Q1 2020 Earnings Call
[music].
Good day and welcome to the people gig store for close to fourth quarter since you're talking to earnings call. At this time of will touch on the conference over to Steve Virostek. Please go ahead sorry.
Thank you Sir and welcome everyone to do you go next door first quarter earnings call for 2000, and once you. Joining me today are Gerard Smith, President and Chief Executive Officer, and Jeff Rutherford Chief Financial Officer.
For the benefit of our participants we have posted slides, which a company. Our discussion. These slides are available on the Investor Relations page shows people next door Dot com.
Also we will post a replay of our webcast to the IR website later this afternoon.
Slide two contains a reminder that today's comments will include non-GAAP financial information, which we believe it's helpful in assessing the company's performance.
The supplemental schedules of our slides, we have reconciled each non-GAAP metric to its most directly comparable GAAP metric.
On slide three we remind all participants that certain comments, maybe characterize as forward looking statements and but there are a number of factors, which could cause actual results to differ materially from these statements.
Additional information on these factors can be found in the company's FCC filings.
Participants should be mindful that are forward looking information is current as of today and subsequent events like rendered this information to be outdated.
And now I'll pass the microphone to Gerard.
Good morning, Thank you to everyone for joining proteins cool.
Due to the widespread and global implications of the Cobot 19 pandemic I will spend most of my prepared remarks discussing our response plans the resiliency of my model.
Customer validation of our value proposition.
We were very pleased with our results this quarter, the Jeff will get into the details.
My perspective, you're executing in line with our strategy, we delivered stronger than expected orders, especially in Eurasia bank at retail.
Revenue was in line cobot expectations that we continue to deliver strong year over year improvements in profitability.
Starting on slide to be I'll describe our near term priorities.
Well the earliest stages or the crisis in January 1st priority has been on protecting the health and wellbeing of our employees.
Our second priority is on our mission to deliver essential services.
Has designated by the U.S. government than many other governments around the world.
Almost 100% about banking revenue at around 65% about retail revenue.
It was generated from customers that always central businesses.
Extremely pleased that we've consistently delivered strong service levels, thanks grocery stores pharmacies that feeling convenience locations.
Which facilitates critical day to day Congress.
Thirdly, we are committed to strengthening the boat next door during this crisis.
This means leveraging the operational rigor we have forged over the past two years to drive efficiencies in our business.
It also means we're taking steps to maintain adequate liquidity.
Sure financial flexibility.
Our response depend dynamic is guided by a company values shown on the Whiteside the slides.
Sure phenotypes and of underpinned our progress has two years.
Starting with collaboration.
Employees are using technology to calibrate what an unprecedented scale.
Meet customer needs at a dress business challenges.
This is taking place despite the social distancing protocols, we operate under.
We're acting with great sense of urgency and decisiveness as we seek to enhance the way we do business.
<unk> mix of customers and shareholders.
More than ever.
Siemens stepping up the whole one another accountable.
Slide four I'd like to add more color swap comprehensive response planes.
Starting with our customers and solutions.
We're delivering strong service levels, which reinforce a value proposition.
Even in the hardest hit variants of the world.
In terms of customers have affirmed our values.
The criticality of the ATM and retail checkup channels.
Two recent customer quotes on this slide.
One probably European grocer and the other from a large financial institution in the U.S.
Sure the essence of our value proposition.
And we continue to enhance our differentiation by bringing to market or do you get series next generation banking solutions.
Self checkout solutions.
Phonetic software.
I have cheap enabled whole connects data entry.
Turning to our employees, we've gone to great lengths since early January you proactively care for their health and wellbeing.
We have equipped our service technicians with the appropriate to protective gear.
And train them on relevant hygiene and social distancing rules.
Employees that are manufacturing facilities.
We have segmented our workers intensified up beginning rituals, taking temperatures on a daily basis.
And for our support functions, we have provided the profit tools resources in guidance.
More than 10000 employees to safely productively work from home.
Im pleased to report that our efforts I'll make a difference.
Operating well in all areas of our business with no disruptions. Despite these circumstances.
We're also looking out for the financial health of employees as well during was tumultuous time.
Hi, establishing had employee crisis reserves fund, which is available for employees who need support.
Especially in markets with limited government programs.
In recognition of the tremendous efforts of our frontline service employees during this challenging time.
We have provided an extra week of pain.
Additionally, a company has increased the frequency and depth of its internal communications.
Return, we're seeing strong employee engagement and resourcefulness during this crisis.
In addition, I'm pleased to see Diebold nixdorf.
We supported got communities.
Hi, O, we'd be introducing faced shields and shipping them to medical facilities they need.
Germany, we started manufacturing ventilator coverage.
Our manufacturing facilities are all online are performing well.
With respect to like global supply chains members of our response team have been vigorously engage since January.
Major disruptions by maintaining frequent contact with our key suppliers.
Wondering safety stocks and developing contingency plans.
Our current 19 is likely to remain as a watch item full supply chains over the coming quarters.
Can't be pleased with our ability to limit the impacts.
A comprehensive response is leveraging the operating rigor, which we've created during the past two years.
We continue to efficiently manage inventory receivables and payables as well as in direct spend.
And we're keenly focused on maintaining adequate liquidity and financial flexibility.
I'll give an abundance of caution we drew the remaining amount, but our revolving credit facility in March.
Lets likewise, we provided a framework for thinking about the impact of Cobot 19, Diebold nixdorf over the medium term.
Firstly, our business model gives resilience underpinned by many customers reaffirming that the ATM can self checkout channels are vital to their business.
Got a company plays a critical role and their ability to serve the needs of their customers.
Starting off services business, which generated about 51 cents of total revenue in 2019.
We expect a mild impacts as the vast majority, though how about services revenues are occurring.
It comes from sticky contracts for maintaining critical ATM is at retail devices.
In the near term or.
We are likely to see a slowdown installation service revenue.
Certain hardware related projects pushed out.
Well I products business, which accounted for about 39% of revenues in 2019.
We expect to see a moderate impacts a certain customers postpone installation dates will differ new hardware purchases.
Pronounced in the second quarter.
We have to take them multiple steps within a manufacturing operations to create a variable costs structure.
To help us mitigate impact of lower volume or not profitability.
We've been brought software business would generate recurring revenue from the sale of licenses and maintenance, which we expect will be very resilience.
Project based business or professional services.
Could be affected by customers to throwing initiatives.
Although we have the experience very limited impact to date.
Vast majority of our customers are continuing this important work.
Additionally.
Soccer teams I've done a great job of supporting customers remotely but.
So these reasons, we expect a mild impact to our soccer revenue.
Which accounted for about 11% total company revenue in 2019.
From industry perspective, we expect our banking business, which generated approximately 74% other companies revenue June 2019 will show greater resiliency or retail business.
Due to the iron mix of services and software revenues.
So while we're confidence in the resilience of our business model.
<unk> standing still during this time.
Continue to take credit decisive actions strengthen people next door.
On slide six you will see that we continue to execute when our multi year Vietnam costs program.
Encouraged with our achievements.
Looting substantial games and profit margins during the first quarter.
We were saying good progress from our services modernization fines and our G.N.A. cost reduction actions.
Especially our finance transformation outfits.
And walk coded 19 pandemic has mildly influenced select Workstreams will continue to pursue a gross savings targets of 130 million for the year.
Additionally.
Accompany launched incremental actions during the quarter.
To the add up to another 80 $200 million of savings.
We got suspended capital investments on internal major projects <unk> rated operating systems.
During the quarter, we also reduced our annual bonus expense by a substantial amount.
We have to third merit pay increases kind of implemented a hiring freeze.
In several European markets, we have transition certain functions shorter work weeks.
Continue to reduce endeavour spin.
And based around a successful transition to a remote work environment.
Reassessed, a global real estate footprints.
<unk> decisive actions further reduce a footprint over the coming months.
But some of these costs deductions who'll be temporary.
Generate long term structural savings for our company.
Now I'll turn the call to Jeff to provide details on our first quarter results.
Thank you Gerard and good morning, everyone.
During my prepared remarks, my comments will focus on nine gap metrics.
Unless otherwise noted.
Beginning on Slideseven first quarter revenue or $911 million was in line with our pre cold at 19 expectation.
And reflects the actions we are taking to drive higher quality revenue.
In order to make useful comparisons to deprive here.
We had provided a table to explain five different factors.
Or workstream for diversity in nine core businesses are counted for approximately 13 million or revenue variance versus the first quarter of 2019.
That's you can see they 17 million dollar variance from our efforts to reduce our exposure to low margin business with most of the impact related to our actions to call our portfolio of lower value services contracts.
And the Fine line you will see in 30 31 million dollar variance, which includes non recurring volume from the prior year period, partially offset by incremental activity in the current corridor.
<unk>, we're fully known and plan for as part of our 2020 operating plan.
We had previously communicated our expectation.
Per year over year revenue declines in the first task.
Followed by games in the second half a year.
With respect to foreign currency, we experienced headwinds and $23 million in the quarter.
As a U.S. dollars strengthened primarily against the Euro <unk> Brazilian route.
Over 19 is the last factor on this table.
Proximately $33 million, a revenue, which we expected to recognize into first quarter of 20, <unk> 20 will be recognized in future periods.
This effect was predominantly in our retail and you raise your banking segments.
Transition into the rights of this slide you will see the combined efforts higher quality revenue in our Dear now initiatives as nine gap gross profit increase $7 million you're over a year.
We had cheese achieve this positive result, despite the effects of covert 19, and if foreign currency had one of approximately $7 million in the quarter.
From a gross margin perspective.
We are pleased to deliver it 380 basis point increase your your 27.9%.
Oh $911 million, a revenue increase translates to approximately $35 million.
Incremental gross profit.
We are delivering significant margin increase across all three business lines, what services rising by 230 basis points.
Products expanded 280 basis points and our software gross margin increased by 1280 basis points due to an easier calm as.
As well as better delivery and management of our labor costs.
Or decide eight as previously mentioned the company as harvesting operating deficiencies from functional G.N.A. cost as part of our D.N. now transformation.
We made good progress on our finance transformation, which includes regionalizing and centralizing activities and <unk>, it's reducing automation within our core finance functions.
Through the end of March we have streamlined organization by approximately 470 lawyers.
Are procurement initiative is also bearing results as we're utilizing spend analytics to reduce indirect spent.
With respect to real estate expenses, we are looking closely at our needs post calls it.
We have demonstrated highly resilient ability to work remotely and accordingly, we are aggressively moving to reduce our real estate footprints.
In the past several weeks, we have decided close greater than 50 smaller sites permanently.
But when compared with the prior year, we reduce their nine gap operating expenses by $29 million a decline of 13%.
Given this success, we expect to continue to deliver G.N.A. efficiencies going forward.
It was displayed on slide nine stronger gross margin coupled with reductions to operating expense boosted our operating profit.
By $36 million or 133% year over year to $63 million.
The operating margin next expanded by 430 basis points in a quarter to 6.9%.
Our first quarter results include a reduction to our annual bonuses expensive approximately $7 million, which is just one of our incremental actions with executed the strength of the company during the cold in 19 period.
Adjusted either dive $89 million improved by $24 million or 37% over the prior year period.
The company's adjusted either down margin expanded by 350 basis points in the quarter to 9.8%.
The next three slides provides segment level financial information.
In order to make the year on year comparisons more meaningful we introduced adjusted revenue and gross profit for the first quarter of.
2019, which removes the effects from foreign currency ended us features.
We are showing gross profit on the slides to more closely reflect how we're running the business. However, we will continue to disclose segment operating profit in the M.D.N.A. section of our form 10 Q.
Drier mentioned earlier you raise your banking delivered very strong orders in the first quarter and build up a nice backlog.
These ones included a new H.T.M. as a service contract with bank 99, and Austria valued at more than $20 million in a branch transformation when valued at more than $13 million.
With a large Saudi Arabian financial institution.
Moving the slide 10, first quarter revenue or $311 million worth in line with our pre covert expectations.
Approximately 13 million or the revenue decline was due to our divestiture activity well 8 million was due to our delivered actions taken in 2019.
Reduce low margin business. Additionally, certain large hardwood installations benefited 2019 or avenue, which did not continuing 2020.
Delays from the covert 19 pandemic Bush approximately $14 million a revenue in the future periods.
Nine gap gross profit of $90 million in the corridor in a gross margin of 28.9% reflects the resiliency of this segment as we benefit from our D.N. now services modernization and software excellence initiatives.
As well as our intentional actions to reduce low margin business.
Quarter gross profit includes a foreign currency had one of approximately $4 million versus the prior year period.
I'm Slide 11, America's baking revenue of $345 million reflects a 3% decline primarily due to our conscious decisions or accept lower margin service contract.
But then our products revenue, we're seeing good growth from U.S. regional financial institutions.
Although non recurring projects at large banks in North America, each year over year as we have expected.
During the quarter, we were especially pleased to generate software revenue growth of 13% in concert currency.
Gross profit of $104 million for the quarter increase 30% versus the prior year due to the execution of our D.N., a initiatives and a favorable customer mix.
We were pleased to expand gross margins from 22.7%.
30.3% with meaningful contributions from all three business aligned.
P. two <unk> success, what services gross margin of 32.1% for this segment.
Reflecting very good performance from our services modernization initiative.
Slide 12 contains financial highlights for retail sector.
From an orders perspective.
Tail performed as we expected and was in line with the prior year period.
Revenue of $256 million per nearly reflects lower P.L.S. insulation activity in Europe.
Partially offset by growth in self checkout hardware and higher software activity.
Both results came in as expected.
The impact of the pandemic was more cue in this segment.
Pushing approximately $19 million a revenue out of the quarter.
Gross profit to increase the $60 million up 11% and a quarter and gross margin improve significantly to 23.4% due to a favorable revenue mix from services software and self checkout solutions as well as solid progress with our services modernization.
And software Excellence program.
A cash flow up dangerous on flights 13.
As we discussed previously the company has been consistent in our discipline and managing our networking capital over the past several corridors.
Networking capital as a percentage of trailing 12 month revenue the kind steadily over the last seven corridors down to 13.3% and the first quarter of 2020 gone from 19.1% a year ago.
Primarily to more efficient management of inventory and accounts payable.
From the cash flow perspective that working capital drill 15 million dollar benefit year over year.
Because of our focus we believe the company as well prepared to manage networking capital during the current challenging economic conditions.
S communicated previously the company typically uses cash during the first after a year and our free cash use of $65 million in a quarter was slightly better than our expectations unsightly improved versus one year ago.
First quarter results include an incremental $35 million of compensation related cash payments tied to our strong 2019 performance.
Adjusting for this site and you can clearly see that we are delivering high quality or.
Addition to our networking capital efficiency.
Whereas the bottom of the slide we bridge or cash balances from the end of 2019 through the end of March.
We used approximately $71 million to pay down that.
This includes are amortization payments as as well as our contractual requirements to reduce that with at least half of our free cash flow from the prior year.
Since I have already discussed that free cash flow. The next item as cash inflow from a revolving credit facility.
You drew the entire available amount from our facility in March March out of an abundance of caution in light of the evolving coven 19 pandemic.
And related macro economic implications.
<unk> has almost no impact on our expected cash interest payments of approximately $170 million because of the increments because the incremental interest on a revolver are largely be offset by lower labor rates.
Or other instruments.
An additional 89 million dollar reduction of caches attributed to foreign currency.
Headwinds experience in the corridor.
Plus the effect of selling our 68% stake in the German out I.T. outsourcing business called for Thomas and one other pending transaction.
Well the cash balance of $549 million at the end of March.
We believe we have adequate liquidity the blonde the seasonal cash flows of our business and R.D.N. a transformation program.
Slide 14, we highlight our debt maturities and leverage ratio.
Contractual debt maturities of $98 million for 2020.
And 26 $9 for 2021 are manageable.
Our current liquidity model.
Continued to monitor that that markets relative to our strategy to address are 2022 that maturity.
At the appropriate time, we will take steps to optimize our capital structure by reducing our weighted average cost the capital.
Lowering interest rates and extended maturities.
The right of the slide.
We have provided our net debt to trailing 12 months adjusted to either die ratio for the past five quarters.
As you can see we have steadily improve this metric and we are pleased to maintain the 4.4 times ratio in the first quarter as our adjusted either die gains offset the changes to net debt.
This compares favorably to our bank covenant maximum of seven times.
Our net debt on March 31 was approximately $1.9 billion.
Pulling the slide 15.
Build upon Gerard comments about the financial resiliency of our business model and provide a few guidepost for understanding how we expect to perform under challenging macro economic conditions.
For your convenience we have provided selected.
Answer results from 2019, including revenue and gross margin for services products and software.
We expect our services business to be resilient. During this time with the mild impact the revenue as previously disclosed we expect to complete to divest insurers and 2020, which generated about $110 million and services revenue for the company in 2019.
One of these transactions close in Q1 with the other expected the closing too cute to subject to customary closing conditions.
Additionally, the software we deliver for our customers is critical to their performance and there were therefore, we expect a mild impact for call. The 19 to this business.
With respect to product rather than a week.
We expect a moderate impact based on what we have seen thus far as well as the company's experience from prior recession.
Giving the timing of the crisis. It is reasonable to expect it more significant impact the product revenue and the second quarter at certain product installations are expected to be delayed during country Lockdowns.
Well other hardware orders are postpone.
Our current cost structure in incremental action plans provide us with the confidence to improve gross margins during this challenging time.
We are targeting and improvements to service margins due to our actions to improve the quality of revenue and execution or the services modernization plan.
For products, we expected whoever broadly stable girls smart.
Do do our variable cost structure in our solid performance in the first Florida inclusive inclusive of some level or higher freight costs.
At the same time, we expect to improve our software emergence versus the prior year, you to better project execution and more efficient utilization of labor.
Moving the operating profit, we expected benefit from our D.N. now and issues and our plans for realizing approximately $130 million.
Savings for 2020.
October 19 is having in mild influence on select the now Workstreams. We have also launched incremental actions to generate 82 and $100 million a savings as Gerard describe.
These actions include exhilarating, our finance transformation.
Streamlining indirect sun significantly lower bonus expense and the other labor savings reduce travel and marketing expenditures and savings from our real estate in information technology initiatives.
Together with our networking capital efficiencies in cash management action, we are targeting break even free cash flow for 2020.
By minimizing uses of cash we will maintain adequate liquidity and covenant compliance through 2020.
In summary.
This leadership team has taken significant inappropriate action to strengthen the company during these challenging times.
<unk>.
Near term plans and company values provide us with the competence to persevere.
We are hard at work executing these plans.
And we are just we are developing additional others to be used as needed.
And now I will hand to call back to drive for closing found them.
Thanks, Jeff Yeah, I'd like to conclude on slide 16, with a few reminders about why we believe people mixed off.
As well positioned to persevere through this crisis and emerge as a stronger company.
Almost to provide a few color comments regarding April.
First weeping designated as an essential service provider to financial institutions and retailers.
Customers are counting on us to keep that business is running.
And during this crisis, the credit quality of the H.T.M. channel.
Sail and self checkout channels have seen we get from strongly.
<unk> opposition as a trusted technology partner produces strong recurring revenue streams, which underpins a. resilient business model.
<unk> Oh leadership team has demonstrated resiliency and an ability to execute conflicts transformation initiatives over the past two years.
Considering d. is operational rigor incremental cost actions in place.
Confidence in our ability to navigate the current environment.
Emerge as a strong company.
Before we turn over discriminate let me offer a few folks are walk we sold in April.
<unk> NC perspective, you're seeing a moderate slowing in hardware decisions from customers and you raise your banking in detail.
Hey projects are being delayed and not counseled.
But then you raise your banking these delays tend to be mostly evident within smaller cheer two bikes.
Within Americans banking.
Older activity has remained largely in line with <unk> expectations.
Regarding installations, you've seen some hardware installations pushouts.
Typically by several weeks as customers focus on other priorities.
In April affect please shipped more volume that in the same period 2019.
Affecting the backlog as we entered key too.
Even though we may see something implementations pushed out a few too.
How many services perspective.
Change it to be fully engaged with customers into living strong service levels.
And promised software perspective, if not seen any delays professional services projects from larger testaments.
But the only delays observed among chip to into a few customers.
Overall employee morale remain strong as we rally around our customers needs when implemented incremental actions to strengthen d., but next door.
In closing while the current operating environment is dynamic.
We remain confident in our people our mission and into resiliency about business.
You stand ready to support our customers at the global economic economy with coverage.
Confidence is based on the D. enough Fundacion, we built over the last two years.
Robust plans, we executing.
Mr response for seeing from <unk> employees or living out accompany values.
What's that Oh, not send it back to the operating a surrogate to support a acuity.
Thank you Sir.
If you wish to ask a question at this time they will buy question Star one.
Make sure the mute function on your phone switched off that I'll get signal to each other equipment. If you wish to cancel your request the signal, but but things are too.
Again, it's just a one to ask a question.
For the for pushing come from my Summer will have 58, the it's and it's go ahead.
Things couple of questions first Gerard can you maybe talk about how Kobe may team, maybe impacting the timing of the commercial availability of the D.M. series and if there's any sort of difference between regions. If you could provide color around that as well.
Yeah, Good morning, math and thankfully the question. So I think there's two parts to to the question cope with 19 is having no impact on our R. and d. or engineering capabilities to ensure that the full range of being series is available for the market.
I'd say that where we are seeing some impact is most notably in.
Eurasia on surprising, we're seeing a little bit of a slowdown of customers undertaking their certification processes.
Due to the fact that they can't access their own custom labs as they've looked remotely. So we've not seen any change in customer appetites more.
Somewhat of a modest delay in the execution or the certification series due to their inability to access their labs.
And then we'll be stuck to the incremental 80 to 100 million of cost out actions. You guys are discussing this morning should we assume that that's a a pretty you know one for a while you sort of drops through rate down the operating profit and then you know how much in the 80 to 100 years more.
Structural getting nature. Thank you.
Yeah, Matt this job [laughter], a large percentage of those savings are going to be a one time.
Yeah, we talked about the the reduction in bonus we talked about the parole married increase we have some other actions were taking that that.
Had they had been in made available just a government programs subsidy programs and we all served participating in in the government.
That and payroll and and and could patch the Perl programs. So all through all those things make up a a majority of that $80 million to $100 million, but there are also some permanent items in their related to acceleration of finance transformation, well, we talked about relative to real estate.
Some other areas functional cost reductions that we didn't get in any detail about so it's it's it's a mixed bag, but a large portion of that is going to be one time.
Thank you guys.
Sure.
Thank you very low level turn next question Polk sort of J.P. Morgan you'd go ahead.
Yeah things so <unk>.
My Christmas really.
And I'm sure you can anticipate this but you know do two thought the world's change the contact lists retail either maybe in both moving forward.
Sitting in the evidence of the change in but maybe there's two ways to dress at one wasn't sums of the mode in which people will be you can reach I'm in Florida, and banking and the volume to the to moving food. What do you you see any change to your <unk> Andy changes.
Inducement for the things.
<unk>. Thanks, you a question.
So so let me start by saying you know there's been a long standing debates around you know the relevancy all the 18 channel and there's no doubt that code with 19 has reaffirmed in spades, the strategic relevancy and critic <unk>, you know I'll be 18 channel as banks contemplate that they're long term needs. So.
I'd say, if anything we see that as a structural reaffirmation, though the strategic relevancy of the channel. So I'll make some comments on banking and I'll ship towards retail yeah. As we think about what does that mean you too.
Changing consumer behaviors, which talked to see growing interest from our customers for you know <unk> tactical anti microbial coatings on the A.T.N.'s.
We're also seeing obviously, yeah surprisingly heightened interest in a pre staging of cash withdrawals from mobile phones.
I'd say that as banks contemplate the long term relevancy of bank branches, we're seeing emerging interested in those it's still early days full banks to think about you know more sophisticated.
Yeah, kiosks, where they can use those 10 bit more I.P. rather than depending on a man Bank branch. So I think goes some of the fact is that are on a mind just gets yeah banking going forward I think that felt like volume perspective within banking you know doing the steepest part though.
Down phases, we certainly saw a.
Material drop in cash withdrawals unsurprisingly as people stayed at home as markets have started to open up we've seen the vast majority of those you know volumes rebound yeah, although really one of the questions out there is whether there'll be a slight dampening longer term effect.
From the retail perspective, there's no doubt that interest in you know self checkout continues to grow that was certainly a strong.
<unk> <unk> in Europe, and post <unk>, we're seeing that.
Of interest continued go hiking as retail shift towards more and then check out devices and certainly you know, they're certainly seems to be some growing interest in in touch let's versions of self checkout.
I would say well broadly from volume perspective, we're not doing a retailers anticipates test volumes and when I say those comments are primarily geared around.
Intro retailers like grocery stores, which wake up the majority of our retail business.
I think that the other thing that I expect to see across both retail and banking.
Is heightened interest and managed services as banks and details think about the total cost structure going forward.
We believe that we will see heightened interest in <unk> opportunities and some of the winds that you have talked about two evidence of that goes interests.
[noise] <unk> one quick follow up <unk> do you see any could it's exposure any risk no. So much in the counts you see boop Boop cups in your back cloak and Puntland.
No, we're not seeing anything right now, but but I can assure you.
We spend a lot of time looking for it and and.
We're running well we're running is you know one of the advantages of of where people next next door up and experiences we had and and 2018 and 2019 as we are very acutely engaged in working capital management rerun.
Some very detailed direct cash flow models and and we we are now meeting on a weekly basis with Gerard and the finance team and we are revealing dsos and D.P.O.'s and D.I.L. as in in in in a very detailed manner manner and we are very.
Acutely aware of what's going on relative to working capital and cash flow.
But the answer to your specific question, we have not seen anything yet have any material nature.
Mhm. Thank you.
Sure.
Thank you believable now moved over the next question from.
<unk>. Please go ahead.
I think you very much for this a useful presentation average affliction. So first one is how much of it Q1 20 revenue was non recurring in nature.
When when you say not that the first quarter revenue non recurring you mean relative to just a a.
Or short term purchase order.
Yeah exactly yeah, it's just gonna I'm trying to.
Think about so I was I was going to say I'm trying to think about you know when you describe.
Q on 19 had to decline of 31 million you to normal recurring revenue as I was just thinking the same way is there any yeah, <unk>, yeah and short.
Q I'm 20, yeah. So so just just remember how what are what avenue and it it lines up with the resiliency discussion Gerard had is that our our services revenue is generally longer term.
Ah contract oriented. So so that is that is you know a longer term or resilient.
Revenue base in the same is true or software. That's why those two areas are deemed to be more resilient.
Hardwares tends to be based on purchase orders and refreshment needs of either retail or banking customers. So they're non recurring so so it is based on the individual retailer or banking customers <unk> refresh cycle. So what happened.
Ones is if we have very large reese refresh cycles like we had in the first quarter of 19 that do not recur right, we'll get into effect like we had in in the first quarter relative to non recurring refreshed now what we have is and based on mats earlier question, we have that.
Yeah, the series coming out in the back half of this year over his plan to come out back. After this year. So we're going to see some ship as we talked about earlier from from the first quarter under normal times from the first quarter to the second half and enlarge a route repress cyclists.
<unk> anything to add on that I could be yeah.
You can think back to the comments who've made and probably a quarter is one of the key seems we observed in 2019 was very very strong order activity coming out of the Americas G. two window 10 appropriate activities with the first part of a 2019 thing.
Particularly strong with larger banks, and we've been quite clear and we're getting expecting.
A a slow down and those activities as we entered 2020 so.
When you take a look at what was unfolding and she wanted to 2020 that they were very few big one time events unfolding. It was sprayed more uniformity over our customer base. So I don't think we'll see as much of a concentration and she won't have 2020 brushes the same period last year.
Okay, that's that makes sense yeah.
My second question is in terms of the.
Services Division and servicing A.T.N.'s, if we see maybe you.
You could use usage as well and in four kind of staying at home and not really going up to like A.T.M.S or bank branches do you foresee.
<unk> from your customers to to have servicing are you'll come trucks based on.
Remind me for contracts are based on number level of service in terms of frequency Oh, they're just channel surfing agreement that covers.
They're footprints.
The vast majority of of services contracts are related to the units being serviced them up the underlying tones actually activity.
Yeah. So aging this deep locked down periods, we saw a moderation in transaction activity in some markets, but in other markets. We saw an increase in transactional activity. So it will not contracts don't expose us to that variability as they are type two minutes.
Okay. Thank you.
Oh, no take care of the next question from <unk>.
Company. Please go ahead.
Hi, good morning, Gerard and Jeff Fortunately on the idea now initiatives. It's it seems like you guys are stepping up your cost cutting on the D.N. now initiatives is that what you are seeing is needed for the you know Ah you know step up in the gross margin.
It's fact, good morning, yeah. The the primary driver of Ah gross margin group and certainly has been the sustained execution of I.D.N. a program primarily across a services including plan.
Plus the emergence of immense amount of our software excellent program. Those are the two because drivers with a with an eye gross margin for then obviously the second equally important part of I'd be a now initiative as being the.
A reduction in our G.N.A. cost base, primarily led by Yeah, Jeff's efforts finance transformation program.
[noise] guarded and in terms of a certification I I'm, sorry, I'm I joined the <unk> call. A few minutes late did you mention how many banks are certain certifying now.
There's a being an increase in the number of certifications are underway relative to our last reporting period.
I don't have those numbers off the top like I'd like you know, but you can slipping share those are the subsequent period, but at what I had said to his fuck it that in some markets, especially those that wants to be more pronounced lockdowns we have seen.
<unk> slight elongation of a certification process at banks are being unable to get to their own customer labs had there's been no degradation whatsoever in terms of customer interest to the D.N. series, but a slight irrigation of the certification process.
Guarded and.
<unk>.
<unk> shipments off banking products as well as regional products do you could do you expect like most of the bland shipments <unk> do the backup from the or is about how you you guys are viewing it internally.
I don't think that we expect the majority of ship tends to get pushed out. It's you don't forget that we.
Shipments are impacted based on how the virus has been moving around the world. So yeah. The Americans have felt less delays and some parts of Europe and as certain parts of Asia open up getting that positive effect. So yeah. This is done on a customer by customer basis. Yeah. We we do expect in our seeing.
Pushouts into 234.
That are being produced a matter of fact, he's right now which is in park why we expect a.
Slightly more challenging to to but we don't expect all about your needs to get pushed out at all his truck I think it'll be spread or it'll be a unique customer by customer.
Carted. Thank you guys.
Thank you wouldn't know tick ever next question from God.
From North Coast Research go ahead.
[noise] Hi, this is battlefield got good.
Drugs I just want to ASCII quick question, just you perspective, which segment you'd think it's going to recover differs and which we didn't do you think who rebound the quickest between.
I mean, the global market based on your opinion.
Yeah.
With me I don't know better a crystal ball games or than anybody else and clearly the the big on though is whether there's.
Second wave of infections that causes a subsequent locked down with different markets. So I think that that's the big caveats that frames everything I'm about to say.
So if we go back and take a look at the financial crisis of 2008, the as one data point to to to think about.
We saw less impact on banking and so on retail or we're seeing a similar patent play out.
This time around where retail gets a little bit hotter hit a than banking.
So you know when I think about that and I mentioned that in my comments to our banking segment has a higher proportion of services and softer than we tell which is why would expect it to to be more resilient and potentially do rebound a little bit.
Faster, but it's all going to be a function quite frankly of what happens in the next wave as different markets go through their own locked down to the opening phases. So you know until you know we all have a better handle on that Oh I could say is you know provide those qualifying comments.
Great. Thank you and do you think this will create a chance to go market share as other players are paying more impressive <unk>.
Yeah, I can kind of comments on the actions above those <unk>, what I would say is we're feeling very good thought wherever in terms of our competitor differentiation, there's no doubt but.
Services business standing very toll like now we're extremely pleased with how the service levels were delivering at proves the operational strength about this this model.
We're seeing again from customers no degradation in their interest in our B. and C.D.'s machines.
And in fact nice with me.
<unk> purchase orders from banks that historically haven't bought holiday from US, which is a testament to they're interested in the D.N. series.
And I stopped it business is also showing some momentum so net net.
Yeah, we're feeling good about the progress, we're making and I think that positions us well you know once once for through the <unk>.
[noise]. Thank you so much.
Thank you we would allow moved her next question from very eight and stuff. So <unk> management to go ahead.
Hi, Thanks, very much for taking the question I had a question that that just sort of reconciling the free cash flow guide if about break even compared with the prior number of 100, Oh hundred and 30 and it seems like you're actually doing more on the costs side.
And the margins. Okay. So is it fair to assume that most of that differences expecting a a lower top line compared to what you thought prior anything in column that would be great. Thanks.
Yeah, you know we've this is Jeff we we've run rerun multiple models.
And and and we run a bottoms up we run analytical miles we were on Black Swan models, we run them, all right and and then.
And then we look at it from a cash flow perspective, and what what numbers. We can also what what the expectation would be as there's gonna be some impact the top line.
Ah based upon the the discussions we had relative.
To to products the moderately impacted and then the the margin fall through from that and then we offset that with some of the actions were taking and cost reductions and I'm from a cash flow perspective were being very very.
Aggressive relative to reducing capital expenditures were going to only spend critical capitol expenditures that that impact customer contracts or customer obligations and then what we're going to be doing is monitoring very closely.
Working capital and and assuring as from a previous <unk> question that we don't have slip it shouldn't dsos that we maintain our D.P.O. send that we in in particular, we don't build them into our right. That's that's where we we have a primary focus so all those things in concert.
And all the models, where we run we see or we see a path to at least break even free cash flow. So that's what we're talking about here in the in our various modeling scenarios continuing to monitor working capital continuing to monitor capital spending.
To continue to pursue either long term or short term expense reductions all those things in concert give us the competition. So a break even free cash flow.
Got it for fans like just to just one <unk> it sounds like the break even for cash flow, it's an expectation and most of the scenarios and it could be possible to do better than that that's a fair read.
Yeah, that's that's that's right.
We're going to pull the lever says to.
To preserve liquidity and to a expand free cash flow wherever we can that's the focus so and as I said earlier. The good thing is this management team is is completely focused on on that and we don't have to build that muscle that muscle exist because of where we've done for the last two years.
Great. Thanks, very much pushing it good luck.
<unk> Meghan.
Thank you.
And the question from rope jokes funny, but that's cool and go ahead.
I think one of the follow up question on that last question and just make sure I understood.
Free cash flow expectation on slide <unk> 15.
Footnote that'd excludes well non gap right. So <unk>.
What.
I guess I'm wondering what the AD backs, what the magnitude of bad backs would be free cash when you get to like a real free cash flow.
Oh no no. That's that's a real free cash flow what what's included in there from a non gap perspective.
It picks up any any anything that's nine gap that we take out and we we we supply the schedule showing to nine gap adjustments.
Right anything in there that's cash flow is included in a free cash for all the only thing that's not included in that would be any cash effect gain or loss from divestures.
And and <unk> and yeah. So so it does say, it's nine care, but but for example, let me let me get for example is is.
We will finance transformation that you'll see in the in the reconciliation at nine gap that that that under under the restructuring accounting rules. We we recognize now for expense purposes, the severance costs associated with the the headcount reductions that we're executing on.
And also the costs associated where you know the processing from moving some of those or goes processes to third parties. So we can criminals costs to those types of <unk>, we take them out as nine gap. We do include the cash effect in our free cash flow.
So my parents, a little bit all operations, yeah. The only thing that's not in free cash flow and we also disclosed that is anything outside of what we define is free cash flow, but we included and change in that that and that change and that that schedules in there <unk> and as as as I went through in it and they're prepared remarks, what's.
In there as a currency adjustment on cash in any effect from divestitures.
Okay.
<unk>, Okay. My my second person who's around the D.N. series and I know the environment, it's called in the late and I guess <unk> uptake.
Could you put the.
Numbers around that help help me to understand so if you. If you go you didn't hear your expectation, one say, 100% whatever number.
What are you looking at today.
Rooms event, given some of the push joked and especially with this certification taking longer than expected.
Yeah, Rob.
I think a a frame, but primarily by saying if you go back and look it up probably comments, we always had a view that the D.N. series was going to be more of a back and.
H. two event for us customs of work through their certification process. So so you're asked some of those certifications.
Are delayed we may see some of those orders took into 2021 I will tell you that we're not overly.
Uncomfortable with that outcome, you know earlier on both Jeff and I call it to that.
They were select Workstreams as part of idea now initiative.
C modest delays and you know d. into each happens to be one of those so the.
Full year impact on 2020 is actually quite modest given the staging of these orders were lining up.
Okay Christians and things.
Yeah, I believe and I'll check out about last question today from <unk> from D.A. that it's fun go ahead.
Just a two could follow ups drug can you maybe talk about the sustainability of be.
Improvement you saw in software margins in Q1, I think almost 1300 basis points year over year and then also I believe on your last call you'd commenting it. The company was budgeting. Some 25 million I believe that is related to incremental growth investments how your.
Sort of thinking about that as well thank you.
Yeah, but.
So as relates to just software you know as you're well aware you know a large licenses at any given quarter can move the mix around so I would just start with that comment that that being said.
When you look at the timing above their E.S.P.N. now initiatives you know a software excellence program is one of the key ones that we expect to to ramp throughout 2020.
Do expect that to drive increased margins enough socks that business large she as we look at a Billboard utilization about professional services resources.
Aware and how we deployed software capabilities.
So it's a while I don't want to use any one quarter as a as a data point, we are fully expecting an improvement it in our software margins due to those factors.
Terms of the incremental growth initiatives.
Yeah as I mentioned in my Yeah earlier comments. So we do believe that coming out of code with 19, Yeah banks in particular, we'll have a heightened interest in Knight's services related activities and we continue to invest in those actions to make sure that well positioned full covert 19.
So we we have some c. investment never bought asleep, but as Jeff superior onto we continue to.
Focus on protecting the customer oriented growth initiatives, and where we have some duct capital investments, it's being primarily on internal systems.
Got it thank you.
Thank you I would like to turn to call back too steep stick for an additional color remarks.
Could I just want to thank everybody for participating in today's call and if you have follow up questions encourage you to contact me and Investor relations. Thanks, everybody and have a terrific day.
Thank you that was a complete today's conference call. Thank you for your participation <unk>.
No just kidding.