NCR Voyix Corporation (VYX) Earnings Call Transcript & Summary

Well, good morning, everyone, and thanks for coming back. My name is Dan Perlin. I head up the payments processing and IT services practice here at RBC. And I'm delighted to have the now team of NCR Voyix. As I said in the earnings call, I know it was a Herculean task, but you are here and separate and distinct. We have David Wilkinson, who is the anointed CEO; and we have Brian Webb-Walsh, who's the Chief Financial Officer. So thank you both so much for being here. And again, just congratulations on what was, I'm sure, a long way.

Thank you, Dan, it was. It was. Thank you, Dan.

Thanks for having us.

Because it's still very new in investors' kind of lexicon, what I thought would be helpful is if you could just start off and kind of give a brief overview of really what Voyix is today.

Perfect. So Voyix, as you described, Dan, is the -- one, what ended up -- we end up spinning off the ATM assets, but it really ended up to almost be a complete 50-50 split of what we were as NCR. So what Voyix is today is a fintech. We're a platform-led software and services company solely focused on platform, software and services. So we -- there is a bit of a hardware business inside of there, but think about us as a fintech focused on software and services. The -- we serve 3 primary industries. We have the digital banking side. So think about retail banking, through our digital banking application, we're the largest independent provider of digital banking assets in the U.S. We have our retail business that serves -- that's truly a global business, but serves grocery, mass merch, convenience and fuel and department and specialty. And then our restaurant business, which is largely a U.S. business, but we support and follow the big names around the world. We -- in all of those businesses, we're the market leader. In the retail and restaurant side, it's from a point-of-sale software. So think about that very sticky point-of-sale software application. In retail, we're also the leader in self-checkout, have been the leader in self-checkout for 20 years. So we're really proud of where we sit from a market standpoint and believe that it creates a really strong foundation for us as we launch into this new world as NCR Voyix, focused on those industries with our software assets.

Great. One of the few companies really that we follow in many instances where we're actually truly touching the product. Thank you, self-checkout.

So as we've started with pretty much every company at the conference, we're just trying to level set the whole process of what this macro backdrop or demand environment looks like. You have operations that touch a lot of different things in a lot of different geographies. So maybe you could just frame it for us as to what you're seeing in that context?

Yes. There's a lot of noise on the macro environment, as you described, the macroeconomic conditions. We've seen -- we're in an interesting spot. So our customers, we serve more of the enterprise customers on retail and restaurants. So maybe a little less volatile to some of the macro conditions. And actually, the macro conditions are playing into our favor in many cases. It's a little bit different on digital banking. I'll speak about that differently. On retail and restaurants, the -- our customers are seeing strong demand. And in the grocery space, as an example, they came off of record compares coming out of COVID. All of their sales were at all-time highs. They were passing on price to consumers. That's how they were able to maintain margins with rising food costs and other things. They've kind of plateaued in the ability to pass price on, and now they're all scrambling how do we make money. That moneymaking efficiency play for them is really about technology, how they automate processes in the store, how do they think about using technology differently to differentiate their customers' experiences. And that plays really into what we're providing on the platform side of what we do on software, and then it plays into self-checkout as an example in grocery. So we're seeing the reports coming out that holiday sales should be high. I'm hearing strong foundational growth numbers coming from most of our clients and in grocery and where they're looking to consolidate, they're looking to us. And the restaurant side, we're with the big enterprise brands that continue to grow with Todd Penegor at Wendy's, and -- we're the fastest-growing burger chain in the world. So Todd is still growing. Just this week I was in California with Brian Niccol at Chipotle and he -- they're growing. So you look at all these companies that we serve and they still have a growth story. And I think a lot of the macroeconomic conditions are playing into their hand in terms of the value that they provide and where they're looking to get efficiencies, they're looking to either consolidate vendor spend or get better efficiency out of their existing spend and they come to us. On digital banking, the race for deposits is becoming a story about the consumer, you as a consumer of a bank, your experience that you have with your mobile device, really, that's the bank. That becomes the branch. And so more and more dollars are being pushed towards that digital experience. So that's where we're really seeing that battlefront play out for us as where banks are looking to differentiate that experience on the digital side. They're coming to us where we've modernized the platform, moved it all to Google Cloud, open the APIs and created a competitive product stack around that.

No, that's great. So let's go into it a little bit more deeply. The -- what we refer to as commerce, and I think you kind of referred to that as well, which a lot of times is kind of the...

The combination of retail and restaurant?

Yes, yes. I've been kind of consolidating those 2 just to kind of keep myself honest here. But the story there seems like it's a positive mix shift. Software services payments like, moving in that direction. As an outsider looking in, sometimes it's hard to realize like where you are in that process. How much revenues has been shifted. What does that actually mean in terms of revenue growth or the -- the lack thereof in one period or another because of that transition. So if you wouldn't mind maybe teasing that to life and bring us up to speed as to where that process is and that journey is? We can break it apart into the various components, but it would be helpful just in aggregate to start with.

Yes. So 56% of our revenue as a total company was recurring in the most recent quarter. We're looking to get that to be 65% by 2027, and we're looking to make steady progress as we go. Recurring revenue is much more profitable than the nonrecurring revenue. It's like a 46% gross margin on the recurring side. Nonrecurring is 18%. So really, that mix shift is really important. And the way we do it in the commerce business, retail and restaurants, is by connecting our customers to the platform by shifting them to a pricing model and a contract vehicle that is a SaaS-based model and then cross-selling and upselling. And that ARPU, average revenue per unit, will expand over time 3x to 4x as we do that over a couple of years. And as we sit here today, we have a little over 10% of our retail customers connected to the platform. We have closer to 20% on the restaurant side, and we're trying to get that to 40% by 2027, roughly across both businesses. And that's the key driver of the growth. You mentioned the kind of impact in the short term for going upfront software revenue and taking it over time, that has a 3-point negative impact on the company's growth rate in the most recent quarter. And going forward, we're projecting fourth quarter into next year, about a 2-point impact. And then we believe it normalizes in our rate after that, and that's when we start to see the company's growth accelerate.

Yes. Okay. I know you laid out some kind of longer-term targets, '23 to '27 in compounded growth, I think retail was 3 to 5 restaurants, 4 to 6. Pretty close, a little deviation there. But one of the things that struck me as I was looking at that initially on the KPIs is that the ARPU expansion is like 10x that of the location growth. It's pretty material. So there's a massive discrepancy between those 2. I'm just wondering, I get the ARPU expansion and maybe you can elaborate on it even more, but like why not more location opportunity on both of those fronts?

Yes. So we created the model through 2027, like you said, mostly based on ARPU expanding. And that's well within our control as we work with our customers to solve pain points for them, get them connected to the platform, get more wallet share, working with our customers that's largely in our control. We also had modest growth in sites, but that's an area of opportunity where we can actually overachieve. And we didn't base the model on having to get significant site growth, but we can -- we are focused on that, and it's an area of opportunity to overachieve.

So the message, I think it's upside down to the model.

That's exactly what I was going to say. So like the message you're telling me is that there's -- it's a conservative layout there. You've got a lot of things in your control when it comes to ARPU. So let's not get over our skis yet on location count?

Yes. And we're going to -- like Brian described, we'll continue to invest in our existing customers, making sure that they're happy, that we're supporting them well and we have them on the journey. As we do so, we are finding like we're seeing in digital banking, like we're seeing in some of the announcements in the last earnings release around the retail and restaurant, we're winning. We're also winning net new customers. We're just not relying on it to make our model work for us.

Is it also a function of the fact that you have these large enterprise clients? And there's just so much more opportunities you can kind of put into the existing footprint?

Yes. I mean if we even if we said we're going to go after net new customers, it might be a couple of handfuls of customers. So it's not like we're out building this massive base. We are the market leader in point-of-sale software in both of those markets. So we have a large installed base. We want to change the economics, we want to show them the path forward. And if we go win a few new customers, we will, but it's just -- it's not going to be needle-moving in terms of the net new number of customers. So the big sites, it will create a little bit of lumpiness. But overall, we'll continue to take share. And I believe we are in the other markets that we serve.

Yes. No, that's great. Switching gears a little bit to digital banking in this context. The message and the story there is a little different. So this mix shift, it sounds like there's a reacceleration kind of concept to be played out. And you definitely are moving from targets that are like mid-single digits to low-double digits through that horizon period we just talked about. So maybe articulate for us what are the key attributes that are going to get you kind of from the mid-singles to the low-doubles? And also, again, just like the product road map that might get you there as well?

Yes. So we -- the last -- this last earnings, we had 7% growth in digital banking. We described that we expect to exit, to your point, high-single, low-double-digit growth, and that will continue into '24. There's a bit of a history story behind why we're seeing the growth now. We had 36 net new adds over the trailing 12 months. So we're winning share in this space. We weren't always winning share. I mean that digital banking product for those that have followed us was one that NCR acquired years ago was largely under invested and became the donor pool for a lot of these start-ups that have come into this space. We focused about 5 years ago on re-platforming that entire product. Just last year, we finished moving the last of all 20 million of our active subscribers into Google Cloud. And when we did, if you think about that product, we opened up the APIs of that product. And what that does is it allows a lot of partners to wrap themselves around our core ecosystem. So we have over 200 partners that can provide capabilities and services in addition to the things like we've done, we've added Terafina, which adds new account opening. And we've done some other things around bill pay and peer-to-peer payments and card management that all become embedded into that application and allow financial institutions to create a better experience for you as a consumer of the bank branch. So the product itself is one that will embrace all of the innovation that's happening in and around the industry, the investment that a lot of other fintechs are making, we can use our digital banking application as the portal to the consumer for some of those applications. When we do, obviously, we take a fee on the transactions that pass through that banking application. So we're going to continue. We started. You saw us show gross margins down a little bit in that space. That was all sales and marketing. Investment will continue to pour. I'll say we're pouring gasoline on the fire. We want to continue to grow that business. We have a strong backlog from the 36 net new customers that we've added. We're renewing at 95-plus percent. We're seeing pricing stabilize in that segment as well. We feel really good about that business and the prospects for growth long term. And it's a combination of us having a face to the market and investing in go to market. And we just have a really good product now. It's stable. It is feature-rich, and we've opened up our ecosystem.

Yes. So maybe take a step back there because -- I agree with you. I remember -- I mean, goes back to when you guys actually acquired it. I remember those days. I remember that business before. We covered it even at one point when it was public. So it kind of dates me a little bit. But that evolution has been pretty significant. And as we sit here and we think about where the demand is from banks and what they need today, I'm trying to reconcile like the products not only of today that are getting them in terms of like demand deposits and things of that nature, which they very much need, but also like what's going to be the driver for the next 2 to 3 years that you kind of have in your tool kit or already you're investing into for the next, like I said, 3 or 5 years?

Yes. The user -- I mean, this sounds pretty basic, but just -- it's an app. So the user interface for us, we've refreshed the user interface. We're launching our new UI in quarter 1 of next year, and we'll continue to roll that out over the course of next year. We're hearing from -- there are a lot of consultants that play in this space that advise institutions on what they -- how they -- what they should buy and how they should buy it. We're hearing very positive feedback from early previews of what that new user experience will look like. So just making the product more usable, while it's not functional, in a sense, but it just makes it a better product overall. The account opening module, we're continuing to add more capabilities to the new products that can -- the applications and the ease of -- the accuracy of the applications, the lack of audits that need to be done, the real tangible benefits that come from the pace and the velocity of new account opening, we still see that as a critical item. And then more looking forward, we had our Accelerate conference 4 weeks ago in Nashville. The largest is our digital banking user conference, the largest one we've ever done, almost 1,000 people there, prospects and existing customers. And as we were sitting down with clients, a big -- as they're battling for consumer deposits, the kind of the small business and business banking and the commercial banking comes into play as they battle for deposits. So where you'll see us continuing to invest is in some of the commercial and more business banking features within our core product set.

Yes. I asked because like we were listening to our bank analysts this morning, and a lot of the kind of regional and community banks, like they paid up to get deposits so that other people didn't worry about capital risk, right? And so as those anniversary off into next year, it's like 100-plus basis points or more that's allowing them to free up their capital. And so they're probably going to pivot on the product side. But it sounds like you guys are already there for what they're looking for next.

Yes. We're getting there. We're getting there.

Fair enough. So the other thing -- and maybe this is a question for Brian. The ARR is expected to like almost double in that horizon period. So maybe can you just give us the building blocks, if you will, as to how you see that building out and what kind of visibility -- and maybe also, here again, like as an outsider looking into this business, what should we be looking at for proof points that we feel comfortable with?

Yes. So specifically to digital banking?

Yes, just on digital banking for this.

Digital banking, it's more adding users, and that comes from winning new customers and keeping what we have with good renewal rates, which we're currently experiencing. Over the last 12 months, we've had 36 net new wins. And so that's really the driver. ARPU increases a little bit here, but it's mostly coming from the users. And we have a good backlog as we sit here today. We have decent visibility into Q4 and into next year. So we're confident in our ability to drive high-single-digit, low-double-digit growth rates.

So let me -- David, let me ask you a bigger strategic picture question here. I mean, digital banking is a fantastic asset. But it's kind of like which one doesn't go with the other, so to speak, and you've heard us all talk about this previously. So like in the strategic review process, now you guys are separated, but then there's kind of your hat that you have to wear now to think about unlocking additional value. How important is keeping digital banking in the family, so to speak? Or if presented with an opportunity, are there restrictions that would keep you from jettisoning it if the right opportunity came along?

Our focus is on maximizing the return to our shareholders regardless of what that -- what form that takes. So you're right, we have gone through a strategic review process, and we just finished the separation. And we believe that the formation that we've taken coming out of this process is the right formation to unlock value. That being said, we've also just gone through this process, and we set up an ability to separate NCR, as massive as that task was, effectively into two $4 billion revenue companies. So we've learned from that in terms of how we can set up companies to give us ultimate optionality. So we're keeping all options open. We don't have any restrictions on what we would do. We're really focused on right now, just for digital banking, specifically creating a business that is durable, sustainable. And we have an opportunity right now to take share and we want to capitalize on that as quickly as possible, completely. There are no restrictions for us.

Cool. Let's talk about the competitive environment more broadly. So this is not just pertaining to digital banking, it pertains to retail and restaurants as well. Maybe let's jump back a little bit and go to restaurants. So you definitely are in the enterprise stratosphere. So that removes some players out of it. But there are still some other ones there that are trying to knock on the door a little bit. So do you feel like that has changed at all in the past 12, 18 months? You've seen the same people, some are trying to bring out new software. We had them here the other day, yesterday. So I'm sure you know who we're talking about. Are you seeing them in the market yet? Not so much? And then how do you think about some of the ones as you move downstream a little bit?

Yes. Our restaurant business, as you described, it's really 2 pieces. The enterprise business, and we call enterprise 50 sites or more. And then SMB, we call 50 sites or less. So -- or 49 or less, however you want to do the math, greater than equals. So when we look at the enterprise side, it is the big brands. And what they really value is our scale and our ability to not just have the tech they need, but service capabilities to wrap around that to provide complete solutions to them. So some of the competitors in that space that are just -- are challenged with the scale that it takes to support some of these large enterprise clients and really create that value for them on a broader scale. So we see -- I haven't seen that competitive landscape change quite as much, but also our ecosystem, the way we approach the platform, once we get our customers connected to the platform, we're pretty open. So there are -- there's a lot of great tech out there that can help restaurants that we actually help with a connection to our platform to unify that. We unify the consumer data, we unify the transaction data, the pricing, and we allow restaurants to have a more efficient operation as they would take an order online as an example, route it to a store, run it right into their kitchen system and give real-time status back to the guests. We enable that, where if you're just doing point tech solutions, you wouldn't have that seamless integration. So we enable a lot of the tech players in that space as well. And then on the SMB front, we'll run into -- that becomes a very fragmented market where -- there's a lot of players in that space. We tend to gravitate towards the more complex side of SMB. So either a complex restaurant itself or a multi-site operator that's trying to grow. And when they start to grow and you start to think, I might need a tech person or an IT team or I really can't afford it. That's where we add a lot of value because we have the tech and the services to get you up and running and help you grow into -- if you're a 10-site chain, you want to be 50, or 50-site chain, you want to be 200. That's where we find we add a lot of value. So we're really focused on that segment of the market. We think in doing so, we're building a taller wall or a wider moat around our enterprise business where there's a little less competition for us.

Yes. Fair enough. What about payments penetration? That was a big part of the story early on, how you feel about it today. Seems like more of that would happen at the smaller, let's call it, the 49 or lower kind of stratosphere. What are you -- what are you seeing now?

That movement or that sales motion for us in that SMB space is payments-led. So very similar to what a lot of the -- even the people focusing on single sites would do, we're payments-led, we're seeing 90-plus percent attach rate for us in that segment. And we're gaining -- we're net gaining share in that space for us too. The -- you're right in that that's more logical space, but we are seeing wins in the enterprise side too for sites. We're continuing to push that. We are going to accelerate that. That's one of the things that we're excited about and the focus for us as a new company as we come out, we can get really focused on how do we invest in the right areas in both sales and capabilities so that we can penetrate retail and the upper end of restaurant. But you'll see us focus on that. You'll see KPIs that will come out around -- or payment sites, you'll continue to see that and you see penetration in the other segments as well.

Okay. Great. Brian, you sold, I guess, some payments assets a little bit. So maybe -- I say that, and it sounds kind of like you sold really businesses, but maybe can you just explain exactly what you sold and why you did it? Because I think it was some confusion around the quarter as to what that was.

Yes. So they're noncore payment assets that have nothing to do with retail and restaurant attach payments. And they would have been in the other segment as we created Voyix, so it didn't impact the revenue in retail and restaurants. They -- there was a concentration risk, investment was needed. And it was better from a focus perspective, in a going-forward perspective, to divest those assets.

Okay. Okay. So let's stay on the numbers for a second and talk about margin expansion opportunities. Here again, you have a trajectory that is calling for 10% to 12% on a compounded growth basis, 400 to 500 basis points. I mean, this is a lot of margin to achieve in, I would say, a relatively reasonable amount of time. It's not super short, but I mean, it's pretty elevated. And so how are you getting there? What do you think are the bigger challenges? What are the easy things that you kind of knocked down early? And then is there some sort of cadence that we can kind of keep in mind?

Yes. So overall, on the high end, 500 basis points of expansion, 200 of that comes from cost cutting, 300 basis points comes from mix shift, so digital banking growing faster. And then within retail and restaurants, software and services growing faster and hardware declining low single-digit. So -- and that mix shift will happen pretty evenly as we go through 2027. On the cost takeout, we're actively working 3 major work streams around cost. One is around our corporate footprint. Looking at real estate, looking at where we put certain skills focused on low-cost strategic value centers and just having a corporate footprint that fits what Voyix needs. So that's well underway. We have another work stream around our hardware, and it's simplifying how we design our products to improve our hardware margins, and that will benefit us starting next year. And then the third is really looking at our services organization, removing some overlap. There's skill set differences that we need as stand-alone Voyix versus the combined legacy NCR. Our skill set isn't quite as complex. So that's an opportunity. And again, shifting to lower-cost locations where we can and doing more through remote solve. So all of those programs are underway. We expect to be able to maintain our margin next year at 17%, which is the starting point. As we digest the dissynergies of $45 million to $55 million of standing up both companies, our portion of those dissynergies is $45 million to $50 million. So we'll be able to overcome those and keep margins flat. And then from there, think about pretty consistent improvement in EBITDA margin as we go through 2027.

Okay. I don't think of you guys necessarily as an AI company, but it's the topic du jour at this conference. And so are there opportunities for you to utilize both AI holistically, either in the customer management side with generative AI or just AI internally in terms of more efficiencies, cost management, margin expansion longer term?

Yes, there's both. So embedded in what Brian described in some of the cost savings and other areas around getting more efficient is the automation side of what we do. So we provide a tremendous amount of, we'll call it, help desk and remote service offerings for retail and restaurants, part of that full service offering that we have. And so there's a big opportunity there for us to drive automation through AI as it relates to that. The basic things, I was with the CEO of Google Cloud, Thomas and I were having a conversation about how Google has leveraged it internally to do some things like just combing through contracts. As we're making this shift from perpetual license to SaaS contracts, there are multiple contract vehicles we have with each customer, how do we get more efficient at unifying that and creating a better sales motion and a better experience for our clients. So we're going to leverage some of the AI with some of our big partners to go do that. On the customer side, the easiest one, you mentioned self-checkout earlier. The easiest one to think about is how we're leveraging computer vision. We have a -- we'll call it a retrofit to our market-leading installed base of what we call the halo. It's the computer vision, the ability to recognize items with computer vision. That's all leveraging AI models at the edge. So we're embracing AI. All of our clients are looking to automate or drive better use of the data. And our platform really unifies that data and makes it accessible for them to use in AI applications as well. So we're excited about what that means. And we have an Edge product that it's the ability to think about edge computing differently doing virtualization and containerization within the store or the restaurant. That's unique to what we do as NCR Voyix. And you think about the amount of compute required to do AI and automation at the edge, nobody wants to actually put more compute in the store, but you have to. The analogy is like having your Tesla have to go back to the cloud to figure out that it's going to either run a red light or hit another car, you would never do that. It has to have edge compute. We have a retail and a restaurant tech stack that's not ready to do that. We have the answer for that -- that side of the market too with our Edge product.

That's interesting. Okay. I hadn't thought about that. That's a good point. When we think about where you are in terms of leverage today, where are you thinking you're going to end the year? How should we be thinking about that going into next year a little bit? And I think the targets you guys have talked about are like 2 to 3 turns. And so like why is that the comfort zone?

Yes. So we'll end the year, we're targeting around 3.5 turns of leverage that's consistent with what we said at Investor Day. And we also said, by the end of next year, we want to be around 3 turns. And I think 2 to 3 turns, which is a relatively wide range to maneuver in, just given our recurring revenue, the visibility we have around our business model, kind of the cost of debt, we think that's the right leverage right now. And one other point I'd make is our debt stack is inherited from the legacy NCR. So it's attractively priced relative to say average rate is like 5.4%. It's 90%-fixed. So we feel pretty good about our debt stack, but we do want to improve leverage as we move forward in the near term.

Yes. A lot of companies we cover would love to just buy that off you if they could.

Understood.

All right. So the last minute we have here, I want to just talk about holistically how you think about capital allocation. We talked a little bit about leverage here, but like going forward, there's an M&A strategy in place. What are you -- kind of what are the high hurdles? How do you think about that? And then as the company matures a little bit in terms of its growth cycles over the next 4, 5, 6 years, just how do you envision that playing out?

Yes. As Brian described, the priorities are reinvesting in our product. At our core, we're a product company. So we're going to build great software, and 90% of our CapEx goes back into our core products, our core software and platform products. The second priority, as you asked the question to Brian, is really delevering getting us to something that starts with the 2 is our preference in terms of our goal. And then from there, we look at tuck-in acquisitions. We've done that over the years in terms of really looking at buy versus build decisions related to the portfolio. But it will be things that are in and around our platform. So you saw us on the digital banking side, we had Terafina that gives us account opening capabilities. In the retail side, we made an acquisition to give us grocery mobile ordering. So you'll see us do those kind of things that ride our platform that allow us to monetize our base and just grow ARPU through adding. That's where our acquisition strategy we focus in the short term.

Okay. Great. Well, we've hit the mark. So thank you both so much. David, Brian, thank you so much for being here, and best of luck to you. I'm looking forward to covering you in the future.

Thanks.

Thank you.

Thank you so much. Appreciate it. All right.