Good afternoon. My name is Brendan Metrano, Head Investor Relations, and I want to thank you for joining the NCR Atleos Investor Update call. On the call today are Tim Oliver, CEO, Paul Campbell, CFO, and Stuart Mackinnon, Chief Operating Officer. Before we get started, let me remind you that our presentation and discussions will include forward-looking statements. These statements reflect our current expectations and beliefs and are subject to risks and uncertainties that could cause actual results to differ materially from those expectations. These risks and uncertainties are described in today's materials and our periodic filings with the SEC, including our annual report. On today's call, we'll also be discussing certain non-GAAP financial measures. These non-GAAP measures are described and reconciled to their GAAP counterparts in the presentation materials and on the investor relations website. A replay of this call will also be available on the investor relations website.
With that, I will turn the call over to Tim.
Thanks, Brendan, and thanks to those of you joining us today for an admittedly out-of-sequence investor update call. We have three primary goals today. First, we will provide some context and analysis of our Q3 results that were generated on the total NCR basis prior to separation. They were reported by Voyix on December the fifth, and then we, as NCR Atleos, submitted a 10-Q one week later that reported the same results on a separation accounting basis. Second, we will provide a more qualitative update on the state of the business that describes the momentum in our businesses as we exit 2023 and launch 2024. And third, while we don't anticipate providing full year 2024 guidance until we report our Q4 in February, we want to help you begin to build your 2024 model.
Paul will provide some thoughts on the relative strength of each of our reported segments, some more granular assumptions around the ATM-as-a-Service strategy, and an updated look at the balance sheet. Starting on slide six, as you know, the separation transaction was completed on October 16th. I cannot overstate either the enormity of this accomplishment or the complexity and magnitude of the effort that was required to get this done. Our new board is activated and engaged. Our new leadership group has grabbed the reins. I've spent most of my time over the last six weeks reaching out to our employees to recognize their fortitude and dedication, and to our customers to express our appreciation for their patience and support as we bifurcated a 140-year-old company.
The Separation Project Management office has turned its attention to managing toward the exit of our bilateral transition service agreements, establishing the two new and distinct brands, and completing the legal entity transition of assets in a few longer lead time countries. We are also working to minimize the impact of any cost dyssynergies associated with the separation. While our teams could be excused for being distracted or diverted by the separation and losing focus on the daily business, as Paul will describe in more detail, our Q3 was very strong in nearly every aspect. Our performance through the first nine months was ahead of our annual budget that was originally used to calculate the legacy NCR guidance and was consistent with the assumptions we used for modeling in our Form 10 and for our roadshows this fall.
Strategically, our ATM-as-a-Service business, which is only about 18 months in the making, will exit 2023 with about 20,000 machines implemented and revenue of over $150 million. Our network business is seeing the returns on our new fleets in Portugal and Greece that are ahead of expectations, and our revenue per device continued to grow in the Q3 in double digits. Our end markets remain healthy and casualization trends continue to be constructive. While we are not yet prepared to provide full year 2024 guidance, our solid financial performance to date and good momentum, both operationally and commercially, suggest that the assumptions we used as the base year for our pre-separation modeling were the right ones.
On the next two slides, we remind you of the composition of each of our two large operating segments on the left-hand side of the page, and on the right, we give some recent highlights. So on slide seven, up first is the Self-Service Banking segment that provides the most comprehensive portfolio of ATM software, service, and hardware solutions to our bank and credit union customers. The served fleet of over 600,000 devices around the globe gives us unmatched scale in key markets. This business should generate about $2.6 billion in annual revenue, growing at about GDP, but that growth rate should accelerate as ATM-as-a-service business ramps. Profit margins here are expected to be at the company average. This business performed well in the Q3 , with mid-single-digit growth likely outpacing the overall market.
Recent wins include contracting with the Saudi National Bank to replace more than 1,300 older competitive units with a suite of hardware, software, and service solutions. We also grew our partnership with NatWest in the U.K. with additional services as we support their transformation of their ATM platform. The ATM-as-a-Service business continues to build momentum, with units growing 46% year-over-year to more than 18,000 units and driving 10% recurring revenue growth in the quarter. The pipeline remains robust, and interest is broad-based across fleet size and geography. Current partners that have recently added ATM-as-a-Service include Seacoast Bank, Kiwibank, and an extension of the agreement at Old National Bank.
New business wins include Union Bank of the Philippines and Security Bank of Kansas City, where we'll modernize and operate their entire fleets of ATMs. On slide eight, next is the Network segment that describes our shared banking utility of approximately 80,000 owned and operated machines that enable a symbiotic relationship between financial institutions and the world's blue-chip retailers. This business should generate about $1.4 billion in annual transaction-based revenue, growing faster than the company average and at margins higher than the company average. We continued to deliver solid top-line growth in the Q3 , resulting in 5% growth year-to-date through September, led by a very strong North American withdrawal volumes and a favorable mix of high-value transactions. But that top-line growth, combined with our network optimization, drove a double-digit increase in revenue per machine in the Q3 and contributed to margin expansion.
Important new wins included adding 160 Kiwibank off-site ATMs to the Allpoint Network and signing FirstBank, a 100-year-old U.S. regional bank, to the Allpoint Network. Recently, we signed with Asda in the U.K. to run and operate 1,200 ATMs in over 600 retail locations. We also advanced the selective international expansion of our ATM network, deploying Cashz one units in Portugal. The Allpoint Network was also instrumental in several ATM-as-a-Service agreements that we signed in most recent months, further validating the strategic power of our solutions portfolio. To summarize then on slide 9, the underlying end market demand for both physical transactions and increasingly capable ATMs remains strong. We had a terrific Q3 , especially in the context of the separation transaction. We're making significant progress in our growth strategies, particularly with ATM-as-a-Service.
We will finish out a strong year that we expect to be consistent with the assumptions that were the basis of our go-forward business model used in the Form 10 and on our debt and equity roadshows. And with that, I'll turn it over to Paul. Paul?
Thank you, Tim. For those who are new to the NCR Atleos story, I'm Paul Campbell, the Chief Financial Officer. My comments today will be focused on enhancing the visibility of the company on a go-forward basis. I'll start with some additional perspective on the Q3 comparable performance, followed by insight into economics of our ATM-as-a-Service business, and finish up with an update of our post-split financial position and some initial thoughts on where we expect for 2024. Note that my comments on the Q3 financial results generally refer to non-GAAP results, which we rely on internally, along with other KPIs, to track the underlying performance of our business. Moving to slide 11. We are pleased to see the company perform well in the Q3 , despite the distraction of the separation from NCR.
I'm truly proud of the whole NCR Atleos team for their dedication to deliver results in parallel to the heavy workload related to the separation. These results reflect the final quarter as part of NCR and are on a carve-out financial basis using separation accounting. Revenues, Adjusted EBITDA and Free Cash Flow are modestly ahead of ours, our expectations. Total company revenue increased 4% year-over-year, with both of our key segments delivering solid growth. Gross profit increased 9% year-over-year on a combination of top-line growth and 160 basis points of gross margin expansion. The margin expansion was primarily due to favorable cost of goods, driven by optimization in supply chain and transportation that adversely impacted 2022. In addition, gross margin benefited from the strategic mix shift in the self-service, service banking segment from one-time revenue to higher-margin services, including ATM-as-a-Service.
Moving down the P&L, Adjusted EBITDA of $210 million increased 7% year-over-year, with gross profit growth partially offset by higher operating costs related to differences in performance-based compensation and benefits costs in the prior year. Adjusted EBITDA margin expanded 60 basis points year-over-year, reflecting the factors I just noticed. On a Non-GAAP basis, the effective tax rate was approximately 25%, resulting in a Non-GAAP net income of $125 million or $1.77 of Non-GAAP fully diluted earnings per share, based on a share count from the spin of 70.6 million shares. Unrestricted free cash flow on a normalized basis was $111 million for the Q3 , compared to $140 million in the prior year.
Moving to the segment results on slide 12, self-service banking revenue increased 4% year-over-year on a reported basis, led by ATM-as-a-Service, more than doubling from the prior year, while combined legacy hardware and software license revenue was flat year-over-year. Recurring revenue grew approximately 10% year-over-year and 1% sequentially, with our strategic shift to subscription-based model continuing to build momentum. Adjusted EBITDA increased 23% year-over-year in the Q3 , led by higher gross margins and slightly higher operating expenses, resulting in a 400 basis points EBITDA margin expansion. The margin expansion reflects cost optimization activities in hardware and services costs in the current year compared to the prior year that was impacted by supply chain issues. Additionally, we experienced an enhanced profitability from our ATM-as-a-Service business.
Moving to our KPIs, recurring revenue mix is up 300 basis points year-over-year. Our ATM-as-a-Service units are up 46% year-over-year and up slightly quarter-on-quarter. We have a healthy ATM-as-a-Service backlog and funnel and expect to exit the year with over 20,000 units deployed as planned. Our ARR grew 9% year-over-year and 3% sequentially, reflecting the execution of our strategy to more sustainable recurring revenue streams. Moving to slide 13. Network segment revenue increased 7% year-over-year, with a 6% withdrawal transaction growth in North America, more than offsetting slightly lower international withdrawals. We continued to optimize the network, resulting in 8% increase in ARPU on a 3% decrease in owned and operated units....
As discussed during our Investor Day presentation, we continue to monitor fleet unit profitability and move or even remove less profitable units. Adjusted EBITDA in the Network segment increased 14% year-over-year in the Q3 , with volume growth and some one-time favorable commercial developments, more than offsetting a $7 million increase in vault cash expenses. Slide 14 shows the segment breakdown. The T&T and other segments combined represent 7% of the total company Q3 revenue, and about 6% of the total adjusted EBITDA, excluding corporate cost, which is similar to the prior year. So there's no material impact year-over-year performance from these segments. Unallocated corporate costs were $92 million in the Q3 , up from $61 million for the prior year period, again, primarily due to reductions in performance-based compensation and benefit-related costs in the prior year. Moving to slide 15.
Through our discussions with the investment community, we understand there's a lot of focus on modeling 2024. So to aid that effort, we have some preliminary views on 2024 to share, and we'll update that with a full financial outlook when we report the Q4 results in February. We expect full year 2024 revenue to be in the range of $4.3 billion-$4.5 billion, with self-service banking revenue around $2.6 billion, representing 1%-3% growth. Network segment revenue around $1.4 billion, representing 5%-7% growth. We expect the T&T business to be largely flat at $0.2 billion, and the other segment to also be $0.2 billion. As a reminder, the other segment materially represents activities related to transactions with NCR Voyix.
We expect approximately $800 million of Adjusted EBITDA, with slight margin improvement in both our network and our Self-Service Banking segments, led by cost expense optimization, mix shift to higher recurring services revenue, partially offset by transaction effects. Lastly, we expect approximately $200 million in Free Cash Flow. This is up $50 million from the $150 million communicated on Investors Day, and we have confidence to drive lower capital expenditure and improve working capital. Moving to slide 16, we received a lot of feedback during non-deal roadshows and one-on-one calls with investors, that the information provided to date lacked granularity needed to properly model business scenarios based on timing of adoption of ATM-as-a-Service. The data on this slide reflects key modeling assumptions, blending geographical, product, and volume differences. Note that this blended data would not be representative of any specific deals.
Starting with the exhibit on the left, we provide key unit modeling data for ATM-as-a-Service, followed by Self-Service Banking segment information and information around revenue mix and margins. This information is consistent with the assumptions used to build the projections presented in our Investor Day in September. The way to think about unit economics of this mix shift is illustrated in the blended model example on the right. This comparison shows a model transaction under a traditional sale compared to a full ATM-as-a-Service outsource. Financial institutions are outsourcing services that they currently perform internally or through partners today over to NCR Atleos, which we can execute at a significantly lower cost due to leveraging our 80,000 units in our network fleet and the 20,000 units already executed as a service in our self-service banking fleet.
This enables us to provide cost savings to the customer and drive margin expansion. The illustration shows the 2.5x revenue pickup with the expanded margins through leveraging our existing scale. Turning to slide 17, I will finish with an update on the financial position between September 30 data in our 10-Q and the point of separation. I will also recap our capital allocation prioritization. Starting with the balance sheet from the Q3 , there are a few items relating to the split to consider. The most notable is the Term Loan A, with a principal amount of $835 million, which was not funded until the transaction closed on October 16. This will increase the adjusted post-split gross debt to $2.9 billion.
The other item to highlight is the cash balance, which had a number of true-ups from the split that resulted in a cash balance of $275 million at separation. Putting the pieces together translates to an adjusted post-split net debt of $2.6 billion and a leverage of 3.6x based on a trailing 12-month Adjusted EBITDA to Q3 2023 of $741 million. At the bottom of the table, we provide a summary of the key terms of our debt and the contracted annualized amortization payments. Moving to capital allocation, we have a resilient and highly profitable business that generates significant cash flow. This provides us with flexibility and opportunity to create shareholder value over the long term.
To run through the list, our top priority is to support the current businesses and invest in organic growth opportunities that generate appropriate returns. Secondly, we plan to emphasize debt reduction until our leverage is around 3x. Third, we plan to implement modest but meaningful dividend to enhance shareholder returns, which we plan to grow over time in line with Free Cash Flow generation. Fourth, we will consider opportunistic share repurchases we believe represent a good return. Last, we will consider value-enhancing external growth opportunities, including M&A, more likely similar to the investment we made in Clip Money that was announced recently. Finally, we will continue to evaluate these priorities based on developments in our business and external conditions, and ultimately be determined with the guidance of the board of directors. Now I'll turn it back over to Tim for his closing remarks.
Great work, Paul. So thanks again to those of you tuning in today at an atypical time in the quarter. We will be back on a regular cadence, starting with Q4 results. While the different required reporting conventions around a separation can be somewhat confusing, we hope that after this discussion, you're able to feel good about both Atleos' performance as part of the legacy NCR, and importantly now, about our exit velocity as we launch as an independent company and plan for 2024.... I want one more time to express my personal appreciation to our remarkable employees for their herculean efforts to get this spin across the line. And thanks again to our customers for their patience, their support, and their investment in our future joint success. Have a wonderful holiday season. I hope your celebrations are joyous and safe.
Operator, we're now available to take any questions.
Thank you. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. Our first question is going to come from Matt Summerville, from D.A. Davidson. Please go ahead.
Yep, thanks. You guys obviously went over a lot, which is great. But I want to talk about the self-service banking business a little bit. Your ATM as a Service units have been kind of flattish since the beginning of or since the end of 2022, I should say, right around that 18,000. What sort of? Is that more timing related, or is there something maybe going on with respect to backlog and funnel? Maybe if you could give a little bit more granularity there.
Hey, Matt. Yeah. Good, good to talk to you. No, there's nothing. We, we slowed down a bit in Q3. We had, we were focusing on the separation. We had to split our systems up, and we wanted to make sure we execute our service delivery. So with as we sit today, we've got 19,700 live, so we've added about 1,500-1,700 since we finished Q3 and got the separation done. The backlog is very robust. We, we signed 14 deals in the quarter. That includes seven net new logos with about 700 units for the quarter. So no, we are seeing that as a, the funnel's robust, the backlog's robust. We, we just didn't deploy so many in Q3 because we're focusing on the separation.
We also had, as you know, we had Santander, which is our big rollout, so we rolled out none of those in Q2. We did 900 in November, and we've got 600 in December. So now we're in good shape. We were very confident to finish on the higher end of the 20,000-21,000 we expected by the end of this year.
That's helpful. Just as a follow-up to that point, how much of your expansion from, say, 20,000 units to 35,000 units, how much of that is already in backlog, or do you expect to be effectively in backlog at the end of the year? And then I have, maybe one or two more.
Yeah, at the moment, we've got about 5,000 of those in backlog, but we've got a number of deals we're expecting to close in the next 4 weeks. We're hoping to end somewhere around 6,000-6,500 by the end of this year, but we have 5,000 today.
Got it. Looking at the network side of the business, you mentioned, Tim, I believe, well, maybe it was Paul, but you're focusing a little bit more heavily on profitability optimization on the unit level. So how should we be thinking about net site count or net unit count for the network side of the business? You mentioned you added a couple of new customers, which is great, but maybe talk about how many units you plan on removing from service over the next year or two, and what geographies you're sort of speaking to there.
Yeah, I don't anticipate that number changing very much in either direction. I think we've got the right number of machines in the markets we currently serve. As we expand into other markets, so the density of devices is appropriate for the U.S. and some of our more major markets. As we enter places like Greece and Portugal, we will add some devices to this. It's a relatively small number, relative to the 80,000. And we don't intend to reduce our footprint so much as reposition machines, or if we eliminate a machine, it's because it can't support itself. We're getting more sophisticated in the algorithms we use and the knowledge sets we use, the data sets we use to determine whether or not device can be in place.
But we don't believe we can do both at the same time. We don't believe growing the number of devices at the same time you're trying to grow the revenue per device makes much sense at all. So you should expect that number to be about flat to up slightly over time.
Yeah, I'll just add on top of that, Tim, if you don't mind, that we had a few units, we took some units out in U.K. in this quarter, which brought the number down a little bit. When we light up Asda, that'll be 1,200 units coming back on. So I think, yeah, just around that 80,000-low 80,000 units is probably where we'll be for now through the end of next year.
And then could you maybe also just spend a minute talking a little bit more detail on some of the transactional trends you're seeing? North America sounded healthy of mid-single digits, if I heard you right. International, down a bit. Do you see the international side of the business starting to turn positive, and what may be the catalyst kinda for that to happen? And then, if you can then also comment on gross and net vault cash costs, 2024 over 2023, if you expect that headwind, if you will, there to be incremental headwind in 2024 over 2023, I should say. Thank you.
Yeah, I'll start first, Matt, and then maybe Stuart. Stuart's on the line, he can join, too. This might sound a little bit ridiculous, but the transaction volumes in U.K. and in Europe were down, and it was in fact, part of the factor was weather. There was a very wet summer, and really, we can see the transaction trend towards weather. So there wasn't a material erosion in transactions. It was slightly down, and we think it was a lot to do with the climate there and, you know, lack of people moving around. Stuart, do you have anything to add on that before I jump in and talk about the vault cash?
... No, I think you got it right, Paul. I'm in a noisy area. You get all the head, all the head in?
Okay. Sorry, Stuart, the airport seat's a bit garbled. And then from a vault cash perspective, Matt, we, we don't anticipate much of a headwind into 2024. Obviously, we don't know where interest rates are going, so we're not planning on a tailwind for that. But, you know, we- the interest rates next year and the interest rate we endured this year, we think are roughly the same, and our hedges are in place through next year. So year-on-year, I wouldn't see that as being-- we're, we're not planning on being either a head or a tailwind.
Got it. Thank you, guys.
Thank you, Matt.
Thanks, Matt.
Once again, if you'd like to ask a question, please press star one on your telephone keypad. Our next question is gonna come from Michael O'Brien, from Wolfe Research. Please go ahead.
Hey, good evening, guys, and, congrats on the strong results. So my question here is-
Thank you.
Last time we spoke, you mentioned that the five-six kind of traditional ATM cycle is coming up. And my first question is regarding that, as we look at the 2027 targets, is that baked into the 2027 targets? And then if so, do we expect ATM as a Service to kind of cannibalize some of that traditional refresh cycle going forward?
So I think the first is, it's no, and then yes. So when we built the model that we used to take on the road, we presumed that we would stay at about 80,000 units produced a year for most every year. I think we had some modest growth in the total number of devices in the very low single digits. So we thought it was prudent to presume the fleet stays relatively similar, and it's a replacement. It's more of a replacement business. But you are right. If the last refresh cycle was back in, you know, 2018, 2019, we're now coming up on the five-year anniversary of that upcycle.
So in fact, I was talking to a very large U.S. customer today, who they themselves are talking about this, in fact, being a period of time in which they need to ramp up their buy because they actually refresh every five years. So I suspect we will see some lumpiness to the good over and above that 80,000 units across that plan period at some point or another. But we've not tried to model that in. We'll just call it out as it comes.
Gotcha. And one other quick question regarding that. You know, given that the uncertain macro environment that we're in and small cap banks are under stress, how long typically could a bank push off a refresh, a refresh cycle with their existing machine?
Yeah, I don't think we're gonna see the push. I mean, look, you can push for some time. We do it on the network side sometimes if you know, we want to deploy cash elsewhere. But the functionality of the devices has changed so dramatically, and the quality of the customer experience is so different on the new machines. We're actually seeing our customers not want to skimp there. They want to invest back into their ATMs. We've not seen too much in the way of an extension of the buy cycle. What we are likely to see is more pressure to outsource and more folks who want to outsource to us and save money on the service side of the business.
We know that we can do that for them, like we've done it for better than, I guess, close to north of 80 customers on the ATM as a Service side. We know we can save them better than 20% on their internal costs. So we're hopeful that this, the need driven by this upcycle and the desire to outsource and work only on those things that define you as a premier bank, will allow us to pick up more revenue.
No, thank you. That was helpful.
Sorry, Michael, just to add to that, the hardware as such is becoming less and less a material part of our revenue stream. Of our $4.4 billion next year, hardware makes up, you know, $700 million of that. So even in an extreme case, the 20% reduction in the hardware revenue, you're talking about $140 million of $4.4 billion of top line, and probably something in the region of $28-$30 million of EBITDA, that would be a headwind, even if there was a 20%, which would be an extreme reduction in volume. So I mean, we're really not that sensitive to hardware pushout in our business anymore.
Gotcha. And just one quick question for Paul. You mentioned that the $200 million of free cash flow is expected, which is an increase from the $150. It looks like primarily driven by-
Yeah
reduction in CapEx. Is that primarily due to a decrease in growth CapEx? I believe last time we spoke, it was you guys were expecting about $140 million of growth CapEx going forward.
No, it's not. We're gonna meter our CapEx across the board. We're gonna put in strict measurements on how we spend CapEx and the return we get on CapEx, and we're also driving working capital. So no, it's not gonna... We don't see the increase in working capital and the impact on capital; we don't see that as being in any way inhibiting our ATMs and service deployments.
We were frankly too conservative in every line that walked us from EBITDA to free cash flow, we were conservative, and in aggregate came up with an answer that just wasn't sufficient. And so, we want to make sure people understood, as many people told us on the road, yes, $200 million is a hell of a lot better answer than $150 million.
No, helpful.
Thank you, Michael.
Thank you. Good. I think that's it. No more questions as far as we can tell. Look, we're here to take questions as you have them. Paul and I, Brendan, will be here for this evening and the better part of the rest of this week, if we can be of help. We know that your models can't be built out completely from what we just gave you. We assure you that when we come back in February, it'll be a wholesome review of all those things that allow you to build a model. We appreciate your time. Thanks for tuning in tonight. Happy holidays.
Thank you.
This concludes today's call. We appreciate your participation, and you may now disconnect.