contract that might have been worth $100 million that we would have booked upfront, it's now worth $250 million over 5 years. So $50 million a year. So I want to get past that second year on that individual contract. You're picking deferred revenues and booking them. So it's important to recognize that it's an expansion of the work that we're doing for an institution, and it dramatically increases the revenue on a same-store kind of sale. So it will -- once the tide shifts, meaning once we get through the headwind of not booking ATMs upfront, the back -- the tide pushing us would be very strong. That will be a very solid, stable business. On the commerce side, the biggest shift is shifting to next-gen products, Emerald being one in retail and putting it in the platform. And so there's a little bit of headwind as -- in the past, we would have booked an R10 license upfront or STAR point license upfront, and we're spreading -- again, we're spreading that not as -- a little bit more incremental curve on that one. But ATM business once it gets -- it's going to be a little steeper, will have more headwinds and then it's going to go a big push in the back.

Okay. Tim, I wanted to follow up on a point on margin expansion. I think you had 150 basis points in the past quarter. And can you just compartmentalize a little bit the direct costs that you talk about versus the indirect cost migrations. Because I think there's ones that are kind of just benefiting you from things getting better in terms of cost structure, but there's other things you guys are actually doing to make the business.

Yes. And some of those are both indirect and direct, right? There's a quadrant, a 4-block here. Last year was all about indirect cost. We didn't have control of our direct costs. We were a victim of them, and we had to react to a marketplace that wasn't helpful. So we qualified as fast as we could. We changed the routing. We never dropped the customer on their head. We made every delivery we needed to make. We made sure that we spent too much money to get that done, but we thought that, that was important. So those -- our air freight is down, it's down by about 75% for us. We're shipping far less. We had almost $100 million of airfreight last year. Containers are down dramatically, right, from $24,000 a container to something much more reasonable. Now we can move stuff on the water. We can make machines in Chennai and not have to make them in Mexico. And that's saving is a tremendous amount of money. The cost of those components is way down. Chipsets have come back down. We requalified places. We have no problem getting chips -- some of our competitors have said they'd have -- I guess they didn't requalify the way we did. We've got more optionality than we've ever had before, and they're much less expensive than they were. So I think we derisked where we go through a phenomenon like the one we just went through, I think we're at less risk going into that. So those will not only because the market got better because we did a lot. It's going to give us a really nice lift this year on the direct cost side. Last year, brutal, this year, much better. I think $80 million of cost will go away just the absence of the negatives. And I think we'll drive another $80 million to $90 million of productivity ourselves by doing things better. The indirect side, I expect it to be relatively flattish this year. I don't expect much in the way of productivity. We had such a great year last year. We took up a lot of cost -- we run main people pretty thin. There's still some upside. We came into this year thinking we had about $300 million of excess cost going into the spin. Our hope was that we take some of that cost out -- most of that cost out in anticipation of the spin. So we'd offset any negative synergies as we -- as we spun out, that's well underway as well. And I think in the second, third and fourth quarter, you're going to see some relief as well on the indirect cost.

Okay. That's great. You mentioned free cash flow earlier. I think the guidance for the year was $400 million to $500 million. The first quarter, it was $209 million. But the implicit second quarter sounded lower, maybe you can walk that ...

That was Tim's math. I committed to $500 million at the high end of the range. I just did $200 million. The midpoint of the year to be $250 million [indiscernible] but it's zero sum, right? Cash flow zero sum.

I said, this one we'll reconcile...

We did a tremendous job on working capital in Q1. We had to because the prior year, we had 3 quarters of not any cash flow. We did $200 million in the fourth. We said we're going to do that. We said we did $200 million in the first. We did that. And now it's what do we do between the next 2 quarters to get us ready to spin, I think the $50 million is a very conservative number by a CFO who thought halfway was fine to the guidance. I don't want to take my guidance up for the full year. I think we'll have a better second quarter than I originally thought.

Okay. That's good to hear. We would hope that's the case for you. So let's get in some of the businesses. So retail, we talked a little bit about here. You had a 4% constant currency growth. You're shifting $15 million or something like that, which was a 3-point headwind. Here again, like there's a dynamic here. We want to make sure we tease out. But you're seeing really good growth in platform lanes. Your commentary on demand and scope seems good. So just maybe talk a little bit about more specifically what you're seeing in the retail vertical.

Yes. Again, I think like everything else, for our business, the retailers' business changed dramatically coming through the pandemic. There's kind of multichannel, omnichannel world kind of came on them really quickly when it came to whether it's delivery, whether it's order online, whether it's pickup. And so what we're seeing is, so they had to spend money to get there, but it was a great elegance. So we're seeing them all step back now and say, long term, what do they want for a software stack. So a lot of the interest in that. We think the platform strategy that we've embarked upon is the right strategy. And so we disclosed platform lanes or platform sites and hospitality. That's just an indication that we're getting uptick and getting adoption from our installed base. So that's important to us to hold on to those POS. We think POS again is the "some of these would core the other day, the core technology that they run their store, the restaurant on, keep that put them on the platform -- platform for us was into a subscription. But then it also allows us to plug and play add on some things, add on like loyalty module, add on a payment module, add on front-end glass. So add on different capabilities and get upsell and our plan is to upsell literally across the board, about 3x in each customer, same-store customer. And then at a payment at some point, which drives again, transaction revenues, volumes and adds profit to us. So we've seen those things play out. We'd like to push those faster, but we also recognized particularly enterprise side of our business, both hospitality and retail. People don't want a big bang it so that migration to a platform allows them to incrementally move that. And we've seen that play out pretty much as we expected.

That's great. If we pivot over to hospitality, which is arguably, I think the one that gets most of the attention around the crowd, crowded at the point of sale, Toast, gets talked about a lot. I mean we have a bunch of other companies here that are going to talk about it too. But I think it's important to draw the distinction around what is your sweet spot in and around the hospitality space within Aloha. So if you would maybe spend a few minutes on that.

Yes. So if you draw the continuum, so Toast has done a really nice at the entry level, single restaurant table service restaurant, more of a simpler kitchen, and they've really simplified the integration. They've frankly made us a little bit better and how we've bundled our product, how we've integrated in payments, how we've integrated in a handheld device to order a table, how we've integrated in online ordering. But they're really working in single restaurants or multiple restaurant kind of small. Our sweet spots on the opposite of the spectrum, it's the enterprise that's a large-scale thousand-store QSRs or 100 store, 500 store table service like a Buffalo Wild Wing sit down, where the complexity of the kitchen, the complexity multi-store, the complexity of reporting, forecasting, projecting becomes more important. And that's what Aloha does really well. We've held on to that market position and done well on that. The top end, we call enterprise, 50 stores or less -- sorry, 50 stores or more for enterprise; SMBs, 50 stores less. 40, 50 stores start to feel more like an enterprise account where you have to be able to aggregate all your stores, look at your store sales last night compared to last week or last month, be able to aggregate and manage your resources and your staff. So in that segment, we've focused and continue to do well. Toast is growing. We're actually growing the SMB market as well. It's a very fragmented market, and we think there's a lot of room yet for growth.

Awesome. Let's just pivot the digital banking to round out that part of the company.

And have we sold that.

Well, I don't know it was on the tape, but I didn't get the actual press release or the Tweet. So this is a business, I think, doing pretty good. You've got user metrics that are up. I think the revenue kind of in the quarter trends were a little bit flattish. So like the dynamic and reconciling those 2...

Yes. I mean -- so digital banking had a little bit of a onetime in the first quarter of last year, which -- so we track user accounts, we tract ARR. What's important to us is to continue to win in the marketplace at -- so we had 11 wins in the first quarter. We had 1 really big win so far in the second quarter that we announced SECU $50 billion credit unions -- second-line credit union over 2 million accounts. So we feel really good about that product where it's positioned competitively. What we're starting to see is some of our competitors. So we actually make money in that business.

You do have a good margin actually...

And we've made money. We think it's maybe because we run the business well, but also the platform we have at is a multi-tenant platform in a single code line. When we go to [indiscernible] I always talk to the potential client about, okay. When you sign up, you want to sign up with a provider where every time somebody gets an upgrade or future function, you get the same thing. So every single month, when we do upgrades, everybody gets the upgrades. It's starting -- people are trying to figure that out and trying to figure out the benefit that, that provides to each one of them. It also makes them more cost effective for us. So that's been a great product. And as you know, it's been quite a turnaround in 5 years. The team is very excited. This year, -- we pumped more money into sales and marketing because we do have what we believe is a better footprint out there with digital bank in a core in mobile, Terafina which is online origination, just a really good suite of products. And so we think that growth is going to trend towards upper single digits and then get into double digits heading into next year. And the account growth is going to indicate that.

Yes. So the account growth drives about 2/3 of the revenue. And if you look at the ARR, it grew double digits as our account growth group. Mike just said 1 win already gives us 10 points of growth and we get those guys rolled out for next year, right? So there's another 1/3 of revenue that is onetime revenue associated with onetime software sales or CSP sales, sometimes Terafina sales. and last year, a [ brake penalty ]. So there's a termination payment that came to us about $4 million in a business that's small, it's enough to move the needle. It's all profit when it rolls through. So the absence of that hurt a little bit. But -- we'll describe every quarter that goes on in that kind of that onetime sales base. So you can feel good about the growth in the ARR.

Cool. So we got just under a minute left. I mean we talked a lot about banking, self-service banking. So maybe just spend a minute on payments and networks. I mean that was a very strong quarter you guys just came off of. So maybe just talk a few minutes on the trends there.

Yes. So little bit payment network had the benefit of having a very difficult first quarter of 2022, right, pandemic in a couple of months of that quarter. We do a lot in the Crown countries, New Zealand, Australia, U.K., Canada and those were impacted dramatically. So those volumes have come back very strong in the old Cardtronics business for the Allpoint network. We've added more -- so one of the things we don't talk a lot about is as we add more institutions who are issuing, so we talk surcharge-free network, the issue actually pays us the fee. So when we get more cards out that are above, they direct people to Allpoint. So that's starting to grow, putting more devices in the field, traditionally more monoline cash out. starting to do other products like cash in, pay bills, transfer money. So it's really quite frank that network effect in starting to perform.

That's awesome. Well, it looks like you're making fantastic progress towards the separation. If that happens, great. If the whole thing goes great, and the business transformation that I've seen since I guess, 2018, has been pretty remarkable. So thank you very much for being a part of this journey with us. So thanks. Thank you for being here.

Good to see you. Thank you.