Good day, and welcome to the NCR Corporation Third Quarter Fiscal Year 2021 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, sir.

Good afternoon. And thank you for joining our third quarter 2021 earnings call. Joining me on the call today are Mike Hayford, CEO; Owen Sullivan, President and 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 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, in 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 October 26, 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 as always a great job with the intro to our third quarter call. And thank you everyone for joining us today for our third quarter 2021 earnings call. I will begin with some of my views on the business, including an update on our move to NCR becoming a software platform and payments company with a shift to recurring revenue streams, and a focus on improving profit margin. Tim will then review our financial performance and an outlook into the remainder of 2021, and then Owen, Tim and I will take your questions. Let's begin on Slide 4 with some highlights from the third quarter. NCR delivered strong performance that included accelerated recurring revenue growth, significant margin expansion and solid cash flow production. The team executed very well, both strategically and tactically. Strategically improving our mix of software and services, investing in our platform products and at the same time, continuing to build momentum in our NCR-as-a-Service strategy, while continuing to focus on meeting customer needs in the challenging supply chain environment that we experienced in the third quarter. First, we delivered 20% total revenue growth and 39% recurring revenue growth in the third quarter. Recurring revenue represented 62% of total revenues in the quarter, which is the significant increase from 53% one year ago. We continue to make steady progress increasing our recurring revenue, which is consistent with our 80, 60, 20 goals. As you know, the third quarter was the first full quarter of incorporating Cardtronics in our financial results as we closed on the transaction in late June and received the final regulatory approval on August 10 from the CMA in the UK. Second, adjusted EBITDA increased 41%. Third, adjusted EBITDA margin expanded to 18.5%, which represents an increase of 280 basis points from…

Thank you, Mike, and thanks to all of you joining us today. To echo Mike's comments, we are very pleased with our third quarter results. We demonstrated terrific tactical execution in an uncertain business environment and significant acceleration in our more strategic growth areas. As a reminder, the financial close of the Cardtronics acquisition was June 21, and we received final approval from the UK CMA in mid August since we last talked to you on our Q2 earnings call. Today's report includes results for the consolidated companies for the full quarter with legacy Cardtronics now included in our banking segment. Let's begin with Slide 6, which presents a top level overview of our third quarter financial performance. Starting in the top left, revenue was $1.9 billion, up $312 million or 20% versus the 2020 third quarter, driven by strong growth in both our banking and hospitality segments. Normalizing for the inclusion of Cardtronics, pro forma revenue was up 3% year-over-year. In aggregate, we had high double-digit revenue growth in our software business, which is more than sufficient to offset lower hardware revenue. While demand for hardware across all three segments is increasing component availability and freight challenges, constrained both revenue and profitability in self checkout and point-of-sale. Also shown here in darker green is our mix of recurring revenue. With the inclusion, the full quarter of Cardtronics revenue, which has a preponderance of recurring revenue, our aggregate result was up 39% and comprised 62% of revenue in the quarter. On a pro forma basis, recurring revenue was up 7% year-over-year. In the top right, adjusted EBITDA increased to $103 million or 41% year-over-year to $352 million. Adjusted EBITDA margin rate expanded 280 basis points to 18.5% representing a high watermark for the previous four years. While I will provide…

Now turning to Slide 12. Looking forward, our key priorities are clear. First. We expect to continue to execute well in a very difficult supply chain environment. We will continue to put our customers first and deliver on our commitments while we manage through the supply chain challenges. Second, we are eager to capitalize on the opportunities that Cardtronics brings us. We are excited to leverage Cardtronics to accelerate ATM as a service and broaden our retail business. Third, we are experiencing increased opportunities to accelerate NCR payments and transaction processing solutions as we go to market with the more robust offering. Fourth, we will continue to allocate capital to the highest growth and return opportunities with the goal of driving free cash flow and increasing returns for our shareholders. Fifth, we will continue to focus on our customer satisfaction initiatives with the simple belief that happy customers will buy more solutions from NCR. We strive to garner a larger share of wallet with the mission to help our customers run the store, run the restaurant and run self-directed banking. Our strategy of transitioning customers onto our software and payments platforms is gaining traction with customers and the platforms increasing their spend with NCR. And lastly, I’d like to extend an invitation to each of you to participate in our virtual Investor Day, which is scheduled for December 9 of this year. We are looking forward to this event and intend to take a deep dive into our strategy, our software and payment platforms, and an 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. Operator, please open the line.

Thank you. [Operator Instructions] We’ll take our first question from Matt Summerville with D.A. Davidson. Please go ahead.

Thanks. I was wondering if you could maybe first quantify the revenue and operating profit impact you saw associated with. I’m just going to generally, call it, supply chain related stuff, whether it’s access freight, whether it’s not being able to get components. What was the impact in Q3? And I guess, how did that compare to how you were thinking about it heading into the quarter.

Yes, thanks for that question. Let me answer it this way. We talked last quarter about $40 million more cost pressure in the latter half of the year than we saw in the first. So, and we said we saw $20 million of that in the first half of the year. So I think that adds up to $80 million of cost pressure across the year, when we talked to 90 days ago. I think that number is closer to $100 million now. And as described and then $80 million of that will take place in the latter half of the year, so a lot. In the last quarter, the pressure was a little higher than we thought, but it’s really the fourth quarter that is most different from the last time we talked. In the third quarter, that was about 50-50 split between premium freight and cost of components. As we move into the fourth quarter, freight seems to stabilized or is increasing in a much less rapid rate, but cost of components is much higher, likely represent two-thirds to even 75% of that pressure in the fourth quarter. So it causes us then to have to make some decisions on whether the last dollar of hardware revenue is profitable enough for us to go get it. So my concern is – and the reason we walked our guidance down a little bit, it’s I think, there’s $50 million to $75 million of hardware revenue that we will have demand for that we’re unlikely to ship having once we talk with our customers and make sure the retiming is fine with them. We’re unlikely to shift, because of the extreme cost pressure that we hope will abate.

Got it. And then can you also just as my follow-up talk about, I know you gave some numbers and we can probably calculate it. But what was the Cardtronics revenue and adjusted EBITDA contribution to NCR in Q3 and how we should be thinking about that in the context of your Q4 guidance. Thank you.

Yes. That’s great. We’re not breaking out Cardtronics from the banking segment. But I think in my remarks, I said on a pro forma basis, the banking segment grew about 3 – we grew as a company about 3%. If you dig a little bit deeper, both businesses grew about the same year-over-year and both businesses modestly expanded margin year-over-year. And while we didn’t report their third quarter results a year ago, they did. So I think you, you can – I’m not able to talk about them by rule, but I think you could dig those back up.

Got it. Thanks, Tim.

My pleasure.

Thank you. We’ll take our next question from Katy Huberty with Morgan Stanley.

Yes. Thank you. Good afternoon. Tim, just following up on the prior conversation, can you talk about how much if at all backlog growth you saw in the third quarter and is that $50 million to $75 million of lost hardware revenue in 4Q? Is that – are you assuming that goes into backlog or could some of that be lost revenue that you just choose to give up to competitors?

No, we had orders – firm orders for all of that revenue. It couldn’t be delivered in the third quarter. I now – when we talked last week, I think you actually pushed and said, hey, you usually have higher fourth quarters, much better sequential growth, third to fourth than you’re anticipating now. I actually think, now we’re going to see nice sequential growth Q3 to Q4, primarily driven by hardware. I think our hardware revenue will be up, as I said earlier, about 20% Q3 to Q4, so a big step up. The last – let’s call it, the last $50 million of revenue will be somewhat depend it upon whether or not we can procure the components necessary to produce it at a value that makes sense to both us and our customers. So we’re hopeful that all that revenue will get out, if it doesn’t, it’ll carry into the first quarter of next year, but that will be the customer’s agreement.

Katy, to your specific point, we don’t believe customers are going elsewhere. We believe everybody’s got the same challenges with either logistics or with supply constraints around things like chips. And so we know that, for instance, second quarter, we had some sales that others weren’t able to deliver. So we don’t anticipate those sales going away.

Okay. And are you still assuming 10% accretion from Cardtronics in the back half of this year and about $100 million of cost savings next year or now that you’ve fully closed, have you found incremental opportunities?

So it’s already more accretive than that. So it’s already tracking to that’s on the mid-teens accretion this quarter. And I anticipate that the same in Q4 and, yes, we’re still very much on our target of $100 million of net cost energies in 2022.

Okay. And then just lastly, as you transition the business to software and payments, just focusing on payments specifically, I think you’ve talked about a goal of driving penetration into your installed base of the payments offering something in the tune of 15% to 20% penetration. Could you just talk about what that long-term goal is and where you think the penetration rates are today?

Yes. I think we’d still view that those type. And again, the 15% to 20% was kind of the goal against TAM of all the transaction volume that goes through our front end POS systems. And we felt we could capture 15% to 20% of that over time. You saw, let’s talk about a handful of deals now, where we’ve gone back into our customer base in and upsold into enterprise accounts, particularly on the hospitality side, some payment connections. So we’re starting to get some traction there. The attach rate continues to be very strong in the SMB market, when we go into low essentials. So we’re starting to see that success. We are planning into 2022 as we’ve connected payments in the back end of some of the retail products that start to go into the retail side of the business as well and get some growth. And then, as we look at Cardtronics and some of the things we can do by offering and I almost call it a financial kiosk that you can place at a retailer and drive transactions through that with the Allpoint network continue to drive transactions and payments in that avenue as well.

Thank you.

Thank you. We’ll take our next question from Dan Perlin with RBC Capital Markets.

Thanks. Good evening. Tim, can I just ask a question on the adjusted EBITDA margins at 18.5%? You rattled off a bunch of things, pricing costs, positive mix, I guess, the question here I’m kind of wondering is, if you kind of look at what you had to absorb in terms of kind of supply chain costs. And yet still put up this margin, like, what would be a more normalized adjusted EBITDA margin in the context of adjusting for the supply chain issue. And then the second part of the question is, if pricing is part of it, where are you taking up price in an environment where you can’t deliver the goods to clients, like, I’m just wondering how they’re receptive to [indiscernible].

Yes. Remember, we did deliver the goods. To be clear, we didn’t deliver some revenue in the second quarter, but it was less than $50 million in that quarter, in the third quarter. And maybe, and I just intimated, there might be some more in the fourth, but any revenue that wasn’t delivered in the quarter, we cleared with the customer first. So the price increases in some instance are choices that we make with the customer, meaning, if it costs a lot of expedited freight to get that product here, we’ll ask the customer whether or not it’s worth it for them to expend those dollars. We have up until this point. We don’t believe we’ve slowed down the strategic progress, the implementation of any of our customers. I don’t know, Owen, if you want to.

Yes. Dan, this is Owen. The comment I would make is, the conversations with our customers are pretty transparent right now and I would say highly collaborative. This is not unique to NCR. You all know it. We all see it. We see it in our personal and professional space. The supply chain is impacting everyone. What we have been able to do is comfortably say, we are not missing any material commitments on behalf of our customers. I’d say, additionally, the quality that we’re delivering continues to improve. So despite challenges within the supply chain we’ve responded there. And then from a cost standpoint, we have been very transparent about the cost to deliver. And having conversations with our customers that, if in fact, you need, we’re willing to deliver at this level of surcharge or incremental cost to you. We’ve had very good conversations, where the customer said, let’s push this off. It’s not worth the additional cost and we’ll continue to have those conversations. This pressure is not going to go away. Our customers are not surprised by it. I think what they are comfortable with is that we have been able to deliver where they need us to deliver. And we’re pretty comfortable that as we go through the fourth quarter, we’re going to continue to be able to meet the demand and we’ll continue to have these conversations. So I actually think it’s helped in terms of our relationship with our customer base right now.

Back to your question on margin, the mix of revenue this quarter was very advantageous. When we sell less hardware and more software, and I said, software revenues up over 10%, it’s a great outcome from a profitability perspective. That goodness, I think was offset by some of the pressure we just described. As we go into Q4, I think the pressure and cost will increase a bit. I also know that our pricing actions, which are across the board, across all of our products set and all of our services will help considerably against that cost escalation in Q4. And I’d anticipate margin rate as we go into the fourth quarter to look a lot like what we just posted with those two effects, offsetting one another. But to your point, as we go into 2022, I believe we can keep all of these gains from a productivity perspective we’ve been working on and we see our pricing effects take hold. We should have some, let’s say the wind at our back when, and if the cost pressures debate.

Got it. Can I just ask a quick follow-up on or another question rather, just on digital banking? I think you said you’ve called up three new logo wins. As we think about just the implementation cycle for digital banking, I’m just wondering, are there any air pockets as we look out over the next three, four, five quarters that would just be created because of maybe delays in original new logo wins previously? Like obviously, it’s getting recognized in the revenues now, but I just want to make sure we’re not missing anything on that line on as well. Thank you.

No. Dan, I think digital banking is very stable to the extent you’re adding more customers, adding more accounts quarter-to-quarter. The only thing you have is if you get consolidation in the marketplace that you don’t anticipate. So going forward, we came off of what we described as kind of the bottom last year in 2020, and that we felt we would grow back in 2021. We’re seeing that. And then we’ve talked about 2022 even getting higher growth, low double digits. So we feel good as I mentioned the fact that we got digital banking back to growth showing up in the financials, it’s also showing up in the marketplaces. We are winning deals and having success cross selling to our base.

That’s great. Thank you.

Thank you. We’ll take our next question from Kartik Mehta with Northcoast Research.

Hey, good evening. Mike, just thoughts on this logistics issue, and I know you said it’s not impacting current orders. But are you seeing any impact on future orders or maybe customers taking a pause because they know that products aren’t going to be delivered on time?

Yes. I guess, what most of – I mean, Owen talked about it too. Customers are doing, if you think about hospitality or even retail some refreshes rolling through stores, rolling through restaurants that maybe they didn’t get to last during the pandemic. So we’ve seen some of that during the year. In some instances they might put off a refresh. We are working very aggressively, particularly around new store openings. And to Owen’s point, we haven’t disappointed anyone with the inability to deliver. So we’ve delivered when we’ve needed to, we’ve prioritized, we’ve made trade-offs with clients when timing and cost. If the cost of expedite and cost of getting something in to accelerate the timeframe. They decided they don’t want to pay the cost, we’ve chosen not to eat that. And again, they’ve been very responsive and receptive to that. So I – we just haven’t seen that where they’ve got an order, we can’t fill and they run and have somebody else do it. We have very open dialogue around timing around cost, around availability, we’ve prioritized. I think our team Owen and Adrian and the team have done a great job of saying, when you need to open a new store, we’ll get you the components, we’ll get you the parts, we’ll get your store opened.

And then Tim, you’ve talked about this $100 million extra costs and some of the freight costs debating, and obviously some of the other costs have accelerated. I’m wondering, as you look into 2022, how much of the $100 million can you recapture because of pricing that power that you’re going to have and maybe some of these costs debating?

Yes. So I think the initiatives we currently have underway will be sufficient to offset $100 million of inflation next year. I don’t know what’ll happen next year for inflation. So we’ll put plenty of productivity initiatives in place and Adrian and his team will go out help us as costs start to drop around steel or plastic resins and things. We’ll start to claw back what we can. I think the bigger concern in 2022 will be labor inflation. We’ve just not seen much the way of labor inflation yet. And what we have seen has been offset by higher attrition rates. And so I – as you go into 2022, I think we and many other companies have to think long and hard about what is the rate of inflation, both here and importantly in some of the lower cost locations where we manufacture and support. So we’ll be ready for that, but it’s a little hard to say now what that challenge will be and therefore, whether or not we can overcome it. But I feel really good about the initiatives we currently have underway. And I think we’ll start to see the fruits go in the fourth quarter.

And Kartik we had talked last quarter around initiating price increases to cover the cost that we’re seeing on the supply chain or cost we’re seeing on the ability to, to get logistics and transport components. We’re starting to pass those on. We hope that those will all move, that those will stick, that those will offset. And as we go through the quarter, I think we’ll get more experience as to what’s going to happen. I think the words that we used last quarter were this is not unique to NCR. So whether it’s supply chain or whether it’s a logistics cost all of our competitors it’s the same phenomenon. So we don’t – I guess, we would expect that the marketplace will have to adjust the price increases we’re planning to pass through. People will understand that that’s the way they’re going to have to pay to get the components, to get the supplies, to get the hardware that we’re delivering. So we have – we expect that to stick, we just don’t have – we haven’t done that yet. We haven’t passed it all through yet at this point.

All right. Thank you very much. I appreciate it.

Sure.

Thank you. [Operator Instructions] We hear next from Ian Zaffino with Oppenheimer.

Hi. Great. I guess a lot have caused to talk on the cost side and also supply side. Can you just talk about maybe some of your customer conversations that you’re having now, maybe on the SCO side, in particular, as they look to try to abate labor inflation and some of the other inflation. How the talks going as far as your ability to sell more SCOs, et cetera? Or is it sort of that’s not necessarily a factor right now?

Well, I mean, I think you hit it on the head there, the self-service, whether it’s self checkout in the retail space, whether it’s things we do in a restaurant to order a table, pay a table, whether it’s things we do quite frankly in the banking industry with self-service or self-directed banking all those have been in even more demand, demand during pandemic around maybe the desire not to have somebody else touch their goods and services. At this point it is almost entirely driven by cost of labor or the ability to get labor. And so I think particularly in retail, there’s been a lot of desire. Big box stores have done it. Grocery stores are doing it. Convenience fuel stores are aggressively moving to deploy self-checkout. So we’re seeing that quite frankly, across the board.

Yes. Mike, I’d add that we do expect total SCO revenue to be up double digit this year for the full year.

Okay, great. Thank you very much.

Thank you. And that does conclude today’s question-and-answer session. I’d like to turn the conference back over to Mr. Hayford for any additional or closing remarks.

Just want to thank everybody again for joining us today. We continue to focus on our customers. We’ve had that focus for the last three years. And I think third quarter was a great example on that focus, our ability to deliver on our commitments in an environment that is still somewhat challenged, challenged literally around the globe by the pandemic, whether it’s supply chains or whether it’s our ability to get back to work in the offices as we had done prior. Our whole management team here is very proud of the work that our team has done our employees around the globe in working in this challenging environment. And again, really putting that focus and delivery for our customers. I think as exciting or as important for us during the third quarter, we continue to make very strong progress on our strategic goals, increase – including increasing our recurring revenue percentages, increasing growth on our strategic platforms that we have shared around our KPIs and improving our EBITDA margin and improving our free cash flow on a year-over-year basis. So again, third quarter even though through the challenges, we felt really good about where we ended up particularly around our strategic initiatives and our financial performance. And then finally just a reminder again, please join us on December 9 for our Investor Day, where we will update you on our strategic plans and our progress. Thank you again for joining us today.

Thank you. That does conclude today’s conference. We do thank you all for your participation. And you may not disconnect.