NCR Voyix Corporation (NYSE:VYX) Q1 2024 Earnings Call Transcript

NCR Voyix Corporation (NYSE:VYX) Q1 2024 Earnings Call Transcript May 9, 2024

NCR Voyix 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: Greetings and welcome to the NCR Voyix First Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] It is now my pleasure to introduce your host, Alan Katz, Vice President of Investor Relations. Thank you, Sir. You may begin.

Alan Katz: Good morning and thank you for joining our for joining our first quarter 2024 earnings conference call. This morning we issued our earnings release reporting financials for the quarter ended March 31, 2024. A copy of the earnings release and the presentation that we will reference during this call are available on the Investor Relations section of our website, which can be found at www.ncrvoics.com and have been filed with the SEC. With me on the call today are David Wilkinson, our Chief Executive Officer, and Brian Webb Walsh, our Chief Financial Officer. This call is being recorded and the webcast is available on the Investor Relations section of our website. Before we begin, please be advised that remarks today will contain forward-looking statements.

These forward-looking statements are subject to risks and uncertainties and other factors, which could cause actual results to differ materially from those expressed or implied by such forward looking statements. For additional information on these factors, please refer to our earnings release and our other reports filed with the SEC. We caution you not to place undue reliance on these statements. Forward-looking statements during this call speak only as of the date of this call and we undertake no obligation to update them. In addition, we will be discussing or providing certain non-GAAP financial measures today, which we believe are more reflective of our ongoing performance. For a full reconciliation of the non-GAAP financial measures discussed in this call, the most comparable GAAP measure in accordance with SEC regulations, please see our press release furnished as an exhibit to our Form 8-K filed this morning, and our supplemental materials available on the Investor Relations section of our website.

With that, I would like to now turn the call over to David.

David Wilkinson: Thank you Alan and welcome everyone to our first quarter 2024 earnings call. For the quarter, we delivered revenue and adjusted EBITDA in line with expectations. Normalized software and services revenue grew 5% as we continued to onboard new and existing customers to our commerce and digital banking platforms. We executed on our transformation initiatives and saw the impact of the continued growth within our higher margin revenue streams. We achieved solid sales results across our segments, including signing nearly 300 new customers and expanding with existing customers. I’ll provide more detail on our sales activity and our segment updates. We also continued converting customers to our platform and now have a total of approximately 61,000 retail and restaurant platform sites, approximately 18% of our total customer sites.

The ongoing execution of our platform strategy, coupled with our increased investments in our global sales and services network, drove total segment ARR growth of 5% and software ARR growth of 5% and software ARR growth of 6%. Let’s turn to our restaurant segment slide on Slide Six. In the first quarter, we signed more than 230 new customers and increased our platform and payment sites by 6% and 26% respectively. Segment ARR grew 5% in the first quarter. In our enterprise business, we announced a new multi-year agreement with Pressed, one of the leading fresh juice brands in the US with more than 100 locations and a growing Ecommerce and wholesale business. Under our agreement, we will provide a full suite of solutions including point of sale, back office Ecommerce, loyalty and payments, which simplifies their operations and reporting across their physical and digital channels.

Further, our integrated consumer marketing solution will run the Pressed loyalty and marketing program both in stores and online. Pressed moved from a smaller provider to our platform, allowing to engage with their end users and improve the guest experience, while also driving efficiencies for their organization. In addition to signing new customers, we renewed and expanded with our existing restaurant customers this quarter, including a leading restaurant conglomerate in the US who has been an NCR Voyix customer for more than 20 years. This customer has increasingly utilized our commerce platform across their footprint of approximately 600 restaurants to improve their digital guest experience and increase customer satisfaction. In 2023, we began providing real time data and menu cataloguing for this customer.

In Q1 of this year, we further expanded our agreement to enable this customer to better serve their patrons, ordering outside of the restaurant and deliver an experience that matches their brand promise of exceeding guest expectations. We’re seeing traction in our mid-market growth efforts, signing new logos and expanding with existing customers. We continue to execute against our payments-led strategy for new mid-market customers, demonstrated by our 90%-plus attach rate this quarter. We are growing our sales team, simplifying the sales and onboarding process and improving our pricing and packaging, which will accelerate growth for this business. Let’s move on to our retail segment on Slide Seven. This quarter, we signed more than 50 new small and mid-market customers and four enterprise customers, leading to more than 800 additional sites.

We also increased our platform sites by nearly 57% as we continued to convert on premise customers and onboard newly signed customers to our commerce platform. Segment ARR grew 5% and software ARR grew 10%, attributed to the powerful impact of attaching to the platform. One example of this is a multiyear expansion and renewal we signed with Sainsbury’s, one of the largest grocery chains in the UK with over 1700 store locations. For more than two decades, we have provided Sainsbury’s with our on premise point of sale software solution and self-checkout technology with related services. Last month, Sainsbury has implemented our data and analytics module as part of their expanded agreement. We’re on track to connect their entire store footprint, which operates more than 22,000 lanes, to our commerce platform.

As part of the contract in 2025, we will upgrade their point of sale and self-checkout software to our cloud based and in lane solutions. Sainsbury’s commitment to our cloud native platform solution will drive a payback on their investment in less than two years and drive incremental recurring revenue and adjusted EBITDA for our business over the life of the contract. We’re excited to continue our strategic partnership to eliminate in store complexity and deliver an enhanced guest experience. While platform conversions with enterprise customers often have longer sales cycles and take time to deploy, once implemented, they are accretive to revenue and margin and create a return on investment for our customers. Sainsbury’s is a great example of how a customer can realize a fast payback on its investment when converting to the platform.

Our retail customers are increasingly focused on providing choice as part of their guest experience, which is accelerating interest for our next generation self-checkout solution. For example, this quarter we expanded our self-checkout contract with the leading global Ecommerce retailer that I highlighted on our last call. We weren’t even finished with the initial rollout when this customer doubled the number of self-checkout sites and contracted to implement our next gen solution for the remaining installations. We also expanded our relationship with the Navy exchange, an existing point of sale customer, and will now be deploying self-checkout across 40 of their stores throughout the US, with the potential to expand to additional stores over time.

We were able to expedite this expansion as a direct result of a recommendation from another government customer, the Army and Air Force Exchange, based on their experience as an NCR Voyix self-checkout technology and service customer. Let’s move on to Slide Eight. Our digital banking segment demonstrated strong financial and operational performance this quarter. Our registered users grew 5% to more than 28.5 million and the number of active users grew 3% to more than 19.7 million, while segment ARR increased 7%. In 2024, we have taken steps to now align the organizational structure and operating model of our digital banking business with our growth strategy. We’ve built out our senior leadership team and have consolidated our four business lines into a single organization, streamlining our operations and simplifying our go-to-market.

Although our realignment is in its early stages, we have already been able to drive greater sales activity and are realizing cost efficiencies. Further, we have reduced our capital investment without sacrificing research and development capacity, product innovation or speed to market in our platform, products and solutions. In the first quarter, we expanded our relationships with over 200 existing customers, selling additional products and solutions. We continue to unlock ARPU and ARR growth in the largest customer base in the digital banking industry. One notable expansion was with a tier one retail bank that will now use our platform to serve an additional portion of their customer base and further increase cost efficiencies for their business.

Today, 13 of the 15 largest retail banks in the US utilize our digital-first platform. In addition to expanding our existing relationships, we also signed five new financial institutions this quarter, further expanding our industry-leading client roster. For example, we signed a contract with Apple Bank, the largest state chartered savings bank in New York with over 80 branches and $17 billion of assets under management. Apple bank selected us, given the strong value proposition of our comprehensive digital first platform, our differentiated end user experience and the potential to drive efficiencies, leveraging our technology. I would now like to provide an update on our platform offerings. As we continue to invest in and improve our products and services, we will aim to strengthen our customer relationships and capture additional market share, beginning with NCR Voyix loyalty, our proprietary integrated customer marketing solution that allows better personalization and drives incremental revenue by combining customer data, offer management and direct marketing into a single application.

Pressed is a recent example of the increasing demand we are seeing for this solution. As mentioned earlier, our next generation self-checkout solution delivers a more seamless checkout experience to both new and existing retail customers. Retailers continue to focus on improving the guest experience and adopting operational efficiencies in the face of a challenging labor market. To that end, we have launched our next gen self-checkout with over 15 customers, including Sainsbury’s, to provide retailers more agility and flexibility to improve guest experience. Based on this initial demand, we expect a broader set of customers to accelerate their implementation of this advanced technology over the next several quarters, driving additional growth for our retail segment moving forward.

We also have agreements with several third parties that enhance our offering for our restaurant, retail and digital banking customers. These third party applications leverage the cloud based architecture of our platform and generate either transaction based or recurring revenue with healthy margins. For restaurants, we are leveraging technology from Sundae to expand our pay at table capabilities, enabling servers to manage more tables simultaneously. As you’ve seen in our recent press release, we have expanded our partnership with Olo to bring new capabilities and integrated offerings to our enterprise customers. In retail, we are partnering with Everseen to help mitigate shrink by offering AI-enabled EverCheck technology for self-checkout.

Within our digital banking business, we have partnered with MX Technologies to offer personal financial wellness tools and support. I would like to reiterate my confidence in our ability to execute on our growth strategy of signing new customers and converting existing customers to our platform, capitalizing on our unrivaled market position. We are prudently investing across our business to drive software and services revenue and enhance our products and services, further extending our runway for growth. With that, I will turn it over to Brian who will take you through the Q1 financial results in more detail and our outlook for the remainder of 2024.

Brian Webb: Thank you, David and good morning. As a reminder, the spin-off of NCR Atleos created some level of complexity in our 2023 and Q1 reported results, especially when looking at year-over-year comparisons, we are providing normalized results that exclude the impact of certain spin and divestiture related items. My commentary today will focus on these normalized results. Please turn to Slide 11. First quarter total normalized revenue was $858 million, declining approximately 3% as expected, driven by a decline in hardware revenue as a result of the timing of customer refresh cycles. Normalized software and services revenue increased 5% for the first quarter to $662 million. Q1 normalized adjusted EBITDA was $122 million, which declined 2%, driven by $22 million of spin related dissynergies and lower hardware revenue.

Excluding these dissynergies, our adjusted EBITDA would have grown by 15% year-over-year. Q1 adjusted EBITDA margin was 14.2%, slightly higher than the prior year. Our Q1 adjusted EPS was $0.13 and our weighted diluted average share count was $162.7 million. Please turn to Slide 12 to go through the details of our segment results. Across our segments, we saw growth in software and services revenue, which was offset by declines in hardware. Adjusted EBITDA improved across all three segments. This performance was consistent with our expectations. Within our restaurant segment, software and services grew 3% offset by hardware, resulting in a revenue decline of 3%. Software and services revenue grew as we increased the number of platform and payment sites and realized price increases.

Restaurants had solid profit performance with adjusted EBITDA increasing 25% and margin expanding 600 basis points, driven primarily by mix and our transformation initiatives. In retail, software and services revenue grew by 5%, offset by hardware, resulting in a total revenue decline of 7%. The software and services revenue growth reflects our continued success transitioning customers to the platform and expanding with those customers. As David highlighted, while the platform conversion cycle can be longer for enterprise customers, shifting our enterprise base to the platform will accelerate revenue and earnings growth over time. Adjusted EBITDA grew 4% as a result of revenue mix and our transformation initiatives. Within digital banking, Q1 revenue increased 7%, as we continue to demonstrate cross-sell momentum and onboard previously signed customers.

Adjusted EBITDA in this segment grew 10% and margin expanded by 90 basis points, driven by operating leverage and our transformation initiatives. I will now address the impact of separation on our corporate and other line. First, we have the dissynergies related to the separation. This amounted to 22 million in Q1. A portion of these dissynergies reflect both revenue and expenses net associated with the noncore spin related businesses, which we are in the process of winding down. We anticipate that this will extend beyond 2024. In the first quarter, corporate and other also included $8 million of revenue associated with our commercial agreements with Atleos, which has a lower margin contribution. For the full year, we now expect revenue related to commercial agreements to total approximately $11 million.

Please turn to Slide 13. We ended the quarter with 3.9 times net leverage, $2.7 billion of debt and $246 million of cash. As of March 31, under our $500 million revolving credit facility, we had drawn $196 million. As expected, our leverage was higher at the end of Q1, given the use of cash based on normal seasonality. We anticipate net leverage at year end will be approximately 3.4 times. There were a few other expected items that adversely impacted our cash flow this quarter, including $32 million of spend associated with our transformation and restructuring initiatives and $5 million related to separation expenses. These items include severance, professional fees and other exit costs related to rightsizing our cost base. We anticipate seeing our transformation initiatives positive impact to margin ramp up over the coming quarters.

Finally, I’d like to outline our 2024 guidance. As a reminder, our guidance does not reflect revenue or adjusted EBITDA associated with the delayed Atleos transfer countries. Given the first quarter performance and our current visibility for the year, we are reaffirming the 2024 guidance ranges that we communicated on our Q4 call. I’ll now turn the call back to David for some additional remarks.

David Wilkinson: Thanks Brian. Before we move to Q&A, I’d like to note that this morning we announced that Jim Kelly, the current Chairman of NCR Voyix, has now stepped into the role of Executive Chairman. I worked closely with Jim following the spin of the Atleos business, and he has been integral to the development of the go-forward strategy for NCR Voyix during his tenure at the company. I am excited about working more closely with Jim in his new role. He brings a wealth of experience and leadership expertise from public companies, particularly around strategic objectives, operational efficiency and payments. Given the many important initiatives that we have underway, having him in this expanded role will be invaluable to the board and the management team. With that, I will turn it over to the operator to begin the question-and-answer session. Please open the lines.

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Q&A Session

Operator: [Operator instructions] Our first question comes from Matt Summerville with D.A. Davidson. Please proceed with your question.

Matt Summerville: Maybe if you guys can maybe start by just talking a little bit more broadly around what you’re seeing in the hardware environment today. Obviously that’s an important top line contributor, less so on the bottom line. I totally get that, but it’s still an important piece of your revenue. Specifically, include some comments on what you’re seeing with respect to self-checkout, some of the larger projects that you had thought maybe in late ’23 would end up hitting in ’24, maybe an updated view there and then I have a follow up. Thank you.

David Wilkinson: Yeah, good morning, Matt, it’s David. So, as we described, that hardware business is largely project-driven for us and is pretty lumpy and we are seeing in the back half of the year, those projects coming back that were pushed kind of post-COVID the bubble that we saw. So we’re seeing, again, some of those projects resurface in the back half of the year. In terms of self-checkout, self-checkout for us is really a holistic solution. So we’re following the consumer trends of consumers looking for different ways to check out and a lot of that is we’ll call it unassisted checkout. Whether that takes the form of a mobile device, a kiosk, or the standard self-checkout that you know and love in terms of the appliance that sits within a large grocery chain or a large big box store.

So we’re going to continue to see demand. It’ll show up in our business a lot in software and services, because that makes up a big piece of that business. As the hardware thins out a little in the lane, the average selling prices decline a bit, but we see again continued demand and as we described in our prepared remarks, our next gen self-checkout is making some traction too.

Brian Webb: And I would just add that based on the projects, we expect the hardware decline to moderate in the second half versus the first half.

Matt Summerville: So maybe as a follow up then, Brian, along those lines, how should we be thinking about kind of the go-forward revenue and EBITDA cadence, more broadly speaking, as we think about Q2 in the back half of the year relative to the $122 million of EBITDA you delivered in Q1? Thank you. Yes, yes.

Brian Webb: So consistent with what we said on our last call, because our cost transformation initiatives are ramping as we go through the year, and because the hardware rated decline is expected to moderate in the second half, we’ll see revenue and adjusted EBITDA sequentially improve as we go through the year.

Operator: Our next question comes from Mayank Tandon with Needham & Company. Please proceed with your question.

Mayank Tandon: Thank you. Good morning. Maybe just diving into ARR trends, Brian or David, could you talk about what we should expect there, both on the software side and in total ARR, just in terms of trend line as you progress through the year end? And maybe you could break it down by vertical as well?

David Wilkinson: Yes, I would say overall, we’re pleased with the growth we’re seeing in software ARR and total ARR. That includes services as well. That for us, is what gives us confidence in the strategy of adding new customers, the customer growth we’re seeing, and monetizing our base of the largest install base in the industries that we serve? We’ll continue to see, as Brian described, a similar trend in terms of sequential growth of ARR. As we look out over the quarters, that’ll be a trend in all three of the businesses honestly.

Brian Webb: And I would just add one point. We published for the first time a metrics file on our website, which has a lot of the financial data and KPI data. Just encourage everybody to take a look at that.

Mayank Tandon: Got it. Okay, well, then I’ll just turn to a separate question. We get this a lot from investors, and I’m sure you do as well. The digital banking piece obviously is doing really well and we look at the valuations for other pure plays out there in the market. They’ve creeped up actually pretty meaningfully in the recent quarters. So any updates on your plans to potentially monetize the asset, just given the higher valuations in the market overall, and maybe that way, given that the synergies between digital banking and retail and restaurants, it doesn’t seem to be at least obvious to investors. That could be obviously a very rewarding opportunity for the shareholders over time, any thoughts there?

Brian Webb: The digital banking business, as you saw through the results, is performing really well. We’re proud of what that team has done. As I described operationally, we’ve consolidated that into a singular team focused on execution and we’re seeing continued strong growth in that business. So right now, I agree that the value of that business is underappreciated and that’s the whole intent of what we’re doing, is exposing the value of that and the new NCR Voyix. That being said, we always continue to explore all opportunities to maximize shareholder value.

Operator: Our next question comes from Kartik Mehta with Northcoast Research. Please proceed with your question.

Kartik Mehta: Good morning. David, just if you could follow up on the self-checkout, there are a lot of headlines of stores wanting to reduce their footprint in self-checkout. There’s even some legislation proposed in California that they’d like to do away with self-checkout. And I’m wondering, based on that backdrop, what you’re seeing in terms of your conversations with retailers, in terms of demand for the product and how you’d expect that to progress over the next couple of years.

David Wilkinson: Yeah, we see the same articles there. We also, there was one in the UK that was Simon, CEO of Sainsbury’s, came out and said that their customers love self-checkout and they’re continuing to deploy as we described in our relationship with them. So I’ll point back, Kartik, to the consumer trend. This is really a consumer-driven trend. You and I, as consumers and shoppers, are really driving the requirements for both retailers and restaurants to create unassisted ways to check out, order or otherwise transact with these large retailers. So I think that we’re going to continue to see a strong trend and what that looks like. They’re all battling to differentiate the experience for both customers, and they’re in a labor battle for staffing stores for peak times or shifting labor to different value added tasks as they offer new capabilities and new services.