Good day, ladies and gentlemen, and welcome to the NCR Corporation 4th Quarter Fiscal Year 2020 Earnings Conference Call. Today's call is being recorded. And at this time, I would like to turn things over to Mr. Michael Nelson, Vice President of Investor Relations. Please go ahead.
Good afternoon, and thank you for joining our Q4 and full year 2020 earnings call. Joining me on the call today are Mike Hayford, President and CEO Owen Sullivan, COO and Tim Oliver, CFO. 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, but they're subject to risks and uncertainties that could cause actual results to differ materially from those expectations. These risks and uncertainties are described in our earnings release and our periodic filings with the SEC, including our annual report.
On today's call, we will also be discussing certain non GAAP financial measures. These non GAAP measures are described and reconciled A replay of this call will be available later today on our website, ncr.com. With that, I would now like to turn the call over to Mike.
Thanks, Michael, and thank you, everyone, for joining us today for our Q4 and full year 2020 earnings call. I will begin with a review of the Q4 and full year as well as provide an update on our shift to MCR becoming a software and services focused company with a high level of recurring revenue. Tim will then review our financial performance and an outlook into 2021, and then Owen, Tim and I will take your questions. I'll begin on Slide 4 with some highlights from the Q4 and full year. NCR delivered solid performance Despite the current environment that continues to be impacted by COVID-nineteen, we continue to experience incremental improvements However, there remains uncertainty regarding when vaccines will be available to the general population and when businesses will return to normal levels.
1st, we delivered strong free cash flow. We generated $149,000,000 of free cash flow in the quarter $448,000,000 of free cash flow for the year. Tim will discuss in more detail the drivers of our strong free cash flow production. 2nd, we expanded adjusted EBITDA margin sequentially for the 3rd consecutive quarter to 15.8 percent in the 4th quarter, which represents an increase of 10 basis points from the 3rd quarter. As we discussed last quarter, we have taken actions to replace the temporary cash cost savings when the pandemic began with permanent expense savings.
We entered 2021 with $150,000,000 in cost savings that are expected to drive margin expansion. Our performance in the 4th Quarter is a result of some of these actions we have taken and those actions continue to drive margin improvement in 2021 and beyond. 3rd, we delivered 6% recurring revenue growth in the 4th quarter, bringing recurring revenue to 54% of total revenue. Throughout 2020, we have made steady progress generating increased recurring revenue, which is consistent with our eighty-sixty-twenty goals. And finally, we are very excited about the opportunity to combine with Cardtronics.
The proposed transaction accelerates the NCR as a service strategy we laid out at Investor Day in December and further shifts NCR's revenue mix to software, services and recurring revenues. We to EPS in its 1st full year. Now moving to Slide 5. We have continued to progress executing our strategy Despite a challenging business environment, we remain focused on our transition to drive NCR as a service and achieve our Eighty-sixty-twenty strategic goals. For the full year 2020, software and services represented 72% of our total revenues, Up from 65% in 2019 and 54% of our revenues were recurring, up from 46% in 2019.
EBITDA margin was 14.4%. In banking, we continue to have positive momentum in our digital banking platform with 5 new customers signed in the 4th quarter. One of those new customers was WindTrust, a $43,000,000,000 bank with 15 branded community bank subsidiaries that selected NCR's D3 Digital Banking solution. We have already started off 2021 strong with the signing of another new D3 Customer Associated Bank, which is a $35,000,000,000 regional bank based in Wisconsin. In the Q4, we also had cross selling success with existing clients and new products including 7 business banking deals.
In retail, we are gaining traction with our NCR Emerald offering, which is our next gen cloud based retail point of sale solution. As we discussed at our Investor Day, the acceleration in digital Transformation is being driven by consumer demand and retailers needing to respond. We believe this is driving an upgrade cycle for retail POS software And NCR has the largest global installed base. We continue to be excited about the sales funnel for NCR Emerald and recently signed our biggest NCR Emerald deal to date with the largest cooperative in Canada with 1500 stores. We are also seeing increased adoption of our self checkout solutions.
We are experiencing demand across customers, geographies as consumer preferences Accelerate. In Hospitality's momentum of Aloha Essentials respond to software, services, hardware and payments continued in the 4th quarter. This model is proving itself in our ability to attract new customers as well as better service existing customers. During the Q4, over 90% of all Aloha sites sold through our direct offices were sold as subscription bundles, with payments attach rate also strong at 75% of sales into new sites. As we focus on executing our NCR as a service strategy, We continue to invest in our strategic growth platforms, both organically and inorganically.
We recently closed 2 relatively small but very strategic acquisitions. We acquired Terafina, a leading provider for customer account opening, which is a digital front end solution for digital banking. We also acquired FreshUp, a digital online ordering platform, which provides retailers the ability to quickly deploy, Buy online, pick up in store capabilities. With FreshShop, NCR can now help grocers capitalize on the growth in e commerce going forward. These two recent acquisitions are consistent with NCR's strategy to acquire early stage software companies to enhance product capabilities and extend our leadership in the vertical industries we serve.
With that, let me pass the call over to Tim.
Thank you, Mike, and thanks to all of you on the phone for tuning in today. Turning to Slide 6, which presents the top level overview of our 4th quarter financial performance. Starting at the top left, consolidated revenue was $1,630,000,000 down $255,000,000 or 14% versus the 2019 Q4. But as we anticipated, we extended our trend of modest sequential improvement beginning back with the onset of the pandemic. Revenue was up $42,000,000 or 3 percent sequentially from 20 20's Q3 with all three business segments showing increases.
As expected, our 4th quarter revenue was negatively impacted by the broader economic pause. And while I'll dig into the more specific drivers of the year over year decline later, In aggregate, dollars 203,000,000 or 80% of that decline was attributable to lower hardware revenue, which was down 30%. Importantly, our strategy to shift to recurring revenue streams again accelerated sequentially. Recurring revenue was up 6% year over year and 3% sequentially. We shifted $32,000,000 or over 2 points of revenue that previously would have been booked upfront as a perpetual sale to a recurring revenue stream.
This compares to just $9,000,000 in last year's 4th quarter or $27,000,000 in this year's Q3. In the top right, adjusted EBITDA decreased $41,000,000 or 14% year over year to $258,000,000 in line with the revenue decline, with EBITDA margin rate down only slightly from the prior year, ending at 15.8%. On a sequential basis, adjusted EBITDA was up 4% and EBITDA margin rate expanded 10 basis points. The similar margin rate results obfuscate the impact of a tremendous amount of hard work on our cost structure. The temporary cost reductions that were enacted at the outside of the were suspended in late Q3 and were replaced with cost action savings finalized in Q4.
Because they were taken during the quarter, they had only a pro rated impact on Q4 results. The productivity improvements implemented in the 4th quarter were both more permanent and of greater magnitude than those that they replaced. These actions were upsized from $100,000,000 to $150,000,000 to allow us to sustain our profitability at pandemic levels of demand and to drive further margin expansion as demand improves and our revenues follow. Similar to the discussion of revenue, the shift to recurring revenue was also an important descriptor of our relative EBITDA results. Dollars 27,000,000 of adjusted EBITDA did shift out of the quarter, accompanying the respective revenue shift.
This compares to $8,000,000 in a year ago Q4 and $21,000,000 sequentially from Q3. And in the bottom left, non GAAP EPS was $0.59 down $0.26 from the prior year 4th quarter and up $0.04 from Q3. The tax rate of 20% for Q4 decreased as a result of the lower than planned income, which causes planned discrete tax items to have an outside effect on the overall rate. And finally, and maybe most importantly, we generated $149,000,000 of free cash flow in the quarter at $448,000,000 for the full year. This compares to $302,000,000 in the year ago quarter, but just $281,000,000 for that full year.
To say it differently, more than all of 20 nineteen's free cash flow was generated in the last quarter of the year, while in 2020, We generated a much more linear free cash flow result with approximately $150,000,000 in each of the last three successive quarters. Our year over year improvement was due to a 9 day improvement in days sales outstanding, a reduction in both raw and finished goods inventories and a more efficient capital spending plan that more than offset the impact of profitability from the pandemic. Moving to Slide 7, which describes our banking segment results. Banking revenue decreased $149,000,000 or 16%, mainly driven by a 36% Thank customer capital spending constraints continued into the 4th quarter, resulting in lower year over year hardware revenue, are consistent with Q3 and our expectations expressed then for Q4. The remaining decline in revenue was driven by lower attached software related to the lower ATM sales.
Excluding the decline in new ATM hardware and the directly related revenues, our service revenue has shown modest growth year over year. Operating income decreased $57,000,000 or 40 percent, and operating margin rate declined by 4 40 basis points to 10.9%. About 60% of that decline was hardware related and included lower volumes, a disadvantageous geography mix, resulting on absorbed costs and a lower attached software sales. The remainder was from the shift of $17,000,000 of software to future period recurring revenue. Operating expenses were only down 3% and will need to go lower in 2021.
On a sequential basis, revenue was up 2% and operating margin decreased by 180 basis points. Sequential Profitability declined due to the timing of 2 vendor payments and a lag in new cost actions replacing the old one. At our Investor Day in December, we introduced some key metrics for the banking segment as digital banking revenue, digital banking registered users and recurring revenue. For Digital Banking revenue, 2020 marked an inflection point as the full year increased 4% over 2019. Digital Banking registered users increased 12% compared to the Q4 of 2019 and showed nice sequential growth over the last 5 quarters.
Despite the overall declines in revenue, we did grow in the right places. Recurring revenue in this business increased 8% year over year and 3% sequentially. Moving to Slide 8, which shows our retail segment results. Retail revenue decreased $40,000,000 or 7% against a very That was partially mitigated by a year over year increase in services revenue. That said, operating income was up $7,000,000 were 17% versus Q4 2019.
That increase was driven by a favorable mix of revenue, both by product and by geography. Sequentially, revenue was up 2% and operating margin expanded 50 basis points. This was our 3rd consecutive quarter of modest sequential growth, driving significant margin recovery on a lowered cost structure. Down at the bottom, you will see the 3 key metrics we introduced for retail. Self checkout revenue decreased compared to a hardware rich Q4 in 2019 and was down slightly versus Q3.
While this metric is somewhat dependent upon the timing of customer rollouts, we continue to see broad based demand for both by customer and by geography for SCO. We're actively managing both manufacturing and installation capacity in this business to facilitate more linear revenue. And platform lanes increased 40% compared to prior year Q4. We continue to see positive traction in the implementation of our next generation retail solutions. Recurring revenue in this business increased 11% versus the Q4 in 2019 and increased 3% sequentially.
Slide 9 shows our Hospitality segment results. Hospitality revenue decreased $50,000,000 or 22%, driven primarily by lower hardware sales. As expected, our Hospitality segment and its customers have been most impacted by the pandemic, with capacity of service limitations in the Americas and Europe and changes in consumer behavior. 4th quarter operating income declined $8,000,000 mainly due to the flow As was the case in Q3, we were able to partially preserve profitability by reducing operating expenses by 15%. On a sequential basis, we continue to experience incremental improvement in both revenue and operating margin.
While we wait for a more normal operating environment for our customers, we will continue to add functionality to help them acclimate, manage our costs carefully and accelerate our transition to recurring revenue streams. The key metrics added for Hospitality are Aloha Essential Sites and recurring revenue. Aloha Essential Sites, which bundled software, services, hardware and payments into a single offering, grew 42% when compared to prior year Q4 and grew 9% from this year's Q3. We continue to see the adoption of our Aloha Essentials bundle as we convert our current installed base. We're pleased to see a turn in recurring revenue graph at the bottom right.
While down 5% last year, it was up 6% in the 3rd quarter. Turning to Slide 10. We provide our 4th quarter revenue results under our previous operating model for both continuity and added color. Software revenue decreased 9% due primarily to the shift from one time recurring revenue, which represented approximately 2 thirds of the decline. Lower sales attached to new hardware and challenging conditions for our hospitality business account for the remaining decline.
Services revenue remained flat. And finally, as I mentioned previously, hardware revenue was the most impacted in the quarter by the pandemic, declining 30%. ATM revenue declined 36%, while the combination of self checkout and point of sales declined 23%. Software and services as a percentage of total company revenue increased to 71% from 64% in the prior quarter with Lower hardware sales exaggerating our improvement. Recurring revenues increased 6%, driven by our programmatic effort to shift our sales away from single sales events with Petrol licensing to predictable multiyear commitments with relatively high certainty of revenue generation.
Recurring revenue as a percentage of total company revenue increased to 54% from 44% in Q4 of 2019, also benefiting from lower hardware sales. We continue to experience sequential improvement with all Ares increasing compared to the 3rd quarter. On Slide 11, you'll see the same revenue snapshot, But for the full year 2020 versus full year 2019. The shift in recurring revenue had $100,000,000 impact for the full year or roughly 80% of the software decline. Adjusting for that shift, software and services revenue would have shown a modest increase compared to 2019.
Service revenue continued to show resiliency with 2% year over year growth. Recurring revenue increased 5% year over year, living up to its title and validating our emphasis on it. We ended the year with 54% of our revenue as recurring. While admittedly the increase is aided by the AirPacket and Hardware sales, we continue to see growth in all three of our segments with a positive mix shift. On Slide 12, we present free cash flow, net debt and adjusted EBITDA metrics.
As I mentioned earlier, we continue to have impressive performance on the cash side. Free cash flow was $149,000,000 in the quarter. Although a decline from the prior year period, we ended the year with free cash flow of $448,000,000 up nearly 60% from the $281,000,000 in the prior year. Our efforts to improve working capital and drive improved linearity in our annual cash generation are working well. Also, during the Q4, we made a $70,000,000 Contribution to the U.
S. Pension plan is expected to push our mandatory contributions out until 2023. This slide also shows our net debt to adjusted EBITDA metric with a net debt leverage ratio of 3.3x. We ended the year with $338,000,000 of cash, having paid down both our outstanding revolver and our trade receivable securitization facility and having retired 132,000 shares of preferred stock. We remain well within our debt covenants and ended the 4th Turning to slide 13.
Late in Q3, we released several of our temporary cost actions in anticipation of replacing them in the 4th quarter with more permanent and sustainable cost reductions. Those cost actions and the related operational changes or product decisions resulted in approximately $200,000,000 of restructuring charges in our 4th quarter. Approximately $150,000,000 of those were non cash charges, mainly related to excess inventory and software impairment charges related to strategic changes. The remaining $50,000,000 for cash charges for severance and the resolution of several legacy items. We entered 2021 with an estimated $150,000,000 of run rate cost savings.
Approximately 40% of those savings are from operating costs, another 40% from SG and A and the remaining 20% from the corporate functions. And my last slide is Slide 14, which provides an outlook for Q1 2021. Because our end markets are still being impacted by the economic drag of the pandemic And because this successful completion of the proposed Cardtronics transaction at midyear will complicate reported results, we are not going to provide full year 2021 guidance We're standalone NCR at this point. But for Q1, relative to the year ago Q1, so on a year over year basis, We expect revenue growth of 2% to 3%. We expect particularly strong growth in recurring revenue streams, and we anticipate persistently difficult banking hardware environment.
On profitability, we expect adjusted EBITDA margin to expand by 2 50 basis points to 15%. And finally, we expect free cash flow to be positive, which might seem to buck our recent trend. But remember, we have had about $150,000,000 of unavoidable payments in the Q1 related to benefits and compensation that occur in every Q1. We know that you have a complicated modeling effort on your hands and hope to be more prescriptive as we get closer to midyear and to the closing of the transaction.
With that, I'll turn it back to Mike for closing comments. Mike? Thanks, Tim. In closing, I want to first commend the entire NCR team on strong execution in 2020. Despite unprecedented challenges, our employees have continued to take care of our customers and have shown resiliency in these very difficult times.
Looking ahead, our key priorities are clear. 1st, we will continue to accelerate our NCR as a service and eighty-sixty-twenty strategy. We have made notable progress this year despite some of the challenging conditions. 2nd, we will return to growth in 2021. We expect to grow both top line revenue and expand margins.
We took recurring costs out of the business in 2020 and expect the combination of a lower cost structure along with positive operating leverage to drive margin expansion in 2021. We entered 2021 with positive momentum and are laser focused on execution. 3rd, as Tim discussed, we are focused on improving the linearity of both revenue and cash flow. We made significant progress in 20 Turning to Slide 16, I want to close with a strategic rationale for our proposed transaction with Cardtronics. The combination accelerates our NCR as a service strategy and expands opportunities and payments.
It will enhance our scale and cash flow generation, while advancing our eighty-sixty-twenty targets by roughly 2 years. Additionally, the proposed transaction is expected to be accretive to EPS by 20% to 25% in the 1st full year. We believe the combination of NCR and Cardtronics will drive significant value for our customers and shareholders. It's a unique opportunity that both strategically consistent and financial accretive to NCR. And with that, we will open the call for your questions.
Thank you for your time today. Operator?
Thank And we'll go first to Tim Willi of Wells Fargo.
Hi, thanks and good afternoon, everybody. A couple of questions, if I could. First, in your controls and Is there a way to just sort of think about the average, I guess, transaction size, whether that be Product attachment or sort of annualized revenue from the new sales versus sort of Prior experience, just sort of help us think through that revenue look as that continues to gain progress?
Tim, you're breaking up a little bit, but I think you're asking about hospitality and Aloha Essentials versus The way we used to sell, is that the question?
Yes. Just sort of like a way to think about the average attach rates, number of products people may be buying, and I know that's a bundled product, so Revenue lift or just I don't know a way to think about like the delta of these new customers versus the existing base?
Well, I mean, the key to it, so first of all, if you dislocate, we're going to bundle everything in an essential package. You're going to get all the components in there. So instead of piecemealing it, you're going to get a bigger sale and say that that's a A percentage bigger than a typical sale. I don't know if 1x, then you go 1.5x, 2x So you got a bigger sale. The most important thing is attaching payments.
So we've had attaching payments. The revenue per account Goes up considerably if we don't have payments. And honestly, as we get more scale and leverage in payments, That's going to drive margin on those accounts. So it really is that 75% attach rate on payments, which is important to us, Getting those accounts, getting them up and running, they're turnkey. They don't start to parse out each component As a separate RFP to a separate pricing competition.
So over time, we think the margins will hold up better and it's just a better revenue stream for us.
Great. And then just a follow-up. I know you can't say a lot, I guess, about sort of the Cardtronics given the merger has Closed. But I guess it's been now, I guess, a couple of weeks since that formal announcement. I guess I'm sort of curious any feedback you've gotten from your existing Customer base within the banking industry, whether it's conversations you've initiated or just unsolicited feedback From existing customers that you have about how they think about it and your confidence about the deal?
Well, So Tim, we went into it and obviously we know Cardtronics well as a very large client of NCR. They go on the marketplace and Sell today and part of what they sell is bundled up components that we deliver to them. We sell them hardware today, ACAMS. We sell them services, we sell them software and they bundle that up and they deliver a more value added product in the marketplace, which obviously is one of the reasons that we were interested in this combination. We did not expect any Negative feedback from the marketplace, banks, the industry and we just haven't seen any, we haven't heard any.
I don't really know what Cardtronics has seen on their side, but I think we did not expect it and we haven't really heard Negative. What feedback we're getting from the marketplace? We don't really get engaged with what does Cardtronics look like combined with us, but I think the Dental Perception
And we will now move over to Katy Huberty of Morgan Stanley.
Yes. Thank you. Good afternoon. Tim, just a clarification first. Is the 2% to 3% revenue growth in the Q1, is that reported or And what do you expect the currency impact to be in the March quarter?
And just to follow-up on that, guidance implies about Half the sequential decline that you typically would see in a Q1, does that speak to a more robust In demand in the March quarter or is that just changing shape of seasonality because of higher revenue mix than in the past? I have a follow-up from Mike.
Yes. So firstly on the growth rate, on a reported basis, I'd expect to be at the higher end of that range And the currency effect, we left ourselves some room to the downside there if the currency happens to be negative. Right now, it looks like currency will be okay On the linearity from Q4 to Q1, you're exactly right. We did not do in the Q4 some of the things we've done in the past to, let's say, unnaturally move revenue into the full year and into the last year. We have traditionally had very aggressive selling in the 4th quarter, particularly around hardware and we didn't That didn't happen in the last Q4 of last year.
And so that leaves us a much better stead coming into Q1 with a better revenue expectation, a better pipeline and a much more linear revenue pattern really for the full year. So Yes. We're very pleased to be able to show year over year growth in Q1 because you'll recall that was not really a pandemic affected quarter, It's only mildly at the back end. We had a little effect, if you recall, from a tornado. But still, even adjusted for that impact, we would be showing year over year growth.
That's great. And Mike, speaking of capital and hardware spending, if you think about the 3 segments, Which are wholly dependent on a full vaccine rollout versus where could you see a more robust Recovery just as we get visibility into a vaccine, but not necessarily a full reopening.
Wow. Well, I'm not going to share our date, but we declared an end date of the pandemic here at NCI, but I Can't share with you. So that's a great question, Kate. I would say like this, so the parts of the business where Consumers have to regain confidence and get out and feel comfortable going to restaurants, they're going to retailers, picking more retailers again. That's obviously going to drive our hospitality business and our retail business.
I'd say hospitality is probably impacted a little bit more On the high end of our marketplace, the ability to drive through and takeaway obviously, survive in some cases, thrive. I would say hospitality should have a better impact when people can get out and about retail is going to have a good impact. I think The other one is, if you look at what's happening to us in the bank environment, the bank is still operating, but they've been a little bit concerned, A little bit because of the financial performance with the margin net interest margin spread tracking on them this year with the fiscal policies. And then Also just not knowing for them when this economic impact and we've seen them slow down a little bit in their capital spend. So I think the banks and the banks might be a little bit of a trailer when they see the market picking up, but I think Hospitality, when restaurants start opening up, start getting business again and then retail.
Retail is a little bit more of a strategic push. We think that they We'll have to retool their POS technology going forward.
And now we'll move to our next question and that will be with Brett Hough of Stephens.
Great. Thanks, guys. This is Joel on for Brett. Appreciate you taking the questions. So a couple of questions here.
Can you talk about Aloha and maybe the competitive dynamics? Any color on win rates Pipeline in a quarter. And then could you provide any color on the JetPay volumes and maybe some of the trends that you've seen of late? That would be great. Thank you.
Yes. Let me start with Jeff Hague. So Jeff Hague, We've gone through the process of integrating into Aloha and Aloha Essentials. We've started to integrate it into Emerald. We've got it integrated into some of our Other retail products.
And then we've had the most activity in hospitality with Aloha Bundling that in as we talked about was a very strong attach rate. So that's new clients going up to new clients and attaching Hey, man. We started in 2020, in the back half of twenty twenty, going up to existing clients and upselling JetPay And it started to get some momentum and traction along those lines. So we feel really good about not only When we go to tax, but also going back into the marketplace. And again, our strategy is fairly simple.
If you're using our POS At the point of the transaction and we tightly integrate our payments, we can have a smoother interface, smoother integration, Better information, better data flow and if you separate those 2. So that strategy seems to be working and that team continues to make Solid progress. Maybe I'll turn it over to Owen on Aloha and the success. I mean, I think we're Tracking to where we wanted to be in a difficult year. And the competition, I don't think it's really changed.
It's just
I would say that competitive landscape has not changed significantly in terms of the major players. And from our performance, 2nd quarter, it was clearly the low point. We have seen sequential Growth in Aloha Essentials activity in both the 3rd and the 4th quarter. So I would say the team on The hospitality side is feeling modestly positive. But to Mike's earlier comment, Until we see the vaccine and the pandemic a bit more under control, We're in a hold on pattern, if you will, albeit minimal positive momentum going into the year.
So I think there's cautious optimism based
on the momentum we've seen
in the last two quarters. But I think we're still waiting probably until late 2nd or 3rd quarter before we see significant
Thank you.
We will now go next to Dan Kurnos of The Benchmark Company.
Thanks. Good afternoon. Just 2, if I could.
First, just maybe, Mike, on SCO, it was probably maybe
the only real in the quarter and thanks for the incremental breakout or at least color there. Just kind of a just color on what's Driving that success and sort of what you're seeing going forward. And you talked about as part of your Increased linearity, that might be one area to focus on. And then secondarily, the Q1 guide is on the top line, I think, ahead of expectations
And pretty in line, if you think on the EBITDA, but it's kind of impressive. It sounds
like you're getting some momentum. So maybe you guys could just talk through What the drivers are for both Q1 and into the
balance of this year as you see them? Thanks.
Yes, sure. So let me take the 2021 stuff first. So it's tough, right, because we were only going to be NCR alone, we hope, for a couple of quarters, so I know you all trying to build models. Yes, I feel very good about the Q1 momentum. To be able to post growth year over year And let's call it a pandemic unaffected quarter is terrific.
When we talked back in December 3, we talked about a growth rate that approximated 5% over 4 year period that was described then, I think we'll be on that number. I think we've said that it's going to be a linear walk that this is not a hockey It's working a lot, up that curve in most years. I would expect that to be the case this year and I expect it to be, as Bowen just Describe modest sequential improvement quarter over quarter, every quarter. That's what we're headed for. Now as somebody We could get a pandemic bump here at some point.
We've not planned for it. That's not part of our forecast. And we've not planned for a Significant recovery in hardware, particularly at AT and S. So up modestly year over year, but not anything, no big bump. On EBITDA, Similarly, we talked about moving from 14.5% this year to 20% EBITDA margins out of 2024.
I think we'll make at least So 1 year's worth of progress against that delta. It's a little bit lower at 14.5% than the starting point might have been. So we'll have nice margin expansion this year, and I think we'll be 16% -ish for the full year and exit the year at a rate that's In the Q4, that's higher than that. On free cash flow, I think it will be very similar to what we generated this I think the pattern of the generation will be very similar as well. We'll have higher profitability, which suggests we should get a little bit more free cash flow, But I do think that we're going to have to reinvest that into some working capital as we start to grow up out of the bottom of the pandemic.
We, the balance sheet shrunk Across 2020 and then when that happens quickly, you harvest a little bit of working capital goodness And free cash flow. So I think those 2 phenomena offset one another and for the year free cash flow is a lot like the $450,000,000 we generated in 2020. And There's the first part of that question. Michael, you remember the first one? Oh, it's go.
It's go. It's
very was very lumpy in
the year ago period and it is particularly dependent upon some major orders from very, very large retailers. Our effort is to get that to look more linear as well, And it's tough. So you saw a very, very hard comparison in Q4. You saw a year over year number that you probably didn't like. That said, In the first half of twenty twenty one, you're likely to see a 50% growth rate in SCO hardware because the comparisons were super easy.
And so you'll see linear revenue from us this year with, I'd say, 15 percentage growth across the year in scope with it heavily weighted to the front half in terms of
And I would just
add that geographically, we're and from a segment standpoint, Where Tim commented about a lot of enterprise driving lumpiness, we're seeing really good traction in the SMB markets As we continue to work with customers as they address their point of sale Software and look at their entire technology footprint and that includes the self checkout. So if you look in Europe, if you look in the United States and across the SMB, we're getting very good traction and seeing good Backlog and Pipeline Development.
Michael Nelson just laid the mute, said he needs to give a little more guidance for 2021 modeling. So here Here's a couple of other facts that we throw out there. Interest expense, I think interest expense will be just north of $180,000,000 on an NCR stand alone modeling basis. CapEx $275,000,000 to $300,000,000 which if you think about it, depreciation and amortization number of percent, which is up year over year. We should be more profitable, which will cause us to pay a little more tax.
We're hoping to find some discrete items to help us bring that number down. As we sit here today, I think 26 is, let's call it, a fair and conservative number and shares outstanding for the year about 143.5.
Got it. That's super helpful guys. Sort of towards and actually thought SCO was a
little better than I thought. So anyway, thanks for all the color. Really appreciate it.
Sure. Our pleasure.
Our next question will come from Matt Summerville of D. A. Davidson.
Thanks. I wanted to talk about expenses a
little bit here. It looks like SG and A up sequentially, up year over year, the highest Percent of sales you've had in quite a few quarters there. Can you talk about the level of spend that's remaining unusual in there? I guess I was surprised to see it so high.
Yes, there was some unusual spend in there. We had first of all, we had cost actions Coming off and new ones going back on. So we had remember, we had some salary reductions across the organization in Qs 23 that came back online. We started paying people the regular salary except Mike in Q3. And so obviously, There's a lift of all those temporary cost actions that we sought you for.
We replaced them with permanent actions, But those are out of sync with one another. So you'll see the impact of the reduction in cost in Q1, but admittedly those didn't sync up perfectly in Q4, so you saw a little bit of bump in cost. The other is we had some one time items, some settling up of some, let's call it, legacy Contracts that caused this to have higher a little bit higher in the quarter, they will not So there's some non recurring expenditures in there, maybe to the tune of $15,000,000 to $20,000,000
Okay. That's very helpful. And then, what would you say should be a realistic growth rate for the digital banking business You see it for 2021 organically?
Yes, I know. So we Shared on December 3 at our Investor Day that we had felt good that in digital banking, we bottomed out in 2019. We got A little bit of growth in 2020 and we expect in 2020 to get additional growth. I think we're going to keep putting points on the board. We We got some solid organic growth.
We talked about 2 nice sized deals that we signed in the last quarter and mentioned to early this year. And then we continue to add products. So when we add a product like Tarafina, which is online account opening, it gives us another Components that we can go cross sell to our existing digital banking clients, so that will help our organic growth. And then we'll continue to look for little tuck in. We're going to get that business back on track in terms of driving growth.
We took a step forward in 2020. And in 2021, we think it's going to take that next step.
Our next question will be from Paul Chung with JPMorgan.
Thanks for taking my questions. Great. So just on the restructuring charge, it was quite material this quarter. Can you just expand on where the majority of that charge came from? What kind of drove the decision that kind of clean up some of the Legacy costs and how this ultimately kind of benefits your cost base next year?
And then I have a follow-up.
Yes. So $200,000,000 $150,000,000 of it non cash $50,000,000 cash. The cash side was really severance for the cost actions we took in Q4. So we'll be about 1800 people lighter Next year than we were this year than we were last. On the non cash side, we made some changes The way we're going to operate our services business, Adrian and his team think that we can take cost out across the system and bring our inventory levels down By having fewer the right parts in the truck when we make our runs, that's going to cause us to treat our inventories of those parts differently.
And so we wrote down some parts associated with that business in the quarter, some that were excess and obsolete and some that were yet to be repaired and therefore we may not We may not bother to repair, so Ticamosco, of course, of course, of course, way to be repaired. There also were some other Software product and hardware product on the balance sheet that we don't intend to sell any longer. As we look forward, those products were not as profitable as we'd like them to be And our new product offering is better, and so we took those down off the balance sheet as well. And then we had a couple of other, let's call it, contract, legacy contract situations that we wanted to address, they weren't driving value for us. We thought that we'd accelerate those forward, get them off the books.
So yes, with those charges, you'll see the savings, particularly in the services business over time as And therefore, we hope we can keep that lower. And obviously, from a severance perspective, we've talked about the 100 $50,000,000 of cost of that $150,000,000 I'd say $110,000,000 of it is going to be people related. So you'll absolutely see that in 2021 as well.
Got you. Thanks for that. And then as we think about your free cash flow for 'twenty one, you had a nice finish For 'twenty, you mentioned some working cap headwinds probably in 'twenty one. You had a nice benefit this year. But If you see growth in the top line for the year, why can't we exceed kind of $450,000,000 pretty handily?
Just any puts and takes there? Thank you.
Yes. So I don't know. So, Anders, if we get that top line growth, of course, my receivables balance is going to grow. And so I'll have some pressure On working capital, my assumption right now is that we will not improve our days by another 9 days next year, And we won't be able to take our past dues down by a full 6 points or 6 percentage points next year. I do think there's still some room On inventory, not in the services business where we just took that write down, but maybe in finished goods As we go through the year, so I'm hopeful that we'll have some pickup in working capital and be able to offset some of the necessary investment in working capital to support that growth.
So I wouldn't tell you you're wrong, but I think the You should start thinking about our conversion rate of net income to be in that 95% to 105% range going forward. I think we were
We will now move to Ian Zaffino of Oppenheimer.
Hey, good afternoon guys. This is Mark on for me. And thanks for taking my questions. So I guess I'll take this one from us. Just without moving parts on free cash flow and for the volume just going to 2021, can you just give a sense of what capital allocation priorities are?
And Sort of what the, I guess, like appetite for M and A and where the sort of M and A
So you can answer that after I say, first of all, we are going to delever after the transaction is
Yes. So again, it's a little bit before and after of Cardtronics. So We shared, I think, the announcement when we announced the transaction back in a couple of weeks ago that Our typical capital allocation moved to the buyback of those shares, I think our dilution, we would not expect to do that In 2021, we will continue to invest organically, putting capital dollars to build out our products, the We will continue to do that. Tim talked about the CapEx that we're going to continue to spend internally. We will do that in 2021.
We would like to continue to tuck in. We've done a couple, but you could expect that, that may slow down a little bit as we go forward so we can preserve Cash, as Tim said, our priority going forward then will be to reduce our debt level, particularly as it relates to putting on the debt That completes the Cardtronics acquisition. So that's how you think about in 'twenty one. Really for the next, and Tim shared, We made the announcement 18 months to really focus on delevering the balance sheet. And I think because of that commitment, Mike, that we're going to
be able to borrow at a rate that makes Tremendous interest and support our banks have been terrific in supporting this transaction. That's because of our commitment to get back to 3.5 times leverage
And now we'll take a question from Kartik Mehta of Northcoast Research.
Mike, you Talked a lot about ATM as a service, especially now with the combination with Cardtronics coming up. I'm wondering what you have, if Any backlog for financial institutions that are looking for that service and kind of what the characteristics are? Are they credit unions? Are they community banks, Regional Banks, just some color around the types of customers you're seeing that demand from?
Yes. Let me just be Kartik at a maybe more of a macro level of what kind of led us as we start Looking at our strategy the last couple of years and again, as we've laid this out over the last year and a half, we've talked about Really moving upstream to full stack, we call it ATM to service others, others call it maybe more managed services, but The ability to deliver a transaction or a full function ATM, Including driving and operating and switching and routing it along with the hardware software in service. So we've looked at that. We've Seeing around the globe and in different countries, it's actually moved faster than we've seen it in the U. S.
It generally starts with off prem ATMs and the desire and the move of the banks to move that to A standalone footprint that somebody else operates, in some cases somebody else owns. We've also seen banks, Particularly midsized and smaller, and then I would include the U. S. In this category, including credit unions, Where they've looked at the cost to operate and run and set somebody at a scale provider We'll be in a better position to do that for them. With the Sky service levels really simplify their life in terms of Really delivering that ATM transaction to their clients.
So the off prem is really global. We expect that's going to actually take place in the U. S. As well. It hasn't really moved that much yet.
But then we do think midsized to smaller Financial institutions will literally look at outsourcing the ATM operating model and trying to partner that can do it cheaper.
And then just one question on JetPay, Mike. What kind of volume growth have you seen, if any, in
It's kind of a difficult year to measure because as you I'm aware when the pandemic hit early in mid March into April, Jeff Calon with all the other On prem acquirers had a fairly challenging second quarter. So we had a difficult second quarter with transaction volumes in the Q3. They started to recover as people get out in about, but 2020 is a little bit rough here. On an equalized basis, I think We look at the sales that we've done particularly as it relates to going out and adding a lower essential site. And then we've looked at, as I mentioned in the second half of the year, going out and upselling existing clients to add a So if we look at clients and doing apples to apples, we feel good about the 2020 numbers.
If you look at the numbers, it's tough because of the pandemic effect.
Yes, we currently were down in the high single digits for the full year, but of course that was very isolated to the Q2 as we covered.
We will now go back to Tim Lillie of Wells Fargo for a follow-up.
Thanks For the follow-up opportunity. Mike, just going back to the win with Associated, so that's 2 sizable banks. Obviously, those are competitive takeaways. I mean, is there any way to just characterize what you think the differentiators are in those wins, Functionality, price, something else, maybe NCR, just right timing. I'm just sort of curious, that's a nice string you've got going after Turning that business around, is there something there that you think you can build upon and continue to add the large enterprises that you have?
Yes. Tim, that's a really good question. And I said 2 distinct aspects. The first is the feature function capability of digital banking or Your mobile banking. And again, you have to remember that's what retail banking means for banks of all sizes.
So these are nice sized banks, 30 It's hard to reach to miss $40,000,000,000 a lot of branches, a lot of retail clients. They have to have the capabilities to compete with the top 5 money center banks that go out and spend a lot of money. So it's a great win for us It demonstrates that our capability allow those banks to compete with the wells, with the BOAs, with the JPMs that are out there, The city is investing a lot of money in that digital front end. I think the other aspect as we compete with other providers who are I like to say focused on delivering differentiated products is that we horizontally go in with a platform solution, we We call it CSP client services platform that will then connect what you do on mobile, what you do on digital, And so what you can do on an ATM or an ITM, and then we've done that with some very large institutions into their branch footprint. So now you start to follow a retail client literally across the different channels that they might use, and we think that product is Differentiator, we think it makes it simple for those banks to roll that out.
And we have found that a lot of our competitors in that space aren't really looking Horizontal like we are. So I think that's what allows us to win.
And with that, ladies and gentlemen, that does conclude today's question and answer session. I would like to turn the call back to Mr. Mike Hayford for closing remarks.
All right. I just want to thank everybody for joining us today. Just kind of closing comments on the year. 20 2020 was a very challenging year for NCR. When the global pandemic hit us sitting here in March of 2020 and we actually Started to feel that around the globe, even a little earlier, but by March, it was really starting to be called a global pandemic.
The management team at NCL, we put in 3 simple priorities. Number 1, we said take care of our employees, and so we focused on taking care of our employees. Number 2, we said protect our company from the uncertainties ahead. And while sitting here today, you look back and say, wow, those things didn't all come to fruition, Sitting here in March of 2020, there were a lot of uncertainties that we did not know what was going to fit our business. So we took a number of steps to protect our company.
And number 3, we said take care of our customers. Then we said to our team, we said Let's take care of our customers better than anyone else in the industry. And let's exit the pandemic as a better company than when it started. And I'd say thanks to The unbelievable hardware, the efforts of 35,000 impaired associates around the world who Through a difficult environment executed each and every day, I can truly say today That we will be a better company after the pandemic. Thanks for joining us today, and we'll talk to you next quarter.
And with that, ladies and gentlemen, that does conclude today's call. We'd like to thank you again for your participation. You may now disconnect.