Good day, and welcome to the NCR Corporation First Quarter Fiscal Year 2022 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Michael Nelson, Treasurer and Vice President of Investor Relations. Please go ahead.

Good afternoon, and thank you for joining our first quarter 2022 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'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'll 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 April 26, 2022, 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.

All right. I'm assuming by now you've seen our numbers for the quarter, and while the external macro impacts resulted in disappointing financial results, our teams continue to execute in the business segments. And overall, I would say our first quarter was very good. With strong sales contributing to build order backlog, competitive wins, strategic transformation momentum and execution on our KPIs. Inflation, interest, pandemic and war, all impacted us in the first quarter and caused us to miss our expected numbers. Tim will cover more specifics later, but let me give you a high level. Acceleration of costs led by microprocessors, fuel and shipping costs impacted us in the first quarter. We think many of these impacts will be mitigated throughout the year by things we can control, prices and our cost actions. Interest rates moved quickly in the first quarter, we don't see this improving during 2022, so we'll have to address costs elsewhere. The Omicron strain caused impact to transaction volumes as numerous countries slowed down during the first quarter. We have already started to see improved volumes in the second quarter. And lastly, the war in Ukraine has impacted our business in Ukraine and Russia. Tim will cover the impacts and actions we are taking, the bulk of the financial impacts were due to the inflationary cost pressures and the Omicron impacts. On Slide 4, over the past three years we have successfully balanced transforming NCR into software lead as a service company, while continuing to deliver on our quarterly financial performance. During the first quarter, we continued to focus on that balance. In the first quarter, NCR made significant progress against our strategic initiatives with strong execution across our KPIs. Despite the significant challenges we faced, our teams executed extremely well and delivered to our…

Thanks, Mike, and thanks to all of you for joining us today. I echo Mike. Our first quarter results represent a tremendous effort across our strategic growth initiatives, while simultaneously battling a surge in existing challenges compounded with new exogenous shocks. As a reminder, beginning this quarter we will report our results relative to five new segments described on our December Investor Day. And the legacy Cardtronics results are now included primarily in the Payments & Network segment. So let's begin on Slide 6 with a top-level overview of our first quarter financial performance. Because these results are significantly different than we anticipated, I've added an additional chart that follows to provide a deeper condo analysis. Starting in the top left, revenue was $1.9 billion, up $322 million or 21% versus the 2021 first quarter. Recurring revenue was up 35% year-over-year. On a pro forma basis, including Cardtronics for the full year of 2021, revenue was up about 4%. In the top right, adjusted EBITDA increased $13 million or 5% year-over-year to $271 million. In the bottom left, non-GAAP EPS was $0.33, down $0.18 or 35% from the prior year first quarter. The tax rate, while similar to prior year was much higher than our full-year expectation due to the lower level of profit and the follow-on effect on discrete items and deductibility. Assuming profitability improved as we expect, the tax rate will decline across the remaining quarters of 2022. And finally, first quarter free cash flow was a modest use of $10 million due to seasonal compensation expense that was not funded in 2021 and a one-time adjustment to our annual 401(k) match. This result was slightly better than our expectations. Before I walk through the segment results, I want to quantify the macro impacts to our revenue and…

Thanks, Tim. In closing, on Slide 15, we have made significant strategic progress transforming NCR to a software lead as a services company. And while the external sources of inflation, interest, pandemic and war negatively impacted our financial results, we really feel good about the underlying business execution during the first quarter. As we continue to transform the company, we will address the external macro headwinds with price actions, cost take out, and efficiency gains. And finally, we feel confident that we will find strategic actions that will unlock shareholder value. That concludes our prepared remarks for today. With that, we will open the call for questions. Operator, please open the line.

Thank you. [Operator Instructions] And we will go to our first question from Erik Woodring of Morgan Stanley.

Hey, guys. Thank you for taking the question. Maybe you could just help us think or detail a little bit more about the linearity in the March quarter. Obviously, we spoke 90 days or actually I’d say less than 90 days ago and you guided to the year and the quarter. And so, it was the 1Q miss largely from March, how did April trend versus March just looking to get a better understanding of when and where the impact was and perhaps how it was unforeseen when the last time we spoke? And then I have a follow-up. Thanks.

Yes, sure. The last time we spoke was February 8 and I hadn't yet seen January results. So we truly hadn't seen much in the way of results in Q1. As you know the war in Russia, that accounts for most of the adjustment in revenue had not yet started. Interest rates hadn't yet started to climb, gas prices declines even further. And really because most of this has to do with cost on hardware, our hardware revenue was extremely back-end loaded. We could not get the chips we needed, so we assembled the devices early in the quarter, waiting for the last piece which were the chips, and got them out the door in December, and in many instances the last two weeks of December. So the miss on hardware in the quarter is about $45 million, let's say, across ATMs and SCO together, pushed from Q1 out into successive quarters. But that -- we didn't see that coming, we didn't know at the time we would not get the chips in order, in sequence and so we scrambled to get hardware out the door at the end of the quarter.

Okay, that's helpful. And then when you talk about the mitigation efforts on -- I think it was Slide six. Maybe just help us detail those a bit further beyond pricing, what exactly -- what efforts or actions are you taking? When should we expect those to kick-in? Maybe just detail there would be great. Thank you.

Yeah. So let me set that up and I'll hand over to Owen to -- this will be his project to drive. We had pricing actions underway and those pricing actions will pay dividends in Q2 through Q4. We also had cost actions underway, efficiency primarily around the Cardtronics acquisition, those were on schedule and on budget. The difference then is the change in cost between January and now. We have to act more proactively to go chase get more price and more cost. My best guess is that, we will have about $200 million of pricing actions that we put through, which we net about $100 million in 2022 and we'll put through a couple of $100 million of cost savings which would likely net over $100 million in a quarter of that as the year played out. So we're going to try to over solve with internal actions against what we know today in anticipation of further deterioration in some of these macro indicators. Owen?

Yeah, I think to add a couple of comments. It's been -- to say a while since any of us have dealt in a hyperinflationary environment would be an understatement. It's been decades and I think what Tim described in terms of catching the falling knife, we had backlog built in third quarter that we've actually put price increases and surcharges on. As we came into the first quarter and dealt with this back end loaded linearity to our build plan, the cost escalation was extreme. Some of it is inflationary and I'll be candid some of its gauging in the marketplace. I’ll just give you a couple of examples that we dealt with, chips that we were buying at $41 in the second half of the year are now in the open market that we have to go to for almost $2,900. We had chips that were -- we were paying $0.42 for our power supplies, I should say, that we're now paying $114 for. So I will tell you that we wanted to meet customer demand, we did that. We missed on the escalation and acceleration of costs from our backlog in the third quarter to what we are building and delivering at the end of the first quarter. The lesson learned is the actions we're taking and have taken is everything in the second, third and fourth quarter backlog, we have now gone and looked at the selling price projected out what our cost will be and we will continue to stay on top of that and we're taking corrective pricing action. So you take the lessons learned and it wasn't -- it's been a tough one. We are going to continue to deal with hyper-inflationary environment, we're going to be continuously dealing with some of the over-market issues, and what we will continue to do now is figure out how best to take pricing actions to mitigate those discrepancies as we go forward. So between those and cost actions out that we're taking addressing the fuel escalation, which as Tim described, that happened within the quarter. And as I'm sure of about 10 million gallons a year, that's a material impact, we have now started to address that through surcharging and price increases. So I think the action -- we understand the magnitude of the issue that we just went through. We've done our best to project forward and we believe the actions that we're taking will mitigate the risk as we look out through the year.

Got it. Thank you, guys.

Sure.

And we'll move to our next question from Matt Summerville with D.A. Davidson.

Thanks. A couple of questions. It would be really helpful, I think Tim mentioned across a number of the businesses, how strong orders, backlog, the momentum you're seeing there. Is there any sort of numerical -- are you able to give us something more tangible from a numerical standpoint that really can underscore how strong the fundamental demand side is in the business other than to just say it's strong? And then I have a follow-up.

So you can see in the KPIs across the bottom, most of those charts that strategically we made tremendous progress in the quarter. And with those conversions to platform lanes and platform sites, that drives really nice conversion on revenue in future periods. When we talk about backlog, we're really talking about hardware. And the backlog in SCO, it is high -- it's historically high. The backlog in POS is high, and actually, I wish it was a little bit higher and that we delivered a lot of POS devices to keep our customers happy in the quarter that we probably were at breakeven or less as Owen described this chip escalations on a device that only costs $1,200, to have a $400 increase in a chip is pretty painful. So we have not broadcasted our backlog numbers before, but I think now that they only apply to hardware and part of the reason you see us recovering the hardware revenue we missed in the quarter has to do with the fact that that backlog is still there, it didn't get out the door because of chip availability. But that backlog is still there.

Matt, this is Mike. I would ask you again just to go back and look at the strategic KPIs, hospitality platform sites up year-over-year, 37% retail platform lanes up 400% year-over-year, tremendous scope. Digital Banking up 11% RAV endpoints for our payment business both the Allpoint as well as merchant up almost 30%. So across the board, the strategic metrics did really, really well. We got hidden hardware and we got hitting hardware late in the quarter on some areas we couldn't react to. If you look at the full year, where we sit today, we have eight months to make adjustments, we can adjust on price and adjust on cost. We didn't have an opportunity in the first quarter to make the adjustments. So again, the strategic KPIs, the strategic transformation we were extremely excited about really, really strong first quarter.

I’ll just try and give you something to grasp onto. The backlog in hardware, particularly in Retail and Hospitality was up more than 30% year-over-year in the quarter.

Got it. And then as a follow-up, did I effectively hear you correctly in that you're repricing some of the backlog? And then Owen, maybe just a little more context, we're kind of a year into this inflation and I clearly understand it's gotten worse, hands down, no doubt about it. Every single company who is going to report is going to say the same thing. Is there a way in your business, in NCRs business to better align inbound cost versus how you're pricing the product? As you guys are probably aware, I follow some of the more industrial tech type names, indeed majority of them are actually in a favorable price cost spread position right now. And I guess I'm trying to understand more around your business maybe what makes it so much different? Thank you.

Yeah. No, that's a very good question. Owen and I asked that ourselves as well. When you sell us a solution and you sell long-dated contracts, four, five-year contracts with only annual escalators, it's really hard to catch-up in an environment where prices increasing so quickly. We also have very long lead times, particularly because of availability of parts, long lead times on our SCO and ATM units, and I guess POS now as well. When we sell those units to our customers, we commit to a price and we get revenue recognition when they implement those devices. And the change in cost for us over that four-month period of time, when a step function changes like it did in Q1 is painful. And so, we need to find a way, contracting with our customers that we protect ourselves against that extension of implementation.

Got it. Thank you, guys.

Sure.

And we'll move on to our next question from Charles Nabhan of Stephens.

Hi, good afternoon, and thank you for taking my question. Given some of the visibility you have into consumer behavior through your businesses, whether it's Allpoint or Hospitality, just curious what you're seeing in terms of spending trends, given some of the inflationary pressures? And also, curious if stimulus -- the lapping of stimulus disbursement through 2021 has any impact on your businesses or the cadence of results over through 2022?

Yes. On the first part, whether we've seen customers impacted by spending trends, we have not seen that yet. If you look at our commerce business, Retail and Hospitality, the two biggest challenges, the executive teams and managers of those entities have is the implementation of technology and the pace of some of the change, particularly around opening up new channels and integration of channels, a lot of that is brought on by the pandemic quite frankly. And then secondly, the second biggest issue is labor. The cost of labor, the availability of labor and so as you look at NCR, as they look us as their software technology and their self-service equipment that allows them to deliver at lower costs. So we actually -- and Tim talked about SCO and the retail, that's a pretty active area just as people try to roll that out and help to impact the labor costs. So on a stimulus that hit Allpoint, some of in 2020, a little bit that hit in 2021, you could see the months for that rolled through, so that did have a little bit of a spike and some revenue pick up. The first quarter impact to Allpoint and transaction volume was really related to offshore, Australia, U.K., Canada, South Africa, some of the other countries where they did shut down probably a little bit in the states where some regions may be slowed down due to Omicron. And I suspect as most of you know, Omicron kind of came out in late December, early January, and is relative and shutdown parts of the business. So I don't think the impacts in the first quarter relates to impact of stimulus that we've kind of mapped it out. As you look at it, we still grew even with those impacts, our payments grew year-over-year quite nicely. So it was more of a -- where we thought we were going to begin to plan versus year-over-year growth.

Right. The segment grew, Mike, and so that the total transaction volumes. So the U.S. did grow better than others, but in aggregate, payments volumes were up year-over-year just not up as much as we would have thought.

Got it. And just as a quick follow-up on supply chain, and I apologize if you touched on this earlier. Could you speak to the receptiveness of your customers in accepting price actions from inflation? For example, obviously, nobody is happy about it, but are you seeing any orders just delayed indefinitely? Or are the majority of our clients accepting? And I guess as a parallel to that, if I think about the difference between the $50 million and $100 million in mitigating actions, if you could speak to what would lead us to come at the low end versus the high end of that range?

Yeah, let me take that from the customer perspective. There isn't a customer who is not dealing with it on their end of things. And I think if you listen to many of our customers as they have reported and talked about the issue, they are trying to stay out ahead of this cost curve as well. So, we have been as transparent with our customers as possible regarding the cost escalation, the fuel cost, the hardware cost, the freight costs, which have all escalated and it's to no one's surprise that we're having the conversation. Most of our customers are understanding it and I think there is -- to this point a tolerance. I think all of us are going to -- will be taxed on the level of tolerance. But thus far, as we've gone back to our customers and explained and met their need, and I think that's a hugely important issue. We have met the needs of our customers throughout all of this, as they have expanded, as they've opened up, as they've refreshed and I think that's a really important element of our commitment to support our customers. And in that conversation, especially in the last 30, 45 days we have been very clear about our need to make sure that we're regaining pricing because of the cost escalations.

Again, I think on the 50 versus the 100, I think we need to look at all that whole page in aggregate. We tried to estimate where we think that the macro environment is going to take us over the next three quarters. And I think we are reasonable in our expectations. We don't know whether we're right, but we think that are right expectations. I also said, we're going to over solve against that, because we're not sure that the world might not deteriorate further. And so, when I talked you about a couple of $100 million of cost or a couple of $100 million of pricing actions to try and net 2, 2.25 this year, that would be over and above the 50 to 100 I described here. We need to get 50 to 100 to get back to the guidance we provided, I feel very good about the guidance range we provided and these are the actions necessary to get there. When and if we overachieve this 50 to 100, it should be accretive presuming [indiscernible] continue to get worse.

Got it. I appreciate the color. Thank you.

And we'll go next to Kartik Mehta of Northcoast Research.

Hey, good evening. Mike or Tim or Owen even, you've talked about obviously delays because of what's happening in the marketplace. Are any of your customers canceling orders, maybe because of the price increase or maybe not being able to get the product on time?

Yeah. Again, Kartik, if you think about what we're delivering, so think about a restaurant we're delivering POS system, so it's a device, but it's also all the software and the technology, they need us to open a store or in some cases refresh the store, refresh the restaurant. That's the same with a store and again at the same with our banking business. So, I think our challenge is been getting the price increases and then another one is just getting the surcharges for expediting orders pushed through to the customers, and I think the team is confident we can get that done. And I think the profile of the customer relationship is dramatically different, because it's not hardware-focused independent. To Mike's point and I'll go back to the strategic KPIs, these are about installing systems to run the restaurant to address the conversion to the latest version of POS for our retailers and coming along with that is the hardware. So our customers are not backing off. These are strategic initiatives on their part, which includes our hardware. It's why we've worked so hard to make sure we're getting the hardware product to them and in the total scheme of the imperative that they're trying to gain, I think that's where right now the cost discussion with them is holding up. So they're not backing off because it's not a single hardware transaction, most of these are part of a bigger imperative.

And then just one last question. Just on the merchant acquiring business, I know you've talked about integrating that business to at least NCR Silver and obviously Aloha, and I'm wondering how that's progressing and what the uptake might be from a customer standpoint?

Yeah. So for our SMB market, the Silver product and the Aloha and then again, we got a market Aloha Essentials where we bundle it. For new installs we're running about 90% attach rate on payments, so we're actually doing quite well. We've continued to make progress with larger Hospitality sites, enterprise sites upselling our payment into those sites as well. And then this year our goal is to get up and running in the retail side as well with the tax payment.

Okay. Thank you very much. Appreciate it.

Sure.

And we'll go next to Paul Chung of JP Morgan.

Hi, thanks for taking my questions. So just on Digital Banking, you saw EBITDA growth coming, you had a relatively kind of slower pace in revenues, but 11% which was quite strong. Is the mix driving some of that or some of the overall macro headwinds you mentioned or some of the consolidation you also mentioned?

No. Digital Banking doesn't -- inflation doesn't impact this business nearly as much as the others. I think it's just a temporal mix shift in the quarter. There is not a notice -- there is nothing to worry about that margin rate, it's still very high.

Yes, it's very high. Got you. And then what are features active users are using the most? And how is the firm kind of driving higher active users there? What are some main reasons clients don't become active? And then I have one final.

Yeah. I mean Digital Banking across the board for the whole, retail enterprise with our clients or in the broader market, most everybody uses your digital device to payments as a retail client consumer. So payments are very active, review accounts, transferring money, the big movement in Digital Banking is account origination. Our Terafina product is actually doing really strong as we go back and cross-sell into banks and credit unions across our customer base. So, we actually competitively in Digital Banking product space are really doing strong this year. The slight dip is really one of the customer got acquired about a year and half ago that will be converting. Large client got merged [indiscernible] and then another one that had notified I think four years ago that they were going to go in-house quite frankly, which is very hard haven't really seen one of those. And as Owen mentioned or Tim mentioned, the early third quarter in July, we anticipate bringing on two new clients. So it's really a slight dip in the account line. The registered versus active, we look at that delta as a great opportunity to add new active accounts, we get paid an active. So the team has a very strong program to go back and work with the banks, so you do a branded exercise with the bank, that will leave with NCR to go back to existing clients and say did you know you can do your bill pays using your digital device, did you know you can open your account, did you know you could transfer money and try to get people back using that accounts, so we get paid.

Got you. And then lastly on self-checkout, if you could give us an update on how the Bed Bath rollout is progressing? Are you seeing kind of more traction with other key retailers here beyond grocers and home recruitment? And what are your kind of expectations there as we lost some tough comps here moving forward? Thank you.

Yeah. It's really -- so Bed Bath & Beyond is going great, team is really -- again at SCO, we have a great product, both hardware and software, right, its usability and we clearly lead the marketplace in that regard. So the big boxes that move down market are grocery stores, large grocery chains now to mid-size and then very strong in the CFR convenience fuel space where they're starting to be challenged by labor, cost of labor and availability of labor and really moving aggressively to rollout self-checkout.

Thank you.

Thank you.

And with no further questions in the queue, I would now like to turn the call over to Mike Hayford for closing remarks.

Thank you. So the team here is obviously disappointed in the numbers. It is a result of things moving at a pace that some of trends seen before in terms of multiple external factors. So the pace of the cost moving very aggressively in the first quarter. The pace of interest rates that we anticipated changes this year, but they moved very aggressively in the first quarter. The pandemic, which I know we're all tired up two years into it, the Omicron wave, we had not expected those kinds of impacts and I think anybody did having businesses cycle back to a little bit of a slowdown. And then lastly, we did not really predict the War and the impacts that it would have on our business in Russia and Ukraine. So while our numbers are disappointing, our performance during the quarter was not -- we feel very positive about our performance. We had good momentum and good execution across all of our strategic initiatives. Our whole team worked really, really hard in the first quarter, we continued to win in the market, we continue to drive execution platform lanes. And the retail business dramatically up, digital banking strong growth again, customer wins again, both cross-sell as well as new logos. Hospitality sites, Hospitality is on a great tier in the last number of quarters and this quarter was no exception. So number of sites, particularly in some of the SMB markets with the relaunch of our SMB product to a cloud-based product that we're excited about. Our payment attach revenue, payment attach in Hospitality, very strong year-over-year. And then what we're doing in the Pay360 and LibertyX, rolling out new products into our endpoints in Allpoint exchange. So we looked at strategically and you can see the strategic metrics, we had a really strong 2022 first quarter. The difference, I tell you on the cost, where at the first quarter, we didn't have the time to make the adjustments that we needed to the impact of this quarter. We have the time to make those adjustments and I think, Tim, did a nice job of laying out the desired actions we will oversell and we feel very confident that we can hit the numbers that we have identified for impacting our cost structure throughout the rest of the year. Our teams again have continued, just a great shot out to everybody performing in a very difficult environment, not only some of the external forces that we talked about, but still continuing to work in this hybrid environment where we're not all sitting at our chairs. We continue to win in the marketplace, beat the competition and we feel that we will do that through the rest of the year. So I want to thank everybody for joining us today. And we will talk to you next quarter.

And so that does conclude this call. Thank you for your participation. You may now disconnect.