NCR Corporation

Ladies and gentlemen, good day and welcome to the NCR Corporation first quarter fiscal year 2020 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Michael Nelson, Vice President of Investor Relations. Please go ahead, sir.

Good afternoon, and thank you for joining our first quarter 2020 earnings call. Joining me on the call today are Mike Hayford, President and CEO, Owen Sullivan, COO, and Andre Fernandez, CFO. Before we get started, let me remind you that our presentation and discussion will include forward-looking statements within the meaning and protection of the Private Securities Litigation Reform Act. 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 reports. On today's call, we will also be discussing certain non-GAAP financial measures. These non-GAAP measures are described and reconciled to the GAAP counterparts in the presentation materials, our earnings release dated April 30th, 2020, and on the investor relations page of our website. 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. I will begin with some of my views on the business, including the impact from the tornado that damaged our fulfillment center near Nashville, Tennessee, and the impact on the corona pandemic, and then an overview of first quarter performance. Andre will then review our first quarter financial numbers, and Owen, Andre, and I will take your questions. I'll begin on slide four with an overview of our current operating climate. We entered 2020 with momentum across our businesses in the first two months of the year, and then the increased global spread of the coronavirus pandemic began to impact our business. Also, on March 3rd, our tornado damaged our fulfillment center near Nashville, Tennessee. Our fulfillment center is operated by a third party, and together, we activated a recovery plan. We shifted shipments from other facilities and created another warehouse near Nashville. Shipments are now back to normal capacity, and we have caught up on the backlog by mid-April, but the outage did adversely impact our first quarter performance. In terms of the coronavirus, we have had a task force in place since January. which was originally put in place to focus on China and our supply chain. We then expanded this to include business continuity around the world. In mid-March, we implemented work from home around the world for our office-based employees. We continue to have employees in the field each day supporting our clients, as well as employees who work in our production and distribution centers. We have worked with government agencies around the world to ensure that NCR's offerings are designated as essential business. Today, we have been successful in most jurisdictions. Nevertheless, since the coronavirus pandemic expanded globally in March, we have experienced challenges with certain customer installations as well as impact with certain customer groups. We expect the pandemic to create headwinds to our customers and our business until COVID-19 is contained. consumer confidence improves, and the economy begins to rebound. Although it's difficult to project how deep and how long the coronavirus pandemic will last, we do expect it will negatively impact our business for at least the remainder of 2020. Let me shift to a brief summary of the impacts to each of our business segments. Our banking business is primarily focused on self-service and retail banking. Assuring availability of self-service banking is a priority across the globe. This includes installing and maintaining ATMs as well as assuring availability of our digital banking platform. All of these critical functions of our bank customers are considered as part of essential infrastructure. Within our banking segment, we experienced challenges that caused ATM shipments and installation delays, but thus far they have been largely hardware and installation services related, resulting in a decline in ATM hardware revenue and corresponding margins. Overall, our ATM break-fix services, which represents the largest percentage of banking segment revenue, remain solid, driven by the maintenance backlog both from our 2019 ATM sales and from large customer service contract wins last year. However, there can be no assurance that such operations will not be impacted in the future. While a limited amount of our order activity pushed at the end of the first quarter, overall orders remain solid in the quarter with minimal cancellations. In the first quarter, we also continue to have positive momentum in our digital banking platform with eight new customers signed. Within our retail segment, the food, drug, and mass merchandising market, which includes grocery stores, drug stores, and big box retailers, accounts for the majority of our retail segment revenues. We have realigned our resources to support our customers as they respond to changing consumer demand particularly with regard to self-checkout and contactless checkout. Our professional services team has worked closely with our customers to meet the shift in demand, and we expect preferences towards contactless and self-checkout to continue beyond the coronavirus pandemic. However, there will be a near-term push-out in selling additional self-checkout units, as many of these customers are simply too busy operating their stores and a resource constraint as they serve their customers. We are hopeful that these delays will be brief and believe that several of our large customers will resume the installation activity later in the second half of this year. Our convenience and fuel retail with customers, which include gas stations and convenience stores, are also considered a critical function. We are not expecting the coronavirus pandemic to have much of an impact in this market. However, customers in our department and specialty retail market and in our small and medium business market, which accounts for roughly 20% of our retail segment, have encountered significant adverse impacts in connection with the coronavirus pandemic, including temporary closures of physical stores and reduced consumer spending. We expect our hospitality segment will likely be the segment that is most impacted by the coronavirus pandemic. Within this segment, we have the quick service restaurants, which are large chains and represent the majority of our hospitality business. These customers remain busy with drive-thru and pickup services being in demand during the coronavirus pandemic. These customers are better positioned than other customers within the hospitality segment, but our business will be negatively impacted from lower new store openings and less remodeling activities during 2020. We expect our table service restaurants, which are sit-down restaurants with more than 50 locations, to experience negative impacts as a result of shelf and place orders and social distancing practices. Although many of these customers have experienced an increase in their online ordering and takeout business, we expect total revenue from this customer segment to be adversely impacted until COVID-19 is contained and customer confidence improves. Customers in our small and medium business market, mainly restaurants, which represent roughly 3% of the total revenue for NCR, have experienced significant impacts as a result of the coronavirus pandemic. We have been working closely with our customers to help them in this crisis and have enabled over 600 restaurant locations with online ordering in the hospitality business. And we are working with another 500 restaurant locations in the small and medium business markets. We've also partnered with Nimbus to support and assist small businesses impacted by COVID-19 with accessing Small Business Administration Paycheck Protection Program loans. Thus far, we have over 200 customers that have or are in the process of being funded by that program. We also continue to execute our strategy to shift our revenues to more recurring revenue streams. Until the coronavirus pandemic spread globally in March, we continued to have success with Aloha Essentials, which bundled software, services, hardware, and payments. During the first quarter, we added 372 incremental Aloha Essentials sites as subscription bundles. We also went live with selling our payment solutions to quick service and table service restaurants as we had planned. We are working with our customers to help them manage through the crisis and maintain our position as a valued supplier, which we think will pay dividends long-term. We are also taking every measure we can to maintain and preserve our employee base, since by doing so, we believe the company will be in a stronger position once we emerge from this crisis. In an effort to maintain a stronger liquidity position, we have taken several steps to build our cash reserve to improve financial flexibility and provide a cushion to help weather the impact of the pandemic. These steps include suspending our share repurchase programs, limiting our M&A activity, reducing salaries for members of the leadership team and certain salaried employees, reducing our planned capital expenditures, eliminating most contractors, curtailing travel, freezing merit increases and freezing hiring, fully drawing down the remaining $630 million on our five-year $1.1 billion revolving credit facility and issuing $400 million of five-year senior unsecured notes. We have taken these actions and have built a large cash reserve to provide a cushion to address potential impacts from the pandemic given uncertainty over the depth and length of this crisis. Now moving to slide five and an overview of our first quarter performance. First, we continue to actively manage through the COVID-19 pandemic, including daily executive meetings of our executive team. Of course, we have been doing those virtually, but have continued to meet at least every day and many times twice a day to manage the changes to our business as they occur. Second, although overall revenues declined slightly due to the impact from the damage to our National Fulfillment Center in the current pandemic, we did grow revenue in our banking segment in the first quarter. Third, we continued to increase our recurring revenue up 7% on a constant currency basis over the first quarter of last year. Fourth, our software and services revenue grew to 74% of total revenues in the first quarter, up from 68% in the first quarter of 2019-20. And lastly, we improved our liquidity position to prepare for the uncertainty of COVID-19. Now moving to slide six and an overview of our financial performance in the quarter. Consolidated revenue was $1.5 billion, down 2% as reported, and down 1% on a constant currency basis. We estimate the combination of damage to our global fulfillment center in Nashville and the coronavirus negatively impacted first quarter revenue by approximately $75 to $80 million. It was primarily impacted in the hardware-attached software. However, despite the market interruption, we continued to execute our strategy to shift to recurring revenue streams with multi-year contracts. Our efforts have accelerated sequentially from last year, and in the first quarter, we shifted $19 million in revenue that previously would have been booked up front to recurring revenues, an even higher number than we had anticipated for the quarter. Adjusted EBITDA decreased 14% year-over-year to $188 million. We estimate the combination of damage to our National Fulfillment Center and the coronavirus negatively impacted first quarter adjusted EBITDA by approximately $20 to $25 million. Q1 2020 non-GAAP EPS was 31 cents a share. These financial results are in line with the pre-announced expectations we released on April 7th of this year in conjunction with our bond offering. Lastly, free cash outflow with $15 million for the first quarter of 2020, which improved due to improvements in working capital from the free cash outflow of $87 million during the first quarter of 2019. Free cash flow was also helped by a $25 million insurance advance we received late in the quarter from the loss of a Nashville facility. As a reminder, our historical free cash flow is typically negative early in the year. With that, let me pass the caller to Andre.