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spk22: You are currently holding for the NCR Corporation second quarter fiscal year 2022 earnings conference call. We are currently admitting additional participants and we should be getting underway shortly. Thank you for your patience and please continue to stand by. Thank you.
spk18: Please stand by.
spk22: Good day, everyone, and welcome to the NCR Corporation second quarter fiscal year 2022 earnings conference. Today's call is being recorded. At this time, I'd like to turn the conference over to Mr. Michael Nielsen, treasurer and head of investor relations. Please go ahead, sir.
spk23: Good afternoon, and thank you for joining our second quarter 2022 earnings call. Joining me on the call today are Mike Hayford, CEO, Owen Sullivan, President and COO, and Tim Oliver, CFO. Before we get started, let me remind you that our presentation and discussions will include forward-looking statements. These statements reflect our current expectations and beliefs, but they're subject to risks and uncertainties that could cause actual results to differ materially from those expectations. These risks and uncertainties are described in our earnings release and our periodic filings with the SEC, including our annual report. On today's call, we'll 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 27, 2022, 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.
spk07: Thanks, Michael. And thank you, everyone, for joining us today for our second quarter 2022 earnings call. I will begin with some of my views on the business, and I will also provide commentary on our previously announced strategic review process. Tim will review our financial performance, and then Owen, Tim, and I will take your questions. The team has done an excellent job executing in a difficult macro environment. Coming off a very difficult first quarter due to a number of external factors, the team focused on execution in the second quarter, and they delivered. As important, we continued to build strong momentum in the business as we made progress on our strategy to NCR becoming a software-led as a service company with a higher shift to recurring revenue streams. Let's begin on slide four with some highlights from the second quarter. First, we delivered 23% year-over-year total revenue growth on a constant currency basis and 35% recurring revenue growth constant currency in the second quarter. Second, adjusted EBITDA increased 26% on a constant currency basis from the second quarter of 2021. Third, adjusted EBITDA margin expanded to 17%, which represents a 250 basis point increase from the first quarter of 2022. Fourth, we are beginning to see the supply chain impacts easing, meaning The component costs and transportation costs have not worsened in the second quarter. But more importantly, our engineering and procurement teams have adjusted by designing alternative components and certifying more sources to begin reducing the impact. And finally, overall, our teams executed extremely well, and we experienced strong customer demand for solutions across our business segments and continue to successfully transform NCR into a software-led as-a-service company with higher recurring revenue streams. Software and services revenue represented 73% of total revenue compared to 69% in the second quarter of 2021. Recurring revenue represented 61% of total revenue, up from 55% in the year-ago quarter. Now moving to the business update on slide five. We had a strong momentum across our strategic growth platforms, which support our company's transformation. In payments and network, we are making progress across both merchant acquiring and the Allpoint network. We are seeing an accelerating number of merchants sign on for integrated payments with a POS decision. We are also expanding NCR Pay360, which brings more transaction types, including digital currency solutions, at NCR endpoints. We also continue to see strong all-point growth, both in terms of transaction volume and new FI partnerships. Pleased to announce that PNC Bank has partnered with the all-point network starting in June, extending surcharge-free ATM access to more than 10 million of their customers. In digital banking, we continue to have positive momentum. In the second quarter, digital banking had 25 renewals, five new logo deals, and the continued expansion of Terafina with four new clients for our online digital account opening platform. In self-service banking, we continued momentum in our ATM as a service solution. Interest in our offering is accelerating both in community banks and large FIs globally. In the second quarter, we signed 10 ATM as a service deals, including Bank of New Zealand, which is embracing NCR's ATM as a service to run the bank's ATM fleet as part of its digital transformation. NCR will own and operate the bank's off-site ATM fleet and will also run its on-prem fleet of NCR ATMs. In retail, we continue to gain traction with our NCR Emerald POS software and our NCP, NCR's commerce platform. We have positive momentum in winning the upgrade imperative for retail POS software, including in the second quarter, Stater Brothers Markit, Southern California's largest privately-owned supermarket chain with 171 stores connected to the NCR Commerce platform. Theta Brothers implemented NCR Emerald to connect all technology to run the store. They were able to successfully deploy all new software and hardware to all 171 stores in only 15 weeks. In hospitality, we continue to experience strong demand across our enterprise and SMB customers. In SMB, our Aloha Cloud restaurant platform is a user-focused turnkey solution that helps operations run their restaurant. During the second quarter, we launched an updated Aloha Cloud software and hardware solution and continued to invest in our direct distribution model. Our payment attach rate for hospitality accelerated during the second quarter as we had a record high number of payment booking sites with over 90% attach rate for new SMB customers. In the enterprise market, we expanded our partnership with Wendy's, connecting them to the NCP, NCR's commerce platform, which will enable Wendy's to better manage and use data captured through the NCR Aloha point of sale. We also signed a deal with United Franchise Group to deploy NCR Aloha in all of its locations with a bundled solution including point of sale, secured payment processing, robust data reporting, back-end software solutions, and kitchen production solutions. In the second quarter, we continued our evolution to a lean factory model by outsourcing manufacturing. A couple of weeks ago, we transferred our Budapest manufacturing facility to Enocom, which will reduce fixed costs and continue the shift to a more variable manufacturing cost model. This transition is part of a strategy which we started in 2018. Today, 90% of the SKUs that we used that we used to manufacture will now be outsourced. And finally, I'll provide an update on our Board-led strategic review process. As noted in our February 8th announcement, the Board did not set a timetable for this strategic review process. This process continues to be ongoing. We are evaluating strategic alternatives available to NCR in the context of our continued strong The goal of the strategic review process has not changed to unlock value for NCR shareholders. With that, let me pass it over to Tim.
spk25: Thank you, Mike. Last quarter, we spent a significant amount of time describing the long list of exogenous detractors that resulted in financial performance that was well below our expectations. At that time, we estimated not only the impact for the first quarter, but then tried to extrapolate the impact for the remainder of 2022. we were partially correct. The Omicron wave that disrupted hardware supply chains and suppressed transaction volumes at payments resolved in Q1. We saw both higher transaction volumes and better availability of components respectively in Q2. That said, fuel prices are persistently high. Component costs remain too high even if availability is better. Interest rates are higher. Inflation has reached a 40-year high and the war in Ukraine continues to disrupt and distract our large presence in Eastern Europe. And now, you can add the implications of a rapidly strengthening U.S. dollar to the list of challenges. Our second quarter results represent very strong execution despite this extremely difficult macroeconomic environment. We generated productivity, closed some of the price-cost gaps, and delivered the product that had been delayed in Q1. We diligently controlled the things that we could control and readied our businesses for any further shocks. Our team simultaneously executed a recovery plan, accelerated our strategic initiatives, and supported the ongoing strategic review process that we launched in February. This was a very busy and successful 90 days. While uncertainty persists, our strong performance in Q2 and the further mitigating actions we plan to take in the second half allow us to leave our outlook for the full year unchanged from that we delivered in April. Although some headwinds in Q1 improved, others, like interest rates, got worse, and we have a new headwind in foreign exchange rates. As is always the case, the outlook we provided in April presumed currency rates at that time. In Q2, foreign currency exchange reduced revenue by $50 million and adjusted EBITDA by roughly $15 million, and we still delivered strong results. We currently expect a similar FX impact going forward. We still believe we can hit the lower end of our guided ranges from April, even with these challenges. Let's begin on slide six with a top-level overview of our second quarter financial performance. Starting in the top left, we delivered revenue of $2 billion, up $320 million, or 23% from the prior year on a constant currency basis. Warrant currency exchange rates had an unfavorable impact of $50 million, split roughly evenly between our self-service banking and retail segments. Recurring revenue was up 35% on a constant currency basis. Adjusting for the partial quarter of Cartronics last year, revenue was up 4% on a constant currency basis. In the top right, adjusted EBITDA increased $58 million, or 26% on a constant currency year-over-year basis, to $339 million. Foreign currency exchange rates had an unfavorable impact of roughly $15 million. Adjusted EBITDA margin expanded 20 basis points from the second quarter of 2021 to 17%. While we don't typically discuss EBITDA margin sequentially, The outlook we provided in April did describe sequential EBITDA improvements beginning with Q1 levels in each of the remaining three quarters of the year of between $50 and $70 million. In Q2, we improved by almost $70 million over the Q1 level, even after a significant currency impact. This allows us to be closer to the $50 million of sequential improvement in Qs 3 and 4. In the bottom left, reported non-GAAP EPS was 71 cents, up 9 cents or 15% year-over-year. The strength of the U.S. dollar reduced EPS by about 7 cents. The non-GAAP tax rate was 21.2% in the quarter and results in an average for the first half of the year of 25%. The rate was driven by stronger earnings as well as the timing of the street tax items. During the second half of the year, we expect tax rate to be within the range of 27% to 29%. And finally, free cash flow was flat, which was a solid outcome given the challenges in supply chain that caused both nonlinear revenue recognition and a discretionary investment in working capital. We have invested roughly $250 million in working capital in the first half of this year, much of it in raw inventories and finished goods, to insulate our customers from a supply chain disruption. These investments in working capital are expected to support our growth in the back half of the year and will generate cash then. Let's move to slide seven. Starting with this segment is our payments and networks. Starting in the top left, payments and networks revenue increased $278 million, or 515% year-over-year, driven by the acquisition of Cartronics. On a Cartronics pro forma basis, revenue increased $35 million, or 12% year-over-year, driven by LibertyX, growth in the merchant acquiring business and in the all point network. Payment and network adjusted EBITDA increased 411% year over year. On a pro forma basis, adjusted EBITDA declined 9% year over year due to a non-recurring UK property tax rebate at the legacy Cartronics in the prior year and much higher interest rates. You'll recall that interest rates are an operating expense in this business. The cost of cash rental goes through EBITDA as a cost of goods. Adjusted EBITDA margin rate was 29%. The bottom of the slide shows payments and network segment key metrics. On the bottom left, endpoints increased 25% year over year. These access points to the all-point network and merchant acquiring terminals are increasing as we migrate them to the NCR installed base. In the center bottom are transactions. a KPI that illustrates the payments processed across our all point network and our merchant acquiring business. Transactions remain flat year over year against a very tough comparison due to the last of the government stimulus related activity in the year ago quarter. Transactions increased 8% from the first quarter of 2022 with continued growth in both North America and a rebound in the United Kingdom. And annual recurring revenue in this business increased 11% from the first quarter of 2022. Turning to slide 8, which shows our digital banking segment. Digital banking revenue and EBITDA increased 2% year-over-year, with an adjusted EBITDA margin rate of 43%. Digital banking's key metrics in the bottom of this slide include registered users, active users, and annual recurring revenue. Registered users decreased 3%, and active users declined 5% year-over-year. As mentioned during our first quarter earnings call, user counts were impacted by two long-anticipated customer consolidation deconversions. Neither of these were competitive losses. One customer was acquired, and another told us several years ago that they would move to an in-house solution. These deconversions will be more than offset by the onboarding of two of last year's major wins, Wintrust, which successfully converted last week, and Associated Bank. ARR was up 2% year-over-year. We expect the revenue growth in this business to accelerate in the second half of the year and to exit the year at about 10%. Remember that only about two-thirds of the revenue in this business is driven by user counts and that user counts can have a short temporal dislocation from reported revenue. And finally, Terrafina continues to grow at more than 60% year-over-year. Slide 9 shows our self-service banking segment results. About half of the $50 million of total company currency impact affected this business. Self-service banking revenue was up $34 million, or 5% year over year, and 9% on a constant currency basis. Adjusted EBITDA increased $142 million, or 1% year over year, and 4% on a constant currency basis. The adjusted EBITDA margin rate was 21%. This business continues to mitigate ongoing global supply chain effects of component availability, freight, and fuel inflation. The bottom of this slide shows our self-service banking segment's key results. On the left, our software and services revenue mix was flat compared to last year at 67% due to higher ATM hardware sales in the quarter. ATM as a service units increased 3% year over year to almost 4,500 units. We have a very strong backlog of ATM as a service deals and now expect more than triple the number of units to more than 15,000 machines by year end. The shift of recurring revenue continues to gain traction with ARR of 3% year over year. Moving to slide 10, which shows our retail segment results. This segment absorbed the other half of the $50 million of total currency impact to revenue. Starting in the top left, Retail revenue was flat year over year and up 4% on a constant currency basis. Order activity in this business remains strong and backlog is high. The composition of our backlog is different from prior periods as we execute our NCR as a service strategy. We're building backlog with multi-year contracts, which will drive future recurring revenue streams. Retail adjusted EBITDA was down 14% and down 9% on a constant currency basis. this business is still highly impacted by component cost inflation, particularly on POS devices. However, our mitigating actions and better product mix during the quarter drove significant improvement in profitability from the first quarter of 2022, with adjusted EBITDA margin rate up 620 basis points sequentially to 19%. The bottom of the slide shows the retail segment key metrics. On the left, platform lanes. a KPI that illustrates the success of our strategy to convert our retail customers to our platform-based subscription model. We increased our number of platform lanes to almost 600% compared to the same period a year ago. We see accelerating momentum for the conversion of our traditional lanes to platform lanes and have a substantial lane conversion backlog. In the center-bottom, self-checkout revenue increased 1% year-over-year. Keep in mind that install timing causes a lag in this metric, and we expect growth to accelerate the second half of the year. Recurring revenue in this business was flat year over year and up 4% on a constant currency basis. Slide 11 shows our hospitality segment results and illustrates the momentum across this business. We experienced strength in both the enterprise and SMB markets caused by an uptick in new restaurant openings, technology refreshes, and acceleration in our payments business. As Mike mentioned, we had a record high number of payments booking sites. Payment attached rate is strong at roughly 90% of sales into new SMB sites. We increased our feed on the street and invested in sales and marketing to catalyze growth. And the strategy is working. We are winning new customers and benefiting from competitive takeaways. In the enterprise segment, the receptivity for our payment solution is exceeding our expectations and demand for our service desk solution is strong. Hospitality revenue increased $23 million, or 11% year-over-year, as restaurants reopen, rework, and expand. Second quarter adjusted EBITDA was up 18% year-over-year, while adjusted EBITDA margin rate was 19%. Hospitality's key metrics on the bottom of this slide include platform and payment sites and ARR. Platform sites increased 39%. Payment sites increased 139%. and ARR was up 15% year-over-year. This business is simultaneously executing extremely well on its strategy as it is also delivering excellent quarterly results. On slide 12, we present free cash flow, net debt, and adjusted EBITDA metrics to facilitate leverage calculations. As I previously stated, free cash flow was flat in the quarter. Receivable days outstanding and finished goods inventory both increased. We invested in working capital to support the second half growth. We expect working capital improvements in the back half of the year, particularly around inventories and receivables. This slide also shows our net debt to adjusted EBITDA metric with a leverage ratio of 4.0, down slightly from the prior quarter due to higher profitability. And we ended the second quarter with $398 million of cash and remain well within our debt covenants. Those covenants include a maximum pro forma leverage ratio of 5.25 times. We also have significant liquidity with almost $900 million available under our revolving credit facility. We have a strong balance sheet with an average cost of debt of less than 5%, ample liquidity, and the financial strength to support our growth strategy. With that, I'll turn it back to you, Mike.
spk07: Thanks, Tim. In closing on slide 13, During our first quarter call, we said we would adjust to the external factors which negatively impacted us in the first quarter. Our team did just that. In an environment which is still challenging, our team performed exceptionally well and delivered a solid quarter. As important, we have made significant strategic progress transforming NCR to a software-led as-a-service company. And while the macro environment remains challenging, we feel good about the underlying business and the operational discipline during the second quarter. That concludes our prepared remarks for today. With that, we will open the call for questions. Keep in mind, please hold your questions regarding our strategic review as we will not provide further comment on that topic today.
spk20: Operator, please open the line.
spk19: Thank you.
spk22: If you'd like to ask a question, please signal by pressing star one 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. Again, press star one to ask a question. And we'll pause for just a moment to allow everyone an opportunity to signal. And our first question will come from Dan Perlin with RBC Capital Markets.
spk16: Thanks. Good evening, everyone. I just wanted to follow up on the outlook question here um you know you said you're leaving it unchanged you feel like you can still hit the low end of the range given the fx headwinds which look like they're going to get worse for you before they get better over the next couple of quarters so i just want to make sure um we're all kind of level setting so the the revenue numbers that you would put out for the full year were approximately kind of eight eight billion you're just even thought was a billion four to a billion five and then the free cash flow was 400 to 500 i believe in eps 27230 so We should be kind of, I guess, teeing in on the lower end of that range, I guess, first of all. And then secondly, there's a pretty significant ramp in the free cash flow in order to achieve that. I'm just wondering if you can walk me through some of the guideposts we should be looking for. Thank you.
spk25: Yeah, sure. Let's see, free cash, writing it down. The FX was an issue in Q2, about $50 million on revenue. And to your point, It's going to get worse in the second half of the year if the forward curve is correct. So if forward rates are correct, we've probably got another $170 million of pressure on revenue in the second half alone. I think that translates to about, oh, maybe $50 million of pressure on EBITDA in the second half of the year, which would be 20 cents of EPS. So the walk from, let's say, the midpoint of the range down to the lower end of the range is entirely attributable to FX. But as I sit here today, I believe we will be able to get to the lower end of that range. On free cash flow, if I'd be more concerned about free cash flow if I didn't know exactly why we're bouncing off of zero. We know we purposefully and intentionally increased inventory levels by about $150 million, and our receivables are up by $100 million today. purely because of timing, because of the fact that too much of our hardware is shipping in the last couple weeks of the quarter. And that has gotten progressively worse as the year played out. The good news is we got the hardware out. The bad news is we got it out way too late to collect the cash. So it will come back. It's just timing. We hope to get more linear as supply chains free up.
spk15: Okay. That's really helpful.
spk16: And just a quick follow-up on supply chains specifically. I think, Mike, you were saying it's not gotten worse, not necessarily better either, but you've come up with more creative solutions and you've done a job of incrementally expanding sources. I'm just wondering if you could kind of dive into that a little bit more and just give us a picture of what's really playing out on the field. Thank you.
spk07: Yeah, I mean, I think the external factors, meaning some of the prices in the marketplace are haven't necessarily gotten much better. They haven't gotten worse. And then the ability to move either components or finished goods around the world at lower costs, meaning putting it on containers and ships versus flying it, you know, is incrementally getting better. But I think the big change we called out is in an environment where things have stayed the same, which we think they're going to be for the second half, if not get a little bit better externally. In terms of things that we could control, our engineering team, and Owen talked about this last quarter call, that our engineering team was designing around some of the chips that had dramatically accelerated in cost so we could find alternative chips and therefore find alternative sources. And that did happen in the second quarter. So as we look at the third and fourth quarter, we believe will have a positive impact, meaning lower costs for raw supplies because we can source different chips, and we've certified other suppliers. So we have a more optimistic outlook sitting here today than we did three months ago.
spk17: That's great to hear. Thank you so much.
spk19: And our next question will come from Matt Somerville with D.A. Davidson.
spk11: Thanks. I just want to put a little bit of a finer point on where you are with price cost. Can you give us anything to help triangulate on that in terms of maybe how much price cost was a headwind EBITDA margin in Q1 versus how much headwind you saw price cost in Q2, and then what you're expecting for the last half of the year that's kind of baked into the numbers you're speaking to today?
spk25: and then I have a follow-up. Yeah, that's a multivariate equation, right? So let me walk through how we did it last quarter, which was we talked about the impact of the COVID wave, and it abated as we thought that it would. And in fact, we recovered there and got back some of the revenue that had been missed. The war in Eastern Europe was no change, right? It is what it is. We're out of the country, and so it impacted on a known basis. The inflation versus price line uh as mike just said i think components are going to get better in the second half of the year i think our component costs will be better in the second half of the year because of the hard work that's been done by by our um sourcing teams freight has not yet come down and that's an important part of our the impact inflation to us freight has not come down it's a little bit more available we do expect to see freight ease off late in the year but probably not in q3 From a fuel perspective, it's hard to know. Fuel prices were higher in Q2 than they were in Q1. It looks like they're now stabilizing, and maybe they'll be even a little lower in Q3 than they were in Q2. The biggest change for us is interest rates. Interest rates are probably 100 basis points. The expectation is 100 basis points higher than when we talked 90 days ago. Every one percentage point in interest rates costs us about $24 million at EBITDA. as a cost of goods in the payments business. So I think we also talked about trying to have $200 million of cost action and $200 million of pricing actions. I'll tell you that the pricing actions are all in place because of the long lead time on some of our products. So we can't impact that from here. I think whether we get to $200 million or not will be heavily dependent upon our ability to convert those price increases, to hold those price increases in a competitive environment, we're doing okay so far. And on the cost side, we're probably halfway to where we need to be, and we've got some work to do in the second half of the year, and Owen and I are working on that. I hope that frames it for you anyway.
spk11: Yeah, no, that's very helpful. I appreciate that. And then as a follow-up, and you may have just answered it actually, Tim, payments and network, you saw a nice sequential bump in revenue. EBITDA was pretty flat. Is all of that flattening out in EBITDA then? Is that being driven by the cost of cash, so to speak, for that business? Or is there something else going on that's contributing to that?
spk25: Yeah, there's three things going on in there. One, before we acquired Cardtronics, on a pro forma basis, they benefited from An item in the UK, there was a one-time item associated with a rebate on property tax that had been paid, and it came through EBITDA, and it's non-recurring. So that's a temporal issue. It's gone. The other is we did add LibertyX. LibertyX was just under $20 million of revenue in the quarter. LibertyX has no profitability currently, so it's a break-even business that dilutes margin rate. And then, yes, lastly... interest rates are higher. And I think across this year, it's probably going to be an aggregate of $35 million to this business. And so we're working to mitigate it. Every point really is $40 million, if you just do the math, right, a point on $4 billion. But we've got some ways to mitigate some of that, both with hedges and with changes in business models. So we'll keep working it down. But, yeah, that will, when we get to the end of the year, the biggest change in margin rate for this business will be the dilution from the addition of the revenue from LibertyX and interest costs. Understood. Thank you, guys.
spk22: Our next question will come from Eric Woodring with Morgan Stanley.
spk04: Hey, good evening, guys. Thanks for taking the call, the question. Sorry. Just to nail down on the outlook, I just want to make sure I'm clear there. So, When you talk about kind of $170 million of incremental FX pressure in the second half, does that imply that revenue should be $170 million lower than about $8 billion, or are there offsets from better operational performance that would get you back to that, again, $8 billion number? And if so, what would be some of those offsets? And then I just have a follow-up. Thanks.
spk25: Yeah, so typically when we give guidance, we leave ourselves some room. And I said approximately $8 billion, so you can imagine I probably had a plan that rolled up to north of that. Forward rates right now suggest $170 million of pressure. If we just simply take the euro, pound, Japanese yen, and Canadian dollar and convert back our revenue streams, I don't know whether those will be correct or not. But we'll keep trying to grow. I think there are avenues to get more revenue this year. In our services businesses in particular, we're continuing to work. So I think $8 billion is a reasonable number. I think our results, as I said today, will round to $8 billion from one side or the other. On EBITDA fame, we had a wide range. It's a very wide range. And so I think I can absorb this new hit inside of that guided range. And the same would then translate through down to EPS.
spk04: Okay. That's really helpful. And then, you know, maybe last quarter you just talked about backlog up 30% sequentially. Just any way you can help us kind of talk to the size of the growth of backlog or if you saw it decrease because of supply chain improvement and, you know, any kind of qualitative comments that you could talk about on underlying mix if that's changed at all. That's it for me. Thanks so much.
spk25: Yeah, sure.
spk04: I'll let Owen take that one.
spk10: Yeah, I would say as we came out of the quarter, we have not seen a change in the sales activity, the funnel activity, and across all of the businesses, order activity carried good momentum coming out of the quarter. So we're continuing to see growth across the hardware, the software, and most importantly, We're seeing it on the as-a-service business in both the ATM as-a-service as well as, as Mike talked about in his comments, sites, payments, and platform lanes out of hospitality and retail. So obviously, as Tim talked about the outlook, that's predicated on the momentum we're seeing in order activity.
spk21: And Mr. Woodring, did you have anything further, sir?
spk03: No, that's it. Sorry about that. Thank you so much.
spk22: Thank you. We'll now take a question from Kartik Mehta with North Coast Research.
spk13: I wanted to make sure on the free cash flow I understood your comments. I think the range was $400 million to $500 million last quarter when you gave guidance. Do you still feel comfortable on that low end? You talked about guidance being on the low end, around that $400 million. or will that be difficult because of the inventory you've had to add because of the current environment?
spk25: No, I think I intend, we intend to convert that inventory to cash in the latter half of the year. As blockchain start to let up, we won't need as much safety stock and we won't have as much finished goods sitting around because we only get it shipped in the quarter. So I, I'm not worried about harvesting that on the receivable side. Uh, We know why it's drifted up a bit. We can work it back down. We'll make it a focus and get it down. So that's $250 million of cash that was used in the first half of the year that I think we can harvest in the second half. The remainder of the $400 million will come from higher profitability in the second half of the year versus the first. And for the most part, that solves to the low end of the range we just described. If we're able to get further into the range from an EBITDA perspective or to find more a little bit more revenue, then we could get closer to the midpoint. But I think, you know, $400 million is probably the right place to be for now.
spk13: And, Mike, you obviously talked about some of the challenges that are happening in Europe, specifically Eastern Europe, because of what's going on. I'm wondering, is that leading to any cancellation of orders throughout Europe or even Eastern Europe because of the current environment?
spk07: No, Kardec. You know, we had on the first quarter call when, you know, the war started in the Ukraine and we had to pull out of Russia. And I think at that point we probably had a little bit more question around what might happen throughout the rest of Eastern Europe. I think today it seems to have settled into, you know, unfortunately kind of a norm. And we haven't seen impacts that have bled over into Europe. our businesses in Eastern Europe or in Western Europe.
spk18: Thank you very much. Appreciate it.
spk22: And our next question will come from Charles Navhan with Stevens.
spk14: Hi, good afternoon, and thank you for taking my question. Just curious if your ability to manage some of the supply chain headwinds and specifically procure certain chips internally has translated into competitive advantage, or if you see that as a potential tailwind in the second half of the year.
spk07: Yeah, I mean, I think the ability to react, whether it's the team on the supply chain side that did a really awesome job in the second quarter, continuing to find components and then certify new supply sources, or the engineering team, which also has been doing a great job literally for the last year, continuing to design around challenges, whether it's ability to get chips or whether it's the price. So I think we feel really good about our ability to react. OWN talked last quarter about just the timing. So in the first quarter, we didn't have the timing to be able to do that. We were able to do that in the second quarter, so we believe As Tim talked about, coming into the third and fourth quarter, that will be a pickup or a benefit for us in terms of our cost pressure. Competitively, I think in the three verticals we compete in, right now we feel as good as we've ever felt. We have products that are competing. I think in the hardware space, whether it's the ATM market, the ITM market, whether it's SCO, whether it's POS, we think we're out there competing very well, and we've been able to work some of the costs down to working the supply chain and working through some of the other engineering activities. So whether that translates into more REV, Tim talked about, as we look at the outlook, we'll continue to chase opportunities for revenue. But we feel really good about where we sit right now.
spk10: Yeah, I think the only additive comment I would make is, when Tim talked about our investment into working capital, We have heard consistently from our customers that we have been a very dependable provider. We got asked a lot in the first quarter about missed shipments or project delays due to the supply chain, et cetera. The one thing, and I'll give huge props to, as Mike just did, the entire organization, we did not miss a customer commitment and haven't in the whole first half of the year. And that ends up being a competitive advantage without a doubt. You know, it's taken some investment. You saw some of the costs that we incurred in the first quarter. But if you're a long-term player, those investments are appreciated by the market and by our customers, and we're hearing that. So we feel really good about where the team's left us.
spk14: Got it. And as a follow-up, I had a question about the cadence of free cash flows for the back half of the year, and I apologize if I missed it. I know historically the fourth quarter has been the – the high for the year on free cash flow, but obviously there's some abnormalities this year. So any color you could provide on the cadence for the back half of the year would be helpful.
spk25: Yeah, hard to predict. I do think our fourth quarter will be a very strong quarter. I think the third quarter will be solid. But I would have a fourth quarter that is greater than the third.
spk18: Got it. Thank you. Sure.
spk22: And once again, if you'd like to ask a question, please press star one. We'll now go to Paul Chung with JP Morgan.
spk08: Hi, thanks for taking my question. So just to follow up on cash flow on that last point, you know, so are the shifts in the kind of second half resulting in, you know, kind of higher AR balance kind of regarding your service contracts, given some macro headwinds? Are we reverting back to that second half seasonal cash flow Again, or is this temporary? And how is the kind of pricing environment and competition evolving here? And I'll follow up.
spk25: So I'll defer on pricing and competition to Owen. On the first one, cash flow generated in the last month of the year is no way to live. We worked incredibly hard to get back to the point where cash flow was more linear, and we've been unable to keep up that trend in an environment where way too much of our revenue comes very late in the quarter because we just can't get the parts to get them out the door. And that's really where most of the issues in the hardware side. A lot of the recovery coming out of the pandemic in 2022 has been hardware. And so we're going POS. So that's been a struggle. I don't want to live this way much longer. I think supply chains are easing. I suspect that we will get back on a better cadence of more linear free cash flow generation as we get into 2023. But at this point, I've only got a half now to generate the cash I need to generate, and we will do it.
spk10: And on the pricing, I think my comment in the first quarter was that for those of us who have lived in hyperinflationary times in the past, which not a lot of us have, catching that falling knife was tough. And so we saw the impact in the first quarter of not getting there. The team across all the industry groups have made adjustments to pricing, both permanent pricing and temporal pricing. We believe that the pricing is reflective of the reality that we're all dealing with, and our customers have accepted that. There have been some temporary charges that we've put through on freight and on um fuel that will be temporal and our customers understand that we have not seen those price increases uh create a competitive disadvantage in fact to the contrary to my comments a few minutes ago our customers have been very appreciative of our ability to deliver despite all of the supply chain disruptions so we think that the pricing uh will hold. It is competitive, and where it's been temporal, we'll adjust accordingly.
spk07: Let me just add to that. So when it comes to pricing in the marketplace and competing, NCR is in a much, much better place than many of our competitors. We're in a much better place with our products. And as importantly, as we sit here today, we're in a much better place financially terms of our revenue, our earnings, and our cash flow than a lot of the folks that we've been competing against the last number of years, literally in all three lines of business. So we'll continue to operate the business with discipline. We'll continue to operate the business to generate revenue and earnings and cash flow, and we will come out better in this environment than a lot of our competitors.
spk08: Thanks for that. And then can you just talk about your backlog for self-checkout? You mentioned some increased conversion kind of later this year? Which verticals are you seeing demand? Are you seeing competitive wins, kind of new deployments? And then how should we think about kind of visibility for next year after strong growth throughout the pandemic? How do those trend?
spk10: Yeah. So I would say from a self-checkout, we are still very bullish about the self-checkout marketplace. If you look at first to second quarter, you saw what is not atypical, which is some lumpiness in terms of order activity. So we were up roughly 15% quarter to quarter on our self-checkout. Our outlook for the year is still that we will grow in the mid-single-digit range. I think we just had published the RBR report through 21, and once again, we were the ship share leader across the globe. We still hold a huge market share position. And what encourages us are new segments that are opening up. I think I mentioned this in the past, the specialty retail environment like Bed Bath & Beyond just has embraced the self-checkout. The convenience fuel and retail sector is growing. really receptive and, in fact, looking at. And as labor continues to be a challenge, we think that self-checkout is going to play very strongly. So we look at the balance of the year and feel good about our outlook from a year ago for 22. And there's nothing that would suggest going into 23 that it should slow down.
spk08: Right. And then last question. Any just general update on kind of regional bank demand across ATMs and digital banking services would be helpful. Are you seeing any customers tightening budgets here, given some macro headwinds? Just any comments on the macro here for regional banks? Thank you.
spk07: Yeah, we haven't really seen banks change their buying behaviors at this point. I think the banks have the benefit of a little spread right now, and then I think the banks are starting to look forward and trying to estimate, like everybody else is, what will be the impacts on the economy, whether it will hit their balance sheet. Digital banking, anything related to self-service, anything related to efficiency, anything related to cost savings, which is effectively what we do in banking, continue to be things and areas that our customers are looking for.
spk10: Thank you. The other comment I would make on the banks and the ATMs is if capital is an issue, what we're seeing from many of our customers is their embrace of the ATM as a service. And that clearly allows them to continue to build out their physical distribution with ATMs and ITMs without outlaying capital. So if that is an issue, we're already seeing customers really embrace the idea of the ATM as a service offering across the globe, all the regions now. We're having really good activity. A number of closures that Mike talked about. And the pipeline for that business is growing in the double-digit range. So we feel really good that we have an offering that would address any conservatism on the part of the bank.
spk01: Thank you.
spk22: And we'll take a follow-up question from Dan Perlin with RBC Capital Markets.
spk16: Thanks. Just a quick follow-up on digital banking. Tim, did you say the exit rate, i.e., maybe the fourth quarter rate would be 10% is what you had embedded in guidance, or were you suggesting that for the full year? I just wanted to make sure I was clear on that.
spk25: We had two big accounts coming on. One of them is coming on a couple months later than we would have thought. So we're going to exit the year at 10%. I think the full year rate is likely to be very high single digits. But remember that it's not just accounts that drive growth. We've got some deals out there for DSP that could push us north of 10%. So there's a chance we hit 10% for the full year. We will certainly exit the year at a 10% run rate.
spk18: Got it. Okay, that's clear. Thank you.
spk22: And there are no further questions at this time, so I'll turn things back over to Mike Hayford for any additional or closing remarks.
spk05: Thanks.
spk07: During the second quarter, we continued to be impacted by a number of the external factors that we saw in the first quarter. In spite of that, even in this environment, our team at NCR really delivered a great financial quarter. They continue to build and deliver on our strategic initiatives for our product platforms. And as always, we believe we deliver the best care to our customers in the industry. The result of the second quarter, the strong performance we delivered in the second quarter is what gives us confidence that we can continue to execute in this environment during 2022. Thank you so much for joining us today. We will see you next quarter.
spk22: And that does conclude today's conference call. Once again, thanks everyone for joining us. You may now disconnect. Thank you.
spk00: Thank you. Hello. Thank you. Thank you. you Thank you. you you
spk22: Good day, everyone, and welcome to the NCR Corporation's second quarter fiscal year 2022 earnings conference. Today's call is being recorded. At this time, I'd like to turn the conference over to Mr. Michael Nielsen, Treasurer and Head of Investor Relations. Please go ahead, sir.
spk23: Good afternoon, and thank you for joining our second quarter 2022 earnings call. Joining me on the call today are Mike Hayford, CEO of Owen Sullivan, President and COO, and Tim Oliver, CFO. Before we get started, let me remind you that our presentation and discussions will include forward-looking statements. These statements reflect our current expectations and beliefs, but they're subject to risks and uncertainties that could cause actual results to differ materially from those expectations. These risks and uncertainties are described in our earnings release and our periodic filings with the SEC, including our annual report. On today's call, we'll 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 27, 2022, 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.
spk07: Thanks, Michael. And thank you, everyone, for joining us today for our second quarter 2022 earnings call. I will begin with some of my views on the business, and I will also provide commentary on our previously announced strategic review process. Tim will review our financial performance, and then Owen, Tim, and I will take your questions. The team has done an excellent job executing in a difficult macro environment. Coming off a very difficult first quarter due to a number of external factors, the team focused on execution in the second quarter, and they delivered. As important, we continued to build strong momentum in the business as we made progress on our strategy to NCR becoming a software-led as-a-service company with a higher shift to recurring revenue streams. Let's begin on slide four with some highlights from the second quarter. First, we delivered 23% year-over-year total revenue growth on a constant currency basis and 35% recurring revenue growth constant currency in the second quarter. Second, adjusted EBITDA increased 26% on a constant currency basis from the second quarter of 2021. Adjusted EBITDA margin expanded to 17%, which represents a 250 basis point increase from the first quarter of 2022. Fourth, we are beginning to see the supply chain impacts easing, meaning the component costs and transportation costs have not worsened in the second quarter. But more importantly, our engineering and procurement teams have adjusted by designing alternative components and certifying more sources to begin reducing the impact. And finally, overall our teams executed extremely well and we experienced strong customer demand for solutions across our business segments and continue to successfully transform NCR into a software led as a service company with higher recurring revenue streams. Software and services revenue represented 73% of total revenue compared to 69% in the second quarter of 2021. Recurring revenue represented 61% of total revenue, up from 55% in the year-ago quarter. Now moving to the business update on slide five. We had a strong momentum across our strategic growth platforms, which support our company's transformation. In payments and network, we are making progress across both merchant acquiring and the all-point network. We are seeing an accelerating number of merchants sign on for integrated payments with a POS decision. We are also expanding NCR Pay360, which brings more transaction types, including digital currency solutions, at NCR Endpoint. We are also continuing to see strong Allpoint growth, both in terms of transaction volume and new FI partnerships. Pleased to announce that PNC Bank has partnered with the Allpoint Network starting in June, extending surcharge-free ATM access to more than 10 million of their customers. In digital banking, we continue to have positive momentum. In the second quarter, digital banking had 25 renewals, five new logo deals, and the continued expansion of Terrafina with four new clients for our online digital account opening platform. In self-service banking, we continued momentum in our ATM as a service solution. Interest in our offering is accelerating both in community banks and large FIs globally. In the second quarter, we signed 10 ATM-as-a-service deals, including Bank of New Zealand, which is embracing NCR's ATM-as-a-service to run the bank's ATM fleet as part of its digital transformation. NCR will own and operate the bank's off-site ATM fleet and will also run its on-prem fleet of NCR ATMs. In retail, we continue to gain traction with our NCR Emerald POS software and our NCP, NCR's commerce platform. We have positive momentum in winning the upgrade imperative for retail POS software, including in the second quarter, Stater Brothers Market, Southern California's largest privately owned supermarket chain with 171 stores connected to the NCR Commerce platform. Stater Brothers implemented NCR Emerald to connect all technology to run the store. They were able to successfully deploy all new software and hardware to all 171 stores in only 15 weeks. In hospitality, we continue to experience strong demand across our enterprise and SMB customers. In SMB, our Aloha Cloud restaurant platform is a user-focused turnkey solution that helps operations run their restaurant. During the second quarter, we launched an updated Aloha Cloud software and hardware solution and continued to invest in our direct distribution model. Our payment attach rate for hospitality accelerated during the second quarter as we had a record high number of payment booking sites with over 90% attach rate for new SMB customers. In the enterprise market, we expanded our partnership with Wendy's, connecting them to the NCP, NCR's commerce platform, which will enable Wendy's to better manage and use data captured through the NCR Aloha point of sale. We also signed a deal with United Franchise Group to deploy NCR Aloha in all of its locations with a bundled solution including point of sale, secured payment processing, robust data reporting, back-end software solutions, and kitchen production solutions. In the second quarter, we continued our evolution to a lean factory model by outsourcing manufacturing. A couple of weeks ago, we transferred our Budapest manufacturing facility to Enocom, which will reduce fixed costs and continue the shift to a more variable manufacturing cost model. This transition is part of a strategy which we started in 2018. Today, 90% of the SKUs that we used to manufacture will now be outsourced. And finally, I'll provide an update on our board-led strategic review process. As noted in our February 8th announcement, the board did not set a timetable for the strategic review process. This process continues to be ongoing. We are evaluating strategic alternatives available to NCR in the context of our continued strong performance. The goal of the strategic review process has not changed to unlock value for NCR shareholders. With that, let me pass it over to Tim.
spk25: Thank you, Mike. Last quarter, we spent a significant amount of time describing the long list of exogenous detractors that resulted in financial performance that was well below our expectations. At that time, we estimated not only the impact for the first quarter, but then tried to extrapolate the impact for the remainder of 2022. We were partially correct. The Omicron wave that disrupted hardware supply chains and suppressed transaction volumes at payments resolved in Q1. We saw both higher transaction volumes and better availability of components respectively in Q2. That said, fuel prices are persistently high, Component costs remain too high, even if availability is better. Interest rates are higher. Inflation has reached a 40-year high. And the war in Ukraine continues to disrupt and distract our large presence in Eastern Europe. And now you can add the implications of a rapidly strengthening US dollar to the list of challenges. Our second quarter results represent very strong execution, despite this extremely difficult macroeconomic environment. We generated productivity. closed some of the price-cost gaps, and delivered the product that had been delayed in Q1. We diligently controlled the things that we could control and readied our businesses for any further shocks. Our team simultaneously executed a recovery plan, accelerated our strategic initiatives, and supported the ongoing strategic review process that we launched in February. This was a very busy and successful 90 days. While uncertainty persists, Our strong performance in Q2 and the further mitigating actions we plan to take in the second half allow us to leave our outlook for the full year unchanged from that we delivered in April. Although some headwinds in Q1 improved, others, like interest rates, got worse, and we have a new headwind in foreign exchange rates. As is always the case, the outlook we provided in April presumed currency rates at that time. In Q2, foreign currency exchange reduced revenue by $50 million and adjusted EBITDA by roughly $15 million, and we still delivered strong results. We currently expect a similar FX impact going forward. We still believe we can hit the lower end of our guided ranges from April, even with these challenges. Let's begin on slide six with a top-level overview of our second quarter financial performance. Starting in the top left, We delivered revenue of $2 billion, up $320 million, or 23% from the prior year on a constant currency basis. Warrant currency exchange rates had an unfavorable impact of $50 million, split roughly evenly between our self-service banking and retail segments. Recurring revenue was up 35% on a constant currency basis. Adjusting for the partial quarter of Cartronics last year, revenue was up 4% on a constant currency basis. In the top right, adjusted EBITDA increased $58 million, or 26% on a constant currency year-over-year basis, to $339 million. Foreign currency exchange rates had an unfavorable impact of roughly $15 million. Adjusted EBITDA margin expanded 20 basis points from the second quarter of 2021 to 17%. While we don't typically discuss EBITDA margin sequentially, The outlook we provided in April did describe sequential EBITDA improvements beginning with Q1 levels in each of the remaining three quarters of the year of between $50 and $70 million. In Q2, we improved by almost $70 million over the Q1 level, even after a significant currency impact. This allows us to be closer to the $50 million of sequential improvement in Qs 3 and 4. In the bottom left, reported non-GAAP EPS was 71 cents, up 9 cents or 15% year-over-year. The strength of the U.S. dollar reduced EPS by about 7 cents. The non-GAAP tax rate was 21.2% in the quarter and results in an average for the first half of the year of 25%. The rate was driven by stronger earnings as well as the timing of the street tax items. During the second half of the year, we expect tax rate to be within the range of 27% to 29%. And finally, free cash flow was flat, which was a solid outcome given the challenges in supply chain that caused both nonlinear revenue recognition and a discretionary investment in working capital. We have invested roughly $250 million in working capital in the first half of this year, much of it in raw inventories and finished goods, to insulate our customers from a supply chain disruption. These investments in working capital are expected to support our growth in the back half of the year and will generate cash then. Let's move to slide seven. Starting with the segments, this segment is our payments and networks. Starting the top left, payments and networks revenue increased $278 million, or 515% year-over-year, driven by the acquisition of Cartronics. On a Cartronics pro forma basis, revenue increased $35 million, or 12% year-over-year, driven by LibertyX, growth in the merchant acquiring business and in the all point network. Payment and network adjusted EBITDA increased 411% year over year. On a pro forma basis, adjusted EBITDA declined 9% year over year due to a non-recurring UK property tax rebate at the legacy Cartronics in the prior year and much higher interest rates. You'll recall that interest rates are an operating expense in this business. The cost of cash rental goes through EBITDA as a cost of goods. Adjusted EBITDA margin rate was 29%. The bottom of the slide shows payments and network segment key metrics. On the bottom left, endpoints increased 25% year over year. These access points to the all-point network and merchant acquiring terminals are increasing as we migrate them to the NCR installed base. In the center bottom are transactions. a KPI that illustrates the payments processed across our all-point network and our merchant acquiring business. Transactions remain flat year over year against a very tough comparison due to the last of the government stimulus-related activity in the year-ago quarter. Transactions increased 8% from the first quarter of 2022, with continued growth in both North America and a rebound in the United Kingdom. And annual recurring revenue in this business increased 11% from the first quarter of 2022. Turning to slide 8, which shows our digital banking segment. Digital banking revenue and EBITDA increased 2% year-over-year, with an adjusted EBITDA margin rate of 43%. Digital banking's key metrics in the bottom of this slide include registered users, active users, and annual recurring revenue. Registered users decreased 3%, and active users declined 5% year-over-year. As mentioned during our first quarter earnings call, user counts were impacted by two long-anticipated customer consolidation deconversions. Neither of these were competitive losses. One customer was acquired, and another told us several years ago that they would move to an in-house solution. These deconversions will be more than offset by the onboarding of two of last year's major wins, Wintrust, which successfully converted last week, and Associated Bank. ARR was up 2% year-over-year. We expect the revenue growth in this business to accelerate in the second half of the year and to exit the year at about 10%. Remember that only about two-thirds of the revenue in this business is driven by user counts and that user counts can have a short temporal dislocation from reported revenue. And finally, Terrafina continues to grow at more than 60% year-over-year. Slide 9 shows our self-service banking segment results. About half of the $50 million of total company currency impact affected this business. Self-service banking revenue was up $34 million, or 5% year-over-year, and 9% on a constant currency basis. Adjusted EBITDA increased $142 million, or 1% year-over-year, and 4% on a constant currency basis. The adjusted EBITDA margin rate was 21%. This business continues to mitigate ongoing global supply chain effects of component availability, freight, and fuel inflation. The bottom of this slide shows our self-service banking segment key results. On the left, our software and services revenue mix was flat compared to last year at 67% due to higher ATM hardware sales in the quarter. ATM as a service units increased 3% year-over-year to almost 4,500 units. We have a very strong backlog of ATM as a service deals and now expect more than triple the number of units to more than 15,000 machines by year end. The shift of recurring revenue continues to gain traction with ARR of 3% year over year. Moving to slide 10, which shows our retail segment results. This segment absorbed the other half of the $50 million of total currency impact to revenue. Starting in the top left, Retail revenue was flat year over year and up 4% on a constant currency basis. Order activity in this business remains strong and backlog is high. The composition of our backlog is different from prior periods as we execute our NCR as a service strategy. We're building backlog with multi-year contracts, which will drive future recurring revenue streams. Retail adjusted EBITDA was down 14% and down 9% on a constant currency basis. this business is still highly impacted by component cost inflation, particularly on POS devices. However, our mitigating actions and better product mix during the quarter drove significant improvement in profitability from the first quarter of 2022, with adjusted EBITDA margin rate up 620 basis points sequentially to 19%. The bottom of the slide shows the retail segment key metrics. On the left, platform lanes. a KPI that illustrates the success of our strategy to convert our retail customers to our platform-based subscription model. We increased our number of platform lanes to almost 600% compared to the same period a year ago. We see accelerating momentum for the conversion of our traditional lanes to platform lanes and have a substantial lane conversion backlog. In the center-bottom, self-checkout revenue increased 1% year over year. Keep in mind that install timing causes a lag in this metric, and we expect growth to accelerate the second half of the year. Recurring revenue in this business was flat year over year and up 4% on a constant currency basis. Slide 11 shows our hospitality segment results and illustrates the momentum across this business. We experienced strength in both the enterprise and SMB markets caused by an uptick in new restaurant openings, technology refreshes, and acceleration in our payments business. As Mike mentioned, we had a record high number of payments booking sites. Payment attached rate is strong at roughly 90% of sales into new SMB sites. We increased our feed on the street and invested in sales and marketing to catalyze growth. And the strategy is working. We are winning new customers and benefiting from competitive takeaways. In the enterprise segment, the receptivity for our payment solution is exceeding our expectations and demand for our service desk solution is strong. Hospitality revenue increased $23 million, or 11% year-over-year, as restaurants reopened, reworked, and expanded. Second quarter adjusted EBITDA was up 18% year-over-year, while adjusted EBITDA margin rate was 19%. Hospitality's key metrics on the bottom of this slide include platform and payment sites and ARR. Platform sites increased 39%. Payment sites increased 139%. and ARR was up 15% year-over-year. This business is simultaneously executing extremely well on its strategy as it is also delivering excellent quarterly results. On slide 12, we present free cash flow, net debt, and adjusted EBITDA metrics to facilitate leverage calculations. As I previously stated, free cash flow was flat in the quarter. Receivable days outstanding and finished goods inventory both increased. We invested in working capital to support the second half growth. We expect working capital improvements in the back half of the year, particularly around inventories and receivables. This slide also shows our net debt to adjusted EBITDA metric with a leverage ratio of 4.0, down slightly from the prior quarter due to higher profitability. And we ended the second quarter with $398 million of cash and remain well within our debt covenants. Those covenants include a maximum pro forma leverage ratio of 5.25 times. We also have significant liquidity with almost $900 million available under our revolving credit facility. We have a strong balance sheet with an average cost of debt of less than 5%, ample liquidity, and the financial strength to support our growth strategy. With that, I'll turn it back to you, Mike.
spk07: Thanks, Tim. In closing on slide 13, During our first quarter call, we said we would adjust to the external factors which negatively impacted us in the first quarter. Our team did just that. In an environment which is still challenging, our team performed exceptionally well and delivered a solid quarter. As important, we have made significant strategic progress transforming NCR to a software-led as-a-service company. And while the macro environment remains challenging, we feel good about the underlying business and the operational discipline during the second quarter. That concludes our prepared remarks for today. With that, we will open the call for questions. Keep in mind, please hold your questions regarding our strategic review as we will not provide further comment on that topic today.
spk20: Operator, please open the line.
spk19: Thank you.
spk22: If you'd like to ask a question, please signal by pressing star one 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. Again, press star one to ask a question. And we'll pause for just a moment to allow everyone an opportunity to signal. And our first question will come from Dan Perlin with RBC Capital Markets.
spk16: Thanks. Good evening, everyone. I just wanted to follow up on the outlook question here um you know you said you're leaving it unchanged you feel like you can still hit the low end of the range given the fx headwinds which look like they're going to get worse for you before they get better over the next couple of quarters so i just want to make sure um we're all kind of level setting so the the revenue numbers that you would put out for the full year were approximately kind of eight eight billion you're just even thought was a billion four to a billion five and then the free cash flow was 400 to 500 i believe in eps 27230 so We should be kind of, I guess, teeing in on the lower end of that range, I guess, first of all. And then secondly, there's a pretty significant ramp in the free cash flow in order to achieve that. I'm just wondering if you can walk me through some of the guideposts we should be looking for. Thank you.
spk25: Yeah, sure. Let's see, free cash, writing it down. The FX was an issue in Q2, about $50 million on revenue. And to your point, It's going to get worse in the second half of the year if the forward curve is correct. So if forward rates are correct, we've probably got another $170 million of pressure on revenue in the second half alone. I think that translates to about, oh, maybe $50 million of pressure on EBITDA in the second half of the year, which would be 20 cents of EPS. So the walk from, let's say, the midpoint of the range down to the lower end of the range is entirely attributable to FX. But as I sit here today, I believe we will be able to get to the lower end of that range. On free cash flow, if I'd be more concerned about free cash flow if I didn't know exactly why we're bouncing off of zero. We know we purposefully and intentionally increased inventory levels by about $150 million, and our receivables are up by $100 million today. purely because of timing, because of the fact that too much of our hardware is shipping in the last couple weeks of the quarter. And that has gotten progressively worse as the year played out. The good news is we got the hardware out. The bad news is we got it out way too late to collect the cash. So it will come back. It's just timing. We hope to get more linear as supply chains free up.
spk15: Okay. That's really helpful.
spk16: And just a quick follow-up on supply chains specifically. I think, Mike, you were saying it's not gotten worse, not necessarily better either, but you've come up with more creative solutions and you've done a job of incrementally expanding sources. I'm just wondering if you could kind of dive into that a little bit more and just give us a picture of what's really playing out on the field. Thank you.
spk07: Yeah, I mean, I think the external factors, meaning some of the prices in the marketplace are haven't necessarily gotten much better. They haven't gotten worse. And then the ability to move either components or finished goods around the world at lower costs, meaning putting it on containers and ships versus flying it, you know, is incrementally getting better. But I think the big change we called out is in an environment where things have stayed the same, which we think they're going to be for the second half, if not get a little bit better externally. In terms of things that we could control, our engineering team, and Owen talked about this last quarter call, that our engineering team was designing around some of the chips that had dramatically accelerated in cost so we could find alternative chips and therefore find alternative sources. And that did happen in the second quarter. So as we look at the third and fourth quarter, we believe will have a positive impact, meaning lower costs for raw supplies because we can source different chips and we've certified other suppliers. So we have a more optimistic outlook sitting here today than we did three months ago.
spk17: That's great to hear. Thank you so much.
spk19: And our next question will come from Matt Somerville with D.A. Davidson.
spk11: Thanks. I just want to put a little bit of a finer point on where you are with price-cost. Tim, can you give us anything to help triangulate on that in terms of maybe how much price-cost was a headwind EBITDA margin in Q1 versus how much headwind you saw price-cost in Q2, and then what you're expecting for the last half of the year that's kind of baked into the numbers you're speaking to today?
spk25: and then have a follow-up. Yeah, that's a multivariate equation, right? So let me walk through how we did it last quarter, which was we talked about the impact of the COVID wave, and it abated as we thought that it would. And in fact, we recovered there and got back some of the revenue that had been missed. The war in Eastern Europe was no change, right? It is what it is. We're out of the country, and so it impacted on a known basis. The inflation versus price As Mike just said, I think components are going to get better in the second half of the year. I think our component costs will be better in the second half of the year because of the hard work that's been done by our sourcing teams. Freight has not yet come down, and that's an important part of the impact of inflation to us. Freight has not come down. It's a little bit more available. We do expect to see freight ease off late in the year, but probably not in Q3. From a fuel perspective, it's hard to know. Fuel prices were higher in Q2 than they were in Q1. It looks like they're now stabilizing, and maybe they'll be even a little lower in Q3 than they were in Q2. The biggest change for us is interest rates. Interest rates are probably 100 basis points. The expectation is 100 basis points higher than when we talked 90 days ago. Every one percentage point in interest rates costs us about $24 million at EBITDA. as a cost of goods in the payments business. So I think we also talked about trying to have $200 million of cost action and $200 million of pricing actions. I'll tell you that the pricing actions are all in place because of the long lead time on some of our products. So we can't impact that from here. I think whether we get to $200 million or not will be heavily dependent upon our ability to convert those price increases, to hold those price increases in a competitive environment, we're doing okay so far. And on the cost side, we're probably halfway to where we need to be, and we've got some work to do in the second half of the year, and Owen and I are working on that. I hope that frames it for you anyways.
spk11: Yeah, no, that's very helpful. I appreciate that. And then as a follow-up, and you may have just answered it actually, Tim, Payment through network, you saw a nice sequential bump in revenue. EBITDA was pretty flat. Is all of that flattening out in EBITDA then? Is that being driven by the cost of cash, so to speak, for that business? Or is there something else going on that's contributing to that?
spk25: Yeah, there's three things going on in there. One, before we acquired Cardtronics, on a pro forma basis, they benefited from An item in the UK, there was a one-time item associated with a rebate on property tax that had been paid, and it came through EBITDA, and it's non-recurring. So that's a temporal issue. It's gone. The other is we did add LibertyX. LibertyX was just under $20 million of revenue in the quarter. LibertyX has no profitability currently, so it's a break-even business that dilutes margin rate. And then, yes, lastly... Interest rates are higher, and I think across this year, it's probably going to be, in aggregate, a $35 million debt to this business. And so we're working to mitigate it. Every point really is $40 million, if you just do the math, right, a point on $4 billion. But we've got some ways to mitigate some of that, both with hedges and with changes in business models. So we'll keep working it down. margin rate for this business will be the dilution from the addition of the revenue from LibertyX and interest costs. Understood.
spk11: Thank you, guys.
spk22: Our next question will come from Eric Woodring with Morgan Stanley.
spk04: Hey, good evening, guys. Thanks for taking the call, the question. Sorry. Just to nail down on the outlook, I just want to make sure I'm clear there. So, When you talk about kind of $170 million of incremental FX pressure in the second half, does that imply that revenue should be $170 million lower than about $8 billion, or are there offsets from better operational performance that would get you back to that, again, $8 billion number? And if so, what would be some of those offsets? And then I just have a follow-up. Thanks.
spk25: Yeah, so typically when we give guidance, we leave ourselves some room. And I said approximately $8 billion, so you can imagine I probably had a plan that rolled up to north of that. Forward rates right now suggest $170 million of pressure. If we just simply take the euro, pound, Japanese yen, and Canadian dollar and convert back our revenue streams, I don't know whether those will be correct or not. But we'll keep trying to grow. I think there are avenues to get more revenue this year. In our services businesses in particular, we're continuing to work. So I think $8 billion is a reasonable number. I think our results, as I said today, will round to $8 billion from one side or the other. On EBITDA fame, we had a wide range. It's a very wide range. And so I think I can absorb this new hit inside of that guided range. And the same would then translate through down to EPS.
spk04: Okay. That's really helpful. And then, you know, maybe last quarter you just talked about backlog up 30% sequentially. Just any way you can help us kind of talk to the size of the growth of backlog or if you saw it decrease because of supply chain improvement and, you know, any kind of qualitative comments that you could talk about on underlying mix if that's changed at all. That's it for me. Thanks so much. Yeah, sure. I'll let Owen take that one.
spk10: Yeah, I would say as we came out of the quarter, we have not seen a change in the sales activity, the funnel activity, and across all of the businesses, order activity carried good momentum coming out of the quarter. So we're continuing to see growth across the hardware, the software, and most importantly, We're seeing it on the as a service business in both the ATM as a service as well as Mike talked about in his comments, sites, payments, and platform lanes out of hospitality and retail. Obviously, as Tim talked about the outlook, that's predicated on the momentum we're seeing in order activity.
spk21: And Mr. Woodring, did you have anything further, sir?
spk03: No, that's it. Sorry about that. Thank you so much.
spk22: Thank you. We'll now take a question from Kartik Mehta with North Coast Research.
spk13: I wanted to make sure on the free cash flow I understood your comments. I think the range was $400 million to $500 million last quarter when you gave guidance. Do you still feel comfortable on that low end? You talked about guidance being on the low end, around that $400 million. or will that be difficult because of the inventory you've had to add because of the current environment?
spk25: No, I think we intend to convert that inventory to cash in the latter half of the year. As supply chains start to let up, we won't need as much safety stock, and we won't have as much finished goods sitting around because we'll be able to get it shipped in the quarter. So I'm not worried about harvesting that. On the receivable side, We know why it's drifted up a bit. We can work it back down. We'll make it a focus and get it down. So that's $250 million of cash that was used in the first half of the year that I think we can harvest in the second half. The remainder of the 400 will come from higher profitability in the second half of the year versus the first. And for the most part, that solves to the low end of the range we just described. If we're able to get further into the range from an EBITDA perspective or to find a little bit more revenue, then we could get closer to the midpoint. But I think, you know, $400 million is probably the right place to be for now.
spk13: And, Mike, you obviously talked about some of the challenges that are happening in Europe, specifically Eastern Europe, because of what's going on. I'm wondering, is that leading to any cancellation of orders throughout Europe or even Eastern Europe because of the current environment?
spk07: No, Kardec. You know, we had on the first quarter call when, you know, the war started in the Ukraine and we had to pull out of Russia. And I think at that point we probably had a little bit more question around what might happen throughout the rest of Eastern Europe. I think today it seems to have settled into, you know, unfortunately kind of a norm. And we haven't seen impacts that have bled over into Europe. our businesses in Eastern Europe or in Western Europe.
spk18: Thank you very much. Appreciate it.
spk22: And our next question will come from Charles Napana-Stevens.
spk14: Hi. Good afternoon, and thank you for taking my question. Just curious if your ability to manage some of the supply chain headwinds and specifically procure certain chips internally has translated into competitive advantage, or if you see that as a potential tailwind in the second half of the year.
spk07: Yeah, I mean, I think the ability to react, whether it's the team on the supply chain side that did a really awesome job in the second quarter, continuing to find components and then certify new supply sources, or the engineering team, which also has been doing a great job literally for the last year, continuing to design around challenges, whether it's ability to get chips or whether it's the price. So I think we feel really good about our ability to react. OWN talked last quarter about just the timing. So in the first quarter, we didn't have the timing to be able to do that. We were able to do that in the second quarter, so we believe As Tim talked about, coming into the third and fourth quarter, that will be a pickup or a benefit for us in terms of our cost pressure. Competitively, I think in the three verticals we compete in, right now we feel as good as we've ever felt. We have products that are competing. I think in the hardware space, whether it's the ATM market, the ITM market, whether it's SCO, whether it's POS, we think we're out there competing very well, and we've been able to work some of the costs down to working the supply chain and working through some of the other engineering activities. So whether that translated into more rev, Tim talked about, as we look at the outlook, we'll continue to chase opportunities for revenue. But we feel really good about where we sit right now.
spk10: Yeah, I think the only additive comment I would make is, when Tim talked about our investment into working capital, We have heard consistently from our customers that we have been a very dependable provider. And we got asked a lot in the first quarter about missed shipments or project delays due to the supply chain, et cetera. The one thing, and I'll give huge props to, as Mike just did, the entire organization, we did not miss a customer commitment and haven't in the whole first half of the year. And that ends up being a competitive advantage without a doubt. You know, it's taken some investment. You saw some of the costs that we incurred in the first quarter. But if you're a long-term player, those investments are appreciated by the market and by our customers, and we're hearing that. So we feel really good about where the team's left us.
spk14: Got it. And as a follow-up, I had a question about the cadence of free cash flows for the back half of the year, and I apologize if I missed it. I know historically the fourth quarter has been the – the high for the year on free cash flow, but obviously there's some abnormalities this year. So any color you could provide on the cadence for the back half of the year would be helpful.
spk25: Yeah, hard to predict. I do think our fourth quarter will be a very strong quarter. I think the third quarter will be solid. But I would have a fourth quarter that is greater than the third.
spk18: Got it. Thank you. Sure.
spk19: And once again, if you'd like to ask a question, please press star one.
spk22: We'll now go to Paul Chung with JP Morgan.
spk08: Hi, thanks for taking my question. So just to follow up on cash flow on that last point, you know, so are the shifts in the kind of second half resulting in, you know, kind of higher AR balance kind of regarding your service contracts, given some macro headwinds? Are we reverting back to that second half seasonal cash flow Again, or is this temporary? And how is the kind of pricing environment and competition evolving here? And I'll follow up.
spk25: So I'll defer on pricing and competition to Owen. On the first one, cash flow generated in the last month of the year is no way to live. We worked incredibly hard to get back to the point where cash flow was more linear, and we've been unable to keep up that trend in an environment where way too much of our revenue comes very late in the quarter because we just can't get the parts to get them out the door. And that's really where most of the issues in the hardware side. A lot of the recovery coming out of the pandemic in 2022 has been hardware. So that's been a struggle. I don't want to live this way much longer. I think supply chains are easing. I suspect that we will get back on a a better cadence of more linear free cash flow generation as we get into 2023. But at this point, I've only got a half now to generate the cash I need to generate, and we will do it.
spk10: And on the pricing, I think my comment in the first quarter was that for those of us who have lived in hyperinflationary times in the past, which not a lot of us have, catching that falling knife was tough. And so we saw the impact in the first quarter of not getting there. The team across all the industry groups have made adjustments to pricing, both permanent pricing and temporal pricing. We believe that the pricing is reflective of the reality that we're all dealing with, and our customers have accepted that. There have been some temporary charges that we've put through on freight and on fuel that will be temporal, and our customers understand that. We have not seen those price increases create a competitive disadvantage. In fact, to the contrary, to my comments a few minutes ago, our customers have been very appreciative of our ability to deliver despite all of the supply chain disruption. We think that the pricing will hold. It is competitive. And where it's been temporal, we'll adjust accordingly.
spk07: Let me just add to that. So when it comes to pricing in the marketplace and competing, NCR is in a much, much better place than many of our competitors. We're in a much better place with our products. And as importantly, as we sit here today, we're in a much better place financially, in terms of our revenue, our earnings, and our cash flow than a lot of the folks that we've been competing against the last number of years, literally in all three lines of business. So we'll continue to operate the business with discipline. We'll continue to operate the business to generate revenue and earnings and cash flow, and we will come out better in this environment than a lot of our competitors.
spk08: Thanks for that. And then, Can you just talk about your backlog for self-checkout? You mentioned some increased conversion kind of later this year. You know, which verticals are you seeing demand? Are you seeing competitive wins, kind of new deployments? And then how should we think about kind of visibility for next year after strong growth throughout the pandemic? How do those trend?
spk10: Yeah. So I would say from a self-checkout, we are still – very bullish about the self-checkout marketplace. If you look at first to second quarter, you saw what is not atypical, which is some lumpiness in terms of order activity. So we were up roughly 15% quarter to quarter on our self-checkout. Our outlook for the year is still that we will grow in the mid-single-digit range. I think we just had published the RBR report through 21. And once again, we were the ship share leader across the globe. We still hold a huge market share position. And what encourages us are new segments that are opening up. I think I mentioned this in the past, the specialty retail environment like Bed Bath & Beyond just has embraced the self-checkout. The convenience fuel and retail sector is growing. really receptive and, in fact, looking at. And as labor continues to be a challenge, we think that self-checkout is going to play very strongly. So we look at the balance of the year and feel good about our outlook from a year ago for 22. And there's nothing that would suggest going into 23 that it should slow down.
spk08: Right. And then last question. Any just general update on kind of regional bank demand across ATMs and digital banking services would be helpful. Are you seeing any customers tightening budgets here, given some macro headwinds? Just any comments on the macro here for regional banks? Thank you.
spk07: Yeah, we haven't really seen banks change their buying behaviors at this point. I think the banks have the benefit of a little spread right now, and then I think the banks are starting to look forward like everybody else's, what will be the impacts on the economy, whether it will hit their balance sheet. Digital banking, anything related to self-service, anything related to efficiency, anything related to cost savings, which is effectively what we do in banking, continue to be things and areas that our customers are looking for.
spk10: Thank you. The other comment I would make on the banks and the ATMs is if capital is an issue, what we're seeing from many of our customers is their embrace of the ATM as a service. And that clearly allows them to continue to build out their physical distribution with ATMs and ITMs without outlaying capital. So if that is an issue, we're already seeing customers really embrace the idea of the ATM as a service offering across the globe, all the regions now. We're having really good activity. A number of closures that Mike talked about. And the pipeline for that business is growing in the double-digit range. So we feel really good that we have an offering that would address any conservatism on the part of the bank.
spk01: Thank you.
spk22: And we'll take a follow-up question from Dan Perlin with RBC Capital Markets.
spk16: Thanks. Just a quick follow-up on digital banking. Tim, did you say the exit rate, i.e., maybe the fourth quarter rate would be 10% is what you had embedded in guidance, or were you suggesting that for the full year? I just wanted to make sure I was clear on that.
spk25: We had two big accounts coming on. One of them is coming on a couple months later than we would have thought. So we're going to exit the year at 10%. I think the full year rate is likely to be very high single digits. But remember that it's not just accounts that drive growth. We've got some deals out there for DSP that could push us north of 10%. So for the full year. So I think there's a chance we hit 10% for the full year. We will certainly exit the year at a 10% run rate.
spk18: Got it. Okay, that's clear. Thank you.
spk22: And there are no further questions at this time, so I'll turn things back over to Mike Hayford for any additional or closing remarks.
spk05: Thanks.
spk07: During the second quarter, we continued to be impacted by a number of the external factors that we saw in the first quarter. In spite of that, even in this environment, our team at NCR really delivered a great financial quarter. They continue to build and deliver on our strategic initiatives for our product platforms. And as always, we believe we deliver the best care to our customers in the industry. The result of the second quarter, the strong performance we delivered in the second quarter is what gives us confidence that we can continue to execute in this environment during 2022. Thank you so much for joining us today. We will see you next quarter.
spk22: And that does conclude today's conference call. Once again, thanks everyone for joining us. You may now disconnect.
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