Q4 2019 Earnings Call

Please standby.

Good day, ladies and gentlemen, and welcome to the NCR Corporation fourth quarter fiscal year 2019 earnings Conference call. Please note today's conference is being recorded at this time.

Conference over to Mr., Michael Nelson, Vice President Investor Relations. Please go ahead Sir.

Good afternoon, Thank you for joining our fourth quarter.

Your 2019 earnings call joining me all the call today or marketing for Crazy.

Oh, Okay. So we're going to see Oh Andre Fernandez.

Oh.

Before we get started.

Argue that out presentation and discussion will include forward looking statements. These statements reflect our current expectations and beliefs, which are subject to risks and uncertainties that could cause actual results could differ materially from those expectations.

They don't certainties or just rod.

And our periodic filings would be.

Including our annual report on today's call will also be discussing certain non-GAAP financial measures.

Non-GAAP measures all gets rod and reconciled to GAAP counterparts in the presentation materials. The press release dated February 11, 2020, and on the Investor Relations page on our website a replay of this call will be available later today on our website NCR dot com.

With that I would now like to turn the call over to Mike.

Thanks, Michael.

Thank you everyone for joining us today for fourth quarter and full year 2019 earnings call.

To begin with review in the fourth quarter and full year as well as provide an update on her shift and yeah, becoming a software and services focused company with a higher level recurring revenue.

You called it MCR as a service.

Andre will then review our financial performance and 2020 guidance and then on Andre and I will take your questions.

I'll begin on slide four with some highlights from this past year.

We ended the fourth quarter with momentum across our businesses and finished the year strong.

2019, it was important for us to rebuild credibility with our customers around hardware delivery and service quality.

After a difficult 2018.

And we delivered.

For the year revenue increased 10% constant currency helped by strong ATM girls.

In addition to a good ATM year, we experienced solid growth across all of our business line.

Excluding the revenue.

Total revenue increased 6% on a constant currency basis in 2019.

I'm proud of the work of our entire organization as a t. rallied around the concept of customer first.

We stated happy customers buy more products from NCR.

We continue to work each and every day to improve customer service and satisfaction.

You made notable progress over the past year prioritizing investments in our strategic growth platforms, including Emerald Aloha Nexgen.

Connected services digital banking and payment.

For the year, we continued to grow our recurring revenues across all our business line.

I recurring revenue totaled.

$3.145 billion in 2019, an increase of 8% on a constant currency basis over 2018.

Lastly, today, we introduce our full year 2020 guidance Henri little discuss outlook in greater detail during his comments.

Now moving to slide five.

In an overview of our full year 2019 financial performance.

We generated strong sales growth for the full year revenue exceeding $6.9 billion.

8% on reported basis, and 10% on a constant currency basis.

Adjusted EBITDA increased 11% year over year, while adjusted EBITDA margin expanded 40 basis points to 15.3%.

Non-GAAP EPS was $2, an 81 cents per share up 7% as reported and 14% on a constant currency basis.

FX headwinds negatively impacted EPS by 16 cents during the year.

Lastly, free cash flow was $275 million for the year, which improved from 223 million in 2018.

That's just like sick and an update on our strategy to shift MCR as a service the shift to a software and services led organization focused on delivering bundled recurring revenue solutions.

These 24 by seven solutions will provide the technology or a customer's needs around their stores their restaurants, and the self service banking.

We transitioned to NCR as a service company. We are focused on the changes required in critical areas of our organization.

Our offerings.

I go to market strategy and our delivery capabilities.

<unk> industries, we're making progress with their offering and starting to win in the marketplace.

Give me a few proof points last month at entering the National Retail Federation Conference. We showcased our next generation retail architecture, and we see positive feedback.

We announced a general availability Emerald our next generation cloud based retail point of sale solution.

You have dramatically reduce the time to market and brought a first I'm inclined to market from contract.

Running of store in less than six months.

For banking, we began the process of shifting away from perpetual license revenue models and started writing contracts with recurring revenue spread over a multiyear contracts in the fourth quarter. We saw these efforts to accelerate with 52 deals signed on recurring contracts that in the past would've been an upfront payment.

We expect that shifted to accelerate in 2020.

And digital banking, we signed a 45, new contracts, including 16 new customers.

So signed over 120 contract renewals during the year with zero competitive losses. During 2019. This is a marked improvement compared to 2018.

Hospitality, we experienced increased success with a lot of central which bundled software.

Services hardware and payment.

During the fourth quarter, roughly 80% of all SNB alone looks like so she loved direct sales channel were sold as a subscription bundle.

And in payments, we remain on track with our integration plan.

The first quarter, we will see uncontrolled deployment with quick service customers in pilot table service customers.

Targeting general availability for quick service customers by the end of the first quarter, followed by table service customers in the second quarter.

Integration work at the also underway, but the general pilots attempt plan.

Second half of this year.

Our go to market strategy continues to evolve that's part of that evolution. We have continued to align our organizational structure to better connection of products to our customers in the marketplace at the start of this year, we move sales and product management directly under our business units as we strive to be more flexible and agile with their customers.

As we look at delivery, we think about Onboarding and ongoing customer support required in a 24 by seven business, we are enhancing a client delivery capabilities, including more automation and program management and more predictable and positive experience for customers.

We will be providing additional details about our shift.

As a service at our Investor day scheduled for early night.

Moving to slide seven and an update on our M&A activity and strategy.

During 2019, we completed eight acquisitions for a total spend of less than $230 million.

These transactions demonstrate our disciplined approach to M&A as they would tuck in deals largely aimed at strengthening our software offerings accelerating our growth and advancing our recurring revenue.

Most recently, we we acquired Vince drought.

Writer of edge virtualization technology.

Vince for is consistent with our strategy of acquiring early stage software companies that enhance our product capabilities and extend our leadership across the verticals we serve.

Since its platform will enhance our next generation store architecture for both retail and hospitality industries.

Again, I'd like to reiterate we had a solid 2019, you could better pair of a customers and of our employees are beginning to shift to a software and services led enterprise.

Overall, I'm very happy with our progress.

With that let me pass the call over 200.

Thank you Mike I'll focus my comments on constant currency growth.

Your job so the impact of foreign exchange.

Marty eight shows all consolidated financial results for the fourth quarter and full year 2019.

As you see on the left in the fourth quarter, both revenue and non-GAAP EPS increased 6%.

FX lower non-GAAP EPS by approximately four cents in the fourth quarter.

No the negative impact of FX has moderated significantly in the second half of the year.

On the weekend side for the full year 2019 revenue increased a strong 10% led by our banking segment.

And benefited from a 33% growth in ATM revenue.

Even excluding eighteens total company revenue was up a solid 6%.

Full year non-GAAP EPS was $2, an 81 cents an increase of 14%.

Also led by our banking segment and driven by higher software and services revenue combined with improved profitability, you know hardware business reversing the supply chain and capacity issues, we experienced in 2018.

Recall, we had a stated goal this year of reducing the operating loss in our hardware business by more than half.

I'm pleased to report that we exceeded that goal and recorded only a small loss in our hardware business.

Overall, we were pleased with our full year financial performance, particularly as we absorbed a number of earnings headwinds that we previewed on our third quarter call.

Recall, we discussed 25 to 30 cents of unplanned EPS headwind in 2019 related to three buckets.

First transactional items, such as retiring the convertible preferred previously held by Blackstone.

Likely higher interest expense from our debt refinancing in Q3.

The negative impact of FX, the timing of our share repurchase.

Dilutive impact on a year from M&A.

Second increased investment in our business units primarily hospitality.

And third the ship to recurring revenue.

We also absorbed a fourth bucket, which was approximately 10 cents of additional compensation expense, resulting from the company having exceeded our targets for the year.

Again, we were pleased to have achieved all commitments. Despite these headwinds.

Slide nine shows our banking segment results for the fourth quarter and full year.

In the fourth quarter banking revenue increased 2% exceeding our expectations.

While growth moderated from double digit growth in previous quarters recall, we had a tough comp in Q4, well later to strong ATM shipments and sales we recorded in the fourth quarter 2018.

For the full year banking revenue increased 13% led by a 33% growth in ATM hardware sales.

Excluding ATM hardware banking revenue still increased 4% demonstrating strong demand for our software and services solutions and to Spike a partial shift of banking software to recurring revenue.

As we signed an increasing number of deals in banking software this quarter on a recurring basis.

On the services side related to banking, we continue to grow our hardware maintenance backlog of future annuity stream both from the ATM sales as well as from large customer wins this year to service Multivendor fleets.

For the fourth quarter and full year operating income increased 14% and 31% respectively.

The growth was driven by higher volume and a favorable mix through our ATM as well as higher software and services revenue.

We also benefited from significantly improved profitability in our hardware manufacturing operations mentioned previously which positively impacted all segments.

Moving on now to slide 10, which shows our retail segment results.

Retail revenue increased 10% in the fourth quarter and 7% for the full year.

The increases were driven by double digit growth in self checkout revenue as well as increases in payments from our jet pay acquisition and services revenues.

Yeah acceleration in self checkout growth was broad based in terms of customers and geographies.

Services generated solid growth driven by higher hardware maintenance activity as well as new managed services contracts.

In addition, our jet Perry integration remains on track.

Operating income increased 21% in the fourth quarter and 11% for the full year.

In early driven by higher software and services revenue and improved hardware profitability.

Slide 11 shows our hospitality segment results.

Hospitality revenue increased 5% in the fourth quarter and 4% for the full year driven by increases in cloud revenue payments revenue from our jet pay acquisition and an increase in point of sale revenue.

Operating income was down 45% in the fourth quarter and 34% for the full year.

The decline was driven by a tough comp from several large customer installations in the prior year as well as continued investment in service and support and payments, partially offset by improved hardware profitability.

On the expense side, we continue to invest in programs to enhance our technology to improve customer satisfaction and to support the rollout of our new products.

Additionally, we continue to gain traction with our bundled subscription packages via our Aloha Central's offering.

Although the financial impact during the year from the move to subscription was minimal.

Significantly less than on banking segment.

Shifting gears, a strategic focus for us as we accelerate the investment in these programs.

Now to slide 12, where we provide our full year revenue results under our previous operating segments.

I'm pleased to report that we recorded solid revenue growth across all of our previous operating segments for the full year and higher growth for each then we recorded in 2018.

Software revenue increased 6% driven primarily from diversified growth across our banking retail and hospitality segments.

Services revenue increased 5% driven by increases in hardware sales that are driving higher services backlog and revenue as well as greater managed service offerings.

And finally hardware revenue increased 20% and grew across all segments.

As I mentioned previously ATM revenue increased by 33%, while the combination of self checkout and point of sale grew by 8% for the year.

Recurring revenues increased 8% driven by growth in hardware maintenance football NCR and third party devices as well as higher digital banking revenue helped by our acquisition of de three.

On Slide 13, you can see free cash flow net that kind of adjusted EBITDA metrics.

Free cash flow and do that $275 million for the full year up from $223 million in the prior year.

While we improved cash flow versus the prior year, we ended the year with higher working capital than planned driven primarily by higher inventory as well as higher receivables from increased revenue.

Additionally, we won more multi vendor service contracts and invested in spare parts to improve customer service.

Overall, we improved our inventory position across our supply chain year over year, but still have more to do.

Slide 13 also shows our full year Capex spend up $329 million, an increase from last year, and primarily reflecting an increase in spend in the next generation of software across our business segments.

Finally on the bottom of the page net debt to adjusted EBITDA a measure of leverage ended the year at 3.9 times up slightly from the 2.8 times recorded at the younger 2018, but down from the 3.1 times at the end of the third quarter.

Recall, we generate the bulk of our free cash flow in the fourth quarter of the year, which was partially offset this year by our acquisition of Ginger.

On slide 14, we provide an update on the productivity initiatives completed during 2019, which was centered around three areas.

First we made great progress on our manufacturing transformation improving cycle times from inquiry to order to remittance and sharply reduced the operating loss in our hardware business.

As I mentioned previously operating results in our manufacturing operations exceeded our expectations and was close to breakeven for the full year.

Next we completed our 100 million dollar spend optimization program, which recall was largely intended to offset higher real estate and employee related costs.

Roughly three quarters of the cost savings were realized in essence, DNA, while a quarter of the savings were realized in cost of goods sold.

This allowed us to maintain our opex to revenue ratio at approximately 17.5% for the full year despite higher revenue.

We have identified additional areas of cost savings that should lead to further margin expansion in 2020, and beyond which I'll discuss in a moment.

And finally in services, we continue to invest in the business to focus on service quality and as previously mentioned grew revenue by 5% this year.

While we did not grow our services margin percent in 2019, we're in a stronger position to continue to take market share and win Multivendor service deals and garner a larger share of wallet from our customers.

Moving now to slide 15.

As we pitcher NCR as a service and drive recurring revenue.

Efforts are underway across all functions to effectively deliver bundled offerings to our customers in a seamless manner.

While also targeting business processes to drive improved efficiency.

These efforts will involve both investments in key areas as we shift our business model as well as efficiencies and others as we further focus our efforts.

Overall, we expect these actions will result in at least $90 million annualized run rate savings by year end 2020 with $40 million of savings realized in 2020, which is included in our 2020 guidance, which I'll discuss in a moment.

On slide 16 will find our full year guidance for 2020.

I'm pleased to report that our 2020 guidance is similar to our 2019 initial guidance. Despite the accelerating recurring revenue shift in 2020, which will dampen both revenue and earnings growth.

We expect total revenue to be flat to up 1%.

This is also net of an approximately 1% headwind to revenue from FX as well as a 1.5% revenue headwind from the planned increases in recurring revenue.

As you saw in the second half of 2019. This is beginning to have a dampening effect on our overall revenue margin and cash.

The impact to EBITDA and operating margin is even higher than revenue as much of the revenue. We've been initially contracting as recurring internally developed NCR software on which we enjoy high margins and which are now being recognized overtime.

Included in our revenue guidance isn't expected decline in ATM revenue in 2020.

We expect a decline in 18 on hardware revenue in 2020 of roughly 8% to 10%.

Following a strong 33% growth in 29 team.

However, when looking over a several year timeframe since 2017.

When adjusting for our manufacturing changes in 2018, which adversely impacted ATM revenue that year.

This is consistent with our previous comments that we believe we have been in a generally flat overall ATM environment when viewed over the last several years.

We expect our 2020 adjusted EBITDA to be 1.06 billion to $1.1 billion.

Our non-GAAP EPS is expected to be $2.75 to $2, an 85 cents for the year.

We have assumed the tax rate of 23% to 24%.

And a share count of approximately 147 million shares.

Now regarding earnings and cash flow linearity for 2020 and for the first quarter in particular.

Given a normalized ATM environment greater impact of the shift to recurring revenue on our earnings and continued investment in our hospitality business.

We expect a shift in our you P.S. miniseries compared with the last few years.

Specifically, we expect to generate roughly 12% to 14% of our full year EPS in the first quarter versus our for your average of 16% to 17%.

We expect free cash flow for the year to being a 250 to 300 million dollar range.

In 2020, we have several headwinds to free cash flow, including costs associated with our strategy activation.

Higher cash compensation expense from having achieved our 2019 targets and higher capex.

Overall, we expect the linearity of our cash flows to be similar to previous years with most of our free cash flow generated in the fourth quarter.

Regarding capital allocation priorities for 2020, we continue to prioritize internal investment in our strategic growth platforms, which we believe will drive the highest return on investment in the next three to five years.

Overall, we expect capex in the range of $350 million to $375 million.

On the M&A side, our target remains in the 300 to 400 million dollar range and we'll prioritize companies that add to our software portfolio expand our global distribution and increase our services revenue.

And finally, we expect share repurchases of approximately $100 million to limit dilution.

Overall, we intend to maintain a strong financial profile with manageable leverage and ample liquidity.

Like 17 shows bridges from 2019, adjusted EBITDA and non-GAAP bps to 2020, adjusted EBITDA and non-GAAP NPS and is intended to provide a high level depiction of our earnings drivers for 2020.

As we've said previously the primary headwind in 2020 will come from our ongoing shift from selling perpetual software licenses for which we were recording revenue and margin upfront to term and subscription licenses via which we're recording revenue and margin overtime.

Sean.

As you saw in the second half of 29 team.

This is having a dampening effect on our revenue and margin and is expected to accelerate in 2020.

This shift is expected to negatively impact revenue by approximately 102 $120 million.

Adjusted EBITDA by $70 million to $80 million.

Non-GAAP EPS by 35 to 40 cents.

In addition, 2020 non-GAAP EPS will experience a headwind of 15 to 20 cents from increased depreciation and amortization as well as a higher tax rate, partially offset by a lower share count.

These headwinds will be largely offset by business growth, primarily driven by increased software and services revenue as well as the cost savings I discussed on slide 15.

In total our operating expenses as a percentage of sales should continue to improve and enable us to continue to grow our profit margins.

Mike will discuss our margin targets in a moment, so with that I'll turn it over to Mike for closing comments.

Thanks Andre.

In closing with slide 18.

We made significant strategic progress in 2019, and we did what we said we would.

Delivering consistent strong financial and operating performance.

We enter 2020 with momentum in a clear strategic vision as we accelerate our transformation to NCR as a service.

The next steps, we're taking in a transformation will build on our success today and are consistent with our long term 80, 60 20 gold.

These include.

Her accelerating our software and services revenue generating suitability capturing increased recurring revenue stream I focus remains the same that software and services to 80% of total revenue.

And recurring revenue, 60% of total revenues.

Second driving margin expansion to be a gross margin improvement.

Action and that's seen a class in a disciplined pricing approach.

Long term EBITDA margin target, 20% compared to our current.

EBITDA of 15.3% in 2019.

And third continuing to execute a balanced capital allocation approach with the focused on return on invested capital.

Free cash flow generation and disciplined M&A that will enhance our offerings and accelerate our business transformation.

The entire NCR team is focused on execution.

Serving our customers and forging ahead with that forward vision of becoming and as a service company.

We will continue to prioritize our spending focus first on delivering service to customers and additional products to market place.

We also believe it is important to take care of our employees and continue to build a customer focused culture at NCR.

We believe that by doing so our shareholders will be rewarded with a favorable return.

We will house in Investor Day on May 14 at our headquarters in Atlanta, where we will share more details on our NCR as a service strategy.

Thank you for your time today and now we will open up the call for your questions operator.

Thank you and ladies and gentlemen, if you'd like to ask a question. Please check my pressing star one on the telephone keypad. If are you seeing if speakerphone. Please make sure you know function has turned off tie your second feature equipment again press star one to ask a question. My first question today, It will come from Dan Perlin with RBC capital markets.

Thanks, Good evening, guys and thanks for all the detail on the transition I just wanted to make sure I understood.

Have you think about kind of like the pro forma guidance would be and what their results will be I guess two things. One are you planning on updating it on a pro forma basis as you go along throughout the year and then.

Secondly is it simply is just saying you got 35 to 40 cents that you're absorbing here I Miss actually what you said, we'll see additional 15 to 20. So if you could clarify that from it'd be great.

Yeah, I mean, and first of all we know.

I don't know that will give you a pro forma other ways to lead. This described it though we will share is the impact like we are we kind of last quarter sharing the impact.

In revenue and EBITDA.

And he can guess at according to quarter basis that were in hearing so as to go through the year, we'll call out.

How much impact we had that corridor and but we try to give you hear some headlights into the full year.

What are anticipated to impact will be.

So Dan this is Andre so just clarify that to 75 to 85 was the range and then we set their dad is Ah Ah that would have been 35 to 40 cents.

Higher.

So just just a quick data perspective, any additional 15 to 20 cents. We just wanted to point out that I've done it as a headwind in that wall, but we're offsetting that additional 15 to 20 cents true business growth as well the cost savings I talked about [noise].

Okay and then its good to see on the banking side, you guys have picking up a fair amount of business. There I was surprised quite frankly, but is that a function of.

Are you doing something different in terms of bundling that solution already I mean that seems to be the area, where you would take it most of the brought in terms of making this transition.

That's baked beans increasingly competitive and yet you guys seem to be continuing to when some of those deals. So.

Any color there would be great. Thanks.

Yeah, Dan I'm surprised that you're surprised [laughter].

You know I I think we talk a going back a year ago, where we know that are serious 80 in the marketplace was getting a lot of attention and a lot of demand.

As you actually we call here go back and actually we were struggling.

With that supply side, even though we had really strong demands we corrected that during they came.

Well, that's the American demand and a that's held to a very strong for us as you can see by the numbers.

Not only for the full year, but also a pretty good finish in the fourth quarter.

We we believe that the shift to focusing on delivering better service.

And what the marketplaces, providing what our competitors are providing service a aligned with our ATM.

Yields better ATM sales and so we've put money back into that channel.

Harks back into the channel, we've added resources and Weve directed that aim to deliver a better service experience than what they get anybody else in the market.

Great. Thank yet.

Thank you. Our next question will come from it tend to quickly with Wells Fargo.

Hey, Thanks, and good afternoon I had three questions. The first one is just around the payment strategy understanding a lot of this is sort of just beginning to get rolled out but is there any color. There you could provide around your confidence.

And being successful here, whether that be you know in bound to fly and inquiries or just receptivity by sales or anything you can sort of point you just roll up to two where youre maybe.

Six months ago nine months ago around a payment strategy.

Yeah, Tim I see what is it is a with Phil.

Looking at somebody integrations and it's still.

On track, but it's still early.

I'm getting a couple of data points that helped with a little bit of color. So as we go after market with a low central's were bundling in payments as part of that and the receptivity to that and we've leased tended to be focused originally on.

Our direct channel so well we have access into the into the marketplace is the restaurants with our direct.

On the street, where else bundling Aloha with hardware service and desktops rent payments I would call that a little essential in its own and I sit down and talk to the sales people as they come in this year.

That's correct kick off meeting that bundle.

It's selling they're very excited about having not to sell they think it's a lot easier simpler sale than what we were doing in the past and when we asked about payment.

They get no pushback, they so a new fail. It just comes with a an SAP Hana pratik.

We still have to demonstrate that we can go cross selling up sell to somebody who is using a different.

Hi, there, a which were starting to do as you see the other schedule, but outline and so that's the restaurants and then at retail we're just starting to integrate it to some of our retail products will be doing that this year. We will we would anticipate similar will wear out installing a new product.

With a new client.

The payment sale will be fairly straight forward, if we're not trying to display somebody's gonna get a little more complicated, but we still we still feel pretty good about owning the front end hardware and software footprint and adding the ability to go in Paris or payment story.

Great and then and then one more for so you might get then a housekeeping as well but the.

On a lot of work since you showed up I think around you've referenced a lot on this call around sales people in service.

Are there any types of statistics that you might have to just provide to color around the work you've done there whether that be net promoter scores or employee retention and more morale studies or anything there what really show you know where you're asking that journey around the people side of the business or is it just something more anecdotally that we'd have to.

Reference some sort of rather they run the generic financial so if the company.

Yeah, you know what is going to start with a 10% revenue increase year over year on a constant currency basis.

And.

Yeah, I Wanna get question around changing the culture of changing the focus or be more client a customer service.

Centric how do we look at the metrics and my answer is always they're going to eventually end up in better business success, whether its revenue it or the to earnings. So we do track MPS internally, we have im sure that extremely we have specific goals and we still have a desire to improve their particularly in some of the different fine.

You know the culturally due to employee surveys, we do a lot of.

Probably a lot more.

A culture interaction by walking around we've visited I think I got to 23 different locations around the globe. This year. One went for a lot of those are things that brown underwent 100 gets out in the field. So I.

I think we we touch both clients and our employees and.

Yeah, They don't and it doesn't end up a affecting in a in our sales and I revenue and earnings itself or not but we feel pretty good about.

The progress.

We don't think we're done that we we've made progress from last year and Uh Huh.

Great well my housekeeping question for Andre was in your revenue guidance you reference.

An expectation and decline in the ATM hardware revenue, what's at that number 8% to 10% decline in ATM hardware.

That's correct.

Okay. So if we exclude that actually is probably won't that stronger growth around the services and the software side of business.

Yeah, and even that's tracking and even you know we used to report.

Hardware.

Segments. So you could see some of the hardware and she had historical numbers. So even with an ATM decline at age or 10% I think still compares very favourably to watch a previous years.

Perfect. That's all I have thanks very much.

Yep.

Thank you and next we'll hear from a Katy Huberty with Morgan Stanley.

Yes. Thank you. Good afternoon, when are you expecting to hit the Enterasys service 86, he 20 targets and Andre should we think about 2020, it's a year of the biggest headwind to revenue and earnings or does that headwind ratably as you've got went to 2021.

Yeah I'll a this is Michael excuse me little so we laid out our strategy to or you know to focus on a shift of revenue shift tougher and service in our shift to recurring.

And then a permanent and a.

Our general back on November seven 2018, we set a it's a multiyear plan we called that five year plan. So we would we would feel were one year ended at 29, English really that for sure to get get started and.

What I think it's time, we literally got started at 19 study could go in America with bundles with packages, where we stood at shifting to.

Recurring revenue streams and deferring revenue and we gave those you know they've never seen nice that impact in 19. So it's it's are you aware one year into five year plan.

I would I be can answer the stupid idea where does it.

20 funny I don't believe is certainly the high water Mark I think is that a couple of years before we get a tailwind out of the deferrals that we've made a we'd look at that is and we try to attract a slightly different.

But we tried to between three to three of them here kind of catch up. So if you look at that over time I get a couple of years headwinds will flip to a tailwind.

Yeah, Katie I I agree with that I think you'd have a difference for us to go to 60% now you know, we probably at about a billion dollars more.

Recurring revenues, so what I think this year as a very meaningful acceleration in 2020 versus 29 chain, but I think as Mike said, it's certainly not the high watermark.

Okay, and we're moving maybe 100 going in dollars and if you recall in the past I think we certainly had about $300 million.

I'll software licenses. So we're moving a good portion of that but you'll likely see some acceleration I've asked in the future beyond beyond 2020, you know we're also looking at Oh contracting differently too. So we're also looking at some of our professional services revenue to how can we.

A contract differently. There. So we can take that on a recurring variances, which is largely or almost exclusively upfront revenue today, including looking at a portion of a hardware. So so I think you can get some acceleration will well happy on coffee on 2020, and then in the future. We think the big driver of recurring revenue will not so much fees.

Shifting existing licenses, but rather than new products that were investing in that will start to come to market here and then selling those right out of again on a recurring basis.

That's helpful color. Thank you can you can you also address how you have evolved the commission structure to drive bundling and the transition to subscription.

Yeah, I'll I'll kind of give you little bit that kind of ads from Laura that so we actually started that last year recognizing that in our prior years prior to the 19.

Commissions were predominantly focused on in your revenue.

Or in your sales.

And that Didnt that we weren't people for doing multiyear contract and Didnt reward, but we would call bundles or.

Packages of solutions.

We said it shipped last year and then that could have always had we're continuing to push that even further this year and Uh huh.

Central's behaviors.

I would I'd add to that Kt is that as part of our whole pricing.

Initiative last year as we've looked at the transition license from.

Actual to subscription as we looked at the bundling of Aloha essential et cetera, we had thought they put in place of pricing discipline a deal scoring that every deal goes into a deal scoring system. It shows the sales reps the competitiveness of that pricing and it shows the impact on.

Commissions, so where reinforcing.

So the incentive plan, which as Mike has said has shifted to rewarding multiyear contracts and deals, but it's also reinforced with the pricing discipline and clear.

Pat so.

The benefit of.

Pricing, both competitively and add to our benefit.

And we're starting to see it really pays feedback on that.

That's great and then just one last question for me can you talk about that progress around the payments processing solution, which products have you integrated that solution where are you seeing the most adoption and is there any notable impact in terms of revenue in 2020.

[noise] Yeah. So again, we started with we've got silver, which is our small business a small medium business pratik integrated with.

The payment.

We're rolling.

That out into the restaurants, we went to the little how sweet both focused on quick quick service as well as table service customers and that will come out and <unk> second quarter.

Gee, so we're starting to already sell fell into that.

Into the marketplace and then second half of your well try to attaching it to some of the retail products, including General which has our next next gen cloud products in the retail marketplace. Yeah. The numbers I wouldn't say the number is a in its funny funny, you know well see it impact well what what were.

Really looking for is the run rate at the end of the year and what kind of adoption and pick up a we get it thinking thats. It really question how do we how do we know what do we go out to sell that are our theory around somebody wanting a kind of straight through.

Rating with a hybrid type of service entering the payment attached is working so thats the metrics that we're going to watch when we go to so are we getting the uptick and then but as I've run rate at the end of the year the numbers and 20 funny won't be dramatically.

Acted in terms of 7 billion dollar company.

Thank you.

Next we'll hear from Paul Coster with JP Morgan.

Yeah, it's actually taking a cushion lots folks move them first quarter Coleman for you I think you said.

Yes, we grew 12 full troops to view it books, it's too soon some too. So it's also a proxy for revenue.

And I just need next generation through I I think cars because it was something stupid transition, but you can see why did it would be concentrated in the first quarter them up so that's your Q.

As you said, we bought transition over the course of you.

Yeah, Paul its Andre I'll start. So those are we said he asked was going to be a little bit lower than the historical when they are already whereas the revenue. We think LTM line and I think why why that discrepancy and like I said in my prepared remarks. There are few reasons. One is the impact of the shift your recurring so.

That's then that's been accelerating over the course at night train and we think on a quarterly basis, we'll continue to accelerate so that's an EPS drag if you like in that in the first quarter I'd that we didnt happen the first quarter of last year.

I had a continued investment that we're making in our and our hospitality business.

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Acceleration you still ongoing and it will continue through year, what why would.

If you its drugs and shouldn't in Scoop second third and pulled forward is.

Yeah, well it will be an ongoing guy go over the course of the year.

HM Okay. As you move towards goes in service business model is going to start showing backlog and so future contracts revenue or even the dilution screen so worthy.

Yeah, Oh, yes, so where what we're doing right now is getting a little below guidance into the intact.

On revenue and EBITDA, an idea and we expect to.

Having 20, Tony based on the shift to recurring.

And then we do plan to report on that.

We will I will start laying out more and more metrics as we go through this and have a little bit more experienced and that a little bit more headlights into what the things look like and I know we've had.

You know dividends puts in terms of backlog.

TCV, a our et cetera. So we're going to look at that I will share a little bit more me about.

What we're thinking about in terms of metrics and trying to the timing of when we would come out with those but we do anticipate we will share more metrics as we get further ominous pathway.

When equivalent.

That's it for now thank you.

Thanks.

Thank you and next we'll hear from Matt Summerville with D.A. Davidson.

I just a couple of questions first Andrea I want to be clear on the fourth bucket of headwind you encounter the 10 cents of incremental compensation related hits in the PML was that incurred in the fourth quarter in entirety or what's the right way to think about though.

No. It's Paul I mean, we had been we've been encouraged get throughout the course of the year soda. It was implied any into numbers and then obviously, we had a bad very good fourth quarter as well. So that was really open up over the course of the full year.

And then with respect to hardware profitability sounds like it's hovering just shy of breakeven at this point what.

What was sort of is the right way to think about how that evolves in 2020 should we think about that business is being you know permanently in the black on a go forward basis, given the progress you've made over the last year and in that same sort of context are you contemplating any additional manufacturing.

Outsourcing or other ships at this point.

Hey, Matt it till one.

I would say that you are hovering to.

Description is about right. We were we expect to being a black this year on the manufacturing [noise].

I'm not sure I'm going to permanent but that's a hope and as the objective, but certainly in 20, we think we will be into black we're constantly looking at.

The manufacturing.

What we refer to a ecosystem as you know we made a lot of changes 18 months ago.

We settled through those I think we have a pretty good grasp of the business right now and we see there's always some opportunities that we will continue to evaluate including if more outsourcing makes sense. Then that's what we'll do it we will continue to look at where the leverage for grain costs.

Down.

Manufacturing standpoint.

And then with respect to the 90 million of anticipated cost savings associated with the latest round of expenses related initiatives can you, maybe parse that out a little but give a little bit more granularity in terms of what the major buckets or the sort of underpin that 90 million dollar target.

Yeah, and again, so the 90 million, we laid out and how much actually drops in 2020.

So, we're saying 40 will be impacted in 2020, and so you can see that this is not an action. We're taking from Matt. This is really kind of the plan to shift our organization around a strategy to become the as a service company. So there's a lot of moving parts behind the scenes how do we aligned our sales team how do we line or go to market, we try to put in the context of our off.

Thanks, I go to market and then the delivery we know that comes to delivery service that we offer to support that we have the 24 by seven in terms of other products credit support that we have to do so we've got a lot of things we have to change and move forward and as part of that we know yes.

Thanks for doing that will lead to we're going to stop spending money on and then we'll have to reallocate. So it's actually a little more complicated than just looking at a specific areas I will say the one thing we'll continue to do is looking for inefficiencies as opposed to cutting out.

Dollars that are out in the field with the customers or product or delivery. So we'll look for areas that we believe we can take out inefficiencies as opposed to cutting back on customer focused spending.

Thank you guys.

Next we'll hear from that Brett Huff with Stephens.

Good afternoon, guys. Congrats on the progress on the strategic initiatives.

Thanks, Brad.

Three questions first one school for them to chronic once a day I just want to make sure that I'm doing the math right. If I take the midpoint of years, you're at a 1% cost.

The 1.5% of I think FX than it had a 100 basis points Oh.

Shifting to recurring that gets me to about 3% and that sort of setting aside the headwind from the slowdown in each month hardware I just take that 3% that's apples to apples to your kind of near term growth targets of 1% to 3% is that what I should be comparing that to.

Yeah, that's right because that's it that's what you just calculated it would be a rough estimate of what revenue would be had we've taken that revenue all upfront and instead, we're checking it over time, so that's correct.

I just want to make sure but that's helpful. And then you've got to can you talk a little bit about color or some color. Mike I think you did early on about 45, when digital banking Union percent Aloha sales with essential things like that can you talk about when rates I know, we get a lot of questions on there's a new competitors out there some strong competitors out there.

In the restaurant Pls, the toes microbes, well et cetera, and then also in digital banking, obviously, there's a whole lot of new important competitors. What can you say any other color about when rates or what you're hearing from clients. When you do when or if you're using why you didn't sort of one yield for that.

Yeah, So let me hearts that up a little bit so obviously.

In banking in total we felt really good about the year.

ATM zix him service to support platform.

On the wins outside of even selling hardware.

We're in a in the in the banking side had a very strong here.

Well with our suffer stacked on top ATM and there is nothing pratik.

A digital insight it as you pointed out has a from our competitors in the digital banking side digital insight and be three or two digital banking products. We had a well he feels is a great 2019 digital banking and when I say that that's coming off of some challenging years.

Well, we were losing a customer so I hope it's supposed to stabilize the proud to stabilize the customer base. We did that in 19, and we added a number of new flags.

We had a number of new contracts. So we anticipate.

Digital banking footprint to get back into a growth mode and 2020.

We actually feel pretty good about where we stand with their competitiveness in digital banking vis-a-vis some of those new entrants. So now it's just getting back to execution, where I would say three or four years ago, maybe took her I escobal I think we've put that together and feel good about the future there.

Retail.

We feel we think we're actually ahead of the pack a little bit more product, we think our hardware stacker ASCO products I really solid there and now its or Emerald.

So I put product cloud based product, we're pretty excited about retail we don't see anybody else out there are claiming the man so.

We went to NRF, we laid out our vision or strategy for our platform or architecture I went to virtualization, we had quite was instruction.

Well Democratic and I think our booth really stood out at that show and then lastly, the restaurant space is probably the most competitive issue I know, it's pretty easy to write a little restaurant Pratik, Nick what I can get its mark I think it's much harder to sustain that well I think it's much harder to get the profitability.

Focusing on you can see our numbers have been impacted.

We have a lot of competitors that are focused on market share gain and focused on profitability and we decided we're going to we're going to stand to compete and hold onto our customers Oh that are American share start to cross sell and then add a payment and we're going to spend the money to maintain that position.

Okay. That's really helpful and then less product one and I don't know quite how to I'm not sure what you'd kind of called this product within sort of include but it's kind of the value added product going beyond the break fix in kind of the monitoring within the four wall.

The store I think you've had big some big change could you do that for how big is that business and how did that figure. This year did you start to see some of the wins and get some of those higher margin I heard value, but in terms of contract again.

Yeah.

Over health services are actually did very very well this year, a solid growth, we talked about adding adding higher figure than me.

The ATM fads, if it is for break fix side, who were not necessarily a hardware footprint. So we had a fair amount of success with that.

Our story and actually in the retail side, we had some wind back the claims with less than.

Well, we went back and with that we call. It Dcs I did affect the services, which is the ability to manage remotely monitor and information.

Correct.

Situation remotely as opposed to rolling a truck whenever we can and then if we have trouble attract we actually have a little headlights into what actually needs to be fixed at the store or the.

Bank in this case, that's an ATM.

So we thought it gets momentum we tell we're going to continue that that's in that because we think that will differentiate a footprint. We think that with the scope that we have other feet on the street, coupled with that technology, we will have a differentiated product and again, our gross their sales and service is extremely important to us going forward as part of our shift.

Recurring both the global services managed services as well as professional services. So.

We'll continue to push that but it did say up a it's a great differentiator for us right now.

And thank you. Our next question will come from Dan Kinda, what that benchmark company.

Thanks, Good a good evening I hopefully this is the last question because it's been a lengthy here I'll try to keep a brief for you guys. Andre you made some some quick comments just about SCO strength I, just curious and I think Mike you just kind of talked about a little bit just any color on kind of what's driving that and sort of what momentum you're seeing there.

And then Mike just kind of as you continue to add here.

On the tuck in side, just kind of what areas you might be looking out to sort of to fill in where you need to go next.

Well I was just fiscal first so 2018, we've rolled out of public health SCO six both in the states and in Europe, and we struggled with some of the capabilities. We brought that product back in the end of 28 team and then did some fixing up both on the hardware and software around that but that back up in America.

We are really good 29 teams across the board.

So.

The product is out there it's a having success it's starting to go down market. We've added to stop with product, which is a fraud detection product, which is really what drives adoption. If we can reduce the fraud on self checkout. So I think that's helping as they go down market with the value proposition and ensco.

On M&A are you kind of we do we we've continued to look at marketing channels would have been really can improve in connection with their customers. We've done that with the high fidelity hospitality challenges channels and say well look at that globally, what we can get better access via channel.

We've done some services deals we did the pickup or the service platforms in Brazil, which increases our I reach down in Brazil, and then we've done a couple deals each year that a very software technology focused.

Lastly, we didnt instead, which of the software virtualization hardware virtualization that suffered driven and we did decrease in the digital banking arena.

We did or in the still here before we did.

South lift so.

You should expect that will add some product tuck ins every year.

Evan Epic study to defend our market reach in the channel side, we'll do that and then.

We actually think we had a pretty that service footprint around the globe. If we can pick up services in market and get some leverage.

We will do that as well because we think those deals are fairly accretive. So I mean, it's a you know we don't chase a lot of deals we stay very focused on the footprint in terms of our three industries and geographies that were already in market and that's what we continue to.

And next we'll hear from Kartik Mehta with Northcoast research.

Hey, good evening.

Mike you talked a lot of I'd payments I'm wondering pad the sales people friends, you're going to market selling payments, what what are they referring to as a value added NCR can provide on the payment side and what's allowing them to win business.

Yeah again, the them, though the most experience we've had so firstly go out with a aloha and silver and reconciling in two or into a businesses or maybe the SMB or a that's called chain of restaurants table service restaurants.

And.

We actually we felt in the package. So we don't pull out payments I think in the past.

When we went in and tell them everything but payment and then they had to find payments on their own for them that was what was a.

Uh huh.

As a hassle was made it more difficult. So again, we talked where sales sales or people that were in town for the sales kickoff and they all reported a very very high conversion rate when they walk in with a bundle and talked about it included payments. They they don't we see pushback. So that's six branches.

So far I think as we go and look at larger customers and a competing by integrating our payment product with their point of sale. We will continue to look at ways, where we can heightened that alignment that we can begin.

Helped with reporting we can help that they adjudication of the chargebacks and make that flu therefore that client.

But it's all about integration and ease of use in terms of high value prop.

And that does conclude today's question and answer session. Mr. My Canford I would like in a conference back over to you for any closing remarks.

[noise] sort of the thank everyone for joining us today on our fourth quarter and full year 2019 earnings call.

We ended up a year or as you can probably tell we're very pleased with that performance in 2019.

Meeting, our meeting and in some cases exceeding our financial goals for the year and then beginning the shift to MCR as a service.

We'd like to invite everybody to join us.

In Atlanta on May 14 for an update on our our strategic plan. Thank you again for joining us today.

And again, ladies and gentlemen that does conclude our conference for today, we thank you for your participation.

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