NCR Corporation

Good day and welcome to the NCR Corporation's second 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 second quarter 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 reports. On today's call, we will also be discussing certain non-GAAP financial measures. These non-GAAP measures are described and reconciled to their GAAP counterparts in the presentation materials, the press release dated July 28, 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. Before I get started, I want to thank Andre Fernandez for all his work during his time at NCR. I appreciate all he's done, particularly around firming up our balance sheet, increasing the transparency with the investment community, and helping organize our industry general manager structure. I also want to thank him for staying on until October 1st to ensure an effective leadership transition. I wish him well in his next endeavors. I will begin with some of my views on the business, including The Impact from the Coronavirus Pandemic. Then I will review our second quarter performance and talk about the success we are having with our digital-first contactless solutions. Owen will then review our business progress. Tim Oliver, our newly appointed CFO, will then review our second quarter financial numbers. Then Owen, Tim, and I will take your questions. Starting on slide four, just two years ago, we began the shift to a customer-centric digital first software and services business model. We made tremendous progress in 2019 and entered 2020 with strong momentum. When the global pandemic hit, we took aggressive steps to focus on three priorities. First, the security and safety of all of our employees around the globe. Second, continuing to serve our customers. And third, protect the financial health of our company. I want to express my appreciation to our employees who have shown incredible commitment and flexibility as well as an intense dedication to support our customers during these difficult times. While our financial results in the second quarter are disappointing on a year-over-year basis entirely due to the coronavirus pandemic, we are quite pleased with our company's performance during the quarter. Our revenues and margins held up better than we had expected Our business success in the competitive marketplace was very strong, and we continued to make progress on our strategic product initiatives. Now moving to slide five and an overview of our second quarter performance. First, while we do not expect the COVID-19 health crisis to be mitigated until 2020, sorry, until 2021, we have shifted our management attention from a focus on COVID-19 to a focus on growing the business in the second half of the year, winning in the marketplace, and continuing our strategic shift to NCR as a service, all while operating in a COVID-19 environment. We actually kicked off the second half of the year with a shift to offense and called it our 2020.5 plan versus the first half of 2020 where we found ourselves in a defensive position reacting most of the second quarter. Second, there were several bright spots in the quarter, including recurring revenue constant currency growth of 7% compared to last year. Third, we are generating accelerated momentum in our shift towards recurring revenues. We have shifted many of our software and solutions from an upfront software license to recurring revenue. This includes both software attached to a hardware sale as well as software sold independent of hardware. This remains a top strategic priority, and we have accelerated momentum as we enter the second half of the year. Finally, we made additional progress strengthening our liquidity and improving our financial flexibility. The cash preservation actions we took earlier in the year, coupled with our continued focus on cash management, helped drive free cash flow of $171 million during the second quarter. We ended the second quarter with $1.7 billion of cash on the balance sheet. which has provided significant liquidity and financial flexibility to invest in our strategic growth platforms and deliver uninterrupted value to our customers as consumers' transaction habits have shifted. With that, let me pass the call over to Owen.

Thanks, Mike. I will begin on slide six and provide an overview of our current operating environment. As Mike mentioned, we built a plan in response to COVID-19 that we believed would get us through this difficult period. The plan prioritized taking care of our employees, our customers, and the health of the business. Our team has done an outstanding job responding to the many challenges and specific actions that we put in place. We have performed in balance throughout the quarter as we preserve cash and manage expenses while continuing to invest in the products and capabilities required to meet our strategic goals and compete and win in the markets we serve. We have seen our already strong relationships with customers accelerate and we've become even more of a strategic advisor as we collaborated with them in navigating extremely choppy waters. Whether it has been assisting them in the accessing of the government PPP loans helping them move to online or guiding them toward and implementing our contact solutions, we are creating even deeper relationships with our customers. While taking care of our employees and our customers, we are also accelerating our transformation to NCR as a service. Our plan coming into 2020 was to continue the transformation of every aspect of the business to deliver the as a service promise to our customers and investors. We are confident in stating that the efforts behind these imperatives have not been sidelined due to the challenges of COVID-19. These efforts to transform address the range from how we build our products and offerings, to how we go to market, to our service and support, through to our financial and reporting systems. As we drive the transformation of the business, we continue to strive to be an even more efficient and effective steward of our resources. We are clearly executing a parallel plan to execute in these tough times while building and positioning for our future. On slide seven, in prior forums, we have talked about our digital first strategy and our belief that adoption of these solutions would gain increased traction in the years ahead. Given the impact of coronavirus, the adoption rate of digital transformation across the banking, retail, and hospitality industries has clearly accelerated. Many of these solutions have gone from a nice to have to table stakes for our customers. Restaurants, retail stores, and banks are all interacting and transacting with consumers differently due to COVID. Customers are looking to NCR for help and support as consumers increasingly want to conduct business via a device they trust, mainly their smartphones. They want to pay at the physical location without touching the kiosks. They want to arrange for takeout at restaurants or complete in-store purchases via mobile devices. They want less interaction with devices that they don't know or trust. For consumers that prefer to use a physical device, we recently introduced our antimicrobial shield. This is a coating that can be applied to hardware, including touchscreens, keypads, headsets, and card readers. This antimicrobial coating makes it more difficult for microbes to live on coated surfaces, reducing the possibility of transmission through touch, and is also designed to improve the effectiveness of standard cleaning and disinfecting procedures. Additionally, across our industries, we are seeing increased demand for our digital-connected services, which enables us to service an IoT-enabled device, whether it's an NCR device or a third-party device. Now moving to slide eight in the retail industry, where the growing consumer shifts toward using the smartphone to conduct transactions is accelerating. We offer a wide range of solutions, including touch-free self-checkout and payments, mobile gas pump activation, digital connected services, as well as our Emerald offering. We recently deepened our relationship with Bash's family of stores. Bash's plans to roll out the complete NCR solution, which encompasses all software and payments processing for full and self-service checkouts. plus solutions for customer loyalty, promotion, merchandising, and more. Along with Northgate, Bashes is the second client within the year to implement Emerald. Both projects took months, not years, to go live. Come and Go, a convenience and fuel retailer with over 400 stores in 11 states, is using NCR's mobile pump activation solution, which allows customers to activate the gas pump from their mobile device. These are just a few examples of how NCR is enabling our retail customers to compete and thrive in the current environment. Moving to hospitality, we have seen a notable uptick in customer interest in our contactless payment solutions. Today, we have close to 1,000 sites using our contactless payment solution. In addition, we have seen strong adoption with NCR's online ordering solution and added over 1,400 sites in the second quarter. We've launched solutions that allow our guests to sit down at restaurants and view the menu on their phone via a QR code, order food on their phone, and then pay on their device. This lets consumers conduct transactions using their smartphones, eliminating the need to touch physical menus, exchange cash, or hand over their credit card. One example of how we have helped restaurants is our partnership with Firehouse Subs. Together with Firehouse, our teams work to add customer care information to Firehouse's digital ordering platforms to make it easier for restaurants staff to identify which car to deliver the order to. While this has simplified operations for Firehouse locations, it's also elevated the customer experience. With that, I'll turn it over to Tim.

Great. Thanks, Owen. I first want to say how thrilled I am to be at MCR. It's great to be back with the leadership team with both old and new friends. I look forward to meeting those of you on the phone or reacquainting with some of you. As it's been the practice, my comments will presume a constant currency adjustment that removes the impact of foreign exchange. So slide 10 presents the top-level view of our second quarter financial performance. Starting in the top left, Consolidated revenue was $1.48 billion, down 12% versus the 2019 second quarter. As we expected, revenue was negatively impacted by the broader economic pause caused by the coronavirus pandemic. We'll dig into more specific drivers of the decline as we go, but more than three-quarters of that decline is attributable to lower hardware revenue, which was down $173 million, or 29%. That said, our continued effort to shift to recurring revenue streams accelerated sequentially. In the second quarter, we shifted $22 million, or almost 1.5 points of revenue, to recurring revenue that previously would have been booked up front as a perpetual sale. Adjusted EBITDA decreased 24% year-over-year to $201 million, and EBITDA margin declined by about 180 basis points to 13.5%. The combination of lower overall revenue, the strategic shift to recurring revenue, which, as shown, represented about $18 million, and the unabsorbed fixed cost collectively described this decrease. Non-GAAP EPS was $0.27, down $0.49 from the prior year's second quarter. $0.09 of that decline resulted from the shift to recurring revenue that I just described, $0.07 from a higher quarterly tax rate of 33%, $0.05 from the increased interest expense primarily related to the precautionary borrowings that were initiated as part of the COVID action plan, and that leaves about 21 cents related to the lower revenue and operating results. The tax rate of 33% for the second quarter was higher as a consequence of lower earnings, the outside impact thereof of permanent non-deductible items, and the timing of anticipated discrete benefits within the year. Lastly, on this page, our cash preservation efforts were successful. and allowed us to deliver free cash flow of $171 million in the quarter versus just $9 million in the year-ago quarter. The improvement was due primarily to working capital improvements, particularly on receivables. While we did receive the benefit of a $70 million insurance advance, all but $10 million of that advance has already been spent to replace assets lost to the tornado. And payables were actually down in the quarter as our vendor payments were more linear and less lag than prior quarters. Moving to slide 11, which begins the discussion of our segments and summarizes our banking segment results. Banking revenue decreased $105 million, or 11%, mainly driven by a $79 million decline in ATM sales. The remainder of the decline can be attributed to the service revenue associated with the install of those machines and the adoption of our recurring revenue model. Excluding the decline of ATM hardware-related revenues and the impact from the shift to recurring revenue, banking revenue would have been up slightly year-over-year. And within our banking recurring revenue, non-ATM application software represents now more than half of our total contract value. Operating income decreased $37 million, or 29%, and operating margin dropped 280 basis points to 12%. These declines were driven by lower revenue, the resulting unabsorbed cost, and were offset by lower discretionary spending and other cost initiatives we put in place earlier this year. Operating expenses were down 9% in this segment. Moving to side 12, which illustrates our retail segment results, retail revenue decreased $75 million, or 13%, with more than three-quarters of that revenue declined from hardware. The hardware decline was attributable to the very difficult market environment for the retail sector, the lack of access to stores or priorities of our customers, and a tough comparison to a particularly large self-checkout sale last year. Most of the remaining shortfall related to service revenue that gets pulled with new hardware installs. On our prior earnings call, we discussed the delay we expected for installing self-checkout units at several of our large customers, as many of these customers were too busy operating their stores during this pandemic to undertake an installation project. As an update, Those orders are in backlog and remain on track to be delivered in the second half of the year, with no cancellations expected. Moving down to P&L, operating income was down $23 million, or 58%. This decrease was caused by lower revenue and underabsorbed costs. And like banking, these shortfalls were partially offset by discretionary spending and cost initiatives launched at the end of the first quarter that reduced our overall operating expenses. Retail operating expenses, like banking, were also down 9% year over year. Slide 13 shows our hospitality segment results. Hospitality revenue decreased $42 million, or 20%, similarly driven primarily by lower hardware sales, with those sales down 44%. As expected, our hospitality segment has been the most impacted by the coronavirus, with mandated shutdowns or customer aversion to sit-down dining and limits to social gatherings. Second quarter operating income declined $13 million, mainly due to the flow-through impact of lower revenue. While we were able to reduce operating expenses here, too, by about 7%, prudently higher reserves on accounts receivable offset most of those savings in the quarter. Turning to slide 14, here we provide our segment quarter revenue detailed under our previous operating segments for comparative purposes. Software revenue decreased $36 million at 6%, driven primarily from the shift to recurring revenue, as well as from the impact of the challenging economic conditions. Services revenue was flat for the quarter, driven by lower installation revenue, offset by an increase in recurring service revenues from hardware maintenance, managed services, and digital-connected services. And as I've mentioned previously, hardware revenue was the most impacted in the quarter by the coronavirus, falling $173 million, or 29%. More specifically, ATM revenue declined $79 million, or 25%, while the combination of self-checkout and point of sale declined $94 million, or 33%. Recurring revenues increased $38 million, or 7%, driven by growth in cloud, professional services, and payments revenue. Recurring revenue as a percentage of total company revenue increased to 55% from 45% in Q2, though admittedly in large part due to lower hardware sales. And finally, on slide 15, we present free cash flow, net debt, and adjusted EBITDA metrics. As Mike said, we are very pleased with our performance on the cash side. Free cash flow of $171 million in the quarter was a significant improvement over both the prior year and sequentially over Q1. Our pandemic response included an urgent focus on working capital and a company-wide initiative to reduce cash costs. Our execution exceeded our objectives that we set back in mid-March. This slide also shows our net debt to adjusted EBITDA metric with a net debt leverage ratio of 3.1 times for Q2, which is consistent with where we ended last quarter. And finally, as you remember, at the end of March, we drew down $600 million on a revolver, and at the beginning of April, we issued a $400 million bond as precautionary measures to de-risk our balance sheet and improve financial flexibility. The cumulative effect of all of these actions is a very solid balance sheet with sufficient liquidity and no significant debt maturities until July of 2022. Overall, we ended the second quarter, as Mike said, with close to $1.7 billion of cash on hand. We remain compliant with all of our debt covenants and ended the second quarter with credit facility leverage well under our debt covenant maximum of 4.75 times. With that, I'll turn it back to Mike for his closing comments.

Thanks, Jim. Hey, before I do a close, I'm going to ask Owen to just give a few more points on slide seven on the banking, just emphasize a few of the key points. Sure.

Thanks, Mike. Welcome to live TV. Within the banking industry, we continue to have success with our digital banking platform, including signing three new customers in the quarter, all of which were competitive takeaways. We've also had success cross-selling existing clients with new products, with 18 new business banking deals done in the quarter. Also in the quarter, our digital banking registered users increased 12% organically to more than 23 million. Elsewhere in banking, we have increased success shifting our software to a recurring revenue. Our unattached software offerings, which are sold independent of ATM hardware sales, have very strong momentum. These software solutions include multi-vendor ATM solutions, enterprise monitoring, remote deposit capture software, transaction processing, branch transformation software, and security applications. We continue to receive positive customer validation as we have migrated our software license solutions, both our unattached software and our ATM software, to recurring revenue. In the second quarter, we signed over 150 banks to a recurring revenue model that previously would have been revenue sold as an upfront software license. One such example is a software sale independent of hardware at Note Machine, one of the UK's largest ATM operators. We helped Note Machine upgrade their transaction processing platform. with no downtime and they are now processing increased volume at a reduced cost. Michael, turn it back to you.

Thanks, Owen. The second quarter of 2020 created a unique set of challenges for our management team to address. We put the health and safety of our employees as our number one priority. We said we must take care of our customers and continue to deliver the best service in the industry. And lastly, we said we must protect the interests of our company's shareholders and take care of the company and environment with limited visibility. To that end, we focused on preserving cash and maintaining our cash balance. I am pleased that the actions we took during the quarter not only preserved our cash, but in fact increased our cash balance during the second quarter, and we expect to be free cash flow positive for the full year 2020. But more importantly, we continue to make progress on execution of our strategic goals to become a software and services-led company with predictable recurring revenue streams as we help our customers run their stores, restaurants, and self-service banking. Our competitive wins in the second quarter demonstrate the progress of our investments in our strategic platforms in digital banking, our next-gen Aloha, our cloud-based retail product Emerald, payments, and our CFP self-service banking and ATM platform software. We will continue to focus on our transformation to drive NCR as a service and achieve our 80-60-20 strategic goals. Our strategy remains consistent. Seek to drive software and services to 80% of our total revenue, recurring revenues to 60% of our total revenue, and expanding with a margin to 20% in our coming years. My message to the NCR team, has been clear. The first half of the year is behind us and we begin 2020.5. We took defensive actions to make it through an uncertain first half of the year and now we turn the page. We enter the second half of the year focused on growing the business from the first half of the year and taking offensive actions. Our strategy is working and our liquidity position is strong. We enter the second half with a large cash position and increased financial flexibility. We are confident that we can continue to weather the current crisis while also investing in innovative solutions and becoming an increasingly critical partner for our customers. We will look to allocate capital in our strategic growth platforms such as digital banking, Emerald, Aloha, payments, and digital connected services. And we will also consider tuck-in acquisitions and paying down debt. Our vision remains the same, become the software and service technology provider of choice to run restaurants, retailers, and self-service banking. Thank you for your time today, and now we will open up the call for your questions. Operator?

If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. A voice prompt on the phone line will indicate when your line is up. And again, press star one to ask a question. We'll pause for just a moment to allow an opportunity to signal for questions. We'll go ahead and take our first question from Tim Murray with Wells Fargo. Please go ahead.

Thank you, Anne. Thank you. Good afternoon, everyone. A couple quick questions, if I could. Mike, could you talk about any shifts that you think you're seeing in the competitive landscape across any of the operating segments. I know we're still sort of early in this, but it seems like some people will take advantage of this to gain share. Others will struggle to stay up or be relevant. I'm just curious if there's any areas where you're really seeing that opportunity emerge for NCR to be a clear winner, why others sort of go out with the time? And I have a couple quick follow-ups.

Yeah, Tim, that's a great question. And again, we kind of framed, you know, the first half even as we were navigating, you know, COVID and a lot of uncertainty that we still stayed very focused on our investments for the future. And then as we enter the second half, you know, really a shift to the offensive side. And we feel confident really good about our positioning and the point that you raised I'd say the two areas we see that the most retail and in hospitality where there have been a fair number of I'll call them just new entrants and new upstarts who have built or started to build some level of product but don't have the scale clearly are not positive cash flow yet don't have the number of customers that says they're going to make it to the next level We think there's a distinct opportunity to go into that market and we're already seeing some cases where we're winning back customers who started to look in that direction and we're taking them back. So we feel pretty good that coming out of this crisis we'll be a stronger company, stronger relative to our competitors and probably as much an indication of some of them just not being able to survive this long of a challenge.

Great, thanks. And then just a couple quick follow-ups. Owen, I think you quoted a growth rate for digital banking users. I think you said the number was 23 million, but I didn't catch the growth rate associated with that user base.

Yeah, it was the digital banking platform of registered users, Tim. Yep. grew 12% to just over $23 million. So that's across the digital platforms, DI and D3.

Is the 12% an acceleration? Because I know there's been some improved momentum coming across the digital banking business now for several quarters, and I'm assuming that's an acceleration off of what we saw in the past quarter.

Yeah, there's no doubt. Yeah.

And then last question I had, I guess, for Tim Oliver, nice to meet you over the phone. You know, Mike, Tim, Owen, is there anything we should think about with the new CFO, whether it's just the outreach to the streets, or is this just sort of, you know, something that with Andre was sort of anticipated probably a while ago, and just that there shouldn't be too many changes in any way, shape, or form, or just something, you know, that we'll start to see in the next couple quarters? around the reporting and the finance and the balance sheet and stuff like that?

No, I don't think you'll see anything, you know, externally different. You know, Andre, you know, made a personal decision to go on and do something else, and we were lucky enough, as I think Tim referenced, we've worked with him in the past. But, you know, our external reporting, I think, has done really well. The transparency, the shift, the openness that Andre has brought We'll definitely be continuing that going forward. I think the only thing, and we had talked in the past about as we make the shift to recurring and NCR as a service, as we call it, what other metrics will we share? We'll still continue to look at what else we share going forward, and so we'll keep on that track.

Andre has been incredibly helpful the last couple of weeks to try to get me up to speed for today. He's built a team that is very capable, and I think you should expect very similar high-quality analysis from us and me going forward.

Again, that is star one to ask a question. If you find that your question has been answered, you may remove yourself from the queue by pressing star two. We'll take our next question from Dan Kernos from Benchmark Companies. Please go ahead.

Great. Thanks. Good afternoon. Nice job, guys. Just maybe, Mike, can you kind of frame up a little bit more the push in contactless, either economics just around screens or the phone-based solutions that you're implementing? Is there a payments opportunity there? And kind of what do you think sort of the TAM is as you guys kind of keep going down that path?

Yeah, so at a bigger picture level, we obviously shifted to digital first a year and a half ago now in terms of strategy and started building out much more on the mobile device. We've always had a very strong footprint in product offering and digital banking, but we've started to add that in other parts of the business. So when COVID hit us in mid-March, early June, April, Owen and the team went and said, what else can we do to shift the contact away from our device, whether that's an ATM, whether that's a SCO, whether it's a POS, whether that's any other device that a customer and consumer might be touching, and move it to your mobile device, move it to a device that you control as opposed to something else somebody else has touched. So we moved down that path. you raise a really good issue. So in some areas, it's really just an extension. So when you go up to ATM, there's a couple different ways that we've implemented it. But you don't actually have to touch the ATM. You can touch your mobile device, set up a transaction to make a deposit, make a withdrawal, and not have to touch the screen. Same on a SCO. We moved very quickly with one of our very large retailers who wanted to move from actually completing a transaction by touching a self-checkout to actually using their mobile app where the consumer could actually complete the payment on their app, and we help them facilitate that. And then on to hospitality, the restaurant space, which is more appropriate where we've developed an app and rolled it out to our customers already where you can pay at the end of a meal, and you can complete a transaction with your mobile device at your table by scanning a QR code. So we'll actually pop a menu when you enter the restaurant. with the QR code, and unlike a lot of systems that do, we'll ask you to pop a menu that you can order from your mobile device, and at the end of the meal, you can actually pay with your mobile device, and we'll facilitate that payment for your current acquirer, or we'll run it to our merchant acquirer. And in that case, we charge a fee. So in some cases, we're able to get a transaction fee. In other cases, it really is just extending and adding some capabilities to our systems that others maybe don't have in the marketplace.

Got it. And then in your prepared remarks, you did allude to, you know, reverting back to sort of the tuck-in strategy along with considering debt, giving a strong free cash flow quarter here. I'm just curious, you know, and maybe if you want to take it in tandem with some of those players that weren't able to scale, you know, I'm sure you would, you know, I'd like to have, you know, a First Global or whatever, some major payment platform to go out and buy. But is there something small that maybe gets you some initial scale to accelerate your efforts? Or are you looking at that high value debt and just maybe want to take that out if you have the cash flow to do so?

Well, you know, I think we'll continue to look at both. Clearly, we put a lot of that, we put the debt, the additional debt, we do down the revolver. We took on some more bonds as just a precaution. I'll tell you, mid-March, it looked scary. It looked a lot more uncertain back then as we looked at what was going to happen, just a lot more unknown. I think right now we feel pretty good that it's played out the way we expected it to play out. And then as we look forward, if things stay, you know, they're not great, but if they stay kind of the way they are bumping along, we feel pretty good about our outlook for the year. So then we have excess liquidity on our balance sheet that we put on there to protect ourselves. So at some point, we'd look to pay some of that back, whether we pay back the revolver or we pay back some of the debt. And then I think as we pointed out, there may be some opportunities to do some more tuck-ins. We've been doing that successfully in 2019 and 2018. And so As we get more clarity in the future, we feel better about starting to get back and adding some more products in that fashion.

We'll take our next question from Katie Huberti with Morgan Stanley. Please go ahead.

Hi, this is Karen coming on for Katie. Thanks for taking that question. I just had two quick ones. So first, do you have a sense of what percent of revenue in the quarter was tied to mobile and contactless solutions? And then when a customer shifts to one of these solutions, is it often larger or smaller than historical deals, or it seems like it may be incremental? So just any color there would be helpful.

Yeah, I don't think we'll call out the transaction specifically or the business. Again, in some cases, like, with an ATM or with a self-checkout device. It really helps us sell our product, and particularly as we go forward. So the ability to integrate with a self-checkout where people can do the transaction without touching the device we think is very important. Obviously, digital banking, the mobile device has been a mainstay to that footprint. And then we talked about the restaurants and rolling that out. Some of that is extending the Aloha Essentials product marketability. We had, as Owen talked about, really good success in a difficult market actually selling new clients to Aloha Essentials. And then part of that is when you sign up with NCR and the whole Aloha suite, you get all these capabilities which allow you to differentiate your experience with your consumers. So we don't really track it as a discrete as much as it makes our products more competitive.

Got it. That makes sense. And then just quickly on recurring revenue, could you remind us what's included in that calculation? Is that all revenue tied to a longer-term contract that are built on a monthly basis?

Yeah, our rather, you know, everybody uses a little bit different definition. Our simple recurring revenue definition is it's revenue that we don't have to go out and sell in a given calendar year. So everything is multi-year contracts. Obviously software, there's some SAS and there's subscription in there. We had really good success in professional services transitioning from services that were sold by the hour or by the day into services sold for, we had a really large five-year contract where we're doing application management over a five-year window for a large client in the retail space. Our global services footprint where we have five-year contracts to support the hardware, whether it's SCO or ATM. So all those are things that just helped with the predictability of our revenue stream. Obviously over time we believe that helps raise our EBITDA margin and just makes our business more predictable.

We'll take our next question from Dan Perlin with RBC Capital Markets.

Hey guys, this is Matthew Miller on for Dan. Thanks for taking my question. I was wondering specifically on banking, specifically like the health and maybe more so general attitudes of your banking clients. Do you think they're feeling more comfortable operating in the current environment? And I'm just curious on the demand, would you characterize that as pent up or maybe like new demand given the current environment?

Yeah, I think everybody, one of the things that Owen and I have done you know, as we've been working from home is we literally have marched through, we've each called two to three clients every week, the executives that are at our customers. And so we've talked to a lot of bankers, some very large banks and some smaller regional banks, community banks, credit unions, et cetera. And, you know, it's hard, but I think the same challenge we have is trying to figure out what's going on with the health crisis, what's going on with the economic crisis, We had some challenges with some of the social issues out in the market that caused impacts to some of the branches and some of the ATMs. So I think there's just a lot hitting everybody. So the level of comfort, I think you see a little bit of what's going on and what am I going to do. I'd say the one consistent theme is people feel pretty good about our relationship and where we're going. We keep trying to find a bank bankers who are backing away from the ATM channel, and we haven't found that. They have shifted from a branch first to a digital first, but a digital first and then an ATM connectivity, and then tying them all together as we talk about our strategy for self-service banking and some of the things that we've done with some large clients where we've built a platform that connects what you do in a branch to what you do at an ATM to your digital platform. I would say the overall tone that we're getting, there's the uncertainty and the caution. But I think, again, I use the words, it was a lot scarier in March than it is today. People recognize we're going to have to live with this mode. I think people are getting more optimistic about the future. I think people are starting to release more capital budgets. Our top of our pipeline is getting stronger. And so I'd say sitting here today, we feel much better than we did on our April call and much better than we did when we did that quick call at the end of March.

We'll take our next question from Paul Koster with J.B. Morgan. Please go ahead.

Hi, this is Paul Chung on for Koster. Thanks for taking that question. Just on your accounts receivable benefit in the quarter and for the first half, what's kind of driving that and What are your expectations for the second half in AR? And then kind of giving a nice start to the first half, I know you mentioned you expect free cash flow positive, but, you know, given you've already hit 50% of last year's free cash flow and, you know, CapEx is probably down, can you also confirm that CapEx number for the year? And, you know, what stops free cash flow from being up this year as, you know, four Qs? typically your seasonally strongest quarter?

Yeah, I'll let Tim start on the AR question. So I think first, I'm not sure there's anything typical about seasonality this year, right? I think the pandemic is going to outrun some of the typical seasonality. That said, too, some of the timing on cash flows were self-inflicted, and we're trying to be a little bit more linear in the way we conduct really all levels of business. That said, AR can only be collected once. We over-collected in Q2. The quality of our receivables is exceptional. It stood up well and was much stronger than perhaps we even gave it credit for as we went into the quarter. We made some good progress on receivables in that 60- to 90-day past due range that we had, for some reason, had gotten a little bit ahead of us. And we made excellent progress there. It brought that back down into a more reasonable range. So while there's still... AR to be collected, I think the overachievement is now behind us in Q3 being a more typical quarter. It is true that Q4 is our best cash flow quarter most years, and I suspect it will be a very good one this year. I'm not sure whether it will be the best, but since there's not much certain in the world right now, we're just going to continue to say that we are going to be free cash flow positive for the year and let the year play out.

Okay, and then on your OpEx cuts, do you see any of these costs becoming permanent? I know you mentioned some elimination of some contractors. I just want to get a sense for how to model out next year OpEx. Thank you.

Yeah, we entered the year, and on our first call, we talked about taking out about $90 million of ongoing costs recurring costs. We deferred a lot of those recurring actions during the first half. We said we want to take care of our employees, and so we did not go through and do reductions in staff as a lot of other companies had done. We didn't feel that was right when there was so much uncertainty in the first half of the year. We did take out a lot of actions, contractors, discretionary spending, plant equipment, etc., etc., We did preserve our investment in product, as we talked about, our strategic product investment. So you see some savings, a lot of cash savings in the first half. As we get into the second half, we will start to look at how we take up more costs related to recurring saves and get back on track with that $90 million number. I don't know how much of that we'll get this year because, again, we didn't do the actions in the first half. But We'll get back to taking out those costs for the long haul and give you an update next quarter.

We'll take our next question from Matt Somerville with DA Davidson. Please go ahead.

Thanks. Sort of to one of the earlier questions, Can you maybe talk about just the cadence from month to month and what you've seen in July in terms of incoming order rates across banking, retail, and hospitality? Have you indeed seen material sort of sequential improvement over the last four and a half months, or three and a half, excuse me?

Yeah, I'll start. This is Mike, Matt. You know, clearly April was a scary month, right? So most of the shelter-in-place started to take effect the third week of March. So in April, there wasn't a whole lot of activity, and obviously our salespeople have been not on the road face-to-face either, so it's been via the phone. So April would have been a very challenging month, and as you probably would expect, each month gets a little better as people get either used to it or more comfortable or more, you know, becomes more normal, this new kind of new norm. So I think we would say our sales activity and our pipeline activity has improved each month as we've gotten into this, and I'll let Owen add any color to that.

Yeah, I would say, Matt, that is a fact that the momentum on the pipeline has continued to build. We're seeing on the retail side conversion of that pipeline to order activity. Starting in Europe, actually, we had some really nice activity there. We're seeing it in the U.S. for retail right now, so we hope that continues, but we like the momentum it's building. On the hospitality side, as Mike said, certainly a huge pause in that sector, but if you recall, Aurore large relationships with the quick service restaurants. It makes up a big part of the hospitality business, and we're starting to see new store commitments and openings and projects back on track, so we're seeing that momentum pick up. On the banking side, the funnel's picked up, and I will say that we're seeing the right momentum in order activity. they're probably being very cautious as they look at the second half of the year. But as we came into July, we saw the order rate start to pick up again. So we like the funnel. We now need to focus on the conversion to order across all three.

Yeah, and I think one of the early questions is what is the ton to tenor of bankers, or the same would be the same for retailers and hospitality. And I think Everybody's looking for the same thing. When do they have certainty in an end to this crisis? So we do need that to happen before people start to release their capital and turn those prospects actually into orders. So we'll be a little cautious other than the good words around some upside activity, but until it's turned into orders and revenue, We'll have to wait and see how this thing plays out.

The last comment I'd make about the pipeline and the activity and that mindset, we are seeing a really nice build of pipeline and conversion from the banks on the software side. And as I talked to Frank Halk who now runs banking for us and his team, they would suggest that there's much more strategic focus and investment into the platforms that differentiate and create the right customer experience for their customers that they're positioning with the software. The hardware will follow. It's a bit more, as he describes it, discretionary spend, the hardware is, but again, we're seeing the funnel build, the conversion from it is a little slower, but we really like the activity we've been seeing on the software side, which is really strategic investment on the part of the banks. And then just as a follow-up, how do you guys see hardware profitability or hardware losses playing out in 2020 maybe relative to how you ended 2019?

Yeah, obviously with the reduction in volume, it's going to be a difficult year for us, a challenging year to get the same, as you recall, 19 over 18 was a very good year. improvement in our margin. We took a number of very specific actions. So 2020 is going to be a challenging year, meaning margin's going to be down over 2019. And part of that's going to depend on how much of the REV comes back in the second half, if any, or whether that starts to come back in 2021. I think at this stage, we're very focused on getting our cost structures in place for where we anticipate a 21. calendar year to be, and that's what we'll do in the second half of the year.

We'll take our next question from Ian Zuffino with Oppenheimer.

Hey, guys. This is Mark on for Ian. Thanks for taking our questions. Just a quick follow-up on, you know, can you just give a sense of, you know, the momentum between sort of the domestic market and venture national? Sounds like, you know, momentum is fairly strong on, you know, digital for both hospitality and banking. Is that more, you know, domestic or international or sort of both? I guess, like, you know, starting to catch up. Thanks.

Yeah, this is Owen. I think I mentioned we're starting to see on the retail side momentum in the Asia-Pacific market and in the European market, which, you know, the corollary to there is that they were dealing with COVID ahead of us. Not that, to Mike's point, COVID's going away, but I think people have put enough shock absorbers on to understand that they're going to have to deal with round two or round three, or COVID's here to stay, and they're starting to do that. But the retailers, the big box retailers, the grocery stores, you know, as you would understand and see, they've been doing fine, and we're benefiting from that, and we're starting to see that momentum move across the globe on the retail side. Most of our hospitality is U.S.-based, except for our large quick service clients, and we're seeing those who are outside the U.S., like I said, we're starting to see order momentum, and that's picking up. And on the banking side, I would say not as dramatic a delineation in terms of how Europe is responding to all of this. It's probably more consistent in the U.S. and Europe right now where they've been cautious, but the pipeline is building and the order rate activity, albeit a little slow, is going in the right direction.

We'll take our final question from with North Coast Research.

Hey, good afternoon. Mike, as you looked at the banking orders or retail orders, early on in the crisis, I think they were being deferred. And I'm wondering today, as you look at those orders, are they still being deferred or are you seeing cancellations?

Yeah, we haven't seen any. You know, we had the challenges very early on. Logistics timing, again, a lot of uncertainty of when people could install. So we had some deferrals, we've seen no cancellations related to that. So it's just a question of when we're able to get the implementations done. We talked about a very large retail client of ours in the second quarter who typically would be implementing a lot of SCO just has been too busy to do it. We don't think any of those are lost. It's just a timing issue when they actually take the self-checkout devices and implement. So we we feel good about the fact that people are still holding tight to moving forward.

And then just on the ATM side, you know, you read a lot about branch closures and banks rethinking what the branch configuration should be. How do you think that will impact your banking business on the ATM side and then on the DI side?

Yeah, Karthik, you know, it's... It's an interesting question. Again, it's hard to get data because it's all too new and everybody's got a point of view. We've done a lot of direct outreach with the banks and the credit unions and the people who are buying from us. The interesting perspective is they tell the story around in the old days. Retail banking was a branch-centric model. And it went from branch then to an ATM to try to push out, be more efficient, cover more hours, 7 by 24, and move from transactions to an ATM. And then in the mid to late 90s, digital banking came. And digital banking was kind of an extension of the branch and the ATM network. And now the way banks are thinking about it is that retail relationship starts with digital banking. So they flipped it around. But then it goes to an ATM to do transactions. And then lastly, it goes to branches. So when they think about reconfiguring retail banking, they think about reconfiguring branches and their branch network, reducing the number of branches. But at least the empirical feedback we're getting is that they're still viewing ATM as a critical component in their retail delivery.

That concludes today's question and answer session. Mike Hayford, at this time I will turn the conference back to you for any additional or closing remarks.

Thanks. So in closing, we feel really good about the progress we made during a difficult second quarter. While we took care of our employees, took care of our customers, we managed our cash flow and continued to invest in strategic software solutions. We are confident we have the financial flexibility to continue to navigate through the COVID-19 crisis successfully. In the second half of 2020, we will shift to offense and focus on executing our 80-60-20 strategy. Thank you all for joining us today. We look forward to speaking with you at the end of the third quarter. Thank you.

This concludes today's call. Thank you for your participation. You may now disconnect.