All right, thank you everybody, and welcome to the Oppenheimer Technology Conference. I am Ian Zaffino, I am the Equity Research Analyst that covers NCR Voyix. I have an outperform rating, $15 price target, and I'm very honored to have with me today the company's CEO, Jim Kelly. Jim, thanks for joining us.
Sure, Ian, thanks for having me.
All right, you know we're hot off of earnings, and maybe just help us understand the quarter, maybe recap that for us, and give us any highlights of the quarter that you're seeing.
Sure. I think as those who have been following the stock, or those who are new to it, I was formerly the Chairman of the company. I stepped in in February as the new CEO. As I said in my prepared comments and on the call, I learned a lot about our customer base. I've been involved with the company for a year as the Chairman before stepping into this role a little over a year. My expectations for this year were to remain steady and perform against the expectations that we set at the beginning of the year. I think for the quarter, irrespective of how the stock may have reacted on a couple of points, I thought the quarter was a good quarter for us. On the revenue side, we were slightly higher than expectations. That came with some margin compression, but largely that beat was around hardware.
On the earnings side, we met consensus expectations and internal expectations in terms of what we wanted to achieve for the quarter. Deeper into the business, restaurant, I thought, is if you look at the comments that Benny made, and I have the two Presidents on the call, and I've just recently put the Chief Product Officer on just to give everybody a broader view of what's going on here and different perspectives. Restaurant, as the company went through its split in 2023, the leadership there actually left, and it is a new team that has come in, the team that's joined us, and we mentioned the Chief Revenue Officer within the restaurant segment. His name is Miguel Solares. Miguel has got 25 years in the restaurant space. Our renewals this year have been at 100% on the enterprise area.
Our opportunities that he's opened up, both with his reputation but also the capabilities and the reputation of the company, I think are quite impressive, and I think you'll continue to see that improve into next year. Later this year and into next year, a number of these larger enterprise organizations are constantly looking for new opportunities in terms of capabilities, and I think the good news for us and for our investors and for our customers is that we have the capabilities that they're looking for, in particular around microservices. Likewise, on the retail side, I thought the performance, the number of new accounts that we have signed in all our four, in each of the four major or four divisions of that segment, were also very strong. It's a work in process.
I stepped into this role to make some changes and improve the overall performance, top and bottom line. I've had a chance now to meet over 50 of our largest customers, both on the retail and restaurant side, and I would say, as I said in my prepared comments, the relationship is good. It's been strained at times, maybe in particular somewhat during the COVID period, but also during the split in terms of focus, a spin-off of an organization I've seen once before firsthand. I mean, it's very disruptive to the company, and I would say last year as well was a year of transformation. In addition to just getting through the split, we were also selling off a significant asset. This year has been all focused on delivering product, delivering on commitments to product, better execution relative to setting expectation, and then achieving it.
On those measures, I think the company did very well for the quarter.
Okay, good. I guess before we get more into the business, maybe walk us through the ODM agreement with Ennoconn and any updates there.
Sure. Just as a reminder, last year, in addition to divesting our digital banking business, which is now called Candescent, owned by a private equity firm, Veritas , the second focus in restructuring the way the company went to market as a platform company as opposed to what was historically a hardware company. We signed an agreement with the manufacturer of our products, a company called Ennoconn, which is minority-owned by Foxconn, the same company that makes the iPhone. The expectations, internally, I was the Chairman at the time, but the expectations last year were that we would be able to get through, sign it over the summer, and then get through it in 2024. The reality was not that, and that's why we're continuing to work on it. As we've said on several of the calls, it was technology. We're an Oracle shop. They're an SAP shop.
They have to build some technology because now they're in the distribution business where they wouldn't have previously been in the distribution business. That was a distraction for a number of months. They've acquired a piece of software from a company called Manhattan. As I said on the call, our expectation is still that we'll finish it up by the end of the year. We've already gone to pilot successfully for Europe and Asia, and the piece that remains is the Americas, which is out of Nashville. We go to pilot, I believe, on the 18th of this month, so I think we'll be able to have a view internally by mid-September. Once the pilot is meeting expectations, we'll commence a migration of our business to their business.
They'll be picking up a number of our employees, and we still think we're on track to have that completed by the end of the year.
Okay, good.
Just to clarify too, so that will mean next year, provided that happens, once it's switched over fully, we'll no longer report in our gross revenue hardware sales. We'll earn a commission, which will be reported in there, but not the absolute numbers. It'll be software services payments and a commission on hardware. The expectation as well, we're working on repositioning the P&L. Today we mix software and services together because if you look at the company years ago, large conglomerate in a bunch of different businesses. Likely the decision, I'm sure, years ago was to squeeze down certain lines together. We're trying to give more clarity on payments, software services, and then hardware commission. It'll be a cleaner view in addition to the segments in the business, but a cleaner look on the P&L, and we're working to try to get that done by the end of the year.
Thank you. Maybe talk about retail, hardware, software, some of the growth that you're seeing there versus expectations of what you had previously.
Yeah, I think on the, let's start with the restaurants again. I think what we're seeing today in restaurants is not like what we will see as the team digs in. As I described, we have a new leader in that group, and he's brought in a new team. We've also, on the SME side, replaced our previous leaders in that area. It's been largely a turnover of the entire sales leadership, starting at the executive level and then one level down. My expectation is you'll see us, historically, we have focused very much on just taking care of our existing customers, not to minimize it, but as I said on the last call and before this and where we stand today, we have roughly 1% revenue attrition from our customers.
Customers stay with us, not just because of the software and its capabilities, but also the service organization that supports them. I think you'll see us, as a result of my joining, pursuing new relationships because it's enterprise. They're almost exclusively RFPs, but you'll see us much more prevalent in the RFP space than maybe in the past, where I think they seemed somewhat content to stay where they were. Not to minimize the importance of retaining our relationships, but to get the company ultimately to the growth rate we're looking for, it's going to need the same. On the retail side, as Nick East, the Chief Product Officer, has commented on the last couple of calls, the movement is to bring our microservices, cloud-native applications, our platform to market. I think we have 13 customers already signed on it.
We have one that is working through a rollout, so they're through pilot. Actually, two customers, one customer's in pilot, the other one has started the rollout. Feedback on the application, the platform itself has been extremely positive. As we look into 2026 and beyond, there's going to be a full court press recognizing that both in the retail and the restaurant side, we have very aged applications that are running in some of the stores that I'm sure are restaurants that you shop in or eat in today. The exciting piece for me, and I think for the entire 14,000 people here, is we're launching a next-generation solution that I think is unmatched, in particular on the retail side and not as well on the restaurant side. Next year, the balance of this year is to get those products to market and continue to pursue payments.
You didn't mention that per se, but payments will start and continue to be a bigger part of the story here. We touch over $1.3 trillion of point-of-sale transactions across our entire enterprise and mid-market and SME space. The company has only accessed a very small piece, and it's on the restaurant side. There you're talking about single to maybe two, three location establishments. If you look at it on the enterprise space, both on the fuel side as well as grocery and DSR, we have a lot of very large customers that are paying somebody else to provide that service, and we now have the capabilities through a new relationship that we announced in February to take advantage of offering to our customers one relationship to provide everything from the point of sale all the way through payments.
We have all the internal capabilities other than the authorization system at this time by virtue of an acquisition the company made several years ago. I think great new products coming to market and payment capabilities that the company's not had previously, I think we're set up very good for the back half of this year and then clearly into next year.
Okay, yeah. We're going to just stay on retail for a little bit longer. How would you environment, you know, as far as customers' willingness to transact? Has there been changes in scope or size, or, you know, where are their heads as it relates to the products that you deliver to them?
Yeah, so the majority, obviously, the vast, vast majority are still on legacy applications, and these legacy applications are very dated. They work. They're not overly costly, I would say, relative to these organizations. The challenge that they have, I like to analogize it to an iPhone where you have real-time feedback of whatever you're looking for sitting there on your phone. That's what our platform offers. Similar to a company like Netflix, you watch a movie one night, and the next night it's going to show you something similar because it knows your buying patterns. That's what our customers are looking for. I haven't seen any real reluctance thus far.
We haven't pressed the product in a material way, but very large, whether fuel or grocery, the ability to have that capability, the redundancy, our edge product, which is a component of the application, the microservices capabilities, which is going to become a mainstay for the retail environment. I think they're excited about the journey to the next step. I haven't seen, cost is always going to be in the grocery business or in fuel is going to be a big driver. It's a balance between them managing costs, but also getting the benefit of having this type of application. It'll be easier to make changes, easier to do updates. It has the ability to extend to allow them to do updates directly to the system for those who are larger.
I think the value enhancement is such that that is overwhelming the general and maybe concern that cost is becoming more of an impediment to completing a sale. We've sold, as I said, we're at probably 13 or 14 customers today who have either purchased it and are starting to install or have purchased it and are pending install. That price is always going to be negotiated, but that's not an impediment from where I sit today.
Okay, good. If we were to maybe toggle over to restaurants, maybe talk about new wins, you know, where renewal trends look like. Maybe you want to give us an example of that, as well as any maybe platform expansions with, you know, existing customers and the customer base.
Yeah, I would say probably the strongest piece is on the renewal space relative to the new wins. While we have a number that we're working on today, our focus is enterprise predominantly. We support the mid-market as well, and we announced a couple last quarter, the quarter before. We support SME, that's largely the smaller side, which is largely by virtue of the acquisition many, many years ago of Aloha. We have a dealer network, and we compete against the smaller players or those who go after single-site locations. That is not the predominance either of the revenue or the profit of the organization. Although I will say the payments on that side, we get 100% of all our new SME customers are taking our payments end-to-end, our gateway together with the acquiring piece.
Both on the retail side as well as the restaurant side, our focus is enterprise and upper mid-market. The setup for the balance of the year is a number of RFPs that were new customers as well as existing customers who are checking the marketplace to see what other options are out there. The feedback I've gotten from the leadership of these companies would suggest that we're in very good shape, and we'll see how the second half plays out in terms of announcements. One of the challenges that we have, being focused on enterprise, is announcing names. I know some people otherwise like to talk about names, but generally these larger customers prefer you not name them. If you look at our scripts, they're almost exclusively referencing the type of business that we're extending the relationship with or getting into as opposed to calling out the specific names.
Renewals are great. They're 100%. Payments are starting to roll out to the enterprise base, which we don't have today. We have, I think, a strong pipeline for wins on the enterprise and mid-market space into the back half of the year.
Thanks. How do you think about the competitive landscape and maybe just compare the enterprise competitive landscape to the non-enterprise? I don't know if you want to call it SMB or mid-market, but you know, because there's some perception issues, I think.
Yes, I would say, Ian, you're absolutely right. There's definitely perception issues. I think as it relates to that, I would align this to a lot of us eat out. You go to certain establishments, you see brands that are pretty prevalent in a lot of restaurants across the U.S., and the company won't say by name, but I think people know who I'm referring to. While we do compete in that space, that has been largely because of legacy. We have a fraction of the size of an organization that some of the bigger players have in the SME space. If you flip that to the enterprise, again, comments that I made when I first joined in February, we have roughly 8,000 people that support services here.
When you get to larger mid-market and enterprise, your product in and of itself is not what drives a decision by these companies. They don't have, typically, they don't have a very deep IT organization. There are exceptions, but they rely heavily on our organization. We have a Professional Services group that is roughly 2,000 people of the 8,000 that support these large enterprises, both on the retail and the restaurant side. Without that, I think it's difficult for those who are in the SME market to be able to reach into the enterprise space because you need that infrastructure. They come to rely on it. We have, I think, a very strong, dedicated team. This is a company that's been around for 145 years. It's been in the software space for over 30 years.
It's built a very efficient, large machine that knows how to take care of customers in both arenas. From an enterprise competition space, I mean, there's maybe one or two names, but most of them do not have, and including those, do not have the same services capability that we do. I think where we need to continue to invest and bring forward products that are in the queue are on the restaurant side. I think there we've been probably late to bringing cloud solutions and microservices solutions to our customers, but we are moving aggressively in that way and meeting the needs of enterprise, and it'll cover mid-market, maybe one day as well the small market.
Okay, thanks. I want to maybe switch gears here. If anyone has a question, please put it in the chat or send me an email at ian.zaffino@opco.com. I'll get your question asked and hopefully answered. The chat or email me. Jim, if we were to go on to payments a little bit, talk to me about the opportunities there and just like a strategy overview.
Sure. The best example I referenced earlier is our SME space. The company did an acquisition in 2019 of a company called JetPay. It was a small public company. In 2023, we sold the authorization, the front-end piece, the piece that drives when you put your card in the terminal and it's validated for not being lost or stolen and within credit limits. That piece, because it was not, that system was not capable, nor did it have the integrations necessary to be able to support large enterprise restaurant or retail organizations. That is why it was divested. In February, we signed an agreement with Worldpay, which is now going to become Global Payments. I think for those who know me, I was the President of Global and the CEO and founder of EVO Payments.
We have a new relationship with Global that will cover a lot of the markets in which we, or all the markets that we operate in other than Japan. That was not a company that either of them focused on. Back on the restaurant side, we sign up all new restaurants, small merchants, and most mid-market merchants today. We pick up payments. At the same time, we're picking up the point-of-sale relationship. Historically, though, for enterprise, restaurant, and retail, we didn't have a payment solution. Even with JetPay, JetPay was not capable, did not have the products that were necessary to support benefits or fuel, and therefore that was never pursued five years ago. That is what we're doing now. We're pursuing that in a meaningful way. The size of the total spend that goes through our point of sale around the world is $1.3 trillion.
My last company, which had $700 million in revenue, we had $150 billion going through our terminals at the point of sale. We weren't a software company. We were a credit card processing company. Here as a software company, it's our point of sale, our software point of sale, now connected to Worldpay that we can offer an end-to-end solution that the company couldn't offer until this year. The conversion of our existing portfolio onto Worldpay should be completed by the end of September. The opportunity is $1.3 trillion of spend. We can now start to market to those customers, and that's exactly what the sales force is incentivized as a spiff to do. That's exactly what we're intending to accomplish, to get as many, if not all those customers over time onto us for an end-to-end solution, end-to-end encryption, end-to-end service.
That way, if we make a change at the point of sale or if there's a change at the processor, we have a piece of software that sits in the middle, which we call Voyix Connect, that will normalize to avoid any disruption of processing capabilities or processing at the point of sale for our customers. It's a better solution than where they have been in the past. I was just on the phone with one of our large petroleum gas companies, fuel companies, and we're dealing with two intermediaries who have to integrate to our point of sale. This is legacy. By taking those out of the mix, it gives us the opportunity to make it easier, save some money for the customer, but mostly ensure the continuity of service at the point of sale. These are on-premise data centers. One's in Ohio, one's in Virginia.
Today in the U.S., they process what runs through them is $800 billion of the $1.3 trillion of volume. The rest of it is spread across the other regions. For us to be able to move, today we have probably a half a billion of credit card in our numbers. You're looking at an opportunity to go from $500 million to $800 billion just in the United States. Outside the United States, we don't touch credit cards at all. Payments is a huge opportunity. My background's been 25 years in payments, as I say, Global Payments and EVO. There's probably 40 people here today, plus the people who are here as a result of the JetPay acquisition that are payment experts. 40 people from EVO, some of them actually used to be with me at Global Payments as well. I think we're very, we're well situated.
What are the impediments? We have to explain this to our enterprise customers. The enterprise customers already have a relationship. We have to work through that transition. This is the first time the company's truly been able to offer end-to-end payment capabilities for any customer that we do business with today. Opportunity is really big, and we'll start to show more of that in the coming year as we refactor the income statement. You'll be able to see our growth in payments right now. Right now, that payments growth is a significant driver. I expect software is going to move in the same way, services to continue to move faster than where we've been in the past. Those three points are where we're relying on to drive growth for the future.
Okay. I know we kind of touched upon this, but you know, when I think about your vision or when you think about your vision over the next several years, what are going to be like the big sources of upside, you know, international growth? How do we think about margins and levers to increase margins?
Yeah, just on the back of what I was describing, I think the near-term benefit opportunity is in payments. That's going to move faster. The complexity of it, I mean, they're already using some, our customers are using somebody for payments today, somebody for gateway. That's just not a surface that NCR seemed to want to play in. They were much more of an open market to some extent. As that moves inside the company, that's not dependent on anything but some time and connectivity. It's not, we're launching a new software. The company's already paying for this to somebody else. This same story I've seen in the payments world where we were the payment processor, we were the merchant acquirer, then the customer picked up a new point of sale, the point of sale had end-to-end capabilities, and we would generally lose that opportunity.
I think that's the primary driver. On the software side, software takes time to change a point of sale for a supermarket. It's not as though they're going to shut down the point of sales. It can't all be done at night. There is across the fleet of stores, and some of our locations have over, the enterprise has over 20,000 lanes within the organization. That's more of a transition. It's launching our new products into those establishments. We're moving away from selling our legacy applications for a host of reasons, but mainly our new Voyix POS, the capabilities that far exceed what the customers are currently seeing. I think that's the second piece in terms of big move. The increase of software maintenance. Software maintenance now, if you look at the P&L, if you take out hardware, it's roughly $2 billion.
A quarter of that is software maintenance agreements under perpetual licensing agreements. While we have some perpetual licenses in that number, most of that is software maintenance. That number is going to grow significantly as we move them from an on-prem application to a cloud application with all the capabilities of a platform company, as I described. That together with payments. I don't want to minimize services. I think services has been somewhat undersold here. I was in Serbia last month. That's where our operations center, 4,000 people are located. You walk around the building and you see all the different desks, some of which are encased in a closed glass office of over 100 people that are servicing leading organizations, of which I won't mention the names, but they're household names in the restaurant space or in the retail space.
We have roughly, I think, 35 out of upwards to 500 large customers that are using services today. Big opportunity, and this is something we're talking as a management team, big opportunity to sell into services as well. I think on all three planes, we have opportunity. Payments first, probably services second in terms of speed and software just because it takes time. As I said, we've already started to sell to Voyix POS and Voyix Self-Checkout. We probably have 13, 14, as I said earlier, in the market today.
Okay. As far as tariffs, just give us a rundown on the exposure there and what you're doing to mitigate it.
Yeah, so I guess my initial impression, I don't really remember his first term on tariffs exactly. We were not in the payment space. We really weren't exposed to tariffs. I mean, I knew the narrative, but I don't know that I knew the implications. Here we do have suppliers that we purchase product from that are now subject to higher tariffs or tariffs that they didn't have previously. Our agreements generally provide that we can pass on that cost. When this first hit, I just started, and my view was this could be transitory. It was not going to stay forever. I didn't want to go through the process of communicating to customers that we were going to pass on a tariff. Initially, I don't think they really got started until the second quarter.
Yes, we've absorbed costs to date, a few million dollars with more, because we didn't really start till the second quarter. We're starting to see it in the third quarter. My feeling on this has changed. I said this in the prepared comments that presumably Trump will be in office for four years, and this may extend beyond four years. At some point, this is not going away anytime soon. They're still in the range that we described on both of the last two calls. My expectation is that we're going to go back to the customers where appropriate and say, look, we've absorbed a couple million dollars or so already, but my expectation is we're not going to do this in perpetuity. I think we're going to move in the direction of letting them know this is kind of a cost to doing business these days.
Maybe the final question, just touch upon capital allocation priorities, you know, free cash flow use, any M&A out there that you'd like to pursue?
Sure. Look, we took a big step toward fixing the balance sheet last year. We sold a business that couldn't sell during the prior four years. We sold it for a very good price at $1.5 billion. I think we paid off about $1.3 billion of term debt, and we paid off another $300 million of a revolving receivable line of credit. I think the balance sheet's in much, much better shape. I mean, it's in excellent shape compared to where it was. The area that we need to focus on currently is billing and collection timely. That has more to do with infrastructure changes that we need to do to improve the billing systems. A lot of it still is legacy, and we have a big project underway to address that.
Last year we also, and into this year, we spent about, I think it was $125 million in buybacks. Part of that was because we sold a company for $2.5 billion. A lot of the proceeds went to pay off debt. Some of it was a return to shareholders. I think we bought back close to $10 million shares during that time period. I think that's still part of something that we have another authorization out there. That's something that we'll continue to look at depending on where the stock is trading. Most of this is going to be generated free cash flow that will show up in that direction. I don't think you're going to see us in the M&A space in any material way.
We have some stuff that we have to clean up that we're still dealing with from the Atleos-NCR split, that some of the businesses that we got are really businesses that they were involved with. There's some of that that we'll still have to resolve. It's not an acquisition. It would be more of a divestiture. On the M&A side, the thing that's most interesting to us internally is the advancement of AI. Not that we'd be buying an AI company, but we're definitely seeing AI as a benefit to our development cycle. It's rapidly improving. The turn, it's consistent with what other companies are seeing. The nice thing is as we build out our new applications, we already have the playbook. We have these applications. Grocery stores are not changing the way they do business, or restaurants are not changing the way they do business. Fuel the same.
They're just looking for modern capabilities. I think an area that we're investing in in terms of spend, it's not necessarily capital, but it's spend. Some of it may be capital, is around how we can bring AI in to be more efficient as a company. I would say that's consistent with what the board has talked about with us over a year ago, and we're starting to see it in our services group and how to handle phone calls, etc. We're doing it in document retention, but most importantly, we're starting to use it in a material way in software development, in rewriting applications to meet the needs of our customers.
All right, Jim, this was great. This was really helpful. Thanks for taking the time, and I'll let you get back to your one-on-one.
All right. Thank you. It was nice to see you.
Take care now. Thank you.