NCR Voyix Corporation

Q4 2023 Earnings Conference Call

3/5/2024

spk02: And as we started seeing that happening, you kind of stick your head up and go, wow, what's going on? Is it just us? Or is it the market? What's happening? And so as we started to look around the market, and I had a lot of conversations with other people that are more in that hardware space, we found out it seems to be more of a market dynamic than just happening to NCR Voyex. And so that's when we made the decision to, we're not going to see those projects budgeted for. You can't create that kind of budget inside of these big customers in that short amount of time. These are longer lead time elements, so we pulled that out. And then that was really the bridge, and so those were the big three drivers. And then what also was exciting too is we, and you all reminded us, we left out our ARR story. And so we added that back in, and we were really excited about that. We saw 5% ARR growth in 23. And then we exposed a new metric called software ARR. And software ARR, so ARR, annual recurring revenue, is software and services. We still have a pretty big services business. inside of the business. The software business is growing a lot faster than services in that space. So when you look at software-only ARR, we saw 9% growth in 23. So that's what gives us the confidence in the software and services growth overall is seeing those metrics play out because that's the ARR. We'll see that continue to grow into 24 at very similar rates. So we're excited about the ARR growth overall.
spk00: Perfect. So that's kind of a great introduction. everything. Maybe if we go back to December quarter earnings, obviously relatively recent for you guys. You noted, I wrote down three things here, strong traction with platform sites, some of your KPIs, and then competitive deal wins. Can you maybe just talk us through some of the highlights from the quarter that you'd want to emphasize?
spk02: Yeah, I think the platform site growth is encouraging. So you look at across, I won't go into the exact numbers, but it's approaching 30,000 in restaurants and approaching 30,000 in retail in terms of the number of sites that we have connected to the platform. It was north of 60% growth in retail and about 8% growth in restaurants. And what's exciting about that is that is really, when we connect you to the platform, it gives us, one, we get an uplift immediately in terms of the recurring revenue stream. And the second piece of that is we get the recommitment from that client that they're our customer and they're recommitting to our platform as their go-forward path. And then it creates the jump-off point for cross-sell and up-sell. And that's where we're seeing the growth. That's what's driving that software ARR growth is all that connection to the platform. The other piece is over the past couple years, we've doubled the number of payment sites. While that's still a small part of our business, it's going to be critical for us. And we're still going to continue to focus on how do we get more payments growth, both in that restaurant space, the mid-market space, the mid-market side of restaurant, the mid-market side of retail, where we think we have the largest opportunity to take share, is we're going to focus on attaching payments or being a payments-led offering in that space. So that was an exciting part of that announcement. And then the wins, we are winning in the market. We talked about digital banking. I'll start there. We had 39 wins over all of 23. And when we look at those wins, it is undeniable that we're taking share in the market. So that is a crown jewel within the portfolio that we have inside of NCR Voyex. On both the restaurant side that when we have with Nautical Bowls speaks to the strategy we have around the mid-market, when you get a little more complex as an operator, our value increases. And it's really that full service, not just the tech itself, it's the ability to wrap services around it and offer that full offering. And Nautical Bowls was one that we had won. It was a competitive takeaway from one of the companies that is you know, is winning in the single site space, but, you know, struggles to get up into that mid-market space, as we described. That's, again, where we see a lot of value. And us winning in the mid-market space also creates a little bit wider moat around that enterprise business that we described where we're, you know, in restaurant and retail, we have over 300,000 sites that we support today in our install base. So we want to create a competitive moat around that. And retail, we want a competitive win, and we're expanding with existing clients. We talked about a major e-com player that in their physical stores is deploying our, self-checkout capabilities. So that's fun for us in terms of we still see self-checkout as a big driver, not just the appliance and piece of furniture itself, but it's really more about the software and services that go around that as we think about consumer choice and computer vision and mobile and RFID starting to win out in that space as well.
spk00: Okay, perfect. And so you alluded to the hardware challenges that you mentioned at earnings led to part of the the guy down for 2024. Can you maybe just talk to us about how we should think about growth by each segment in 24 and just how does that differ? How is your thought process or what you see in the market today different from when you had your analyst day, a handful of months ago?
spk02: Yeah, so I'll run through the businesses quickly. Digital banking we think is going to grow.
spk00: We'll get into more detail. I'll be doing each one.
spk02: Yeah, yeah. Digital banking is going to grow at seven is what we talked about. Restaurants will be flat to 1% up and retail will decline 4%. So when you look at that retail business decline, that'll take us back to hardware. The muted growth on the restaurant side is really about hardware. There's just more hardware projects than the big enterprise clients in those two businesses. When you dig deeper and look at ARR growth and software ARR growth, while we didn't provide guidance, I think they're gonna grow in similar to what we described in 23 for the total business. So retail was only 1% growth in ARR in 23. I think it'll be more in line with the average for all the businesses in 24. We had some service contracts that are embedded in that that quite honestly in the department specialty has been challenged. It's a small part of our business, but we had some big services contracts with a couple department specialty store companies that went out of business that filed for bankruptcy. So that had a short-term impact for us. We've insulated for that. We've isolated that. It's a very small part of our business. And we moved on, so that's not going to repeat. But that was a driver there. The restaurant side is continuing to grow. That'll be payments-led and mid-market. I described a go-to-market investment across all three businesses of about $15 million for just straight go-to-market. How do we get more energy focused on adding net new sites and converting our existing base? And digital banking is just a strong business that's growing at 7%. I mean, we're going to continue to take share with a great product in that space.
spk00: And then just one, lastly, touching on the hardware thing that you mentioned, are these projects When you talk about them not being budgeted, are they being canceled? Are they just being pushed out? Is it the macro that's the biggest factor? How should we be thinking about maybe that return of hardware as we think forward?
spk02: Yeah, I mean, these companies are still spending. There's not spending on hardware. They're focusing on software and other services that are creating experiences. And so we're continuing to grow in a lot of these relationships that would have bought hardware in the past. So again, we'll probably fall in line with normal refresh cycle rates with these. They're sweating assets a little longer. Our edge and our platform software start to break the hardware to software dependency a little bit too. We're breaking some of that ourselves. We'll see less dependency on hardware growth, but we think that business will normalize out. We talked at Investor Day of low single digit declines in that business. We think that's the way we're modeling that going forward from this point forward. We think we'll get We'll get the hardware behind us. We believe this business overall should be a mid-single-digit grower like we've described, and we'll have pockets of really high growth in software.
spk00: So let's dig into retail and restaurants first. The growth algorithm for you guys is based on converting your customers to the platform, obviously, and upselling and cross-selling products and services. What are you upselling, excuse me, And what kind of gives you the confidence? I think your goal is to reach kind of almost 40% of the installed base on the platform by 2027. What gives you the confidence in reaching that target?
spk02: Yeah, so on the absolute 40%, I feel good. If I plot that line from where we are today when I described, at Investor Day, we sit at about 10% in retail and 20% in restaurant. And I look at the progress that we've made, the higher growth in retail would suggest that that trajectory of that line gets us to that 40%, and I think restaurant's on that right path. So we're seeing the evidence supported by the platform connections that that is playing out. In terms of what we're selling, so right now we're doing it, our strategy is really a pull strategy for both retail and restaurant based on a need. So if you're a restaurant and you come to us and say, I need better data and analytics in terms of where I'm selling across my entire chain, how am I doing on promotions, how do I drive value and demand, how do I do dynamic pricing? We would say the way we deliver that to you is through our platform. And so we would get you connected to the platform at that point. We don't have to change your legacy application in the store, which is a benefit. We don't have to do a rip and replace. We connect you to the platform. And now we have the data and we change your contract to a subscription. And then we add the content on data analytics package as an example. And that's why we're seeing an ARPU uplift immediately upon signing. And we start to cross-sell. We can cross-sell loyalty. We can cross-sell kitchen. We can cross-sell self-checkout. We can cross-sell payments. So we have modules that we'll start to add on to that core layer of services in the platform that allow us to do that cross-selling and up-selling. And we're seeing it play out. I mean, we are seeing the uplift of the 1.5 to 1.7 times the existing recurring revenue stream that we have with that client when we sign them up. And as that cohort ages over 12, 24 months, we're seeing that expand like the example that we described at Investor Day. It's all playing out. It's a little ahead, I think, on the initial sign-up, but it's playing out as we expected on a per-site or per-customer economic level like we described at Investor Day.
spk00: And staying on the retail business and talking specifically about self-checkout, You know, there was a very publicized kind of interview with Jim Cramer earlier this year with some more bearish comments. And so how should we be thinking about the popularity of self-checkout? Because you also just described a new win that you guys had for that business. So there are competing forces, but what's the view on self-checkout as we go forward?
spk02: Yeah, so self-checkout, we believe, will grow. You think about the units. So I'll say units. I'll ground us on hardware for a second because it's the physical manifestation of that. All the people that track this will say it's going to grow mid-single digits unit volume. We think ASPs are collapsing a little bit because of the form factors. They're not this giant piece of furniture with a lot of bent sheet metal. It becomes a kiosk maybe with a scanner. We think about self-checkout too as differently. It's not just a piece of hardware. It's a capability. And so you walking through a store, scanning on your mobile phone items as you check out is self-checkout. It just doesn't mean there's not an associate from the store there with you. Or it might be RFID where you have soft goods and you lay it down on a counter that doesn't look like self-checkout, but that's self-checkout. So we see that trend continuing, but it'll be more of a software and a operational workflow play that we'll sell as an add-on to the platform. I hear all the The negative side of self-checkout, I get all those articles too. People call me up and say, what's going on? We just had the big, the National Retail Federation just had the big show in New York. And I sit on the board of NRF as well. And we talk a lot about the $100 billion problem that is called shrink. And people use that as a case study for why you wouldn't do self-checkout. Very little of that shrink is happening at the self-checkout. That's what the study is. would tell you I just had a large customer. I was on the phone with him yesterday. As a matter of fact, the president of this very large retailer that across 1,600 stores just rolled self-checkout. He just got his shrink numbers in pre and post self-checkout. It didn't move an inch. So yes, I hear all that. And if you roll it out poorly and you have a bad experience and you don't operationally roll it out well, it could be bad in terms of your customer experience. We believe as a company that not one single form of checkout is going to win. Like, all self-checkout is not the, you know, at some point, you as a consumer want choice. Some days, I feel like using self-checkout. If I have a whole basket of groceries, I'm likely not going to use self-checkout. So you want your customers to have choice, and that's the model that we subscribe to, and then we think that's the flexibility we have in the platform. But we think that trend towards, I'll call it unattended or unassisted checkout will continue, and that will be a source of growth for us.
spk00: Okay, good. If we turn to the restaurant's business, again, you talked about platform conversion being 20% today. The goal is also 40% by 2027. You are historically over-indexed to that enterprise part of the segment of the market versus mid-market. Can you talk about the different strategies for attacking each of those verticals and driving forward those platform conversions?
spk02: Yeah. 75% of that business is what we call enterprise. And that would be pretty typical. Those are the big brands that you all know and maybe not love, but you know. We would draw a line that says enterprise is anything that has 50 sites or more. That's kind of a weird arbitrary line. Most of our enterprise customers are much bigger than that. And then we were calling everything below 50 sites SMB. And we were also recognizing that that was probably not fair to that segment. So We've kind of peeled out single site. That's not really a target of ours, these single site operators. We don't deliver the most value there. It's a very competitive market. We've started to focus on five to 50 and call it mid-market. And so we think that's where we're gonna get a lot of growth. That'll be a payments-led offering. We'll have a specific sales force that's focused on getting growth in that space. And it's really the differentiator is creating a full service offering in that space. On the enterprise side, it's really a relationship management task that we have migration plans for all of our enterprise clients so we have a path a roadmap we'll sit down we'll go through it what are you trying to get done what capabilities are you trying to solve and then over what time are you going to convert to the platform so we'll map all of that out with all of our enterprise customers so that will be a very metered uh one-on-one set of conversations. That'll be a very similar conversation to the one I described in our earnings release around Red Robin. So when I sit down with G.J. Hart, the CEO of Red Robin, and we have a conversation about what he wants to get, what he's trying to do, what his mission is, he's like, look, David, I want you to take all the tech in the store because I'm trying to make great hamburgers. And that's kind of the simple value prop that we have. It's like you focus on making great burgers and we'll focus on tech and we're both going to be happy. And so that's what we'll do in the big side of the enterprise. Okay.
spk00: You made a comment that I thought was interesting and important. Payments, the payments attached. So 90% of mid-market customers that you convert to your platform. This all kind of stems from the JetPay acquisition done a couple years back. So can you maybe just explain the history of that deal and the real value proposition? Why are we seeing such strong payments attached? What are you providing? Is it that full solution? Is it as simple as that? Is there anything more to it, would you say?
spk02: Yeah, it is. Well, it's not as simple as that. It's as simple as that. So when we acquired JetPay, we got some payment capabilities. And then you saw one of the bridges was we sold some non-core elements of JetPay last year. And there were some bespoke standalone contracts that had nothing to do with attaching to a retailer or a restaurant. So they were government municipalities and other things that were not core in the required investment. So we sold those off. And so our value prop is really we start the payment anyway. We likely route it through our gateway. We just weren't processing it. And not having that processing piece required a lot of integration work for both the customers and for us and likely the payment provider. So what we've done is we've removed some value steps in that value chain where there were just people, you know, it was slowing them down, the ability to take different forms of payment. It was creating different economics. So we can do it. end-to-end, not on a payment processing. We're not going to save you bips off of processing. I mean, that's just not, we're not that much of a scale player in that space. Where we're going to save you is the total cost of how you think about payments and your time to market in that payments ecosystem. Okay. And a little bit of brain damage on the integration side.
spk00: Let's talk about competition, but I want to do it from the Voix perspective, obviously, because that's where a lot of, we get a lot of investor questions. There's you know, newer startups, faster growing startups. You're obviously a very incumbent, very sticky solution. And so how do you think about the competitive pressures in retail versus restaurants? And what is the true value prop that you deliver that perhaps some of these competitors can't deliver, don't deliver?
spk02: Yeah, our value in both restaurant and retail, specifically the enterprise space, is the full service capability. Our ability to take the tech, as I described earlier, and wrap it with services, whether we're taking a first call from a store, whether we have a connected set of capabilities where we understand the health of the devices in the store, the health of the software, we're monitoring it, we're fixing things remotely, that's value that we create where scale really matters. So you think about, we do services for the largest retailers in the U.S., the largest retailers in the UK, the largest retailers in Australia. That kind of scale allows us to do some really interesting things with some of these bigger clients. And so I think that's where we differentiate. That also starts to play down to that mid-market space because when you get and you're in that 5 to 50 space, you're sophisticated enough to where you need scale and growth and you might need to build an IT team because you can't do it all yourself. Most of these restaurants that are 10 restaurants are either a chef or somebody that's been in the business for a while, and they're like, I want to build great food, or I have a great concept that has a great experience. And you realize, you wake up one day and think, man, I need an IT team to manage this. That's where we come in, and we kind of give them their IT team where they don't have to build it. So that's really where we differentiate. We have some products that compete in that single-site space, but that's not where we leverage... our scale and our differentiation. So you're gonna see us in that full service software and services.
spk00: Okay. Let's talk about digital banking. We haven't talked about that one yet. But it's kind of the crown jewel, so to speak, of the Voix business. You've done a phenomenal job turning around that business. What has really changed and allowed you to start winning back customers and be more competitive in the market?
spk02: Yeah, the product is so much better. than it was before. And we've done a really good job of not only taking the core retail banking product and making it better, but adding business banking functionality, adding functionality like account opening when we acquired Terrafina that gave us that capability. And then we have this unique, what we call the channel services platform, CSP, that stitches together the digital channel, the ATM channel, the call center, and the in-person branch and allows you to have an end-to-end experience with your customer at a bank. that doesn't exist anywhere else. I mean, nobody else is really stitching all that together to create that experience. So that's really what is allowing us to differentiate. And then focus. The platform itself wasn't stable in the old world. We finished in 22 and going into early 23 moving all of our customers into Google Cloud. We moved our platform to Google Cloud for stability purposes. It came out of the old NCR data centers and truly into the cloud in a multi-tenant cloud solution. And it's created a lot of stability for us. And obviously that's important as we move through this. And then the extensibility of that platform. So we have over 200 partners in kind of our partner ecosystem. And what that allows is if you're running our digital banking platform, you can create new capabilities to offer to your customers, whether it's peer-to-peer payments or card management or new account opening and those kind of things. We can bring in an ecosystem of partners. It doesn't have to be invented automatically. by us, I mean, we don't care, we'll take a rev share, we'll allow you to connect to the platform and take, you know, we'll get a transaction fee or something off of that. But we're open, we have an open, extensible platform.
spk00: Okay, and how do, or how would you characterize, because you talked a lot about that, about the platform, how would you characterize the biggest competitive differentiator versus some of your very well-known and publicly traded peers or peer?
spk02: Yeah, I would say the, we, When I think about the market, what happens in the market as a financial institution makes its decision, they'll make a decision to say, I want to move, I need something new, because what I have today isn't modern enough to compete in the digital world. I've got to compete with Chime or these neobanks, or my war on deposits is raging, so I've got to go figure this out. They're typically coming from one of the core providers, and then they say, I need something new. So then they start to assess us and the other people that you're thinking about. And then, so that's typically the decision point. And then once we get into that discussion, our ability, our presence in the market, the stability of our company, the fact that we've been through multiple business cycles I think is attractive to some financial institutions. And then when I describe that end-to-end set of capabilities and that ecosystem of partners, that's where when we win in those head-to-head, it's because we have the broader solution capability. If you're looking just at a single piece of functionality, there might be somebody that they say, okay, I'm going to choose somebody else on a specific tiny piece of functionality. But we have this breadth of portfolio that helps us.
spk00: Okay. So let's kind of take all of this together and think about how it impacts kind of financials and whatnot. And so at the end of the day, you guided to kind of mid-single-digit growth, 6% revenue growth, CAGR through 2027. start at a little different point and then accelerate from there. What drives that acceleration? What should we be looking for to go from where you got in 2024 to the end market state that you're thinking about as we get to 27?
spk02: Yeah, so I would tell you that the fundamentals of the business in my mind haven't changed from investor day outside of hardware. So the jump off point has changed. I admit that. I think the growth, what you'll see is as we describe platform lanes and platform connections, as we start to think about total ARR and specifically software ARR, those will be the metrics that we will be watching internally. That's the way we'll incent our sales teams to grow. Those are the things that we're watching for in terms of the elements, the core elements of growth that will create true, durable growth that has a higher margin profile that will drive the right mix to create the the EBIT expansion. We're kind of thrilled that the EBIT margin expansion is a little bit better than we thought in terms of a rate at Investor Day. That's a function of some of the aggressive cost actions that we're taking. We're finding more cost savings opportunities as we spun these business, as we spun ATM out and we get really focused. There's a lot of opportunities to get more efficient. So we're taking advantage of those. We announced that $100 million annualized cost takeout plan to both offset synergies, allow us to invest and go to market, and deliver some additional margin back to the business. We're excited about what that looks like. We talked about it when we said that we targeted a mid-single-digit grower of this business at Investor Day. I still think that's the right target for this business. I still think it's the right target.
spk00: You kind of answered some of the questions that I had on how you get to that EBITDA growth that is faster than revenue growth. We'll move past that and just go to free cash flow. Because you've talked about free cash flow conversion improving as well. Are any of the underlying drivers kind of different than what you just outlined in terms of what gets you to that mid-single-digit growth, what gets you to the faster EBITDA growth? Anything we need to be thinking about from a working capital standpoint or shift in the model, more ARR that gets you to that better free cash flow conversion?
spk02: Some of it is that shift to error, the predictability, the revenue. That will help us do things like improve DSOs and get us a little bit more efficient in working capital. There's not anything major in terms of that. There's some basic, we'll call it, better management and blocking and tackling that we'll do in terms of how to improve that as well. Obviously, the higher margin helps us drive more cash flow from a capital standpoint. investment in the products. We've said 6% to 7% investment this year. We said $250 million of CapEx, 90% of that goes towards software. As we grow ARR a little faster, the dynamics of that capital allocation strategy might shift. You can kind of get to the lower end of that range, probably as software becomes a bigger part of what you're doing, the portfolio matures. Maybe you pull that CapEx down just a hair to get a little bit better conversion of cash. but we are going to convert cash better. We're going to use that cash to build up some cash balances, and that will help us on our net leverage. We'll look to de-lever. Those are the ways we'll think about that, and then we have the one-time cash expenses due to separation that I'm ready to be done talking about, but they're still real, and we'll get through that knot hole of all these separation costs that I know you all are just You don't want to hear from me on that either. You want to talk about the operations of the business. It's just real and the complexity of what we're doing. Right.
spk00: So let's, you know, we have a few minutes. I'd love to talk about, you mentioned capital allocation, but talk about what are the priorities here? You talked about de-levering a bit. What are the targets for you? And then, you know, again, historically, there's always been this angle of kind of like strategic assets that NCR Voix has. How do we think about, you know, your ability to either spin or take any types of different action further to what's already done since the spin in September?
spk02: Yeah, so on the leverage and the cap allocation, we said we're going to try to get down to 3.3, 3.4 this year. And so we're going to be on that path. We set up this new company coming out of the spin, NCR Voyage. Changed the name, changed the colors, bought shirts for everybody, whatever we did. And I built a new leadership team. And I probably changed out more leadership than I thought I would originally, but I did. I built out a new leadership team. I built these businesses to have presidents for each of those three businesses. And that's the way we're running the company, by those three businesses. Then we have the support functions. I was part of all of the strategic review processes that were happening inside of NCR before. I sat at the table with all of the ideas that everybody came with. I watched the all the permutations of everything you could do with every piece of all these businesses. And I'll tell you that we are now exploring ways to look at our business differently, both from a sub-product level and a sub-geo level or a footprint level that we never had the ability to do as NCR because we were so complicated as NCR. So we're much smarter about those businesses. And I will tell you structurally, as a company, I know what all the different options could look like and I'm creating a company that can operate and create ultimate flexibility in how we're structured. And I also want to say that I also know how distracting strategic reviews and spins and all this other stuff can be because I've lived it for three years. And right now, I'm excited about what this team is doing, the leadership team. They're coming together as a team. They believe in the strategy that we have on the page. We have a good strategy. We're putting up good numbers in terms of the core areas of the strategy. And this team is excited to execute and deliver what we have on the page. That's what their focus is. We'll continue to think about how we structure the business and do all this other stuff. Yes, we're not distracting the teams. They are focused on execution. And I think that's I want to get some of that distraction behind us and just get focused on execution.
spk00: Yeah, and that's a great place to end because we just have a minute. But maybe leverage those comments and just give us a final word about, you know, why should we be excited about NCR Voyex? What's kind of underappreciated? What should we think about this business as we go forward? Kind of the key highlights that you want to leave us with.
spk02: Yeah, I would tell you that I appreciate everybody's patience as we get through this spin. We know it's been noisy. There's a lot of noise in the system. And again, I assure you that we're trying to make it as easy as possible. We have an amazing employee base. We have an amazing customer base that we are taking on this journey that are all willing to sign up with this journey with us. When we do, we're going to grow this software revenue stream. In the meantime, we're putting a new focus on adding new customers to either juice some growth out of that space or continue to show that we're winning in the marketplace. Our products are winning in the marketplace as evidenced by the wins that we put up on the board. And we're being disciplined about not only creating a team, but taking costs out and executing this business. So we feel, on behalf of the management team, we feel really good about the strategy, and we're excited, and we're winning.
spk00: Good. We'll leave it there. Thank you, Dave.
spk02: Thank you. Perfect. All right.
spk00: Thank you. Thank you very much.
Disclaimer

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