NCR Atleos Corporation (NASDAQ:NATL) Q4 2023 Earnings Call Transcript

NCR Atleos Corporation (NASDAQ:NATL) Q4 2023 Earnings Call Transcript February 14, 2024

NCR Atleos Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and welcome to the NCR Atleos Q4 Fiscal Year ’23 Earnings Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Brendan Metrano. Please go ahead.

Brendan Metrano: Good morning, and thank you for joining the NCR Atleos earnings call for the fourth quarter of 2023. Joining me on the call today are Tim Oliver, President and CEO; Paul Campbell, CFO; and Stuart MacKinnon, Chief Operating Officer. Tim will start this morning with an overview of fourth quarter financial and operational results, followed with an update on objectives for 2024. Next, Paul will provide an in-depth review of our results and the 2024 outlook. Then we’ll move to Q&A. 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 and are subject to risks and uncertainties that could cause actual results to differ materially from those expectations.

These risks and uncertainties are described in today’s materials 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 and on the Investor Relations page of our website. A replay of this call will be available later today on our website investor.ncratleos.com. With that, I’ll turn the call over to Tim.

Tim Oliver: Thank you, Brendan, and thanks to all of you joining us this morning. We appreciate your interest in Atleos. The summary Slide on Page 6 describes a very busy 2023, capped by a strong fourth quarter that sets a solid jumping-off point for NCR Atleos in our first full year as a separate company. Importantly, our performance in the second half of 2023 and our current outlook for 2024 are both consistent with the modeling that we use during the separation process for discussions with both debt and equity investors. In the fourth quarter, we posted solid year-over-year revenue growth, with particular strength in our transaction-driven and in our services businesses, that both benefit from our increasingly successful strategy to generate more revenue per machine from our base of 600,000 ATMs. The fourth quarter finished out a year of exceptional execution on three different fronts.

First, we completed the separation of a 140-year-old company into two industry leaders with clear strategies and strong competitive positions. Second, we overcame the potential for distraction and the sheer magnitude of the work associated with the spin, and delivered financial results that were well ahead of our 2023 annual budget. And finally, we made significant strategic progress by growing both our ATM-as-a-Service business by 30% to over 20,000 machines and by adding new FI partners and new countries to the network. I’m extremely grateful for the diligence, the fortitude and the dedication of our global NCR Atleos team. And I’m very appreciative of the patience and support our customers showed us as we navigated a very challenging but rewarding year.

Based on the company’s strong performance throughout this year and the momentum we carried into 2024, today, we announced 2024 guided ranges that are consistent with the preliminary targets highlighted in our December 5 investor update call. Paul will offer additional comments in a few minutes. Slide 7 summarizes highlights from the fourth quarter. In Self-Service Banking, we activated over 2,000 ATM-as-a-Service units during the quarter and achieved our goal of finishing the year with over 20,000 active as-a-service units. Activations in Q4 included 1,650 units for Santander in the U.K. We also closed over 20 ATM-as-a-Service deals, including 8 new ATM-as-a-Service customers and 12 extensions with existing satisfied customers. Selling success allowed us to finish the year with good backlog to support our 2024 revenue.

The customer pipeline remains robust, and our fully outsourced ATM solution continues to gain traction globally, and our ability to efficiently onboard and effectively serve our clients improves with each signing and subsequent activation. The Network business had an impressive fourth quarter as well. Top-line growth was strong across most regions as our shared banking utility strategy continued to attract higher and more lucrative transaction volumes. The strong value proposition of the Allpoint Network continues to resonate with financial institutions, including the leading non-bank FIs. For example, we recently announced that American Express selected the Allpoint ATM Network to expand surcharge-free access in its business and consumer checking customers across the United States.

Other notable financial institutions that joined the network in the fourth quarter included Morgan Stanley Wealth and Texas Bank. We also continued to expand our unique blue-chip retail partner network, with the addition of retail segment leaders like QuikTrip, Total petro stations and ASDA. Cash withdrawal transactions across the network grew 8% year-over-year, including 12% growth in the important surcharge-free withdrawals. And we again dispensed record amounts of cash. We continued to optimize network efficiency and tactically rationalize some underperforming locations. The combined effect of strong transaction growth, favorable transaction mix and improved efficiency generated more than 20% adjusted EBITDA growth in the fourth quarter.

Turning to Slide 8. While Paul will walk you through the specific financial targets for 2024, I want to spend a couple of minutes on key goals and objectives that we have cascaded through the entire organization that should enable competitive, strategic and financial success in 2024. Our operating plan for 2024 is structured around three objectives: one, differentiate and grow; two, optimize scarce resource deployment; and three, successfully complete the separation. First, in an environment where the number of ATMs is relatively stable, growth will come from capturing more transactions on our fleet of 80,000 ATMs, or from generating incremental service revenues from the 520,000 machines in our FI customers’ fleets. We will differentiate the experience in our devices with more functionality, better customer interfaces and leading reliability.

We will evolve our hardware, innovate our product offering, augment functionality, and drive 24/7 availability with very limited downtime. Now a pure-play ATM company with a singular focus, we can invest in our products and in our service capability to secure and extend our leadership position. Second, we will optimize the allocation of scarce people, capital expense and operating expense resources. The call on capital will always exceed capacity. We have implemented screening processes that prioritize speed to market and nearer-term revenue generation, followed by more robust project management and return models that are monitored and course corrected more frequently. Frequent measurement and clear accountability will result in higher realized returns and more rapid conversion to top line growth.

Emphasizing continuous improvement as part of our culture will buttress what has been a project-based cost productivity effort across manufacturing and services to become a repeatable annual process. And now that we are a smaller company, we are simplifying our business model and reducing our indirect cost structure. And finally, we will successfully complete the separation of Atleos from NCR Voyix. Although the spin transaction was finalized on October 16 of last year, efforts to fully separate operations, systems, and even geographies, is still ongoing. A few of our businesses have yet to transfer to us due to the lengthy administrative processes in certain countries, which we expect to resolve in the second quarter of this year. There is also a multitude of transitional service and commercial agreements between Atleos and Voyix.

I’m working closely with David and his Voyix team to optimize economic outcomes fairly adjudicated issues and wind down transition service agreements as quickly as possible to minimize duplicate costs or dis-synergies. We have a great company that just completed a remarkable year. And we have good reason to anticipate a bright future for NCR Atleos. With that, Paul, over to you.

Paul Campbell: Thank you, Tim, and thanks to all of you for joining us today. As Tim noted, the fourth quarter was our first reporting period as a stand-alone company, and the work of separating from legacy NCR is ongoing. This, coupled with the use of assumptions, difference in basis of accounting for pre-separation periods and different post-separation capital structure cause us to view the full year 2023 results as less relevant for assessing the company’s post-separation fundamental performance. Therefore, my comments today will focus on fourth quarter 2023 results which more closely align to our post-separation operations and reporting. Also, there are some items related to the separation transaction that impact the comparability of the fourth quarter results with the prior year period.

Firstly, operations in 11 countries were temporarily delayed in separating from legacy NCR due to local processes of setting up NCR Atleos’ legal entities. Undercover accounting, these operations were included in the fourth quarter 2022 results but not in the fourth quarter of 2023. This created an artificial headwind on the fourth quarter of 2023 of approximately $40 million of revenue and $9 million of EBITDA. Of these 11 countries, 4 transferred during Q4 2023 and the balance are expected to transfer by early Q2 2024. Secondly, in successfully separating from legacy NCR, NCR Atleos had dis-synergies of approximately $11 million in Q4 2023. Given these factors, in addition to non-GAAP results that we typically provide when discussing quarterly financial results, in certain instances I will refer to normalized metrics that adjust for these items noted to improve comparability with prior period results.

Note that we rely on non-GAAP results internally, along with other KPIs, to track underlying performance of the business. Turning to Slide 10 and a review of the fourth quarter. Total company revenue increased 3% year-over-year to $1.1 billion. After normalizing for items that impacted comparability with prior year, we estimate total revenue would have grown approximately 7%. The continued progress of our recurring revenue model drove 10% growth in recurring revenue to $777 million and increased the mix of recurring revenue to 71%, up from 67% in the prior year period. Moving to the right. Fourth quarter adjusted EBITDA was $178 million, compared to $187 million in the prior year, with adjusted EBITDA margin of 16.2% and 17.6%, respectively.

The decrease in the adjusted EBITDA and the EBITDA margin was primarily attributable to the delayed countries and Q4 2023 dis-synergies. On a normalized basis, we estimate fourth quarter 2023 adjusted EBITDA would have grown year-over-year by approximately 7%. Moving down the P&L, depreciation and amortization and other expense were relatively similar to the prior year period. The most significant difference was external interest expense, which increased $69 million due to the $2.9 billion debt we issued as part of the separation, with external debt and associated interest expense in prior periods fully attributed to legacy NCR. Fourth quarter effective tax rate was approximately 28%, and the fully diluted average share count was 73.4 million compared to 70.6 million assumed for the pre-split historical period.

The increase reflects dilution from restricted share units and options outstanding during the fourth quarter of 2023, which were not in effect prior to the separation. Fourth quarter diluted adjusted earnings per share was $0.69, and we had a net use of approximately $80 million of free cash flow due to payments related to the separation transaction and working capital timing. Moving to Slide 11. The Self-Service Banking was most impacted by the delayed countries, making fourth quarter comparisons inconsistent. So my comments will focus on normalizing these to provide a meaningful composite. Starting in the upper left, fourth quarter revenue decreased 3% over the prior year period on a reported basis. On a normalized basis, we estimate revenue would have increased by approximately 2% over the prior year period.

Adjusted EBITDA was $146 million, with adjusted EBITDA margin rate of 22%, compared to $159 million and 23% in the prior year. The varies in adjusted EBITDA and adjusted EBITDA margin was primarily attributable to the impact of delayed legal entities and dis-synergies mentioned earlier. This is partially offset by lower SG&A costs in the current year. On a normalized basis, we estimate adjusted EBITDA would have increased approximately 1% over the prior year period. Moving to KPIs at the bottom of the slide. Excluding the separation-related impacts, we saw continued sequential progress on our strategic KPIs. As Tim noted earlier, we finished the quarter and year with over 20,000 ATM-as-a-Service units, which translates to a 43% increase of units over the prior year.

This is consistent with our goal for the year. Annual recurring revenue, or ARR, in the bottom right shows a slight decline, which again was caused by the delayed countries. On a normalized basis, this would have been above $1.6 billion and aligns to the consistent sequential growth trend from our focus on driving sustainable recurring revenue. Some additional information to help track ATM-as-a-Service progress. ATM-as-a-Service revenue accounted for approximately 6.5% of Self-Service Banking segment revenues in the fourth quarter and increased 56% over the prior year period. We added over 2,000 ATM-as-a-Service units during the quarter. Moving to Slide 12 and our Network segment. We saw another very strong performance in the Network segment.

Starting at the top, revenue increased 8% over the prior year period in the fourth quarter, led by high single-digit growth in withdrawal volumes. Withdrawal growth was broad-based with North America up 5% and international up 10%. International growth benefited from the agreement with ASDA implemented in the fourth quarter. Importantly, higher-margin surcharge-free transactions grew faster than surcharge transactions. Moving to the chart on the right. Adjusted EBITDA of $100 million represents margin expansion of 380 basis points over the prior year period, or 31% of revenue. Around half of EBITDA margin rate expansion was driven by incremental volume and higher margin mix. The other half was related to separation accounting treatment in Q4 2022.

Our Network strategy is focused on growing transaction volume on a relatively fixed base of units, including adding users like Banco Sabadell and adding transaction types like Fiserv, both expanded relationships announced recently. Key metrics at the bottom of the slide highlight how well the business has been doing. On the left, you can see that we have continued to optimize our ATM portfolio, finishing the quarter with flat 83,000 units. The chart on the right shows the last 12-months average revenue per unit or ARPU was up 7% over the prior year period in the fourth quarter, another proof point in the execution of our strategy to increasingly monetize our existing network of ATMs. Moving to Slide 13. Starting on the left with comments on the remaining reporting segments.

Technology & Telecom segment revenue and adjusted EBITDA were down year-over-year due to the exit country delays and a reduction in activity for some of our larger customers in Q4 2023. The other segment represents legacy NCR Voyix exited geographies and commercial agreements between NCR Atleos and NCR Voyix. Other revenue increased over prior year period, benefiting from services we performed from NCR Voyix post separation, which would have been intercompany prior to separation. Unallocated corporate costs increased 11% to $83 million due to dis-synergies and higher foreign exchange related other expense. On the right-hand side is an overview of the year-end financial position. We have ample liquidity with over $700 million of cash and credit.

We finished the quarter with a little over $3 billion in debt and $2.6 billion of net debt. Our leverage was approximately 3.6x based on trailing 12-month adjusted EBITDA. Capital allocation priorities are unchanged from our December 5 investor update call, and we plan to review recommendations with our Board in Q2. Turning to Slide 14 and our financial outlook for 2024. I’ll start with full year targets. We expect total company revenues to be in the range of $4.2 billion to $4.4 billion, adjusted EBITDA of $770 million to $800 million, and diluted adjusted EPS of $2.90 to $3.20, and free cash flow of $170 million to $230 million. At a segment level, we expect Self-Service Banking revenue of approximately $2.6 billion with adjusted EBITDA margin of 26% to 27%.

Network revenue of approximately $1.3 billion with adjusted EBITDA margin of 26.5% to 27.5%. T&T segment revenue of approximately $200 million with adjusted EBITDA margin of approximately 20%. Other revenue of approximately $200 million with 6% to 7% adjusted EBITDA margin. Unallocated corporate cost should be 6.5% to 7% of total company revenue. Other relevant assumptions include interest expense of approximately $290 million and an effective tax rate of approximately 26% and fully diluted average share count of 75.3 million. For the first quarter of 2023, we expect total company revenues to be in the range of $1 billion to $1.05 billion, adjusted EBITDA of $150 million to $160 million, adjusted EPS of $0.30 to $0.40 per share. We expect free cash flow will be positive.

Our Q1 2024 guidance fully accounts for the impact of the headwind of the remaining seven delayed legal entities which have not transferred at the end of Q4 2023. The Q1 2024 impact of these delays is expected to be approximately $15 million of revenue and approximately $5 million of EBITDA. We do not expect any material impact beyond Q1 2024. At a segment level, we expect the first quarter Self-Service Banking revenue to be approximately $615 million with adjusted EBITDA margin of 22% to 23%. Network revenue of approximately $350 million with adjusted EBITDA margin of 24.5% to 25.5%. T&T revenue of approximately $40 million with adjusted EBITDA margin of approximately 20%. Other revenue of approximately $60 million with adjusted EBITDA margin in the low single-digits.

Unallocated corporate costs should be between 6.5% and 7% of total company revenue. Other assumptions include interest expense of $75 million to $80 million, effective tax rate of approximately 26%, and fully diluted average share count of 73.9 million shares. Note that we have posted quarterly segment results for 2022 and 2023 in the Presentations section of our Investor Relations website. This can be used as a baseline for modeling our financial outlook. In closing, in Q4, NCR Atleos delivered a strong performance, was a very complex quarter to compare due to the separation event related actions and transactions and the different accounting basis between periods. I look forward to a fresh start in 2024 with minimal transaction-related references and to focusing on discussing the strong momentum and results from our two key segments.

With that, I turn it back to you, Tim.

Tim Oliver: Thanks, Paul. Good work. So 2023 was an eventful, exhausting, and rewarding year. The business logic that inspired the separation of NCR and the creation of Atleos is proving out to be correct. As a pure-play company with leading positions in everything that we do, our tactical and strategic plans are clear and focused. Our team is energized and our customers want to buy more from us. We are confident that reigniting innovation, prudently allocating capital and gracefully completing the separation of our company will drive strong financial performance, enhance competitive positioning and the faster uptake of our service and shared financial utility strategies. And importantly for this audience, the recognition of a more valuable NCR Atleos. With that, we’re happy to take your questions.

Paul Campbell : Operator, just before we go to questions, this is Paul Campbell here. I just want to clarify. I misquoted the free cash flow number. It’s approximately $60 million use of free cash flow rather than $80 million. So a slight misstatement there [indiscernible]. We can go to questions now.

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Q&A Session

Operator: We’ll take our first question from Matt Summerville from D.A. Davidson.

Canyon Hayes: You’ve got Canyon Hayes on for Matt Summerville. I was just wondering if we could get a little bit more of a finer point. I was curious as to the kind of the headwind to revenues and EBITDA due to the as-a-service changeover in fourth quarter. And then also what’s baked into the guide for 2024. Kind of on that same line. I’m just curious what sort of levers we had with respect to the free cash flow update. And I’ve got a follow-up.

Paul Campbell: So for the impact on Q4, it was around $10 million of impact. Most of the units we put on were asset-light in Q4. What was the second question?

Tim Oliver: Impact in 2024.

Paul Campbell: Impact in 2024 is around — between $80 million and $100 million.

Canyon Hayes: And I was curious if you could touch on the kind of the levers up and down on the free cash flow forecast.

Paul Campbell: The levers on the ’24 forecast. Primarily, we’ll — we put them in the before. So essentially, we’re working on the capital deployed. So we’ll meet around the capital, as Tim said, we’re going to monitor our spend and focus on the projects that bring the payback earlier than the future period. And then it’s driving our working capital, making sure that we can make improvements in our days receivable outstanding in particular and tightening up on inventory.

Tim Oliver: Yes. Historically, we’ve been a modest use of working capital as we grew. We don’t think we need to do that going forward. Our new revenue streams caused us to actually have — to convert revenue to receivables more quickly. I think that will be helpful. I also think that we — the primary lever we have is how much CapEx we spend on growth. And while I don’t want to ever have to constrain that, I think it’s the best way to redeploy capital, if necessary, would. We’ve got built into our budget a pretty significant use of cash to drive the ATM-as-a-Service business. I think it’s sufficient to support the year and to support the units and the forecast. So I feel good about the free cash flow forecast. But it’s CapEx and it’s working capital.

Canyon Hayes: And I was wondering if we could get a little bit of a regional view of the ATM market and, correspondingly, what we think that industry units did in ’23 and what the expectation is for ’24 in terms of volume?

Stuart MacKinnon: Yes, Canyon, we have not gotten back — we sort of rely on some of the industry analysts to give us a view of what the market does. So we haven’t really gotten the ’23 view of sort of ATM units sold internationally across all of the vendors. Our volume has been fairly consistent internationally in all of the regions. Fairly consistent with what we said on Investor Day, we expect the market to be sort of flat to 1% up in terms of units sold. We have some upcoming sort of tailwinds, I guess, you could say, in terms of people getting ready to refresh the machines they bought six or seven years ago during the Windows 7 migration. So we expect 2024 to be sort of fairly consistent with ’23 in terms of total units.

Paul Campbell: Yes. And I think another comment there, is that hardware is now becoming less and less a proportion of our total revenue, is now into the teens. And we’re more increasingly becoming a consumer of our own hardware through our ATM-as-a-Service business and our Network business. So it’s not a — it’s important, we’re tracking it, but it’s becoming a less dependent revenue stream for us.

Operator: And we’ll go next to Michael O’Brien from Wolfe Research.

Michael O’Brien: So a few quick ones here. So regarding your outlook for 2024, I’d like to know your macro view going into the year and how that affects the ATM-as-a-Service ramp-up that we’re expecting. Obviously, we’re seeing some pressure in regional banks and so forth. So I’m wondering if you guys are seeing that on your end with the ATM-as-a-Service initiatives.

Paul Campbell: Michael, no, not at all. We’ve got — we’re seeing robust volumes in Q4. The ATM-as-a-Service, I think Tim mentioned earlier, that we’ve got about one-third of our deployments planned for 2024 already in backlog and just working on getting these put into the ground. But we’re not seeing any pressure from the regional bank dialogues. We see that as a potential opportunity for us as banks look to cut their costs, then we can come in, as we said in our Investor Day, we believe we can save them money and generate more profit for ourselves. So this is — it’s something we’re watching closely, but we see it as an upside.

Michael O’Brien: And so are you guys still on track for about 35,000 units for year-end?

Paul Campbell: Yes, we’re tracking to 30,000 to 35,000 by the end of this year, just depending on how many get deployed before we cut off the year this year.

Tim Oliver: Say it differently, if we don’t hit 35,000, it won’t be for lack of demand. It will be the ability to install quickly enough.

Operator: And there are no further questions in the queue at this time.

Tim Oliver: Excellent. Well, thank you for those who did ask questions. We hope to have a bigger audience as we go forward. I know some folks are thinking about picking up coverage soon. We appreciate your interest in the story. We believe strongly in it. And have a great quarter. We’ll talk to you 90 days from now.

Operator: That does conclude today’s conference. Thank you for your participation. You may now disconnect.