NCR Voyix Corporation (VYX) Earnings Call Transcript & Summary

Thanks, everyone, for joining us. We're very excited to have James Kelly here with us, CEO of NCR Voyix. Jim took over earlier this year in February and was previously Executive Chair of the Board. And prior to his time at Voyix, he's CEO of EVO Payments, has had a long career in the payments industry before taking over to NCR. So thanks for joining us, Jim.

Glad to be here. Actually, it's my first time. It's a long trip.

Yes. No, it is. But you come here from the scenery in the weather.

Yes, exactly. It was very foggy when I landed at midnight.

All right. So well, welcome to the conference. It's been less than a year since you've taken over as CEO. I wanted to kick it off. I was hoping you can give an overview of kind of what you're bringing into the role? What your priorities are? How is your priority shifting as you've taken over?

Okay. So just by background, again, I joined initially in October of '23 as the Chairman, as you stated in May. And last year, there's a lot around addressing the balance sheet. So this was a spin-off of our ATM business and the sale of a digital banking business. The spin-off was in '23 -- the end of '23. And the sale banking business was June of last year. And that was -- that, together with helping to work with the current CEO who was at the time -- prior to that have been the Head of the Retail business had moved into the CEO role with the split. And given my background running several public companies, as you said, in payments, but also the most recent one, we doubled somewhat in software, but we tried to keep those separate, generally. And my interest was to fix the balance sheet coming into this year, was to address some operational challenges the company has had in the past. If you look at the history, the company has gone through, as everybody did, they went through COVID, they went through a failed sale process in '21, '22. And then it morphed into a split. So a lot of changes at the organization, in particular at the CEO role. I think the Board's view is we wanted to make sure that the company was on really good footings going forward, particularly because we have some amazing products coming to market and NRF in January and also on the restaurant side as well. So it was just repositioning operationally. And I think they asked me to step into a full-time role here just given my background in operations and leading public companies.

Yes. Great. So I guess, as you step into the role, what's kind of your primary goal to -- what are the operations you're most focused on? What are kind of key initiatives over the next year?

We have historically -- this is a company that's 145 years old, started in the hardware business. They still think of themselves to some extent as being in the hardware business. As you remember, last year, in addition to the sale of digital banking, we announced a relationship with Ennoconn, which is owned by -- or partially owned by Foxconn. The outsourcing, it's called ODM structure. Our expectation was to have that done by the end of last year, some technology got in the way. We're still targeting to have it implemented by the end of this year. So going into next year, this is a platform company and that's the big shift for employees, for our customer base. The customers have been with us 20 or 30 years. Our attrition rates on revenue is 1%. So these are great customers. They're predominantly enterprise. So when you think of our competition, we're focused on enterprise first, mid-market, and we do have some SMB, but that's not the predominance of what we do. And the #1 growth for the launch at the end of this year into next year is to get the product right for the platform. These are cloud native applications that will replace the legacy on-premise applications, like I said, that have been there for a long time. They're long in the tooth, a lot of tech debt and our customers I've seen now 70 of them personally, either some over video, but most of them in person have traveled in with over 75% of our employees, then across India, Europe, Latin America and Europe in the last 6 months. Parts of that is how I learned. I learned about the business. I mean I would run a software company of this size previously. It also gives me a chance to understand the needs of our customers. While as I said earlier, some of the unkept promises we're trying to make up for. But in the end, the customers are on our side. They want to see this transformation move as smoothly and quickly as possible. If you look at what we do as our core business is point of sale. So the point of sale is how these companies make money. While services, I think, is a differentiator and now payments are being introduced to the mix, the core focus is the launch of the platform into next year on both the retail and restaurant side.

So maybe you can talk a little bit about what it means to be a platform company, what it looks like kind of on the ground as you go to these customers? And like fundamentally, how does the customer experience change when they experience NCR as a platform company instead of a hardware company?

If you look at it today, our customers run their stores. So whether it's grocery, convenience, fuel, restaurants, these are legacy applications, like I said several times that have been there for a number of years. But as consumers themselves, they all have iPhones, they watch Netflix, there's somewhere between 13,000 and 16,000 platform companies today in existence. And it's just a very simple concept. We all take it for granted. We watch a movie on Netflix and it's a drama, tomorrow, I'm going to see other dramas suggested to me. That's what our customers ultimately want to do is understand the buying patterns of their consumers. And unfortunately, given the structure of applications that were written 30 years ago, that's just not available to them. And they've been very patient with changing the point of sales, one of the most difficult things a company a CEO can do because that's how they make money. All their money comes through the sale, at the point of sale, whether it's above store or in-store, that's the differentiator. So from their standpoint, they just want to see it see the product in practice. They want to see a number of customers who have accepted it so that they can reference it. It's a very small industry. Any one of those verticals are very small. They know each other. And we have a great reputation. We've been around for a very long period of time. And I think they're a little impatient that we haven't brought this to market sooner. And as I said, there's been a number of distractions over the last couple of years. I think those distractions that have positioned the company to be in the best position it's been a great looking balance sheet but also in a fantastic product that we're coming to market with, surrounded by now payments and enhanced services.

And when you talk to these clients who've been on kind of the legacy platforms for a while, how disruptive is it to swap out the platform? Is it a different kind of front user-facing software platform? Do they have to retrain, how are you thinking about managing that transition?

Yes, as I said before, today, they manage the stores tomorrow, we'll manage the store. So like your iPhone, you're not managing the phone, somebody manages it remotely. You can access applications just like they'll be able to access features, but that will be our responsibility to manage the store for them. So I think that's a value enhancement to where they are today, and it's something there. I think beyond the managing of the store though, back to what I was just mentioning, the access to data to make decision -- buying decisions for their customers is really what the differentiator is going to be.

Great. Okay. I wanted to maybe switch gears and talk a little bit about the payments opportunity. We covered the payments and fintech space here at Goldman. You have a long history in the payment space. It seems like this is one of the first things that you saw as an opportunity for the company when you took over. Can you talk about what was the prior state of payments at Voyix? How is the strategy shifting what is Worldpay going to do to change the way you go to market?

Okay. So yes, I've spent 25 years in payments, both a Global and then a company called EVO Payments, which we sold to Global a few years ago. it's interesting, there's a little time thing in front of us. And we were doing a tour. I was first on the board, and there's a little convenience store inside the corporate office, and there was a red number up on the screen, I remember asking the former CEO, what does that represent? And he said it was the volume of business that goes through our point of sale. So on an annual basis, if you look at across all our markets, we're touching over $1.3 trillion just on the credit side. And if you add fuel to that on top of it, I bet you were pushing close to $2 trillion. So put that up against any acquirer. My last company was $150 billion in volume, and we had $700 million of revenue and sold it for $4.5 billion. So there's a huge payment opportunity it's just -- if you go back to its history, a 145-year-old company, the focus was hardware and later service software, some services, but payments was not something that NCR would have thought of. They were thinking of ATMs or digital banking. They didn't realize that there was value sitting right there. And the value to the customer -- to our customers is that they don't have to have multiple parties involved because while it runs through the point of sale, the transaction, it doesn't turn into cash until the credit card clears. So we can offer it cradle to grave, so to speak, end to end, then that's a differentiator from what they have today. It takes a lot of the noise out it deals with the complexity if there's a change at the point of sale or the change at the processor, they change update firmware or something else, then we're able to -- if it's our process that you're mentioning WorldPay, so we selected WorldPay because of the complexity of our customer base, which is fuel, convenience and grocery, the former JetPay acquisition that the company made in 2019 didn't have that capability. On the positive side, all our SMB restaurants that we sign up, we take 100% payments, 99%. So now we're working through our existing customer base to expose them to the capabilities that we can now offer them so that there's 1 relationship instead of multiple. So just as an order of magnitude in the U.S. alone, we touch on an annual basis, $12.5 billion transactions run through our point of sale, runs through our connected system. So $800 billion of volume in the U.S. as part of the $1.3 trillion. That's already on our system. It's already our customers. We're just going to them to expose the capability that we have on the endpoint, which is Worldpay that they can now take advantage of.

Got it. And when I think about the convergence of software and payments, we've seen that happen really fast at the SMB side. How do you see that happening with the enterprise customer base? And how do you think about the catalyst to get some of these enterprise merchants to switch?

I think the initial reaction when I said this in February was, well, people like to have not all their eggs in one basket, so to speak. But the reality is they have all their eggs in our basket. So if we can offer them payments, we already have the capabilities to do it. I think it's an easy switch. Now switch conceptually, Practically speaking, there's work to do, and it's not going to happen overnight. I mean it's taken a long time to get to where they are today. But I think over the course of this year and next year, we have a team that's dedicated, one to teaching our sales organization, how to sell payments; and two, to be a partner when the process is ongoing with our customers. So we have already had some customers convert over to us. They've said, yes, so we have to work through the process. And we're out talking to all our customers. And so far, the reception has been very positive.

Great. Okay. And then I guess the last question on this. You mentioned that this is a longer-term initiative. What's a reasonable time line investors should be focused on to start seeing some of the impact of the payment strategy?

I would say it's not just payments. I think it's all these components. I mean there's been a lot of change with the organizations. Last year, we took out $240 million of cost as we exited the digital banking business on top of the sales and top of ODM. So some of that is rolled into this year. While our top line is not where we'd like it to be, the earnings have continued to grow. My sense is I will start seeing it. I'll see you before you'll see it for obvious reasons. But I'll start to see it I will let you know often and loud as soon as I do. But I would say it's fourth quarter at the earliest. So one of the ways to think about this, the 75% of our revenue comes from services, people doing things and 25%. If you take out hardware, 25% is software. So we have conversations going on, escalating prices on the software maintenance, which has been around for a long period. At the same time, we're selling new software, the cloud platforms that I just mentioned. Same thing on the 75%, which is the services piece. Historically, the company has not inflated the price of the service over time. It's been flat, generally speaking. So we'll start seeing that over time. I would say on the retail side, our customer contracts are generally every -- the 5-year contracts that we'll see 20% a year. And on the restaurant, they align with payments, so it's every 3 years. So it will slowly build. But as it starts to build, it will start to accelerate, too, because they have a compounding effect. So I think I'll see some of it early in the fourth quarter. But going into next year, I would expect to see payments, the sale of subscription software for the platform and services on top of that. And at the same time, you'll see hardware. So probably some hardware that will leak into the first quarter because we're migrating. We're not going to do it all one big bang. But past the first quarter, at this stage, my feeling is that we would finish the ODM, so you'll be looking at the company as a net of hardware. We'll have a commission associated with it, but we won't have the gross hardware number that you've seen in the past.

Got it. So just to understand that it sounds like still on track for getting ODM up and running, but looking to transition it gradually. So we'll still see some gross hardware revenue early next year?

At this stage, if you saw in the Q, if you read the Q. But if you saw in the Q that we said it would be commencing at the end of the year. The fourth quarter is an important quarter for any company. We're a calendar company. And we have commitments to customers, and we don't want to cause any disruption where January is a much slower month. But it's moving along the revised time line that we talked about at the end of last year.

Got it. Okay. Makes sense. So I want to maybe take a deeper dive into the retail segment and just talk about the growth algorithm. There's been a lot going on. You have this ongoing shift from on-premise systems to a cloud-native architecture. And I think the prior management teams have been flagging the impact that, that has on kind of current period revenue and the impact that has longer term for the business. You've also added an element of payments to the story. So I guess, when you think about the retail growth algorithm, how do you think about kind of near term where you're still undergoing that transition? And then maybe 18 to 24 months out, when do we start to see an inflection in some of the reported revenue metrics?

Yes. When you talk retail across the board as opposed to just software, in particular. Again, I think the time line is the same. I think we'll start to see retail NRF is the big kickoff. So that's when we'll have the booth and all the rest and the customers on-site. So there'll be a lot of conversations, meetings, obviously, around that. One the things said, we're also going to focus on this year is beyond delivering into our existing customer base. The company has been very insular focused on existing customers. It's exposed to making the tent bigger. And so my focus is more on -- since we have this new, I think, market-leading application for the segments that I've mentioned, that we're going to be as focused on forming new relationships as servicing our existing relationships. So I think that's part of a shift as well. So I think the time line is once a contract signed, just like any other SaaS organization we're starting, the billing occurs then as opposed to at the point of actually installation. Installation takes time. These are organizations that have 1,000 lanes, 2,000 lanes. It takes time to install. So there's -- it's not an SMB business where you're signing 10,000 merchants a month, and you're signing 1 customer that has 10,000 lanes. And we have 18,200 fuel locations across the U.S. So rolling that out is not instantaneous, but you'll see the revenue start to build over time, and I think you'll start to see that by the second quarter of next year. The next year is a big year for a number of things because we've spent the time fixing some components of the business. The balance sheet, I said, operational as well. And now with the product coming to market, we're excited about next year.

All right. Just another one on the retail side. On the self-checkout, I think self-checkout business used to be a big focus in kind of prior renditions of the company's disclosures and communications. It was a big chunk of the retail segment. I imagine a lot of that was on the hardware side, so probably less going forward. But maybe just talk about that because you have some marquee customers with Walmart and Whole Foods, really impressive relationships, long-standing relationships for the company. How do you think about the software opportunity in the self-checkout space?

Yes. When you mentioned the hardware, yes, there are some instances, I don't think we sell any hardware without some software. Our software in there, the drivers are our software. Sometimes it's -- most of the times, it's holistically our software. I think, yes, there was a big spike, well preceded me and self-checkout. I think as consumers, we like that convenience. We don't want to see a long line if we have 10 items or 20 items to get out of the store quickly. I haven't -- I've been to a lot of these stores and met with these -- the leadership of the organizations. They still like self-checkout. I think the self-checkout has gotten a bit of a maybe unfair reputation of it's driving a lot of shrink as a result...

Of COVID, right?

Yes, well, even past but there's other technology that we're working on that's in the field today around camera technology, video technology to be able to sort it out. I think AI will continue to assist in that endeavor. I don't think my -- I mean it's fairly limited, but my impression talking to the leadership of these organizations, they want self-checkout. They just want it to not be a source of losses. And I think as that starts to gel around lower shrink, then you're going to see that continue to move because what's the alternative? If you don't have a self-checkout, you're going to have to put another lane in and that's going to be people and that's going to be cost as well. So you're trying to balance the two off.

Makes sense. All right. And then just on the hardware side, how are you thinking about tariffs? I think this past quarter, you left your estimate of the impact from tariffs embedded in the guide unchanged, which is I think, $8 million to $12 million, if I'm not mistaken.

Correct.

Has there been any changes to that? And just any thoughts on kind of mitigation strategies?

Yes. So I think I got this one. Well, I got it wrong twice because I think today, we did the earnings called, Trump made a change and somebody corrected me on the call. So look, I don't have any better crystal ball than anybody else. I did misread. I thought at least through the first part of the year. I mean, I was a new CEO, lots of changes in the company. I thought these would be more of a head fake than they were -- than they've seen been. I mean they're here to stay -- yes. Well, maybe that was -- it was just so egregious some of them in terms of the size that I was just surprised that they would sustain. And then obviously, they've moved around. I looked at before the last earnings call, I think there was something like 27 changes, public changes, tweets about these as to how they were going to change. So for the first half of the year, I was more inclined -- in the first quarter, we didn't see any. It was really just the second quarter that we started to absorb some of them. And we did what we could to mitigate by pushing back to customers and saying, well, we're just not going to order that printer for you because it's a 25% tariff to it. So we'll just have to sweat the existing one a little bit longer. Otherwise, there's a tariff coming and they didn't want to pay it. But going into the back half of the year, I mean, we have treated related to parts and we have related to hardware currently, we are assembling in Mexico, and we're 51% over. So under the U.S. MCA, we're good. That hasn't changed. I mean that's up for next year. So we'll have to see what that looks like. But for right now, my feeling has evolved that this is almost a permanent price increase. And so we're more inclined to where applicable in our contracts to push those on to the customers because they're not going to go away. And hardware, in particular, it's not a big margin business for us for anybody. So I'm not inclined to lose money on hardware, if I don't have to.

Sure. Yes. No, that makes sense. And I guess, like, do you feel -- the idea of like let's sweat the hardware? Do you think the $8 million to $12 million can encompass any element of demand destruction for people who do say let's just try to wait another year before we bite the bullet?

Our tariffs certainly $8 million to $12 million in the size of $700 million. It's not a lot of money. So I don't think anybody, and when you put it across the customer base, this number just disappears. I think it's more of an emotional thing. But we have absorbed some. I mean some of our second quarter had that in there.

Makes sense. Okay. Just on the field services side, I mean, I think it's been one of the things that like you and prior management has always emphasized that the ability to kind of field a fleet of trucks, get people on-site, fix things when they're broken, pick up the phone when people are calling in is just a big differentiator, the ability to service these big enterprise customers at scale is a huge part of the moat on the enterprise part of the business. Can you talk a little bit about that? It sounds like you're talking a little bit more about pricing initiatives in that business. How do you feel about just kind of the size and resources and kind of scope of the services organization?

Well, I would -- I mentioned in the beginning that the focus for this year is getting this product, this platform solutions out to our customers because that's what they're looking for. When you talk about competition, in particular, for someone to displace this at scale, we have 8,000 people in this group between professional services, hardware installation, hardware maintenance and then a call center that does 7/24 servicing out of Serbia and Bosnia. It's quite an amazing organization. It doesn't get the credit, sometimes that it should, but we're supporting -- I was in -- as a few months ago. You walk around the building. It's a multistory building. I think it's one of the largest employers in Serbia. And you see banners of all our major customers, and then there's a group of people and their job is to support that customer for all their needs within their stores, if their systems go down, monitoring their systems, taking help desk call center. It's very, very efficient. And I think we're where we have to do a better job is instead of doing it as a bespoke, I want a little this and a little of that is put it together as a package. So it's easier to buy a package. It's like buying a car, buy a car off a lot or customize it. We've been very oriented to customization of the company. It's kind of its culture, and we're going to try to standardize, make it easier to consume as a customer, but also sell as an organization. So I have I have high expectations for all our groups, but definitely on the services side. I think we -- there's a guy named George Sloan, who runs it. He and his team are fantastic, and they're do whatever it takes to support our customers.

Got it. All right. Let's talk a little bit about the restaurant side of the business. I guess one of the narratives in the integrated POS more broadly is about the competitive nature of the space, and that's especially true in the SMB and mid-market part of the space. You're one of the market leaders in the enterprise side, which hasn't seen the same degree of competition. So what are you focused on to make sure that the increased competitive intensity down market doesn't eventually come up market?

Well, I don't think there's anything can do to prevent it other than we'll have super happy customers at the right price then -- but look, I've heard from CEOs in the past, changing out a point of sale is the last thing. Anybody have seen enough of it. And they've seen enough of it that is not something they want to do. So I think we would have to really step on our toe in a material way. It's not to say they won't go up for RFPs. I mean you hear -- I hear it when obviously, they come out. But for someone to support at scale, they either have to have a partner or a third party be the on-site, and we have displaced a lot of those situations, even last year, some of the companies that we announced, we didn't say the names of the companies because we're restricted. But these are very large multinational organizations that have tried to use third parties, but one we just announced this year, same thing, they were using, I don't know, 10 different subs, and it was too much of a pain to manage them. So ultimately, they want simplicity in their life, too, to be able to manage a relationship. So I -- look, there's always going to be competition, but I think we're extremely well positioned. You look at the last 5 years, all the changes that we've gone through and competition trying to get to that scale, the names that we all know for them to move to that scale, it's not just the product, it's everything else. It's the installation of the product and the supporting of it thereafter. And if you're not able to do that, if you can't convince them that you can do that, then I think it's very hard to take out the incumbent.

Yes. And just on the enterprise space, does the payment strategy on the retail side extend to the enterprise part of the restaurant? Do you think you can do payments for franchisees of...

We just signed one. The answer is yes. I have no doubt that we can do that.

Great. Okay. And then, I guess, on the product side, where are you investing on the restaurant space? And where are you -- what are you hearing from clients around the most important areas for Voyix to deliver?

Yes. I think on the restaurant space, we still -- while we have a local cloud in the market, that is still a monolithic application. It's not microservices. It wasn't built that way. So that is something that we're taking a look at. I think AI is also having an increasingly attractive opportunity. It is an increasingly attractive opportunity for us. in terms of speed to market on applications. Because if you look at the company, we have a library originally as I've been told have not validated this, but one of the employees that have been here for a long time, said 140 applications required over the history of the company. There's 50 that are in operation today. There's 25 that are kind of the core ones. So we have a really deep library of technology. And I think AI can be very helpful for us as we refresh that going forward.

Okay. I wanted to maybe just touch on kind of some more financial-oriented metrics.

I'm not the CFO anymore. That was a long time ago.

That's a sneaky way of getting it. Well, look, I think more from a philosophical perspective, I think about the journey that Voyix has been on to take a lot of cost out of the business. You're also investing a lot at the same time. I think about Jeff Sloan and the Board was always very focused on Global Payments and driving margin expansion, no matter what they had going on. So just what's your philosophy around prioritizing margin expansion and driving efficiencies while also investing?

Jeff got that from me. If you look at Global, we a good ton of cost out, see it. And here, we took $240 million out last year. So there are still -- and I've got questions today when I was meeting on the one-on-ones. We have a lot of -- we have multiple accounting systems, not one general ledger. We have multiple billing systems -- we have multiple sales force systems. We have a lot of manual labor that was just a product, I guess, as we -- as the company years ago, started to offshore labor. I think it was in their mind, faster to offshore labor than to go through the effort of automate instead. So our focused AI aside, our focus is to automate as much as we can. I think it eliminates human error. It improves, obviously, the speed. So I agree with Jeff. I will tell you to mention that. But I agree with Jeff that efficiency is margin expansion is something when we gave the pro forma last year after the Ennoconn because we have to the digital banking Ennoconn deals. That was one of the things that we wanted to show the market that if you take out hardware, we're north of 20% margin business. Which is, for us, I think, a very good place to start. And I think that number is going to continue to ratchet up as we sell more product at a much higher margin because if software is a bigger component of revenue, it's a much higher incremental margin payments as well as a very high incremental margin. So all these things will be additive to margin to the bottom line. And then in particular, we're very focused on cash flow. That's something that -- we had a lot of noise into this year as we've had reductions in other stuff in the numbers, investments, as you said. And as Brian had said on the call -- our last call, some of those investments will creep into this year, probably more so than we thought at the start of the year. But in the end, these are all around automating the organization, making it more efficient in the long term. At some point, we have to do this. We're doing both at the same time. We're focused on the revenue and all the growth needs needed there at the same time, trying to make the company as efficient as possible.

Great. And then just on the capital allocation front. I mean, I think about the journey the company has been on the significant improvement in the balance sheet position. I think you had some leftover after some of the transactions to do a little bit of share repurchases. What's kind of your thought on more steady-state allocation for the company? And what's sort of the journey on over the next couple of years?

Yes. Some of the questions I've been getting is, what's M&A look like? We did some small buyout of our back end this quarter. But I don't see M&A as a driver for us, really the driver of things I've just talked about, the product, the platform, services, payments, in particular, buying another organization, there is more confusion into the organization. So I think for going into next year, the cap could buybacks be part of that. I mean we have an authorization out there today. We did 125 since I've been, I guess, I was the Chairman -- Executive Chairman before this, but over the last -- since the closing of the Digital Banking deal, we did $125 million in buyback.

In the end, that's not -- it has had some help at points in time?

But yes, at some point, that will be a bigger focus of the company. I don't think it will be the back half of this year, but I think it will -- going into next year, it will be definitely something we'll look at.

Got it. Makes sense. I guess in the last minute that we have left, as we look into the next year, what are some of the key kind of signposts that we should be looking at to measure Voyix's performance? And are there any final thoughts you'd leave investors following the company.

Yes. I think the signpost is we have to do a better job in reporting the numbers. We're still coming off a legacy reporting structure. So there's numbers that are mixed together. Payments are mixed in with software with services. So there's work being done internally to split that out to make it easier to understand what the company is, how it's performing. Again, I think we'll start to see some uptick in the back half of this year and definitely into next year. I've asked what's my expectations I don't lead into what percentage we're going to grow at this point. It's still early for me. I think we need to understand what the business looks like a little bit better. But I think the company is -- I think it's a great company, personally. It's the reason I stepped into this role. I think we have an amazing customer base. We have an amazing employee base that the average tenure is probably 20 years. So there's an NCR way within the organization. I think it's -- what's the North Star. Now we understand what the North Star is with the product being -- it's not a product I created, but with the product being ready with payments being ready, I'm very optimistic about next year.

Great. Well, I think we'll leave it there. But thanks so much for taking the time to be with us today. I appreciate your support of the conference.

Thank you very much.