Good day and welcome to the NCR Corporation Third Quarter Fiscal Year 2019 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Michael Nelson, Vice President of Investor Relations. Please go ahead.

Good afternoon, and thank you for joining our third quarter earnings call. Joining me on the call today are Mike Hayford, President and CEO; Owen Sullivan, COO; and Andre Fernandez, 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 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 7, 2019, and on the Investor Relations page of our website. A replay of this call will be available later today on our website, ncr.com. With that I would now like to turn the call over to Mike.

Thanks Michael. And thank you everyone for joining us today for our third quarter earnings call. I will begin with an overview of our third quarter performance and an update on our progress executing against our strategic initiatives before turning it over to Andre, who will review our financial performance as well as discuss our updated outlook for 2019. Then Owen, Andre and I will take your questions. I'll begin on slide 4 with the highlights from the third quarter. Our third quarter results marked the continuation of several key trends, including improved execution and a strong top line growth. During the quarter, revenues increased 17% on a constant currency basis. Growth was once again led by our banking segment with 21% constant currency growth and ATM revenues up 60% constant currency, but it also included diversified sales growth as each of our business segments generated double-digit gains. We are building on the momentum in our core business through the further advancement of our strategic growth platform. While we remain in the early stage of our rollout, customer response thus far has been positive. I'll provide an update on our strategic growth platforms in a few minutes as well as our broader payments integration, which also remains on track. We took multiple strategic steps this past quarter to simplify our capital structure and improve our liquidity and financial flexibility, including refinancing our debt to extend our debt maturities and retiring 57% of our preferred stock. This enhanced financial position is critical as we continue to invest in organic and inorganic opportunities to accelerate our growth and advance our recurring revenue strategy. Finally, we are again raising our full year 2019 revenue outlook and reaffirming our earnings and cash flow guidance. Andre will discuss this in greater detail during his remarks.…

Thank you, Mike. Slide number 8 shows our banking segment results. Banking revenue increased 21% in constant currency led by a 60% constant currency increase in ATM hardware revenue. Driving ATM revenue this quarter was both double-digit growth in ATM orders as well as a significantly higher backlog conversion rate as our manufacturing initiatives have resolved many of the supply and capacity constraints we experienced last year. While the fourth quarter will be a difficult comp for us on the ATM side due to a strong Q4 of last year, we exited Q3 with a solid backlog position. Software related to ATMs combined with growth in services revenue also contributed to the increase in segment revenue. We continue to grow our hardware maintenance backlog a future annuity stream both from the ATM revenue as well as from large customer win this year to service non-NCR fleets. We continue to see a stronger than expected ATM replacement cycle in addition to Win 10 upgrade with strength in the quarter in the Americas and in Europe. Finally, as Mike said in his remarks, we signed an increasing number of deals in banking software this quarter on which revenue and margin is being recorded over time compared with perpetual license deals in prior years via which revenue and margin had been recorded upfront. As a result, we are growing both ACV and TCV in this segment. And as we've mentioned on prior calls are working to determine the appropriate metrics to communicate our progress in 2020 and beyond, as we shift to a higher recurring revenue model. While embedded in the financial performance of our banking segment this quarter and year is the success we've had in migrating from perpetual to subscription-type deals this shift to recurring is representing an increasing headwind to…

Thanks Andre. In closing, we delivered solid third quarter results that included a number of financial, strategic and operational highlights. First, we continue to execute at a high level and have increased our outlook for the year given the strong top line growth we generated in quarter three. At the same time, our targeted investments in our strategic growth platforms remain on target and early response from our customers has been very positive. The progress we have made with our strategic growth platforms and our broader integrated payments offerings, are clear indications of our commitment to driving increasing recurring revenues. We are in the early innings of a multi-year journey to shift revenues to recurring model and continue to be pleased with the progress we are making. In addition, execution of our growth plan will be supported by increased strategic flexibility provided by improved capital structure. We entered the fourth quarter with momentum across all of our business and a clear commitment to further executing on our strategy and driving accelerated growth. We will continue to allocate capital to the highest growth and return opportunities with the goal of driving free cash flow generation and increasing returns for our shareholders. Thank you for your time today. And with that, Andre, Owen and I will take your questions.

[Operator Instructions] And we'll go first to Dan Perlin with RBC Capital Markets.

Thanks. Good evening. Nice progress. I wanted to start if I could on the shift towards subscription. Mike you outlined a lot of meaningful transitions in these products that you're bringing to market. The one I really want to hone in a little bit more on is in the banking side. So, the first part of the question is you talked about signing 29, I think new deals that would otherwise been up in license. I'm trying to make sure I understand what that piece of software is. Is this more branch related? Or is there something else that's happening? It's clearly not digital insight. So I'm just trying to wonder where is that coming from?

All right. I mean so obviously digital insight is already a SaaS-based product. But the other products that we were selling in banking that might have been some of the transaction switching products might have been some of the branch products it might have been some of the add-on ATM product, fraud products. What we did at the start of the year as we said, we would prefer not to do perpetual licenses anymore and we would like to move to hopefully subscription if not subscription move to a term-based license that recurs over a period. And the team has actually done a very nice job of getting out and marketing to that. And so that's what we just -- we were reflecting in the third quarter that we've had very strong success. That particular team has really marched through all their product set. And as they go to sell that, that's the way that they're selling. And third quarter I think that was what we did on every transaction we did. So we just want to call out that we're moving probably a little bit faster than we had anticipated at the beginning of the year. But as I said in my close, this is a multiyear journey to get it shifted to all of our products. But in that particular segment we did a good job.

Okay. In -- and just in order of magnitude I was always kind of under the impression that Aloha in particular just hospitality in general was going to be a big area that we needed to focus on, in terms of the shift? But again you kind of outlined this very broad brush of products. So one I guess are we be right to assume that we need to maybe stay more focused on Aloha in that transition? Or are there other things that you'd point us to? I suspect you're not going to give us any insight yet in terms of 2020 kind of just as a first look there. If you wanted to that'd be great. But if not just point us in the right direction there?

Yes. You're correct about that Dan. We probably won't talk about 2020 today. But with respect to 2019 and where we're going to see what we're starting to see in terms of transition to recurring. We will move and we are moving -- we retrospect the bulk of the Aloha deals that are being sold as Aloha Essentials which is a bundling of our software, our hardware, our service footprint, the support footprint as well as payments attached to that. And so, we've actually had a lot of success in the markets where we control the direct channel. I think we said 65% of those sales are Aloha Essentials. And naturally we actually hope those numbers continue to tick-up. The only caveat I'll say to that, so each one we do we've already -- historically there was a component of Aloha that was sold as a cloud. The service side was really done as a subscription. So there's a piece of it that is now shifting from an upfront fee to a subscription-based fee. So that is actually having -- had an effect of stretching out revenues as opposed to taken upfront. The banking side those were coming in as upfront license. And although those numbers at a macro level in terms of revenue numbers aren't huge, those numbers typically would drop all to the bottom line. So they do have adapting impact on earnings as we go through 2019. And again we talked at the beginning of the year that we plan to have some level of transition. We're seeing the transition. It's going a little better than we had anticipated. But it's still just a bunch of small transactions that eventually will add up to big numbers, but that will take literally years to get there.

Thank you.

And we'll go next to Matt Summerville with D.A. Davidson.

A couple of questions. With respect to the hospitality business, can you talk about in Q3 and maybe on a year-to-date basis the dampening impact that you're seeing as it relates to the investments you're making in Silver, the investments you're making in the Aloha product and when we start to see that taper-off and therefore margins and profitability inflect to the upside?

Specifically to the third quarter, the third quarter obviously we were down a little bit year-over-year. There were a number of things that hit. Some are coming off the balance sheet in terms of actually some receivables and some other spend that we had done that came off the balance sheet. And then others were direct expenses in the quarter to really improve service, service delivery. And then again as you referenced that driving some of the Silver wasn't related to marketing spend. So had we not had some of those items we actually would have minted a pretty decent quarter for hospitality. Fourth quarter I'd say we still continue. And just to put it into perspective we are still very bullish on hospitality. So we're actually -- what I would say is invest mode. Invest mode on products. So we're building out Aloha next gen. We're already half cloud. We're just finishing up some of the other products putting them as a cloud-based subscription product. We talk about rolling out Aloha Essentials that's just going to market bundling all the products along with payment. And that's been very successful. But we're also spending money to improve our service or quality of the product because we're out there competing with a lot of small competitors who quite frankly don't have to make earnings. And we want to make sure that we can pick up market share and compete in that market. So I think fourth quarter, I wouldn't see the inflection point bouncing back up as we head into next year. We talked about our outlook into 2020. At the beginning of the year we'll kind of share where we think hospitality is going into next year.

And then as a follow-up just with respect to Digital Insight. In the past, in couple of quarters you maybe talked on the call about, what you've done there in terms of new wins. Any attrition, maybe some commentary there and if there's any initial successes that you could talk about with respect to D3, realizing it was only acquired a couple of months ago but nonetheless looking at that as well.

Yeah. I mean, I'll start with D3. We talked about the one, really right after we closed that deal. We signed a provider it goes as a whole solution set of banking products in the marketplace, NYMBUS. And they signed up to use D3 as their digital banking platform. So we completed that transaction. On DI has some numbers on deals. I will say that in 2019 -- and again a lot of us got here kind of mid-2018. In 2018 and into 2019, we've been very focused on retention. And we feel really good about 2019. I don't know. We were scratching our heads the other day. We couldn't come up with a single name of a law for our DI customer base in 2019. And hopefully, we'll get through the year. So, I think, we talked the first quarter about picking up about seven new deals, right? And we didn't give you all the business banking add-on these types of new flags that we were planting to customers. We had a good second quarter and third quarter. I don't know, Owen if we have the numbers. But we continue to see momentum rebuilding. We had our digital banking client conference in Atlanta, in the third quarter and had a record crowd attend. And just a great reception for not only the product, but all the enhancements we've done specifically focused around adding business banking DI. We've opened up the API, so people could extend and customize on their end. And we've improved the delivery on the mobile side. And have what we think is the best mobile platform out there. So we're still very excited about DI.

Yeah. The only thing I'd add to that is in terms of our renewal rate we had no losses this year. And that was down substantially from the number that we had last year. And on average our renewal rate was about 11% increase on revenue, under these renewals. So, we're seeing good organic growth within the customer base, as they add users. And we're able to capitalize on that. So, really good momentum, our customer satisfaction level as Mike referenced our conference, but we do Net Promoters Score. And it was materially improved year-over-year. So, team's doing a nice job.

Thank you, guys.

And we'll go next to Katy Huberty with Morgan Stanley.

Thank you. And congrats on the strong quarter, a couple of questions on guidance, the new full year revenue range implies, I think, 4% decline in December. What drives the slowdown which is a little bit worse than prior guidance, would have implied? And then you're raising the full year revenue, but not adjusted EBITDA. Why aren't you seeing the margin flow through which seem to come through some in the third quarter?

Yeah. Let me just start and then Andre can give you a little more detail. So we're -- as we look at the revenue beat second quarter we had revenue beat. Third quarter as we look at the full year we brought up our revenue outlook. Just keep in mind we had a little bit easier comps in the second and third quarter. Fourth quarter of last year was a very difficult comp because we had a lot of backlog particularly on the hybrid side of the ATM, on the SCO side. If you remember last year third quarter, we had a lot of challenges in the manufacturing plant. So this year third quarter was very strong as you can see. And so as we look at going into fourth quarter, year-over-year, last year we had the shift of third quarter orders that ended up being shipped and booked in fourth quarter. So we don't have that, phenomena this year. I mean, we still feel really good about where we're going to end up the year. But as you look at the math maybe it's -- our outlook came back like you said. On the earnings, so with revenue going up, a lot of the revenues going up from the hardware which as we've talked about in the past, the hardware has been running at a negative margin. So we don't pick up a lot of margin there. But just maybe a little color around earnings for the year. We really -- if you think about three different buckets and I'll go through the three. So if we put together all the kind of transactional things the refi had a negative effect. We did the Blackstone preferred where we took that out. We had a negative FX. And then, I'm…

That's very helpful. Thank you.

And we'll go next to Tim Willi with Wells Fargo.

Thank you. Good afternoon. I have two questions. One, you referenced strength in Europe. And I'm sure you're aware of the competitor that seem to point to some weakness in that market. I guess, I'm just sort of curious, if you have any color on context as to why I guess you experienced different outputs during the third quarter around that region. And I had a quick follow-up.

Yeah. I don't want to try to anticipate or predict what one of our competitors said. But looking at some of the points they raised we just haven't seen some of those things. We looked at challenges in different marketplace whether it's EMEA or Europe or Asia or Latin America. Certainly, North America has been strong. But I don't – we clearly haven't seen a dampening impact either in the third quarter. As we look forward, we don't have any less optimism about the future than we'd have going into any other year. So I – we felt really good about third quarter as you can probably tell by the numbers that we minted. And just haven't seen some of those things impact us. We feel that our product particularly the ATM side the Series 80 product is winning the marketplace against our two major competitors. And that's probably what we're starting to see flow through the numbers in the third quarter. We also think our service delivery on our global services that we deliver along with ATMs and with SCO is starting to differentiate in the market. And we're picking up some market share there and we're starting to see that impact positively. So I can't really tell you anything relative to our competitors other than we we're continuing to have really good success.

Second, [Technical Difficulty] I know people pull or I think were [Technical Difficulty]

You're breaking up there, Tim.

You didn't hear? No I apologize. Can you hear me?

Yes.

Could you just talk about the [Technical Difficulty]?

Did you guys -- I can't really.

Yes, Tim. We did not

Tim give us a like a subject area that you're trying to get us to respond.

And we'll go next to Ian Zaffino with Oppenheimer. Ian Zaffino, your line is open. Please proceed.

Hey, guys. This is Mark on for Ian. Thanks for taking obsession, Just a quick one on the balance sheet. It seems like leverage has ticked up a bit this quarter. Are you guys comfortable here? Or is there a target you guys are looking to get to? And are there any changes in your thinking around capital allocation? Thank you.

Let me – yes it ticked up slight. And again, we executed the transaction to take the preferred that Blackstone had held. So we had an opportunity in talking with them. And from our perspective we were not – at least this management team has done all that bond we put in our capital structure. So we saw an opportunity to take it out. And we've had a very attractive price. And as part of that we had to take on a little debt to buy them out. But I don't – we're not changing the range of debt that we plan to be in. We are a little ahead on our share repurchase because of that transaction. I'll let kind of Andre just give a sense of where we expect to be.

Yeah. I think I touched on it in my prepared remarks. Our debt ticked up a little. We bought back shares the $96 million. There was the D3 acquisition which was 74 net and then the 300 on the preferred. So – but you can see on I think slide 12 we're only at 3.1 net debt to EBITDA. And even within the construct that we've laid out at the beginning of the year and continue to follow that. And we generate recall most of our free cash flow in the fourth quarter. That should put us under three times net debt to EBITDA by the end of the year.

And what just – so what we have said and we still – so we like to be around three. We'll flex up to 3.5 if needed which we did a little bit here to go above three. We – our capital allocation policy has been to take out dilution from stock issued as part of compensation plans or stock issued as part of the PIK on the preferred. We've done that. We did that with the buyback that we did about the $96 million. We're ahead of that a little bit because of the preferred buyback. So, our share repurchase is a little bit higher than we had anticipated or would plan to do. We're going to look to do M&A. So, you see us doing M&A at a level. And then we'll always look and see if we don't have M&A, we don't have other opportunities we would pay down debt if appropriate. But we haven't really changed how we're going to treat capital allocation.

Okay, terrific. Thank you very much guys.

And we'll go next to Paul Coster with JPMorgan.

Hey guys, it's Paul Chung on for Coster. Thanks for taking our questions. So, just on ATMs can you talk about the growth drivers in the quarter? Where do you see some particular strength in regions? Did you have any kind of large deals in the quarter? And can you share how regional bank demand is trending? And finally, how -- is there any kind of ASP lift you're getting relative to last year?

I mean I'll have -- I want to kind of walk through the regions. And again -- so, we still believe that we're continuing to I don't want to say outsell. Our sales teams have been doing a phenomenal job this year. But we think our product, our Series 80 product which really tried to roll out at scale in 2018 is winning in the marketplace literally around the globe. So, that helped drive a lot of our sales. Obviously, our manufacturing plant is up and running versus last year. It's been phenomenal. The team has done a great job. But Owen you want to kind of cover regions?

Yes, I would say across all of the regions EMEA, North America, and South America, all teams fired fairly well. We saw contributions from all of those markets within the segments. Here in the U.S., the large banks continue to refresh. A lot of them driven by Win 10, but not all of that activity is Win 10 based. We're clearly seeing the community bank market respond and I think what we're seeing across the board is response to a Series 80 product line. It's -- the receptivity was tremendous last year. It has only continued to improve. So, we're seeing all the geographies. Asia-Pacific as we've talked about in the past has not been a growth market for us for a while since we stepped out of China. But all of our other markets contributed well. And within those markets, all of the segments continued to perform well for us. And to Mike's point, our sales team has done a great job capitalizing on opportunities, working with our own installed base, and looking at opportunities and other installed bases to capitalize on. So--

Great. And then as we kind of think about and shape next year you're hitting some tough comps in 4Q as we move forward. But how should we think about kind of the momentum heading into next year? I know that it's early, but if you could give any kind of color there that would be great. Thank you.

Yes. And again we don't want to really get into -- give you an outlook for 2020 yet. But as we looked at our business, we had a really good second quarter. We had an even better third quarter. ATM growth year-over-year was 60%. Now, we had a little bit easier comp but we still had outstanding ATM numbers in the third quarter. As we start to look forward, we talk -- people have talked about Win 10. We still look at our footprint and we still see about two-thirds of our installed fleet as not being Win 10 ready, so we don't think everybody's addressed Win 10 yet. Those tend to come in. Sometimes specifically Win 10 order because it's a core upgrade. But many times it's hard for us to differentiate when somebody orders a new box whether they're replacing it to get ready for a Win 10 or whether it's just a normal upgrade cycle. So, we have highlights to look forward a few quarters in its own reference. Really all the geographies all our lines of business of community banks, the regional banks, larger banks continue to look positive for us.

Thank you.

And we'll go next to Rob Wildhack with Autonomous Research.

Hi guys. I wanted to ask about the most recent acquisition which was Midwest POS. That follows on from Texas P.O.S. earlier in the year. Can you remind us of the strategy around these smaller regional-type deals? And do you think there's a long list of potentially attractive targets here such that you keep pursuing these types of acquisitions?

Yes. So, effectively we're teaming up with distributors or partners that have been serving in a region. Our point of sale is playing itself for hospitality for the restaurant space. And we look at it from a couple of different aspects. One is quite frankly, these deals generally are accretive very quickly. So certainly in year and sometimes quickly the same quarter. So financially, it's a good transaction for us. But more importantly, as we look at how we go-to-market with our hospitality product specifically with Aloha, whereas in the past, we are selling hardware and then a software stack, we're now going on and selling a bundle, where we're selling hardware software services all together. We're selling it as a subscription and we're selling it with payment. So the Aloha product that we're going out to market. And we talked about where we have local channels where we actually own the local market -- and we're going out marketing a bundle, we're seeing a 65% success rate selling Aloha Essentials versus the traditional way of selling point solutions. When we don't control that channel, the numbers are much lower. It's just more difficult to get the channel partners who are doing a good job of just getting them scaled and getting it and go out in market, not only bundle but subscription and also payments attached to that. So from business strategy, we'd like to do that. And then lastly defensively we've seen competitors particularly some of the ISOs go out and got left for a payment stream go up in the POS. So we feel it's a strategy that a we can make money at very quickly; two strategically it helps us grow that business; and three helps us defend our position. So I guess, the quick answer is yes, we would continue to look where there's opportunities. Sometimes we approach a distributor, sometimes they approach us, but we would continue to look and try to do more of those. I think we have a...

At this time, I would like to hand the call back to Mike Hayford for any additional or closing remarks.

Thanks. Thanks everyone for joining us today. Just to close, we're pretty excited and proud of the progress that we made in the first three quarters of this year. As I mentioned before, we're in the early innings of a multiyear strategy to do the shift to recurring revenues under a subscription model. We continue to remain confident that this strategy will pan out and create long-term shareholder value. I want to thank everybody for joining us today. We look forward to speaking with you over to the fourth quarter call in early next year. And then hopefully, you can all join us in early May. We're planning in early May to hold an Investor Day. We're going to do that here in Atlanta at our headquarters. Thank you again.

That does conclude today's conference. We thank you for your participation.