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

Good afternoon and thank you for joining our first quarter 2023 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 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 May 4, 2023, 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. I will begin with some of my views on the business, and I will also provide an update on our previously announced intention to separate NCR into two public companies, including our recent announcement of our leadership team. Tim will then review our financial performance and then Owen, Tim and I will take your questions. Let's begin on slide five with some highlights from the first quarter. First, NCR delivered strong performance that included solid top line revenue growth and significant margin expansion and delivered over $200 million of free cash flow which puts us on track to delever prior to the spin. Second, we are on track to separate NCR into two public companies in the fourth quarter of 2023. Following Tim's comment on our financial results, I will provide an update on those separation activities. Third, we delivered 4% year-over-year total revenue growth on a constant currency basis and 7% recurring revenue growth, also on a constant currency basis in the quarter. I think, it's important to note that the 4% growth would have been 7% without the impact of shifting to subscription. Fourth, adjusted EBITDA increased 19% on a constant currency basis from the first quarter of 2022. Adjusted EBITDA margin expanded to 16% this quarter, which represents a 150 basis point increase over the first quarter of 2022. Fifth, NCR generated $209 million in free cash flow in the quarter. Over the past two quarters, we have generated over $400 million of free cash flow, allowing us to reduce financial leverage ahead of the separation. And finally, I want to provide an update on the cybersecurity incident we experienced. On April 13, we determined that a single data center outage that impacted sub functionality for a subset of our commerce customers was caused by…

Thanks Mike and thanks to all of you for joining us today. As Mike just summarized, in the first quarter we drove substantial growth in recurring revenue, expanded our profit margins particularly at gross margin and generated over $200 million of free cash flow. A year ago we were faced with a series of unanticipated geopolitical and macroeconomic challenges, that had a significant impact on our business in the first quarter and it compounded across the remainder of the year. At that time we outlined our efforts to control the things that we could. Productivity, price, cost efficiency and customer support level. Those efforts enable the recovery of our reported financial metrics and insulated our customers from our supply chain disruption and our labor challenges. And those early 2022 actions have now been augmented with further cost productivity actions in both Q4 and in this Q1 to generate incremental savings to offset any dis-synergies arising from the planned separation into two separate public companies. This quarter's results are demonstrative of an exceptional effort of our teams to simultaneously drive financial results, accelerate our strategic plan and ready the company for a pending separation transaction. I'll start on slide 7 with a top level overview of our first quarter, which for every guided metric we painted at the high end of the ranges we provided back in February. Starting in the top left revenue was $1.9 billion up 1% year-over-year as reported and up 4% on a constant currency basis. Recurring revenue was up 4% year-over-year and up 7% adjusted for FX. We continue to have success transitioning from onetime perpetual sales into multiyear subscription-based revenue stream. The nature of these contracts shifted $60 million of high profit revenue from what would have been previously recognized upfront to recurring revenue that…

Thanks, Tim. And I'm going to continue on Slide 17 with the NCR separation roadmap. Our go-to-market teams are organized by industry under our general manager unit. These teams are ready and have been ready for the spin. Additionally, there are areas of shared service functions such as legal, tax, HR, treasury IT and others that are well underway in the process of preparing for the separation. We are planning on submitting our Form 10 registration statement very shortly, and then the timing of the separation will be largely dependent on the SEC process and the state of the capital markets. We have already submitted a letter with the internal revenue service, regarding the tax-free nature of the separation. We intend to delever through the generation of free cash flow between now and the separation, which is expected to occur in the fourth quarter of 2023. At this time, we're expecting the timing to be early in the fourth quarter. This of course, is dependent on clearing the SEC process and a favorable capital markets environment. In closing, on Slide 18, looking forward our key priorities are clear. First, we are on track to separate NCR into two public companies in the fourth quarter. Upon separation, we believe each company will benefit from increasing operating and financial flexibility, in pursuit of respective and distinct opportunity set. We believe that spinning of NCR's ATMCo in a tax-free distribution, is the best path to unlock shareholder value. But if other alternative options become available in the future that could deliver superior value, such as a whole or partial company sale of NCR. The Board continues to remain open to considering these alternative scenarios. Second, we expect the cybersecurity recovery to be mostly behind us in the near future. While our recovery process…

Well, thank you. [Operator Instructions] And our first question comes from Paul Chung with JPMorgan.

Hi. Thanks for taking my question and nice execution here. So just on digital banking, are you seeing pressure on your active user base kind of given some of the tough macro backdrop, I guess, across regional banks? And then are you seeing any emerging trends developing? And then, can you also expand on the kind of the new deals that were signed? Were they competitive wins, renewals and any nice momentum you're seeing there?

Yes. Thanks, Paul. On the first question around some of the impacts taking place in regional bank, I think, we did this a couple of months ago and on some of these things first hit, we literally looked across all of our businesses, including digital banking, self-service banking and based on the banks that were at risk or being impacted, it's really not a material number to us. On the digital banking side, at least what we've seen so far, it's not an impact at all. So there's a little bit here and there, but it's not -- doesn't even add up to anything meaningful. We'll watch it like we have in prior years, but we always look at a situation like this, even what's going on. Those accounts are still out there for small businesses consumers and they're going to end up somewhere. We have such a strong market share that we would expect even with some shifts that will end up in a good place. So at this stage we're not concerned about that at all. On your second question, competitive nature yes, everything we do right now is competitive. The nice one for us SECU, not that meant at the rest were nice but that is a very large one, very competitive, second largest credit union in the country over 2.5 million accounts. So very meaningful. We're excited to help them on their digital journey. And really change how they engage with their clients. And I think everybody showed up to compete there. We're very excited that we won on that particular deal.

Okay. Great. And then on the ATM side, are you still seeing regional kind of remain engaged and then given some pressures going on with your nearest competitor – can you expand on kind of the competitive environment there? And then separately, what is spurring some of these are larger ATM as a Service deals from some of these customers. as well. Thank you.

Yes. I mean I think in the first part competitively and maybe what's happened with some of our competitors in the self-service banking. We chose a number of years ago to invest for growth to build out our products, build out our services, to be the best in the industry, build out our software to be the best and have industry-leading hardware. And it's showing up as Tim said, it's a little stronger than we anticipated so far this year. We expect it to be strong for the full year. And we're continuing to win in the marketplace on the ATM, the ATM as a service strategy that we embarked on almost two years ago where we said, we do believe that this is a leverage business where if you can do it at a better price point and you can do it at scale, not only across the country but across the globe that there's an opportunity here to drive a really strong business and take a business that maybe is a little bit lower growth and turned into a pretty high-growth business. And we really are seeing that the desire to outsource and have somebody else who can deliver at a better quality and better service level, which we believe we can again because of scale because of the Allpoint network because of our capabilities coupled with Cardtronics. It seems to be playing on the market. I think the team is very excited. Every year they clear off – every quarter they clear up a bunch of their sales pipeline and turn it into deals and then they build more backlog in the marketplace with demand. So we're excited about another good quarter. And quite frankly I think we're looking forward to the whole year here with ATM-as-a-Service continuing to expand.

Great. Thank you.

And our next question will come from Charles Nabhan with Stephens.

Hi, good afternoon and thank you for taking my question. Tim, David, congrats on the appointment. So I wanted to ask about the capital structure. You talked about refinancing a couple of your notes recently and I know the credit markets are a huge variable but could you speak to your intentions with regard to the capital structure going forward?

Sure. We've talked a lot about delevering getting ready for the spin. We've not deployed that cash yet. We've used to pay the revolver down thus far because the revolver rate is not that different from our long-term rate. That said, there are – as you know there are two bonds we will have to take out. If those trade at a point we think it's a good trade for us to go take them out in advance of the transaction and we feel sanguine about the transaction, we're likely to go out and buy some of those bonds in the open market. I'd love to go after some of the converts. As you'll recall we have $275 million of converts out there still, they're expensive. We've just not yet seen anybody show us ask to make economic sense. So all of the cash you're generating now is to delever to get us ready for the spin.

Got it. And just as a follow-up, if I was to think about the range of cash flow guidance. In your mind, what are the biggest variables that would take you either from the high end of the range to the low end of the range? I know there's a lot of moving parts in the business but just curious how you think about the variables with respect to cash flows?

Working capital was the biggest one coming into this quarter, but we did a hell of a job. We generated $150 million in working capital in a singular quarter and it allowed us to outpace the $500 million high end of this range. So having done fully half of the low end of the range in the first quarter of the year, I feel very good about the high end of this range.

Got it. Thank you. Appreciate the color.

Sure.

And our next question will come from Matt Summerville with D.A. Davidson.

A couple of questions. Tim you mentioned some numbers around ATM transactions withdrawals, et cetera. If you could maybe go over those again I couldn't write them down fast enough. And maybe talk about what you feel is driving that? Because I would imagine that comes to many as being a bit counter intuitive to see that kind of growth in that kind of resurgence?

We've been a big believer in cash all along. Others have tried to talk us out of it. We felt good about the volume of transactions for some time. In this quarter, ATM withdrawals and cash expense were at a six-year high. ATM withdrawals were up 6% year-over-year. And importantly the amount of cash withdrawn per transaction was up another 13% year-over-year. So think about almost a 20% increase in the amount of cash we spent in the quarter. So we feel very good about both our fleet and the efficiency of that fleet and the behavior the consumer behavior we're seeing. I'm sorry, as things get tighter from an economic perspective and if we go into a recession things like cash and debit cards are inferior goods and you'll see much more use of those rather than credit cards.

Yeah. I completely concur with everything you said there. Maybe spend, if you guys could a few minutes on the self-service banking business. Can you do a regional walk through between the four parts of the world what you're seeing on the ground from a demand standpoint maybe where you're seeing greater uptake from an as-a-service standpoint? And then maybe just comment on self-checkout flat. I think it was an LTM metric that you guys shared. What's your view on that business for the full year? Thank you.

Let me -- this is Mike. I'll start with self-service and I want to Tim can jump in with any color. I think again just overall as Tim pointed out the first quarter started out a little stronger than we had anticipated. And as we look at the outlook for the year, it feels a little firmer, a little stronger than maybe he had even anticipated what we shared with you last quarter. And that's self-service banking in total and also our shift to ATM as a service. Our shift to a service as I point out mine numbers that cost the three points of growth. across the board on the shift to subscription. So not only ATM service, but the others just to subscription. So we would have been at 7% adjusted growth instead of 4%. Regionally, I don't know that there's a region that's more or less impacted. They're all doing pretty well. We've seen pretty good strength in North America. The ATM-as-a-service uptake. We had a couple of nice deals in India last year. We did a really nice deal in the U.K. with Santander. We're seeing a lot of movement in the U.S. a lot of deals a lot of pipeline activity. We had anticipated to be more of muni banks and credit unions and we're seeing quite a few super community and regional banks that we have conversations with and then again some very large global banks like Santander. So, again, I think that business is doing better than we anticipated, but everything we expected in terms of that shift to ATM-as-a-Service.

Yes I think the -- this is Owen. The other comment I'd make is all of the regions to Mike's point are really performing well. We're seeing a pretty significant update in the North America market, which for us is our strongest margin market. And so we're seeing really good momentum there. Our pipeline stepped up as fast as faster than we anticipated. And as we have closed a number of deals we announced several of them including things like First Citizens Bank, which was an $80 million plus deal. We are keeping the pipeline -- sales pipeline as big as it's been throughout all of last year. So we're converting the pipeline. We're getting really good backlog -- but we're also we benefited -- a year ago we had a tough quarter everybody did supply chain cost escalated, but our teams did a great job in value engineering expensive parts out we have renegotiated a lot within our supply chain. And as you all recall we did not miss a customer commitment throughout all of last year. The supply chain that we're operating with has held up -- we are seeing costs come back down into the ranges pre first quarter of last year. So we have a very healthy supply chain partnership -- we're getting margins. You'll see that in the gross margins. And as we continue to convert to the as-a-service model despite the headwinds that they create on revenue we're really building a very, very strong recurring business with the ATM-as-a-service. So we're feeling pretty bullish across all the shifts to the ATM-as-a-service.

And so if you run that math out from what we thought just 90 days ago when we gave you guidance for the full year, we presumed $150 million of impact from shifting hardware to as-a-service over the course of the year which would have been about seven points of growth on that total business. So we talked about a 3% decline in revenue for the full year for that business. I actually now think we'll not only exceed the $150 million, which would put more pressure on top line, but we're also going to get back to flat for the full year. So order book is strong, business is doing great, and the outlook is better.

Yes. Thank you.

And our next question will come from Ian Zaffino with Oppenheimer.

Great. Thank you very much. Great job on the cash flow side this quarter. How do we now think about the cash flow cadence, because typically you got many in the back half now you're seeing it earlier on. Maybe walk us through how you're thinking about the cadence? Were there levers that you pulled in this quarter that you may not be able to pull again? I'm just trying to understand it because it's like I said fantastic free cash flow in the quarter. I'm just trying to get my arms around it. Thanks.

Yes. We some of the line items and free cash flow are zero some, right? You can only reduce working capital so far. We underperformed in working capital last year. And so we had some dry powder coming into the year and we suggested we were likely to overachieve in the first quarter on a more linear -- against a more linear expectation for some. I think the second quarter is a given guidance of $50 million of free cash flow on some $4 billion of working capital out there in various forms. $50 million isn't a huge percentage. I feel good about that number and we could be on either side of it a little bit. But think about being halfway to the $500 million goal at the midpoint of the year. with considerably more profitability in the latter half of the year than the first half of the year and similar spending levels I think we'll be able to do very well in the second half of the year. So, I think we'll be halfway home through the first half and we'll have a good second half as well.

Okay, great. Great job there. And then also on the dis-synergies I know you touched about it a little bit. I mean if you were to kind of think about it or maybe bucket the dis-synergies or maybe quantify kind of what the synergies are. I don't know if you could address that right now, or is that something we have to wait for as you get the Form 10 filed? But any additional color that you could give us even now you did give us some good color in the prepared remarks? Thanks.

Right. I think that the numbers that we had talked about even as early as last December was we were looking at $80 million to $100 million of dis-synergy costs -- that cost actions that we set in motion last fall we believe will offset those. We also have -- we'll benefit from those actions and you're starting to see that come through. in the margin especially the gross profit margin. So, we feel pretty good as we're going through this. We've talked a lot about where we are in the separation process. And we are a long way into that process. So, we're getting even better color and visibility into those dis-synergies. And I would say that ballpark we gave you is holding up as are the offsetting cost savings.

For sure. The parking lot of ideas that can be acted upon let's say day two of the separation gets longer every day. We're not going to make a tremendous amount of change in it as we go into the spin. But once separate, there are cost actions on both sides of the house that ought to be accretive at that point in time. So, I agree with Owen, $80 million to $100 million of what we thought. That's seems to be coming true. And we don't anticipate that being additive to the cost structure of the two companies going forward we'll have ways to offset that.

Okay. That’s great color. Thank you so much.

[Operator Instructions] And our next question will come from Matthew Roswell with RBC Capital Markets.

Yes. Good evening. It's Matt Roswell taking in for Dan Perlin. I guess, if we could take -- if we look at the hospitality unit any thoughts on kind of trends through the quarter into April? And then what's been the recent demand for Aloha given that some of your competitors have been aggressive especially at kind of the lower end of the market?

Most of the growth in that business actually was in recurring revenue, which suggests that Aloha is competing very well both at SMB and an enterprise level. That business was a little challenged on the hardware side that the post-COVID balance we experienced last year on POS in hospitality really void revenue last year. In the absence of that we're still growing through it. And more than all of the growth this quarter came from recurring revenue streams.

Okay. Thank you very much.

Yes.

Thank you. And that does conclude the question-and-answer session. I'll now turn the conference back over to Mr. Mike Hayford for any additional or closing remarks.

Thanks. Just a couple of closing thoughts. First, we're off to a really good start in 2023 and we're excited in particular as we head into a very important year for us. The cash flow success in the first quarter coupled with the cash flow that we drove in the fourth quarter so $400 million in two quarters against the target we had of $500 million to delever creates a lot of confidence in our team that we can get to the spin with the balance sheet at the right leverage ratio. Secondly, the activities around the spin that was planned to be completed early in the fourth quarter of this year are on schedule and on track. The teams are performing well. And lastly, as you saw from the announcement today we've announced the leadership of the spin. Again I want to add my congratulations to Tim and David. I know Owen will join me in this. We're excited that they're going to take over the reins and take us forward to execute the strategy and take care of us as shareholders. So we're really excited about you guys taking over and again congratulations. So with that we'll give you an update next quarter. Thank you.

Thanks all.

Thanks.

Well thank you. That does conclude today's conference call. We do thank you for your participation. Have an excellent day.