Good day and welcome to the NCR Corporation Second Quarter Fiscal Year 2021 Earnings Conference Call. Today's conference is being recorded. At this time, I will turn the conference over to Mr. Michael Nelson, Vice President of Investor Relations. Please go ahead sir.

Good afternoon, and thank you for joining our second quarter 2021 earnings call. Joining me on the call today are Mike Hayford, President and CEO; Owen Sullivan, COO; and Tim Oliver, CFO. Before we get started, let me remind you that our presentation and discussions will include forward-looking statements. These statements reflect our current expectations and beliefs, but they're subject to risks and uncertainties that could cause actual results to differ materially from those expectations. These risks and uncertainties are described in our earnings release and our periodic filings with the SEC, including our annual report. On today's call, we 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 August 3rd, 2021, 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 second quarter 2021 earnings call. I will begin with some of my views on the business including an update on the Cardtronics transaction and the LibertyX acquisition we announced yesterday. Tim will then review our financial performance and an outlook into the second half of 2021. And then Owen, Tim and I will take your questions. Let's begin on Slide 4 with some highlights from the second quarter. NCR delivered strong performance that included accelerated revenue growth, significant margin expansion and strong cash flow production. The team drove solid execution across all segments, and we're continuing to build momentum in our NCR as-a-Service strategy. In the second quarter, we delivered 13% total revenue growth. This includes 11% growth from NCR stand-alone and an incremental 2% growth for the 10 days following the close of the Cardtronics transaction. NCR stand-alone recurring revenue growth grew 11% over second quarter of 2020. Adjusted EBITDA increased 40% while adjusted EBITDA margin expanded 330 basis points to 16.8%. We delivered strong free cash flow, we generated $142 million of free cash flow in the quarter. This is the fifth consecutive quarter of positive free cash flow. And finally, we closed the Cardtronics transaction and announced the definitive agreement to acquire LibertyX, a leading Cryptocurrency software provider. The combination of NCR, Cardtronics, and LibertyX will accelerate our Digital First strategy and enable NCR to offer a digital currency solution to our customers. Now moving to Slide 5. I wanted to provide an update on the Cardtronics transaction. Although the transaction closed on June 21. It is still as we expected under U.K. antitrust regulatory review. While under review, we are required to operate independently and although integrating activities have been planned execution of these…

Thank you, Mike and thanks to all of you joining us today. As Mike mentioned, our second quarter results are reflective of strong operational execution, accompanied by significant strategic progress. We closed the Cardtronics transaction on June the 21st. In the 10 days that followed Cardtronics contributed $32 million of revenue and $8 million of adjusted EBITDA that is included in our Banking segment. While our financial results will only include those 10 days for context, where Cardtronics have reported a standalone second quarter on their historical basis, they would have described a very successful quarter with approximately 26% revenue growth and 77% EBITDA growth year-over-year, they would have reported gross margin of more than 40% and record EBITDA margins of 28%. My first slide is Slide 7, which presents a top level overview of our second quarter financial performance. So starting in the top left, consolidated revenue was $1.68 billion, up $193 million, or 13%, versus the 2020 second quarter driven by very strong growth in both our Retail and Hospitality segments, and more modest growth in banking. Our software and services businesses grew in the high-single-digits while hardware paced by SCO and POS grew faster than that for the quarter. Revenue was up $133 million, or 9% sequentially. On an NCR standalone basis, revenue increased 11% year-over-year, and 7% sequentially. Importantly, our strategy to shift to recurring revenue streams again accelerated, recurring revenue was up 11% calculated on a standalone basis and comprise 55% of our revenue in the quarter. In the top right, adjusted EBITDA increased $80 million, or 40% year-over-year to $281 million, including $8 million from Cardtronics. Adjusted EBITDA margin rate expanded 330 basis points to 16.8%. This improvement is a direct result of the more than $150 million in recurring cost savings executed at…

Thanks, Tim. Now turning to Slide 14. I wanted to provide an update on the definitive agreement to acquire LibertyX, which is a software based Cryptocurrency solution. This is a unique opportunity that will enable NCR to provide a complete digital currency solution, including the ability to buy and sell Cryptocurrency, conduct cross border remittance, and accept digital currency payments across digital and physical channels. LibertyX has one of the largest deployment footprints through partnerships with ATM operators like Cardtronics at physical locations including convenience stores, pharmacies and supermarkets. Our key markets are very complimentary and will help both companies grow. This acquisition continues our strategy to digitally engage with consumers and provide retailers and banks additional solutions for their customers to pay, transact and remit. Now turning to Slide 15. Looking forward, our key priorities are clear. First, we are eager to capitalize on the opportunities that Cardtronics brings us. We are excited to leverage Cardtronics to accelerate ATM as-a-Service, broaden our retail business and increase our payment offerings. Second, we will expand our solution portfolio to include a complete Cryptocurrency offering. Our digital currency platform will allow consumers to buy and sell Cryptocurrency across digital and physical channels. Increasingly, retailers are looking for a broader set of financial transaction capabilities, which we are uniquely positioned to deliver on financial kiosks and ATMs. Third, we will continue to allocate capital with the highest growth and return opportunities with the goal of driving free cash flow and increasing returns for our shareholders. Fourth, we will continue to focus on customer satisfaction initiatives. Since I arrived at NCR three years ago, we have been keenly focused on improving customer satisfaction. With the simple belief that happy customers will buy more. We strive to garden our larger share of wallet with the mission to help our customers run the store, run the restaurant, and run self-directed banking. Our focus is paying dividends as our net promoter scores a significant improvement last year, and we continue to strive for further improvements. And lastly, I'd like to extend an invitation to each of you to participate in our Investor Day, which is scheduled for December 9th of 2021. We are looking forward to the event and intend to take a deep dive into our strategy and update on our strategic goals. That concludes our prepared remarks for today. With that we will open the call for questions. Thank you for your time and operator please open the line.

Thank you. [Operator Instructions]. Our first question comes from Katy Huberty from Morgan Stanley. Please go ahead.

Thank you. Good afternoon, Tim, first question for you around just reconciling the second half EPS guide. If I think about the business standalone in the first half, you did $1.15 of EPS, normal seasonality would put you in the $1.40 plus range just for the core business in the back half. And you're talking about accretion from Cardtronics. So, just if you can help us understand if there are some pressures in the core business, that is suggesting less than normal earnings seasonality, or if there's some below the line items that we should be thinking about, then I have a follow-up.

Yes, so I don't think it's on the revenue line, it's very much the way we expected it to play out. We've tried very hard over the last six quarters to stop doing the unnatural things that cause our years to be more backend loaded. And in fact, last fourth quarter was not that much higher than the third, certainly relative to prior fourth quarters, I think the same will be true this year. So this pattern of modest sequential improvement that we've been on is one I expect to continue. And I think another three or so percent organic growth quarter-to-quarter into the third and then another sequential growth into the fourth is probably a little bit higher, maybe 4% going into the fourth. So modestly backend loaded. But we're trying not to unnaturally pull things in to do things at end of quarters that causes to maybe compromise on price or anything else. So I think that was planned and probably compares reasonably well with one year back anyway for 2020. I think the biggest disconnect first half to second half is going to be the - I'd say 50 to 60 basis points of margin contraction, EBITDA margin contraction that I built into the model. And that's almost entirely attributable to a pressure that we're seeing in the cost structure. I think it's temporal. I think it goes away, once this passes but we've got some premium costs associated with parts, with freight, with expedites and with premium labor, we're trying not to miss a customer delivery. And thus far, we've not yet missed one. In fact, we've allowed our customers to even pull forward some delivery dates as they need them. And we've been able to make our supply chain work. So I think if there's a disconnect in people's models, especially when you play up calendarization, it would be in margin rates, our cash flow still very strong, tax rate at 26% in the second half similar to the first, probably a little lumpy, I think it's going to be 29% in the third and 22% in the fourth due to some tax stuff around the transaction that we just completed and some discrete events that are pulling back into the fourth quarter. I don't know does that get you closer?

Yes, that's helpful. Just a follow-up on your comment around supply chain and prioritizing timeliness and revenue over cost. Does that open up market share opportunities, because some of your competitors are talking about missing some revenue opportunities just given the supply chain?

That's exactly our thoughts - yes Katy, that's exactly our thought, we do not think this is a time that we should miss on orders.

Yes, and I would say, Katy, we're seeing that. This is all across the industries that it is opening an opportunity for us. And I will tell you that Adrian and George Sloan, who is our Chief Procurement Officer came in about 18 months ago, they've done a phenomenal job on a day-to-day basis, keeping the supply chain operating at a level that is allowing us to meet our customers' needs. And I'll tell you along with that is the quality has not taken any hits along that. So to Tim's point, we'll take little cost. But if it positions us to grab customer confidence and market share that that's a trade-off we're willing to make.

So if you think about the productivity we generated on a direct basis on our manufacturing services base, all of that was in place when we started the year. So we came into the year with significant productivity you saw in the first half, price inflation are getting weird feedback. Katy, can you still hear us?

Yes, I can hear you.

Okay, sorry, price inflation was relatively muted in the first half, we did a good job of holding on to with our vendors. It's clear in the second half there, we're going to need to relent a bit on costs on both freight and on part. And so I think that's what you're seeing in terms of the relative margin rate from first half to second.

Thank you for that. And then just lastly, Owen maybe you can comment on the timeline and the potential outcomes of the U.K. regulatory review. And if there's any scenario where that would impact your synergy assumptions?

Katy, this is Mike. Yes, so we have a very frequent conversations with the CMA to our legal team. And you may be aware they've posted an August 10 date where we expect to get some feedback from them. So, we'll look to that date to determine what next steps we have based on their feedback, so we don't have any color relative to what they're going to do at this stage. But we will get that soon.

And we don't anticipate any impact to our assumptions on cost synergies.

Thank you. Congrats on the quarter.

Thank you.

Thanks.

Our next question comes from Dan Perlin from RBC Capital Markets. Please go ahead.

Thanks. Hey, I wanted to revisit the supply chain question again a bit. I know it's kind of doubling what you're absorbing in the second half, is that a function of, as you said earlier conceding to people within the supply chain, or is that because you've got a larger footprint with Cardtronics? And then secondly on that, if I could just sorry go ahead, I will let you there real quick.

No, no, go ahead I'm sorry.

I would just say is there any risk that there's finished goods inventory that just doesn't get completed and or that even though you were willing to pony up price for logistics, there's just not enough to go around like just trying to really handicap that, that $40 million absorption number?

Yes, so $40 million is our best guess as to what we're going to experience primarily on cost associated with parts, and freight, we can see that pricing now, we're able to hold off a lot of that in the first half of the year. So I don't - we're very hopeful, there are ways to get that back, right, we can ramp-up our productivity efforts. And we're trying to do that, we can go back to our vendors and ask them for a little bit more help as we get into the second half of the year and hold on to this a little bit longer, we're doing that, we can try to pass some of that onto our customers in price and we will try to do that as well. So I'm not giving up on that $40 million. I just think as we sit here today, it's the prudent thing to do and to the point you made earlier, we'd much prefer to spend that $40 million and drive revenue growth and make sure our customers are happier, particularly happy with us, than to not spend that $40 million.

And then the idea around logistics was say not associated with cost, if you're willing to pony up the point, but what kind of supply and demand you have to have?

Yes, on the cash flow side, I guess we're getting that, our inventory levels are down significantly year-over-year thus far in the year down about 11% in the second quarter, really good progress in fact, every category of inventory was down. I suspect we may choose to invest a little bit in inventory as the year plays out. But I do not expect you saw our free cash flow guidance is pretty terrific maybe our best metric on the page. I don't anticipate having to compromise on that to invest in inventory.

And I would say, Dan, we've talked about this before, we've done an awful lot one and rebuilding that supply chain, as you recall, not too long ago wasn't where we needed to be. So we've got great partners and the quality that they're delivering for us and that collaboration is really outstanding. I would say the other thing which the business lines have done a really good job at is simplifying our product offerings. So what was a high customization, the market was looking for, we've simplified our products across all three business lines. It's allowing us to be much more responsive in terms of delivery time frames, it's also allowing us to be much more efficient with our raw material inventory, which is to Tim's point across the board our inventory right now is really in good shape.

Yes, that's really good to hear. And then just quickly on the banking side ex-Cardtronics, I think you called out weakness in ATM. I'm wondering if you can just comment around, what are some of the dynamics that you're seeing in the market where your bank partners suggesting to you, are they holding off for some reason that we need to be mindful of and is there any expectation that there's lumpiness in terms of how we think about it from a cadence perspective over the next couple of quarters? Thank you.

I'll hand it to Mike here, but the banking business in aggregate is performing well, it's up actually on a revenue basis, which means those things are not ATM hardware are doing very well. And so ATM hardware down close to 10%, about 9% I guess in the quarter, we're clearly making that up with the right types of revenue. So while we wait to see if our big U.S. customers have major orders, North American customer major orders in ATMs as the year plays out to get back on their replenishment cycle we were on. We don't need those to make our numbers.

Yes, just missed color to that, you referenced Cardtronics requested, the Banking segment performance in the second quarter has nothing to do with Cardtronics other than the 10 days got booked there. So the only softness we saw in banking was ATM hardware sales. And as we talked about throughout last year, we've really built our business around focusing on recurring, and focusing around delivering a software footprint and a service footprint, which is clearly part of the desire the deals go to Cardtronics, do ATM as-a-Service. If you look at our numbers in the second quarter, even with ATM hardware down, our EBITDA margins are up considerably, our EBITDA numbers up, our cash flow is up. So our business is really built to perform and deliver even at these levels of ATMs. So having said all that, if the market because the banks continue to get a little more clarity and light at the end of the pandemic and said to free up the capital, we would still expect at some point to see some of that recovery. But if it doesn't, we still have a very solid execution in the second half of the year and going into '22.

Yes, that's great. Thank you very much.

It has run several quarters now our hardware and ATM has been right around $210 million. And that's kind of what we built going forward.

Okay, super, thank you.

Our next question comes from Kartik Mehta from Northcoast Research. Please go ahead.

Hi, good afternoon. This is Alex on for Kartik. Just quick question, I was wondering if you could speak about the competitive landscape in the domestic ATM business and any type of market share dynamics that you're seeing right now. That'd be great.

Yes, this is Owen. So I think to the point of the ATM business, it's performing where we anticipated it would be in that $200, $210 range. As we look across the landscape, we actually feel really good about the competitive position of the ATM business. I would say the discipline that the team has put in place has really allowed us to be selective about deals that we want to stay actively engaged in. And you can see that to Tim's point in the performance of the banking business on the EBITDA side. So as we look at the business, the market is still slow in terms of their capital spend. But we feel pretty good about our market position, both here in the U.S., in Europe and EMEA, we're feeling pretty good about where we're at right now. If you look at our - the overall growth of the business and banking in particular, our teams are feeling pretty good about position.

Okay, great. And then also I believe, on the last call you guys called out that the payments attach rate for Aloha, I think was somewhere around 85%. And I'm just wondering if that trend is still somewhere the same. Are you seeing any improvement or somewhere maintaining that tax rate? Thank you.

Yes, I mean, again, I - we share the quarter-over-quarter tremendous growth in the number of restaurants that we're processing payments for the hospitality space. The tax rate is similar numbers, we're continuing to see very high of tax rates on new Aloha Essential sales, and then the team's actually had a fair amount of success going back into existing accounts and starting to convert them over for payments.

Okay. Great. Thank you.

Our next question comes from Matt Summerville from D.A. Davidson. Please go ahead.

Thanks. Tim, to get back to one of your answers to a prior question that $40 million. I just want to put a finer point on it. That is an unmitigated number, that is prior to anything you can do productivity wise going back to vendors and trying to move pricing. Do I have that accurate?

Yes, I would say that is a gross number in the second half of the year relative to the first half. So I absorbed $20 million in the first half, I think there's an incremental $40 million over and above that in the second. And at this point, we're working lots of different angles - to have to keep the productivity we generate in the first half of the year, which covered that first $20 million. And now we'll go find another $40 million or $80 million annual run rate and productivity to get that back. The reason I called it out is I'm not sure that we can get all that back. But I want to make clear, we're not giving up. And there's probably some messaging in here for our partners that we could use their help to get there.

Sure. And then how should we be splitting that out between Q3 and Q4, and across the lines across the industry groups as we try and model the back half and think about how to cadence this out?

Yes, so I think margin rate will be north of 16% - around 16% in both quarters, if there's upside to that number, it's going to be in the fourth quarter. So I think it will be closer to $16 million in Q3, and then when we're able to cover some of that it would be higher in the fourth. I think revenue I described earlier to Katie's question, I think the growth rate sequentially will be stronger in the fourth quarter than as in the third. And I think I have a higher tax rate in Q3, I know I going to have higher tax rate Q3 than in Q4. So all things point to a stronger Q4, modestly stronger future Q4 not as back end loaded as we've seen in the past. But we always have a spend it or lose it mentality with some of our customers as we enter the fourth quarter that causes and some renewals and if such that take place in the fourth quarter that cause us to perform better.

Got it. Thank you very much.

Our next question comes from Paul Chung from JPMorgan. Please go ahead.

Hi, thanks for taking my questions. So on CADAM, you have projected a $600 million for the second half from what I see. If I caught this against 19 levels which down around 13%. So what are the steps you're taking to accelerate this business? And if you could expand on some examples of revenue synergies you expect to see in the coming quarters?

Yes, so let me try. If it's only so much I can do here. So we're still running two separate companies, right? We've not completed the transaction in terms of the regulatory authorities in the U.K. So I'm not able to know too terribly much about the console analysis that the result, I just get to know the result. That said, that margin rate is incredibly impressive. And what it says is, they're getting traction in the right places, when they can deliver margin up that much on revenue. That's not up very much, not nearly as much they're growing in a right place. As you know, if you followed them, they have some revenue streams that are much more profitable than others. And it's obvious to me that those must be growing quickly than the average. In speaking with them about their expectations going forward. That margin rate as they - as I described is the same in the second half as the record they generated in the second quarter, which again speaks to where that growth is coming from. So remember that they're changing their business model and their revenue mix much like we're trying to do to ours, and I think they're being successful. I'm very focused on their EBITDA, and not so much on the top-line.

Thank you. That's very helpful. And on LibertyX any metrics you can provide on purchase price, revenue, margins, et cetera?

So it's a technology rich transaction that doesn't bring with it a tremendous amount of impact to our reported financials. You'll see a release from us or a filing from us for 1.66 million shares, which you can do the math on that it was the - what we used to purchase LibertyX, it's exciting to us that guys in this space who look to see things move upward in terms of valuation relatively rapidly are [indiscernible] currency. So we paid for the deal entirely and stuck.

And Paul, I think you have to look at a transaction like that similar to what we do with Terrafina or while we do to Freshop where we bought technology, we bought a product to get speed to market and to maybe get into a product where we didn't have the expertise. And then to integrated into our channel. So if you look at the ability to take a LibertyX physical to digital translation, and then you look at our footprint that NCR and our footprint combined with Cardtronics. We believe we'll have one of the largest distribution channels to do these transactions in the industry. So we will push it through a distribution channel and grow it rapidly.

Very cool. And then lastly, can you talk about kind of the long-term strategy and maybe give us an example of monetizing kind of along the edge and experience. A restaurant example maybe, were JetPay, Aloha, LibertyX, CADAM kind of all play a role in generating revenue and recurring revenue would be helpful?

Yes, let me break those out into a few components. So if you take Cardtronics, and what they do on the retail side, think about it as a capability to do a financial kiosk or financial center, at maybe a grocery store, a big box store or pharmacy where traditionally those have been maybe a cash out, maybe a cash deposit is. Again, think of Cardtronics delivering a physical presence of a lot of endpoints for bank customers, where the banks may not have physical presence themselves. So think of about a Neobank that doesn't have physical presence. So they create a transaction point for their customers. So whether it's cash out, whether it's cash in, whether it's now the ability to get digital currency like a LibertyX, whether its ability to pay bills, whether its ability to other transactions as that physical kiosk. So that's - on that side, when you talk about JetPay that strategy has been fairly straightforward. The ability to connect and process the backend of a payment transaction behind all of our POS, whether it's in hospitality. In the restaurants like we've done with Aloha and Silver, or whether it's in retail group, we're going to start doing with a retail point-of-sale product. That's really completing a payment transaction on the back end of a point-of-sale initiation. So really getting end-to-end. And then we started looking at how do we connect across retail, and payments with a network like the Allpoint network. So as we lay out the components, we really look at physical points of presence, whether it's a POS, whether it's a self-checkout, whether it's an ATM, whether it's a financial kiosk, and then what products we can push to the bank consumers or to the retail consumers, and then what transaction fees we can obtain from those products.

Thanks. Very helpful.

Our next question comes from our Dan Kurnos from The Benchmark Company. Please go ahead.

Yes, thanks. Maybe just one, Mike. Can we just follow-up on that a little bit. I don't know if I'm making too big a deal out of this. But we've had all of the credit card companies get deeper into crypto this year. We've had all of the payment companies announced solutions for it. You bought the largest Bitcoin ATM operator, it fits clearly within all the verticals that Cardtronics plays within. So just - I know you just bought it, and I'm sure you're thinking about this stuff. But just maybe help us think through. How you think about even to the last question, just sort of deeper integration. And how you think about whether it is on the payment side? How you dealing with some of the issues around [indiscernible] translation, as well as does this provide an incremental opportunity for something that the banks themselves are asking for?

Yes, you had a lot. I'll just try to focus on kind of the macro trend. So on LibertyX, the largest crypto software provider out there. And as you point out the end points with NCR coupled with Cardtronics and Cardtronics had already partner with LibertyX to offer the ability to load Bitcoin to buy Bitcoin on your wallet at a Cardtronics a point of presence. So clearly that's a piece of it. We will continue to expand that. If you look at NCR, we need to continue to move beyond cash and be able to look at the future of currencies in the future payments. So we believe that crypto or digital currency is a part of that. The product today is really a Bitcoin centric. You could expect to see us move to a stable currency to really allow for payments, we don't have the risk of a Cryptocurrency like Bitcoin that's fluctuating. You could envision the ability to load up on your wallet, a digital currency, and then transact at NCR point of presence, and NCR point-of-sales, and self-checkout devices or to do transactions at a financial kiosk as we talked about. You could envision the ability to load digital currency and to make payments. Again, at that point, or to do person-to-person payments or to transfer money to another person or to transfer across border. So we just think as a macro trend, where that's going to go. We need to be in the middle of it. We think our ability to connect physical and digital points is very unique in the industry. So we saw an opportunity and jumped in and did the deal.

Do you become the ones in all kind of proselytized category? Or do you let somebody else kind of continue to push that given your retail or your - I mean really your SCO presence? And is there any difference longer-term do you think in sort of the margin profile if things migrate in that direction?

Yes, I don't. Right now today, you wouldn't view NCR to be the prophesizing to the retail consumer. That's just not the brand that we have today. I do think we have a very good brand as it comes to retailers, as it comes to restaurants, as it comes to financial institutions. And then again with Cardtronics we have tremendous amount of distribution points. Our ability to then take it from a Bitcoin to maybe a stable currency to maybe build our own wallet, and then to start to connect those stocks. Clearly, as we go down the road, we might look at those opportunities.

Got it. Thanks.

It appears there are no further questions at this time. Mr. Hayford, I will turn the call over to you for additional or closing remarks.

All right, thanks. Just want to thank everybody for again joining us today for our second quarter earnings update. We feel very good about our performance. We feel very good about our performance in the second quarter based on where we had expected to be. We actually feel very good year-to-date. And as Tim talked about our outlook for the year, we're very optimistic as we look at 2021 mid-year going to the end versus where even we thought we would have been starting the year. We're very excited about the upcoming integration with Cardtronics. We're very excited about the recent announcement we did this week with LibertyX. I think more importantly, as we look at progress in the first half. We are continuing to see that our strategy - the strategy that we outlined a number of years ago to shift the software, shift the software services, led our investment and strategic platforms. The strength we're seeing in digital banking, the strength we're seeing in hospitality with the growth of Aloha Essentials. The strength we're seeing in the payments growth, and the strengths that we're seeing in wins in the retail cloud-based solution with Emerald. We look forward to seeing you all on December 9th at our Investor Day that we announced today where we can talk a little bit more in-depth about our strategy, our execution, and our plans for the future. Again, thank you for joining us, and we'll see you next quarter.

This concludes today's call. Thank you for your participation. You may now disconnect.