NCR Voyix Corporation (NYSE:VYX) Q3 2023 Earnings Call Transcript

NCR Voyix Corporation (NYSE:VYX) Q3 2023 Earnings Call Transcript November 11, 2023

Operator: Good day. And welcome to the NCR Voyix Corporation Third Quarter Fiscal Year 2023 Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Mr. Michael Nelson, Treasurer and Vice President of Investor Relations. Please go ahead.

Michael Nelson: Good afternoon. And thank you for joining our third quarter 2023 earnings call. Joining me on the call today are NCR Voyix CEO, David Wilkinson; and CFO, Brian Webb-Walsh. The focus of our discussion on today’s conference call will be on NCR Voyix segment results and key performance indicators for the third quarter 2023. We would appreciate it if you keep your questions focused on the NCR Voyix segment results during Q&A. Please note that our presentation and discussions will include forward-looking statements. These statements reflect our current expectations and beliefs, but they are 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.

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On today’s call, we will also be discussing certain non-GAAP financial measures. These non-GAAP measures are described and reconciled to their GAAP counterparts in the presentation materials, the press release dated November 9, 2023, and on the Investor Relations page of our website. A replay of this call will be available later today on our website, ncrvoyix.com. Slides two and three of our earnings presentation provide further details. With that, I would now like to turn the call over to David.

David Wilkinson: Thank you, Michael. And welcome everyone to our first earnings call as NCR Voyix. Please turn to slide six. This is an exciting time as we begin a new chapter in our journey as a publicly traded company. On October 16th, we successfully completed the separation of NCR Atleos. NCR Voyix common stock began trading on the New York Stock Exchange under the ticker symbol VYX at the market open on October 17th. As we move forward, we are well positioned with an exceptional leadership team and a supportive Board of Directors that come with extensive industry knowledge and transformational expertise. We are fully prepared to execute our vision as a focused, platform-led software and services company. First, I would like to thank to more than 16,000 NCR Voyix employees for their dedication and engagement, particularly over these last few months.

Complex transactions like these can often be disruptive, but I am proud of how our employees contributed to the success of this transaction. Not only did they deliver strong third quarter results, but they also maintained a high level of service excellence for our customers. Before we dive into our discussion of the NCR Voyix third quarter results, I’d like to reiterate some of the key messages we outlined in our September Investor Day, particularly around service offerings, competitive advantages and growth trajectory. Please turn to slide seven. NCR Voyix is a platform-led SaaS and services company that serves three essential industries, Retail, Restaurants and Banks. For fiscal year 2023, we are on pace to generate nearly $4 billion in annual revenue with approximately half of that from recurring revenues.

Software and services comprised about $2.5 billion of our revenue. We operate in a large and growing addressable market valued at a minimum of $25 billion and we maintain a market leadership position within the segments we serve. This year, we were once again named the number one global provider of point-of-sale software for Retail and Restaurants by RBR. Additionally, we are the number one independent provider of Digital Banking applications. I am proud of the solid profitable foundation for growth that NCR Voyix has built upon. Our deep industry expertise, market-leading technology and strong customer relationships are instrumental in sustaining our industry-leading position and healthy margins in this space. We serve customers of all sizes, ranging from small and medium-sized businesses to enterprise blue chip companies that represent some of the world’s leading consumer brands.

We have longstanding relationships with our customers who recognize the value our critical applications provide for their businesses. All of our customers face the challenge of differentiating their customers and associates experiences. This requires modernization of their technology. We have made significant progress over the last few years, transitioning from our legacy hardware-only products to our market-leading cloud-based SaaS solutions. This requires shifting our product focus and go-to-market approach, moving from a product focused approach to becoming a business-critical solution provider to our customers. Our goal is to be the one-stop shop for the technology our customers need to run their businesses. And as a result of these efforts, we have seen our revenue model shift to higher recurring revenue.

In the third quarter, our recurring revenues comprised more than half of our portfolio, representing 56% of total revenues and we are predicting this to grow to approximately 65% by 2027. These are high margin revenues that are predictable and foster long-term relationships with our customers. Please turn to slide eight. As we think about our near- and long-term opportunities, we have a well-defined strategy focused on three areas, grow, monetize and expand. Let me provide further details for each area. First, grow, we will capitalize on secular growth trends to expand alongside the market. This includes acquiring new customer logos and converting existing customers from hardware products and one-time software license sales to our platform-based solutions, thereby reinforcing our recurring revenue streams.

Next, monetize, we will drive revenue and ARPU expansion by offering additional value-added services to our customer base and capturing a larger share of wallet. And finally, expand, we will expand margins and improve profitability through our high margin value-added services. In addition, we have also launched productivity initiatives to drive efficiencies across the organization. In a growing market that continues to evolve through this fast paced environment, we are incredibly excited about the opportunity and runway in front of us. With a strong leadership team that are experts in the industries we serve, we are enthusiastic as we embark on our journey to deliver and create value. Please turn to slide nine. We have a great portfolio of solutions that enable us to deliver platform-based end-to-end technology solutions perfectly tailored to meet our customer’s evolving business needs.

For our Retail and Restaurant customers, we deliver modern cloud-based solutions to help simplify their technology infrastructure and effectively run their Restaurants and stores. We lead with our point-of-sale software, which is the heartbeat of the store to create a sticky application for customer loyalty and longevity. From there, we are able to deliver SaaS-based services via our platform, utilizing cloud-native services and open APIs. Our comprehensive technology suite supports transactional, inventory and customer data, as well as pricing and promotions. Similarly, our Digital Banking solutions allow financial institutions to deliver a digital-first differentiated experience. Banks are looking to transform branches to create a simple and convenient method for attracting and onboarding new customers.

They want to deliver advanced advisory services and reinvent self-service banking through expanded transaction access and on-demand virtual systems. We are in a unique position to enable banks and credit unions to accelerate their strategies to create an entirely new customer experience and we are the only provider offering a unified customer experience for both digital and physical channels. There are a few notable third quarter examples that I’d like to highlight. Beginning with our Retail segment, designer brands implemented self-checkout and signed a contract to convert their point-of-sale and self-checkout software to subscription across over 2,000 lanes. This added platform capability to drive valuable store insights from our analytics package.

Within our Restaurant segments, our team grew our platform sites by 388 and our payment sites by 517. In SMB, our payment attach rate for new customers remains at approximately 90% resulting in a 41% increase in payment sites. In the third quarter, Uncle Julio’s, a Tex-Mex chain with 44 sites focused on delivering made from scratch culinary experiences became an Aloha Essentials subscription with Payments customer. This is a perfect example of NCR Voyix helping an emerging chain accelerate its business growth. In enterprise, Papa Murphy’s who has been a customer of NCR Voyix for nearly 15 years, recommitted to our software with a new three-year Aloha Essentials subscription. Since connecting to our platform, they have been able to alleviate pain points and reduce cost while providing a seamless experience for their customers at more than 1,000 locations.

These examples are indicative of the value our customers see in our platform. Turning to our Digital Banking segment. We continue to demonstrate positive momentum. In the third quarter, Digital Banking sales activity was strong with five new customer deals and 21 Digital Banking renewals. We also continued to experience strong cross-sell and upsell momentum, particularly with our channel services platform or CSP and Terafina, our digital account opening platform. We recently hosted the highly successful Accelerate 2023 Digital First Banking Conference in Nashville, Tennessee. With over 900 attendees, including customers, prospects, partners and industry analysts, the conference generated a powerful impression of NCR Voyix as an innovative, customer-focused and industry thought leader.

This was our highest turnout ever and it was a fantastic opportunity to connect with customers and prospects which garnered great interest in high value orders. Financial institutions have increased their focus on deposit growth, which is translating into reevaluating their Digital Banking solutions and driving strong demand for NCR Voyix digital-first banking platform solutions. We are making excellent progress accelerating growth in Digital Banking by deepening our existing relationships, signing value-added services and creating a pipeline of new deals, demonstrating the value our partners see in our solutions. Before I turn the call over to Brian, I’d like to highlight some of our financial results for the combined NCR Voyix segments I just described.

Recurring revenue grew 7% in the quarter, reflecting our strategy to shift our portfolio as we focus on our software-as-a-service model. This quarter, recurring revenue accounted for 56% of total segment revenue, representing an increase of more than 340 basis points from the prior year. We also gained operating leverage growing segment adjusted EBITDA by 2% on a constant currency basis and expanding segment adjusted EBITDA margin by 90 basis points compared to the prior year. Now I will turn it over to Brian, who will take you through the details of our segment results.

Brian Webb-Walsh: Thank you, David, and thank you everyone for joining our call today. It’s an exciting time at NCR Voyix. We have certainly accomplished a lot in a short period of time, which is a testament to the talent, dedication and experience of our employees. As Michael stated at the opening of our call, the focus of my discussion will be on the NCR Voyix segment results. Our growth rates presented are on a constant currency basis for better comparison purposes. Please turn to slide 11. In the third quarter, total segment constant currency revenue was flat compared to the prior year and on a year-to-date basis, total segment revenue grew 2% compared to the prior year. For Q3, this includes a 3-point headwind from shifting upfront revenue to recurring.

These results reflect our strategy to connect our customers to our SaaS-based platform. Software and services growth offset the decline in hardware revenue, which resulted from the post-COVID bump in the prior year. For the third quarter, constant currency segment adjusted EBITDA increased 2% to $249 million and segment adjusted EBITDA margin expanded 90 basis points to 26.1%. Year-to-date, adjusted EBITDA for the combined segments increased 13% over the prior year and adjusted EBITDA margin expanded 240 basis points to 24.3%. These improvements to adjusted EBITDA were driven by the mix shift from hardware products to our SaaS-based solutions and services, along with cost initiatives that we implemented to improve efficiency. Please turn to slide 12.

As I stated on the previous slide, segment constant currency revenue for the third quarter was flat compared to the prior year. However, recurring revenue increased 7% over the same period. As of the third quarter, recurring revenue for the combined segments represented 56% of total revenue, an improvement of 340 basis points over the prior year. These results reflect our strategy to shift customers to our SaaS-based platform and build our recurring revenue streams. As we have previously discussed, the key tenets of our strategy include retaining our base, upgrading existing customers to the platform and securing higher margin recurring revenue streams via subscription model. Going forward, we will continue to highlight recurring revenue as we believe this important metric illustrates the ongoing shift in our portfolio and we expect recurring revenues as a percent of total revenue to increase over time.

Now let me provide details on each of our segment’s performance, beginning with Retail. Constant currency revenue for the Retail segment declined 2% from the prior year. Recurring revenue increased 3% and represented 47% of Retail revenue in the third quarter, reflecting the shift to our SaaS-based revenue streams. Our Retail portfolio remains healthy and the underlying fundamentals are growing nicely. In the quarter, we more than doubled the number of Retail platform sites compared to the prior year, which is now over 27,000. Annual recurring revenue or ARR, grew 4%, year-to-date, constant currency revenue for the segment increased 2%, recurring revenue increased 3% over the prior year and represented 46% of Retail revenue. Constant currency adjusted EBITDA was down 1% compared to the prior year, adjusted EBITDA margin was 23.2%, which represented an expansion of 90 basis points from the prior year.

These results were driven by the positive mix shift, the higher margin software and services recurring revenue. Year-to-date adjusted EBITDA grew 21% and adjusted margin expanded 300 basis points over the prior year to 20.8%. The improvement in adjusted EBITDA for both the quarter and the year reflect a positive mix shift, cost discipline and normalization of the supply chain. Turning to slide 14. Constant currency revenue for the Restaurant segment was $238 million in the quarter, which was flat compared to the prior year. Recurring revenue grew 12% over the prior year and represented 59% of the total revenue in the quarter. Similar to the Retail segment, Restaurant revenue reflects the shift to our SaaS-based model, our Restaurant performance in the quarter is supported by growth across the underlying key performance indicators.

Compared to the prior year, the number of payment sites grew 41% to more than 6,300 sites and the number of platform sites grew 7% to nearly 31,000. ARR grew 10% to $560 million. On a year-to-date basis, constant currency revenue grew 1% over the prior year. recurring revenue grew 10% and represented 59% of revenue. Q3 constant currency adjusted EBITDA grew 16% and adjusted EBITDA margin expanded 340 basis points over the prior year to 24.8%. Year-to-date adjusted EBITDA grew 24% and adjusted EBITDA margin improved 460 basis points over the prior year to 24.7%. Our adjusted EBITDA improvement for both the quarter and the year reflects the mix shift of the Restaurant portfolio, as well as disciplined cost management in the segment. Turning to slide 15.

Digital Banking had another strong quarter, having exceeded the Rule of 40. Revenue for the Digital Banking segment grew 7% over the prior year to $147 million and recurring revenue grew 9%. The strong revenue growth was driven by client wins, strong renewal momentum and cross-sell success for both Terafina and the channel services platform. We expect growth to continue to accelerate as we exit the year. Compared to the prior year, the number of registered users grew 5% to $28 million and the number of active users grew 3% to more than $19 million. ARR grew 9% to $520 million. On a year-to-date basis, revenue grew 5% over the prior year and recurring revenue grew 6%. Third quarter adjusted EBITDA declined 3% and adjusted EBITDA margin declined 430 basis points to 39.5%.

On a year-to-date basis, adjusted EBITDA declined 7% and adjusted EBITDA margin was down 480 basis points from the prior year to 37.8%. Both adjusted EBITDA for the quarter and year-to-date reflect our increased investments in sales and marketing and technology to accelerate growth for this segment. Before we open up the lines for questions, I’d like to highlight that in early Q4, we divested a non-strategic portion of the assets relating to our payments business, consisting primarily of merchant contracts, our front-end authorization platform and certain IP for cash proceeds of $82 million. Payments remains an important part of our strategy. The divested business generated roughly $40 million in annual revenue and approximately $25 million in annual adjusted EBITDA.

Investing in this portion of our business changes the baseline for revenue and adjusted EBITDA we discussed at our Investor Day. However, our view on our go-forward modeling for revenue growth rates and adjusted EBITDA margins remains as previously described. We have a clear strategy for growth in a large growing market where we can take share, our sustainable competitive advantages include our solid financial foundation, a resilient business model, longstanding customer relationships, industry-leading cloud-based solutions and world-class customer service. This is why we win today and why we will continue to win long term. With that, I will turn the call over to the Operator to begin our question-and-answer session. Operator?

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