Hi, good afternoon, everybody. Thanks for joining us today. I am Ian Zaffino. Welcome to our Oppenheimer conference today. With us today is NCR Voyix. I have an Outperform rating on it, a $19 price target. With us today from the company is David Wilkinson. I believe there's other members of his team there. I, Brian Webb-Walsh will be there, and Alan Katz is here as well, and if there's any questions anybody has. The way we'll structure this is we'll do a brief presentation. David will do a brief presentation, we'll then move to a fireside chat and get to any of the audience's questions as well. Please enter your questions in the chat, or you can send me an email at ian.zaffino@opco.com.
Either way, I'll get your question answered or at least asked, and we'll go from there. So David, again, thank you for joining us.
Yeah, thanks, Ian.
Yeah, so you take it away from here.
Yeah, perfect. We decided to spare everybody more PowerPoint, so we'll give an overview here at the beginning, that my presentation will have no PowerPoint. We'll just describe what we're doing as a business, everything we've been up to as a company, because it's, we've been, as you all have seen in our recent earnings announcement, very busy as a company. I will go back in time a little bit to describe the context for those of you that haven't been following the story as closely in terms of NCR Voyix, where we have come from just recently, our recent history. And then what these recent transactions and the announcements that we made a few weeks ago, what they really mean for our going forward strategy.
So for those that have followed, we, you know, we were NCR proper, five businesses, and we were an overly complicated story that we got a lot of feedback from investors and others that we're undervalued as the... And we believe that as a company, that we were undervalued when we looked at the businesses that we had. So we undertook strategic review processes that led us up to the ultimate decision to spin out the ATM business, and we did that October 16th of last year, and that's what created NCR Atleos as a publicly traded company, NCR Voyix, as what we are today. When we did that transaction, we knew that we had digital banking, restaurant and retail platform, software and service technology, and there were a lot of synergies in the retail and restaurant business.
And the synergy for digital banking was that it was very similar in terms of capital intensity and skills, and it was a Google Cloud Platform, like we have in retail and restaurant, but there was no real shared tech. And we had separate sales teams, and we ran them somewhat independently. The whole premise of the spin and the way we when we did the ATM spin out and kept digital banking was that we believed that we would unlock value for digital banking as we exposed the strength of that business and the perimeter that we had as NCR Voyix. That didn't prove out over the first couple quarters after the spin out, and so we immediately jumped on working on a process to sell the digital banking business.
The point there is, we knew we wanted to create a retail and restaurant leader in software and services. We have this great installed base, and we wanted to continue to grow and migrate customers to the platform and grow that core business. We knew we wanted to de-lever and have a better balance sheet as we went after that pursuit. There are many ways to get there, and we weren't getting the value that we saw for digital banking. Then we knew that ultimately we needed to get cost in line, because when we did the split spin out of the ATM business, we had extra costs sitting inside of NCR as RemainCo that we had to do some cleanup on. So that's what you saw us announce recently in the market.
So we ended up selling digital banking business for $2.45 billion and a $100 million contingency. That will allow us to significantly de-lever and clean up the balance sheet, and get leverage down to two turns, and then give us some optionality as we move forward. We also announced a hardware ODM transaction that changes the way we think about hardware, and then we talked about the costs coming out with 800 staff, $75 million of cost out, 75% of that or 70% of that being OpEx, another 30% being CapEx.
But what that really does for us as a company that, that we're most excited about in terms of that core strategy I described around retail and restaurant, is we had these growth hypotheses that, you know, our focus on growth is about connection to the platform, cross-selling and upselling, and adding net new customers. We, we now can get 100% of our focus on growth. We come out of these transactions into... as we looked at the pro forma that we announced, as a $2.1 billion software and services company that is at a 20% EBITDA margins, approaching 80% recurring revenue, generating 40% of that, or converting 40% of that EBITDA to cash flow under two turns of leverage and growing.
That's what excites us the most about what we are as a company coming out of these transactions, and that's what these really set us up to do. In addition to getting all of that, I'll say, restructuring behind us this year and putting all the management attention towards growing a very healthy retail and restaurant business, that is the market leader in both of those businesses in point-of-sale software. So I'll jump off there, Ian, and turn it back over to you to begin kind of the fireside chat piece.
Yeah, no, this is -
... excellent overview, great overview. Let me just see something here. Okay. Can you still hear me?
... We got you. I do.
So, so the question would basically be on, you know, what you're talking about, about, you know, you, you did this digital banking sale. Maybe talk about, like, what your priorities are now. What weren't you able to do, while this was inside and you were focused on digital banking, that you're now gonna be able to do? Or, you know, how does this now change kind of your priorities?
Yeah, I mean, our key priority is to focus on growth. And you can say, well, we could've been focused on growth, we were in the digital banking side. It creates less clutter in terms of mind share in the company. It allows us to, as I described, to clean up the balance sheet, to get leverage down and improve EBITDA margins. A bit of what we're gonna do with the proceeds actually helps EBITDA margin on an accounts receivable facility that ends up coming out of the business as well. But it also... You know, we had management teams, tech teams, other teams that were worried about this entire breadth of a portfolio, and now we can just really be focused on retail and restaurant.
The more impactful to that transition, or our focus areas going forward, was that hardware ODM model that we announced, Ian. Honestly, while the digital banking was a big transaction, and I think a lot of people were anticipating that we would do something there, given we haven't been able to unlock the value, the real culture and the bigger shift in the way we think about our remaining retail and restaurant software and services business going forward, was the hardware. We've talked about it for quite a while in terms of de-emphasizing the hardware elements of our business.
It was creating volatility in our revenue, and we decided to move forward with the next evolution of our hardware supply chain, and just completely move to that ODM model, where the outsourced design and manufacturing, where we are a sales agent. Our partner takes inventory loss, warranty loss, or warranty risks. They take all of the. They take title. They do the entire supply chain design, end-to-end, and we are effectively a sales agent. That takes the volatility out of the revenue, and that allows our sales teams and our support teams to focus on software and services specifically, and that's something we haven't been able to do as a company.
As you know, when you have hardware, and you have this hardware relationship, and you have to do all the supply chain that I just described in logistics, it creates a lot of work inside the company, and a lot of the bandwidth. Our infrastructure, our systems, our tooling, our sales compensation models, all get wrapped around something that includes hardware. We don't have to do that anymore. We changed that completely. We created a dedicated team to worry about hardware, and then we turn all of our other sellers into software and services growth sellers. It's a big deal for us. It means we're... I mean, for 140 years, we've been a hardware company, in the eyes of the market, in the eyes of our employees, and we just changed that.
So now, you know, just staying on the ODM agreement, you know, how is the company... and you kind of did this, you touched upon this a little bit, but does this impact the services business? I mean, is the services the, you know, area suited for an ODM, you know, to transition over to an ODM model? And then also, maybe help us understand what, like, the savings are, you know, of this agreement, and how does the cost play out, thinking about this?
Yeah, on the services side, Ian, that was a critical consideration for the partner that we chose. Because in our space, our services, along with our platform software, is what allows us to differentiate in the eyes of our customers. As we hear that feedback from our customers, that if you're gonna be in the enterprise space, which we're heavily weighted towards enterprise, and retail and restaurant, is you have to have the full service capability. That's what, that's what differentiates us. So the partner that we chose, we couldn't create competition, and we needed to have the ability to continue to service the clients moving forward, inclusive of hardware, if that's the way our clients elected to do business with us.
Our current services footprint today is we service 50% or more of hardware that's not our own today. So now this is just more an extension. We know how to do this really well. This becomes an extension of third-party. Our hardware was already manufactured by a third-party provider. We just had more of the ownership of the supply chain. So in terms of how we service it, we're, it's a model we're very used to. It's, you know, we will still do service sales, we will still attach services to hardware, and we'll still do the install when we need to on the one-time, on one-time services. So we already have a model that we know how to support third-party hardware. We see this as just an extension of that existing model without the, without all the hardware supply chain.
In terms of cost, the way... You know, so any of the costs that were associated with the hardware supply chain leave the business. So, you know, in the, in the transaction that we contemplated with Ennoconn, they, they will take on the costs that, that they need to, to drive the supply chain. That may mean taking on some people from, from NCR Voyix, and then we will eliminate the rest of the cost. So we'll do the net accounting on that when we go into next year. So you, that's where you'll see what we described in the pro forma as the $100 million of net accounting, and with that, we'll have a little bit of sales and support for our partner costs, that we assume to be about 10%, or $10 million of that, of that cost.
So you'll see that flow through as cost. But other than that, all the other costs associated with that leave our company, and that's what, one of the things that allows us to push the EBITDA margins up north of 20% going into next year.
Okay, sounds like a great deal. You know, if we can focus now on the segments, and maybe we take retail first. You know, how's growth been in that segment, and how has it kind of trended to expectations, and you know, how are you seeing it going forward?
Yeah, the growth in that business has been impacted significantly by the hardware decline that we've been describing in the market. But both businesses have. Honestly, it's overshadowed some of the real growth that we're seeing in software, in retail specifically. So I would say that, you know, hardware's been disappointing based on the macro trends. And I do wanna say on both businesses, the hardware decline is really, as I describe it, we're heavily weighted in the enterprise segment. Those are big enterprise customers that aren't refreshing hardware. Those aren't customers that are leaving the doors. They're not making other choices. We're not losing those customers to the competition. They're just not refreshing. It's, you know, the biggest of the big clients are sweating hardware assets just a little bit longer.
So software for the retail business has trended to our expectations, the ones that we set at the beginning of the year. Services, I would tell you, Ian, they're a little behind our expectation based on the one-time services associated with hardware. So that hardware, you know, we would do installs of that new equipment, and so that's, that's muted or brought down some of the expectations that we've seen on the services business. But, but all in, the software and services ARR growth that we, we started tracking and, and reporting externally this year, is, is moving forward, and we're seeing those numbers trend into the mid-single digits as we get out of the first half of the year, and moving, moving into the next, the back half of the year, we see those trends accelerating through the back half of the year.
Okay. And then, you know, in this new world of, you know, post-ODM, how do we see the growth of maybe each segment? And what I mean by that is, you had self-checkout growing very quickly, large adoption, versus, let's just , the pure POS.
So how does this now... Or how do the trends now look, now we've disaggregated it from the hardware business? You know, not maybe-
... but, like, just longer term in general.
Yeah, and we have a good point of view of what's going on in the retail landscape across all the different segments. Our business is predominantly grocery and big box, and then convenience and fuel is the second part of the most important part of that business, and then department and specialty is the third piece. So I'll talk about a little bit about some maybe some of the trends within the trends. But all of our customers, even if I looked within restaurants, so some of this will apply to both, Ian, as well, but they're really battling how to create the best experience for you as a consumer.
So all of our retailers are facing that same dilemma: "How do I differentiate my brand based on the experience that my consumers have?" And we believe that the best ability for our our customers to create consumer differentiation is through choice, and self-checkout has been a major player in that, in that space for a long time, and it also frees up labor to go do other things in the store, as, you know, buying online and picking up in store and other things like that, take on a bigger part of the business. We view self-checkout as a more of a software play for us. Our intellectual property is really around workflow management and how how you as a consumer would interact with a device.
I'm less concerned about the end device, because honestly, self-checkout may take, you know, takes the form of me as to the store and maybe scanning my own items on a mobile phone or a purpose-built device. It could be a kiosk standing at the front of the store, or it could be the full self-checkout that we all know that has a belt and a bagging area in a big box or a grocery store. So we think self-checkout is really more of how do you create flexibility in checkout, which is much more of a software story for us as we go forward. Of course, there is always a need to have hardware to run software at some point, but we've created lower dependencies on that with the ODM model.
We still think self-checkout, you know, even with some of the press around shrink and other things that are happening in that world, while we've seen muted demand based on refreshes and then some pockets of pullback on self-checkout in its traditional form, we still see that as a big trend in terms of consumer self-service for choice on brand differentiation. On the core Point of Sale, you know, we are the market leader in the segments that we serve, and what we're seeing is not only that, but as we've shifted our focus, we haven't always been focused or had the same amount of focus that we do now on adding net new customers. So as we're adding more salespeople to go drive real growth, we're seeing competitive takeaway wins.
We're seeing a continued expansion of our platform wins, where customers are connecting to the platform and expanding their capabilities as they look to simplify their world of, you know, their vendor ecosystem, simplifying that down, like the press release we had with Sainsbury's a couple of weeks ago. We're continuing to do more and more through our platform for Sainsbury's as they look for ways to both get better access to data and have better availability and speed to market for technology. On the fuel side, convenience and fuel, we see similar trends that we're heavily enterprise-focused again, so there's a lot of consolidation happening in that industry, where the bigger players are buying the smaller players. So we will continue to see good growth there.
An opportunity for us is, we really haven't had much of a footprint in the specialty retail space, so that could be future growth for us as we move forward. We've been predominantly more in the bigger, that look like department stores or big specialty retail stores, that have had mixed results in the marketplace, but we've been fairly well-insulated in that business. We've seen a little bit of decline, but not enough to really describe.
Okay. And then, touch upon the competitive environment in that space and, you know, how does the business now compete, or how is it positioned without the hardware piece of the business?
Largely, in our space, so two things: on the enterprise side, the decisions, the hardware and software decisions have largely been separated. And we've been driving a lot of that as we create software that's hardware-agnostic. You know, we run a fair amount of our software on third-party hardware anyway. The other side of that is where we want to go to market with a bundle in the low end of the space. This arrangement doesn't prohibit our ability to, I'll say, purchase that hardware from Ennoconn, in this case, and then we can bundle it and offer it as a subscription in the very low end of the market. That's what we're doing in the restaurant side in the low end, and a little bit on the retail side.
But I don't think it really impacts our ability to be competitive. Increasingly, the hardware side of that business has become commoditized, and the form factor is getting thinner and thinner in the store. And so we believe a scale player, like an Ennoconn, has an ability to create a better end product to be faster to market with innovation, to ride their scale curve, potentially get better pricing to our customers. So there's a lot of benefits for us that as we became lower scale on the hardware side, partnering with a scale player really makes a big difference.
Okay. And then, you know, can we just turn over to restaurants now, and-
Sure
... talk into the business? You know, this might be a very broad question, but, you know, can you maybe just tell us, you know, like, what's your, what's your differentiating, you know, strategy here and differentiating product? And what, what I mean by it, is I feel like a lot of times you get kind of caught into this, this Toast or this, you know, other type of discussions. You see their growth, then you look at your growth. But, you know, to me, it seems like they're, they're very different businesses. And so, maybe kind of give us a discussion or conversation about, like, what you guys are actually doing and, like, why you guys are differentiated, you know, who you're focused on, et cetera.
Yeah, we again are. You'll hear the word enterprise. Our install base is heavily focused on the enterprise. We break this market down into three effective segments. We have the enterprise customers, we have mid-market, and then we have single site or the small side of what we do. We compete well in mid-market, and that's where when you see us announce new wins, that's where we're winning new business, and it's our combination of a great platform software product with our full ability to full services that customers believe in when they. And they tell us that that's how we differentiate, and that's why they choose us when they do. On the enterprise side, it's very sticky. We have a very sticky application.
Obviously, Point of Sale is a very sticky application, and when you're in the enterprise side, it's much more disruptive to change out that software. So we've got a resilient application, and what we're doing there is connecting our customers to the Platform. So as an example, if you're running our legacy Point of Sale, we can kind of upgrade you to the latest version, connect you to the Platform, and then you can start to consume cloud capabilities, things like data and analytics, online ordering, consumer marketing. You're consuming cloud services while not changing out the core Point of Sale. So that's really what most of these enterprise customers want to do.
They want new functionality, they want to be able to respond to market demands, meet the customers where the customers want to transact, and maybe less disruptive to their overall business, and that's what our platform connection enables. In the mid-market, it's the complexity. Once you start to grow and you become multi-site, maybe a couple of cities with your restaurant brand, you realize that IT is probably a little harder than you want to do on your own, and you don't have that expertise. You were a chef with a great idea, and you made great food, and you got big enough. Now you need an IT team, and that's when you call us because we can provide full services.
If need be, we can ultimately roll a truck out to the field to help you set up, and that's just capabilities that our customers value, and that's why they choose us.
Okay. And then as you look at kind of your progression, I know you guys have laid this out before about growing your software revenues inside the customer, help us understand, like, what the potential is, as far as growing that software, the number of software units you're selling into that customer. How's that going, and what's sort of the potential of that?
Yeah, there's a couple of ways we do that. One is that I describe that platform connection. If you're an existing customer, we connect you to the platform. If you're new, you onboard to the platform natively. When we do the platform connection, there's an uplift when we connect you to the platform. So typically, we're doing it because you want extra capabilities. And so when we get you platform connected on the retail side, it's... If you're paying us something today, you pay us 1.5 tomorrow because we're adding new functionality or shifting wallet share. In the restaurant space, it's a little bit lower, but it's, as we described, it's kind of what our hypothesis would tell us, and then as you're connected to the platform, we can start doing cross-selling and upselling.
That's where we see the benefit of, you know, increasing 2x, 3x, 4x the average revenue per site once we get you connected to the platform. We're less than 20% of our install base connected to the platform, so we have a long runway to continue to connect. Our base, we just finished an exhaustive customer analysis, where we went 3 years back and looked at trended history in terms of the stability of our base, and the base is largely stable. So that's what gives us confidence that we can continue that trajectory of connecting customers to the platform. Again, we have a long runway, and then doing the cross-selling and upselling that would allow us to grow the recurring software and services revenue within those customers.
And then payments becomes an add-on that is probably an under-penetrated asset for us. We gateway most of the transactions that flow through our point-of-sale software, but we don't clip the coupon on processing. So when you see us talk about payments attach in that small and mid-market space on restaurant, we lead with payments, so we have 98% attach rate there. There's an opportunity for us to move upmarket on restaurant, and then we need some capabilities on the retail side that we'll likely partner to round out. But that. As we do that, and as we get our go-to-market motion shifted, we'll start to see some growth, and it'll show up in software ARPU with those customers.
Okay, good. And now, going back to, you know, one of your comments earlier about, you know, you got rid of digital banking. So now with the proceeds, like, what's the use of proceeds, and where do you think that you might be deficient, that you might need to, like, buy something, or add, or an opportunity that you wanna go after? Yeah.
Yeah, so we've been. When we outlined our capital allocation strategy earlier in the year, we, you know, we said we're gonna continue to invest in our core product organically. So we will continue that, and that's built into our budget, so we'll kinda check off. Then we said we wanted to de-lever, to get us down something closer to two turns. So the biggest part of our proceeds will go towards de-levering in terms of getting us to that two turns of leverage on an EBITDA multiple or slightly a little less. The math would tell you if we used 100% of the proceeds to do that, we'd be down to 1.6 or so. There's a $300 million AR facility that we'll take out that has impact to EBITDA.
There's $20 million of fees associated with that, that flow through, that you'll see an uptick $20 million in EBITDA, so we think that's prudent to clean up the balance sheet. And then beyond that, we have... You know, we'll end up around that 2 turns. We think that's the right target leverage ratio for our company, and it does give us flexibility. It'll give us flexibility to do things like if we think a shareholder buyback makes sense, we can do that. If we have to do tuck-in acquisitions, we can do that. Right now, we're not contemplating any acquisitions. We're trying to digest these two transactions that we just did and get really focused on that growth engine for 2025.
Okay. Now I know there's a question on the line. Actually-
... a few questions. Some of them might be a little finance- you know, like, relatively finance-based, but, bear with us. You know, will you provide segment, like, segment reporting now, for the retail and restaurant? Maybe provide subscription software, recurring maintenance, professional services, hardware, and define maybe what your gross margins are for each one. Would you consider doing that?
Yeah, so it's easy to say I'll consider doing that, so but it is also. We provide segment-level reporting today to some extent. We are exposing platform, site conversion, software ARR, services ARR, and total segment ARR. So that's all today already done at the segment level. As we go into 2025, we'll start to get more refined on how we wanna disclose the business and how far down we wanna go into recurring revenues or gross margins, and more to come there, but we're open. We do wanna provide visibility as much as we can, be transparent in terms of what's happening within the segment, so we're evaluating how we wanna report going into 2025.
Okay, and then another kind of financial question here. You know, as far as your pro forma numbers without banking, the report said 2024 pro forma numbers should be about $430. But if you add the adjusted EBITDA of both segments, so the $152 and then the $290, you're at a $600 million run rate.
Yeah, the corporate... There's a corporate segment that you gotta factor in. We don't... There's a corporate and other that you'd have to reallocate back out to that EBITDA to get back down.
Okay, so if we're to do a baseline, you'd use the 430 plus the 75 of cost-cutting?
No, the 430 is the baseline. Sorry. I thought you were gonna go somewhere else. If you add the two-
... there's-
$170, you're at $430 again. So is it $430 plus the $175? Again, I'm sorry, you might wanna just get back to us. I don't mean to hold you.
Yeah. No, that's, that's fair. Alan, if, if we can get whoever's asking that question, we'll, we'll follow up with more detail on the model.
Sure, of course.
Okay, that is fine. And then do you plan to break out, payments revenues, or will you share them?
... it'll be shared in the software line.
Okay.
For now, for now. We may choose to do that later, but for now it'll be in the software line.
Okay. Okay, that is, helpful. Sorry, sorry, I get a little bit technical there.
That's okay.
As far as CapEx, where do you plan to put CapEx? Or where do you think you need CapEx now that you're kind of asset light?
Yeah, most 90% of our CapEx will go towards platform software, so it'll be software investments. And we still think, you know, around 6% of revenues is where that will net out when all is said. We, you know, we've been able to get a little more efficient there. We take, obviously, the digital banking CapEx out of our previous numbers, and then we had some efficiencies. Some of the labor out that we described was in CapEx-related items, so we'll get a little more efficient with capital, but we still think about 6% is the right number.
Okay. And then, final question here, this has really been very helpful, so thank you again for doing this, is, you know, there was a 1.6x leverage math that you laid out, but then the guide is 2x. So what's kind of the discrepancy between the two?
Yeah, there's just some flexibility in how we execute the, either the de-levering or, as I described, we might have some other options to potentially look at higher return items as we go through how we allocate the proceeds. So it's really just some flexibility in what we're, how we're driving that de-levering and use.
And then, if you have time for one more. Restaurant software ARR has been relatively flat. Retail software has been going up modestly. What are the long-term expectations for software ARR for both restaurant and retail?
Yeah, I see both of those at mid- to high single-digit growers in the back half of the year in terms of ARR. The, yeah, restaurant was down a little bit in Q2. It was high in Q1, down a little bit in Q2, but we see that recovering nicely, each of them growing sequentially as we move through the balance of the year.
Okay, perfect. Thank you very much for this, David. This has been absolutely wonderful. You've been spot on, and like I said, I just outperform on your stock, so.
I appreciate it, Ian. The team, the team's been really busy. I mean, we're undergoing a pretty big change, and as we come out, we're excited about what that pro forma looks like. Getting... Accelerating a lot of the shape of the business that we said, getting to higher recurring revenue content, getting EBITDA margins and free cash flow up, and then ultimately leverage down and getting this business growing is, we know, critical to our investors and to our employees. So we are going to be 100% focused on growth.
I see you guys buying stock too, so.
It's a good value.
Good. Thank you very much, guys. Really appreciate this.
All right, thanks. Thanks, Ian.