Q2 2020 NCR Corp Earnings Call
[music].
Good day welcome to the NCR Corporation second quarter fiscal year 2020 earnings Conference call Today's conference is being recorded.
I would like just on the conference over to Mr., Michael Nelson Vice President of Investor Relations. Please go ahead.
Good afternoon, and thank you for joining our second quarter earnings call.
The call today are white paper, President and CEO.
C O M Oliver Seattle.
Before we get started let me remind you that presentation in discussions will include forward looking statements. These statements reflect our current expectations and beliefs are subject to risks and uncertainties that could cause actual results could differ materially those expectations.
In uncertainties are describing our earnings release, Kurt periodic filings with the FCC, including our annual reports.
Today's call will also be discussing certain non-GAAP financial measures non-GAAP measures are described in reconciled to her job counterparts in the presentation materials. The press release dated July 28, 2020, and all these that's really should page of our website.
This call will be available later today on our website NCR dot com with that.
Certain calibre Mike.
Thanks, Michael and thank you everyone for joining us today.
I get started.
Thanks, Andre Fernandez for all his work during his time again yeah.
You should always done, particularly round firming up our balance sheet, increasing the transparency with the investment community.
Helping organize our industry general manager structure.
I also want to thank you for staying on until October 1st to ensure the effective leadership transition I wish him well in this next endeavor.
I will begin with some of my views on the business, including the impact from the Corona virus pandemic.
Now, let me do our second quarter performance and talk about the success, we're having with our digital first contactless solutions.
And will then review why because Congress and Oliver I newly appointed CFO will then review our second quarter financial numbers that Oh, one Tim and I will take your questions.
Starting on slide four.
Two years ago, we began to shift to the customer centric digital for software and services business model, we made tremendous progress in 2019 and answered 2020 with strong momentum.
When the global pandemic kit, we took aggressive steps to focus on three priorities.
The security and safety Oliver employees around the globe.
Second continuing to serve our customers answered protect the financial health of our company.
I want you Express my appreciation to our employees, we've shown incredible commitment and flexibility as well as an intense dedication to support our customers during these difficult times.
Well, our financial results in the second quarter disappointing on a yearly your thesis entirely due to the current Iris and downtick.
We're quite pleased with our company's performance during the quarter, our revenues and margins held up better than we had expected I business, except in a competitive marketplace was very strong and we continue to make progress on our strategic product initiatives.
Now moving to slide five and an overview of our second quarter performance.
First while we do not expect the cold at 19 health crisis to be mitigated until 2020, sorry until 2021, we have shifted our management attention from a focus on coal that 19 totally focused on growing the business in the second half of the year winning in the marketplace.
And continuing our strategic shift NCR as a service all while operating in a club at 19 environment.
We actually kicked off the second half of the year.
With a shift to offense and called it our 20 20.5 plan versus the first half the 2020, where we found ourselves in a defensive position reacting most of the second quarter.
Second there were several bright spots in the quarter, including recurring revenue.
Constant currency growth of seven per cent compared to last year.
Third we are generating accelerated momentum in our shift towards recurring revenues, we have shifted many of our software and solutions from an upfront softer license to recurring revenue.
This includes a little softer attached to hardware sale as well a softer so independent of hardware. This remains a top strategic priority and we get accelerated momentum as we entered the second half of the year.
Finally, we made additional congress strengthening our liquidity and improving our financial flexibility the cash preservation actions. We took earlier in the year coupled with our continued focus on cash management helped drive free cash flow of $171 million. During the second quarter. We ended the second quarter with $1.7 billion that.
Cash on the balance sheet, which has provided significant liquidity and financial flexibility to invest in our strategic growth platforms and deliver on interrupted value to our customers. That's consumers transact transaction habits have shifted.
With that let me pass the call over to a one.
Thanks, Mike.
I'll begin on slide six and provide an overview of our current operating environment.
As Mike mentioned, we built a plan in response to cope with 19 that we believed would get us through this difficult period.
The plan prioritize taking care of our employees our customers in the health of the business. Our team has done an outstanding job responding to the many challenges and specific actions that we put in place.
We have performed in balance throughout the quarter as we preserve cash and manage expenses, while continuing to invest in the products and capabilities required to meet our strategic goals and compete and win in the markets we serve.
We have seen our already strong relationships with customers accelerates and we've become even more of a strategic advisor as we collaborated with them in navigating extremely choppy waters.
Whether it has been assisting them and they accessing up the government PBB loans, helping them move to online or guiding them toward and implementing our contact solutions, we are creating even deeper relationships with our customers.
Well, taking care of our employees in our customers. We are also accelerating our transformation to NCR as a service.
Our plan coming into 2020 was to continue the transformation of every aspect of the business to deliver the as a service promise to our customers and investors.
We are confident in stating that the efforts behind these imperatives have not been sidelined do that the challenges of cobot 19.
These efforts to transform address the range from how we build our products offerings to how we go to market to our service and support through to our financial and reporting systems.
As we drive the transformation of the business, we continue to strive to be even more efficient and effective steward of our resources.
We are clearly executing a parallel plan to execute in these tough times, while building and positioning for our future.
On slide seven.
In prior forms we have talked about our digital first strategy and our belief that adoption of these solutions would gain increased traction in the years ahead.
Given the impact of Corona virus, the adoption rate of digital transformation across the banking retail and hospitality industries has clearly accelerated.
Many of these solutions have gone from a nice to have to stabilize the table stakes for our customers.
Restaurants retail stores and banks are all interacting and transacting with consumers differ differently do cogan.
Customers are looking to NCR for helping support as consumers increasingly want to conduct business be a device they trust mainly their smartphones.
They want to pay at the physical location without touching the kiosks they want to arrange for takeout at restaurants or complete in store purchases via mobile devices. They want less interaction with devices that they don't know more trust.
For consumers that prefer to use a physical device. We recently introduced our anti Microbials shield. This is a coating that can be applied to hardware, including touch screens keypads headsets in card readers. This anti microbial coating makes it more difficult for microbes to live uncoated.
Services, reducing the possibility of transmission through touch is also designed to improve the effectiveness of standard cleaning and disinfecting procedures.
Additionally across our industries, we are seeing increased demand for our digital connected services, which enables us to surface in aiotv enabled device, whether it's an NCR device or third party device.
Now moving to slide eight and the retail industry, where the growing consumer shifts toward using the smartphone to conduct transactions is accelerating.
We offer a wide range of solutions, including touch free self checkout and payments mobile gas pump activation digital connected services as well as our Emerald offering.
We recently deepened our relationship with bashes family of stores Bashes plans to roll rollout the complete NCR solution, which is which encompasses all software and payments processing.
Well and self service checkouts, plus solutions for customer loyalty promotion merchandising and more.
Along with Northgate Bashes is the second client within the year to implement Emerald. Both projects took took months not years to go lives.
Come and go a convenience and fuel retailer with over 400 stores in 11 States is using NCR is mobile pump activation solution, which allows customers to activate the gas pump from their mobile device.
These are just a few examples of how NCR is enabling our retail customers to compete and thrive in the current environment.
[noise] moving to hospitality, we have seen a notable uptick in customer interest in our contact list payment solutions.
Today, we have close to a thousand sites using our contact list payment solution.
In addition, we have seen strong adoption with NCR is online ordering solution and added over 1400 sites in the second quarter.
With launched solutions that allow our guest to sit down at restaurants and view the menu on their phone via a QR code order food on their phone and then pay on their device. This lets consumers conduct transactions using their smartphones, eliminating the need to touch physical menus exchange cash or hand over their credit.
Card.
One example of how we have help restaurants is our partnership with firehouse subs.
Together with firehouse, our teams worked to add customer care information to firehouses digital ordering platforms to make it easier for restaurants staff to identify which car to deliver the order to while this has simplified operations for firehouse locations. It's also elevated the customer experience.
With that I'll turn it over to Tim.
Great. Thanks, I when I first want to say, how drill them to get NCR.
Great to be back with the leadership team with both old and new friends I look forward to meeting those of you on the phone are requiring that some of you.
As has been the practice my comments will presume a constant currency adjustment that removes the impact of foreign exchange.
So slide 10 present, the top level view of our second quarter financial performance.
Starting in the top left consolidated revenue was $1.4 billion down 12% versus the 2019 second quarter.
As we expected revenue was negatively impacted by the broader economic pause caused by the crime and virus pandemic.
We'll begin to more specific drivers of the decline as we go.
For more than three quarters of that decline is attributable to lower hardware revenue, which was down $173 million or 29%.
That said our continued effort to ship to recurring revenue streams accelerated sequentially.
Second quarter, we should to $22 million are almost 1.5 0.2 revenue to recurring revenue that was previously would have been booked upfront as a perpetual sales.
Adjusted EBITDA decreased 24% year over year to $201 billion.
EBITDA margin declined by about 180 basis points to 13.5%.
The combination of lower overall revenue the strategic shift to recurring revenue, which has shown represented about $18 million and the unabsorbed fixed cost collectively described this decrease.
Non-GAAP EPS was 27 cents down 49 cents from the prior year second quarter nine cents a decline resulted from the shift to recurring revenue that he just described seven cents from a higher quarterly tax rate of 33% five cents from the increased interest expense primarily related to the precautionary borrowings.
Canadian as part of the Cobot action plan and that leaves about 21 cents related to the lower revenue and operating results.
Tax rate of 33% for the second quarter was higher as a consequence of lower earnings the outsized impact there of permit nondeductible items and the timing of anticipated discrete benefits within the year.
Lastly on this page our cash preservation efforts were successful and allowed us to deliver free cash flow of $171 million in the quarter versus just 9 million in a year ago quarter.
The improvement was due primarily to working capital improvements, particularly on receivables.
While we did receive the benefit of a $70 million insurance advance all but 10% of 10 million of that advance has already been spent to replace assets lost to the tornado.
And payables are actually down in the quarter as our vendor payments were more linear and less lags in prior quarters.
Moving to slide 11, which begins the discussion of our segments and summarize our banking segment results.
Thank you revenue decreased $105 million or 11%, mainly driven by $79 million decline in ATM sales.
The remainder of the decline can be attributed to the service revenue associated with the installed those machines.
Adoption of our recurring revenue model.
Excluding the decline of ATM hardware related revenues and the impact from the shift to recurring revenue banking revenue would have been up slightly year over year.
And within our banking recurring revenue non ATM application software represents now more than half of our total contract value.
Operating income decreased $37 million or 29% and operating margin dropped 280 basis points to 12%.
These declines were driven by lower revenue.
The resulting unabsorbed cost.
And were offset by lower discretionary spending and other cost initiatives, we put in place earlier this year.
Operating expenses were down 9% in the segment.
Moving to slide 12, which illustrates our retail segment results.
Retail revenue decreased $75 million or 13% with more than three quarters of that revenue decline from hardware.
The hardware decline was attributable to the very difficult market environment for the retail sector.
Lack of access to stores or priority of arc of our customers.
Half comparisons are particularly large self checkout sale last year.
Most of the remaining shortfall related to service revenue it gets pulled with new hardware installs.
On a prior earnings call, we discussed the delay we expected for installing self checkout units at several of our large customers at many of these customers were too busy operating their stores. During this pandemic to undertake an installation project as an update those are in backlog and remain on track can be delivered in the second half of the year witness.
And is expected.
Moving down the piano operating income was down $23 million or 58%.
This decrease was caused by lower revenue and under absorbed costs and like banking. These shortfalls were partially offset by discretionary spending a cost initiatives launched at the end of the first quarter that reduced our overall operating expenses.
Retail operating expenses like banking were also down 9% year over year.
Slide 13 shows are hospitality segment results.
Hospitality revenue decreased $42 million or 20%, Similarly, driven primarily by lower hardware sales no sales down 44%.
As expected our hospitality segment has been the most impacted by the current virus with mandated shutdowns or customer version to sit down dining and limits social gathering.
Second quarter operating income declined $13 million, mainly due to the flow through impact of lower revenue.
While we are able to reduce operating expenses here to by about 7%.
During the higher reserves on accounts receivable offset most of those savings in the quarter.
Turning to slide 14.
We provide our segment quarter revenue detailed under a previous operating segments for comparative purposes.
Software revenue decreased $36 million at 6% driven primarily from the shift to recurring revenue.
Well, it's from the impact of the challenging economic conditions services revenue was flat for the quarter driven by lower installation revenue offset by an increase in recurring service revenues from hardware.
Our from hardware maintenance managed services and digital connected services.
And as I mentioned previously hardware revenue was the most impacting the quarter by the grown as virus falling $173 million or 29%.
More specifically ATM revenue declined 70, you might $9 billion in 25%, while the combination of self checkout and point of sale declined $94 million or 33%.
Recurring revenues increased $38 million or 7% driven by growth in cloud professional services and payments revenue.
Recurring revenue as a percentage of total company revenue increased to 55% for 45% in Q2, though admittedly large part due to lower hardware sales.
And finally on slide 15, we present free cash flow net debt to adjusted EBITDA metrics as Mike said.
We're very pleased with our performance in the cash side free cash flow of $171 million.
In the quarter with a significant improvement over both the prior year and sequentially over Q1.
Our pandemic response, including the urgent focused on working capital and a companywide initiative to reduce cash costs, our execution exceeded our objectives that we set back in mid March.
This slide also shows our net debt to adjusted EBITDA metric with a net debt leverage ratio of 3.1 times for Q2, which is consistent with where we ended last quarter.
And finally as you remember at the end of March we drew down $600 million on our revolver.
Getting in April we issued $400 million bond as precautionary measures to de risk our balance sheet and improved financial flexibility.
The effective all of these actions in very solid balance sheet with sufficient liquidity.
No significant debt maturities until July 2022.
Overall, we ended the second quarter as Mike said, we close to $1.7 billion of cash on hand.
Remain compliant with all of our debt covenants and ended the second quarter with.
Facility leverage well under our debt covenant maximum of 4.75 times.
With that I'll turn it back to Mike for his closing comments.
Thanks, Tim.
Im trying to close them to ask Oh into.
As Kevin seen more points on slide seven on the banking just emphasize this year the key points sure. Thanks, Mike Welcome to live TV.
Within the banking industry, we continue to have success with our digital banking platform.
Clooney, including signing three new customers in the quarter all of which were competitive takeaways. We've also had success cross selling existing clients with new products with 18, new business banking deals done in the quarter.
Also during the quarter, our digital banking registered users increased 12% organically to more than 23 million.
Elsewhere in banking we have.
Increased success shifting our software to a recurring revenue our and attach software offerings, which are sold independent ATM hardware sales had very strong momentum. The solutions software solutions include multi vendor ATM solutions enterprise monitoring remote deposit capture software.
Transaction processing branch transformation software and security applications.
Continue to receive positive customer validation as we have migrated our software license solutions, both our unattached software in the eight and our ATM software to recurring revenue in the second quarter, we signed over 150 banks to recurring revenue model that previously would have been revenue sold as an upfront.
For license one such example is a software sale independent of hardware at note machine what of the UK is largest ATM operators we helped.
Nope machine upgrade their transaction processing platform with no no doubt downtime and they are now processing increased volume at a reduced cost.
I'll turn it back thanks Ellen.
The second quarter of 2020 created a unique set of challenges for our management team to address we put the health and safety of employees as a number one priority.
We said I mean, let's take care of our customers and continued to deliver the best service in the industry and lastly, we said we must protect the interest have accompanies shareholders and take care of the company environment with limited visibility to that end, we focus on preserving cash and maintaining our cash balance.
Please note the actions we took during the quarter not only preserved our cash but in fact increased at cash balance during the second quarter and we expect to be free cash flow positive for the full year 2020.
But more importantly, we continue to make progress on execution of our strategic goals to become a software and services led company with predictable recurring revenue streams as we help our customers run their stores restaurants, and self service banking.
Our competitive wins in the second quarter demonstrate the progress of our investments in our strategic platforms in digital banking, our next 10 alone.
A cloud based retail Pratik Emerald.
Payment and our CSP self service banking and ATM platform software.
We will continue to focus on a transformation to drive NCR as a service and achieve our 80 60 20 strategic goals. Our strategy remains consistent seek to drive software and services to 80% of our total revenue.
Recurring revenues, 60% of our total revenue in expanding EBITDA margin to 20% in coming years.
My message to the NCR team has been clear the first half of the year is behind US and we begin 20 20.5, we took defensive actions to make it soon and certain first half of the here and now we turn the page we entered the second half of the you're focused on growing the business from the first half of the year and taking us into the actions.
Our strategy is working in our liquidity position is strong we entered the second half with a large cash position and increased financial flexibility. We're confident that we can continue to whether the current crisis, while also investing in innovative solutions and becoming an increasing the kit an increasingly critical partner for.
Customers, we look to allocate capital in our strategic growth platforms, such as digital banking Emerald Aloha payments and digital connected services and we will also consider tuck in acquisitions and paying down debt.
Hi vision remains the same become the softer in service technology provider of choice to run restaurants retailers and self service banking.
Thank you for your time today and now we will open up the call for your questions operator.
Thank you I'd like to ask a question. Please take note by pressing star one on your telephone keypad. If you are using the speakerphone. Please make sure. Your mute function is from off to allow your signal to reach our equipment.
Please prompt on the phone line.
Well indicate when your line is open again press star one to ask a question well pause for just a moment, while an opportunity to support for questions.
Well go home to that first question from Kimberly with Wells Fargo.
Hey, guys and.
Thank you good afternoon, everyone.
A couple of quick questions as I said, Mike could you talk about any shifts.
I think you're seeing in the competitive landscape across any of the operating segments. I know, we're still sort of early in that space.
In slide.
Some people well take advantage of this to gain share others will struggle to stay up at the relevance Im just curious if theres any areas, where you're really seeing that opportunities emerge NCR to be clear winner why others sort of go out but the tide.
Couple of quick volumes.
Yeah, Tim It's a great question and again, we kind of framed.
The first half even as we were navigating.
Cultivated and a lot of uncertainty that we still stayed very focused on our investments for the future and then as we entered the second half really a shift to the offensive side and we feel really good about our positioning and.
Quite that you raised I'd say the two areas, we see that the most.
Retail and in hospitality, whether there had been a fair number.
Call them, just new entrants in new absurd to built or started to build some level of products that don't have the scale clearly not positive cash flow yet I don't have the number of customers that.
So it's going to make it to the next level, we think theres a distinct opportunities to go into that market and we're already seeing some cases, where we're winning letting that customers who.
Started to look in that direction, and where we've taken them back.
So we feel pretty good that coming out of this.
Crisis will be a stronger company stronger relative to our competitors and probably as much indication of some of them just not being able to survive. This long of a challenge.
Great. Thanks, just a couple of quick follow ups.
So when I think you quoted.
Growth rate for digital banking users I think this had the number was 23 million.
I didnt catch the growth rate associated with that user base.
Okay.
Yes.
The digital banking platform of registered users Tim.
Yes grew 12% to just over 23 million.
So thats cross the digital platforms.
93.
It's a 12% of acceleration because I know there's been some improved momentum coming across your digital banking business now for several quarters I'm, assuming that's an acceleration off of what we saw yes it has quarter.
Okay, Yes.
No doubt yes.
Okay last question I have got system for a puts them all the nice diminish over the phone.
Mike Melanie.
We should think about.
With the new CFO.
Whether that's just outreach to the streets or is this just sort of.
Something that without rate was sort of anticipated probably a while ago in December.
For the due to changes in any way shape or form much or something.
We'll start to see next couple of quarters around the reporting will finance and the balance sheet and stuff like that.
No I don't think you'll see anything.
Certainly a different.
Andre.
You made a personal decision to.
Go on and do something else and we were lucky enough.
I think Tim FMC, we've looked at some in the past.
But I accidentally put in I think is.
And really well the transparency the shift the openness and Andres, but I will definitely be continuing that going forward I think the.
Only thing and we had talked in the past, but as we make the shift to recurring.
And.
And in here as a service as we call. It what other metrics will really share will still continue to look at what else we share going forward.
And so we'll we'll keep on that track.
Got it has been incredibly helpful. The last couple of weeks to try to give me just be for today. He is going to he's built a team that is very capable and I think you should expect very similar high quality analysis from us and me going forward.
Okay got it star one to ask a question.
Question have been answered you may or may be yourself from the key by pressing star too well take our next question from Dan Kurnos from Benchmark company.
Please go ahead.
Great. Thanks. Good afternoon, my kept guidance, just maybe Mike can you kind of frame out a little bit more push in contact list either economics, just around screens or kind of over the phone that your or the phone based solutions are implementing is there a payments opportunity there.
Sure.
And kind of what do you think sort of the 10 is as you guys kind of keep going down that path.
Yeah. So.
And a bigger picture level, you know, we obviously sit the two digital first a year and a half of the now in terms of strategy instead of building out much more.
On the mobile device, we've always had a very strong.
Printed product offering and digital banking, but we started to add that in other parts of the business.
So when co that hit us in mid mid March early April one and the team led and said what else can we do see shift the contact away from our device, whether that's ATM, whether that's a SCO, whether it's a pls whether that's a.
Any other device that a customer and consumer might be touching and move it to.
Move T mobile device move move into that I said, you control as opposed to something else somebody else's touch so.
We move down the path I think you.
You raise it really get issue so in some areas. It's really that's an extension. So you got the ATM. There's a couple of different ways that we've implemented it but you don't accept touchy ATM you can touchy mobile device.
End of the transaction to make it a positive make withdrawal and not have to touch.
The screen.
Same on ASCO and move very quickly with one of a very very large retailers, who wanted to move from actually completing the transaction by touching a self checkout to actually using their mobile.
App, whereas consumer connect to complete the payment on their app, we help them facilitate that.
And then onto hospitality, the restaurant space, which is more appropriate where we've.
Developed the Napa rolled it out to our customers are ready where you can pay at the end.
Meal, you can completed transaction with T mobile devices at your cable.
Scanning a QR code to we'd love to top of menu when you enter the restaurant.
With the QR code and unlike a lot of.
Systems that do lots of half a menu that you can order from your mobile device and then the end of the meal.
You can actually pay with your mobile device and will facilitate that payment. So your current acquire over Atlanta to our merchant acquirer.
In that case Wi.
So in some cases were able to get a transaction fee in other cases, it really is this extending and adding some capabilities to our systems that others, maybe don't have in the marketplace.
Got it and then in your prepared remarks, you did allude to no reverting back to sort of the tuck in strategy, along with considering debt given the strong free cash flow quarter here I'm. Just curious maybe if you want to take it in tandem with some of those players that weren't able to scale I mean on I'm sure you would.
I'd like to have.
First global or whatever some meager payments platform to go out and buy but if there is there something small that need to get you. Some initial scale to accelerate your efforts or are you looking at that high value.
Debt and just the.
Maybe want to take that out if you have the cash flow to do so.
Well I think we'll we'll continue to look at both.
Clearly, we put a lot of that we put the debt additional that we do down the revolver. We took on some of bonds as to the caution a I'll tell you in mid March it, but they love it looks Gary let the Latin were uncertain back then as we looked at what was going to happen did a lot more unknowns I think right now we feel pretty good.
And that it's played out the way we expected it to play out.
And then as we look forward if things stay isn't that great, but if they stay kind of the way they are bumping along.
We feel pretty good about the outlook.
For the year. So then we had.
Yes excess.
Liquidity on our balance sheet that we that we put on that to protect yourself. So at some point would we look to pay some of that back whether we pay that revolver, we pay back some of them the debt and then I think as we as we pointed out.
There may be some opportunity through some more tuck ins, we've been doing that successfully and 19 and 2018 and so as we get more clarity the future we feel better about starting to get back in adding similar products in that fashion.
Well take our next question from Katy Huberty with Morgan Stanley.
Please go ahead.
Hi agent count on the on site for Kt. Thanks for taking my question I just had two quick ones. So first.
And what percent revenue during the quarter was tied the mobile contactless contactless solutions and then when it customers just the one solution would often larger.
Our smaller than historical deals or.
Like you may be incremental so just any color that would be helpful.
Yeah, I don't I don't think we'll call out the you know the transaction specifically or.
The business again in some cases like with an ATM or the self checkout device. It really helps us sell our product, particularly as we go forward. So the ability to integrate with itself checkout, where people can do the transaction without touching the device. We think is very important obviously digital banking.
The mobile device has been a mainstay.
To that footprint and then.
We talk about the restaurants rolling that out some of that is Ics extending the alone in the low essential.
Productivity we had.
So and talked about really good success in a difficult market actually selling new new clients to a sense of and then part of that is when you sign up with.
NCR and the whole Aloha suite, you get all these capabilities, which allow you to differentiate you experienced with your consumer so we don't really track it as a discrete has as much as it makes our products from a competitive.
Got it makes sense and then I'm just quickly on recurring revenue could you remind us what's included in that calculation.
Oh by the new tied the longer term contracts on a bolt on a monthly basis.
Yes.
Rather everybody gets a little bit different definitions are similar recurring revenue.
Hi definition is its revenue that we don't have to go out and sell into getting calendar year. So everything is multiyear contract.
Obviously software there is some hsas and that is subscription in there.
We had really good success in professional services transitioning from services that were sold by the hour or by the day into service itself. We had really large five year contract, where we're doing application management over a five year window.
A large client on the retail space.
Our global services footprint, where we have five year contracts to support the hardware, whether its scope or ATM. So all those are things that just help but the predictability of our revenue stream. Obviously over time, we believe that helps raise our EBITDA margin and just makes our business more predictable.
Well take our next question from Dan Perlin with RBC capital markets.
Hey, guys the Matthew Miller on for down.
Taking my question.
I was wondering specifically on banking.
Look we like the health and maybe more so general attitudes of your banking clients do you think they're feeling more comfortable operating in the current environment and I'm just curious on on the demand would you characterize that as pent up or maybe like.
No demand given current environment.
Yes, I think everybody a one of the things that alone and I have done you know as we've been working from home is we literally have merged clearly these co two to three clients every week.
The executives that are are at or customers. Since we've talked a lot of bank or some very large banks.
In some smaller.
Regional banks community banks credit unions et cetera, and.
You know it's hard I think at the same challenge. We have is trying to figure out what's what's going on with the health crisis, what's going on with economic crisis.
We had some challenges with some of the social issues out in the market that has impacted to some of the branches in some of the Tam. So I think there's just a lot hitting everybody. So the the level of comfort I think it's you see a little bit of what's going on and what am I going to do I'd say, the one consistent theme as people feel.
Pretty good about I relate some set the way we're going.
We we keep trying to find a bank bankers, who are backing away from the ATM channel and we haven't found that.
They have shifted from a branch refers to a digital first but is it still first and then an ATM kind of activity.
And then and then tying them altogether as we talk about our strategy for self service banking and some of the things that we've done some large clients, where we built the platform that connects what you do in the branch to what do you do it ATM to your digital platform. So I would say the overall tone that weren't getting there's there's the uncertainty and the caution.
But I think again I used the words as a lot scarier Denmark's than it is today people recognize we got to live with this mode. I think people getting more optimistic about the future I think people are starting to at least from a capital budgets are half of our pipeline is getting stronger and so I'd say sitting here today, we feel much better than we did.
On our April call and much better than we did we did that quick called the end of March.
Okay.
Well take our next question from Paul Coster with JP Morgan.
Please go ahead.
Hi, This is Paul Chung onto costs are thanks for taking my question stuff.
Just on your accounts receivable benefited the quarter.
And from the first half, what's kind of driving that and we're hearing.
Occasions for second half.
They are and then.
Given the nice start to the first half I know you you mentioned you expect.
Free cash flow positive.
Given you've already hit.
50% of last year's free cash flow and no Capex is probably down can you also confirmed that capex number for the year and what stops through cashless from being up this year as Fourq Hughes typically your seasonally strong this quarter.
Yeah, I'll, let Tim said on the our question. So I think first I'm not sure vending typical about seasonality. This year right I think the the pandemic is going to.
Run some of the some of the typical seasonal we've seen that said to some of the timing on cash flows were self inflicted.
And we're trying to be little bit more linear and the way, we we conduct really all levels of business that's it.
They are CODI collected once we over collected in Q2 or the quality of our receivables was et cetera is exceptionally stood up well and was much stronger than perhaps we even gave a credit for us we went into the quarter, making good progress on receivables and 60 to 90 day.
Pass through range that we had for some reason I've gotten a little bit ahead of us and we made excellent progress there that brought that back down into a more reasonable range. So while there are still.
To be collected I think the over achievement is now behind us in Q3 be more typical quarter. It is true that Q4.
He is our best cash flow quarter, most years and I suspect it will be a very good one this year I'm not sure whether it be the best but.
There's not much certain in the world right now, we're just going to continue to say that we're going to be free cash flow positive for the year and but let the your play out.
Okay and then.
On your Opex cuts do you see any of these cost savings.
I mean permanent.
I know you mentioned some elimination of some contractors on just want to get a sense for you know how to model out next year Opex. Thank you.
Yeah, we entered the year and on our first call we talked about.
Taking out about 90 million of ongoing recurring costs, we we deferred a lot of those recurring actions during the first half. We we said we want to.
Take care of our employees and so we didnt go through and do.
Actions and staff as lot of other companies had done we didn't feel that was right. When there was so much uncertainty in the first half of the year.
We did take a lot of actions.
Contractors discretionary spending.
Plant equipment et cetera, et cetera, we did preserve our investment in products as we talked about a strategic product investment. So you see some savings a lot of cash savings in the first half as we get into the second half we will start to look at how we pick up more costs related to recurring saves and Doug.
Back on track with that 90 million number.
I don't know how much of that will get this year, because we again, we didn't do the actions in the first half but.
Well get back to taken out those cost for the long haul and give you an update next quarter.
Well take our next question from Matt Summerville with da Davidson.
Please go ahead.
Thanks sort of to one of the earlier question.
Can you talk about just the cadence from month to month than what you've seen in July in terms of incoming order rates across banking retail and hospitality have you indeed seeing material sort of sequential improvement over the last four and a half months or three to happen season.
Yeah, I'll I'll said this is like Matt.
You know clearly.
April list lives, a scary minds right. So most of the.
Shelter in place.
Turning to take effect the third week of Mark So in April that wasn't a whole lot of activity and how does your salespeople event.
Not on the road face to face either so its been via the phone. So late April would've been a very challenging month and as you probably would expect each month gets a little better as people get either used to it at more comfortable or more becomes more normal. This this new kind of new norm. So I think we would say.
Our sales activity in a pipeline activity has improved each each month as we've gotten into this and.
The one at any color to that yeah, I would say, Matt that is the fact that the momentum on order on on the pipeline has continued to build.
We're seeing on the retail side.
Version of that pipeline to order activity.
Starting in Europe actually we had some really nice activity there.
Seeing in in the U.S. for retail right now so we hope that continues but we like the momentum is building on the hospitality side as Mike said.
Certainly a huge pause in that sector, but if you recall our or.
Large relationships with the the quick service restaurants.
Makes up a big part of the hospitality business and we're starting to see new store commitments in openings and projects back on track. So we're seeing that momentum pick up.
On the banking side of the funnels picked up and I will say that we're seeing the right momentum and order activity. It's.
Probably that you know the being very cautious as they look at the second half of the year, but as we came into July we swapped saw the order rates start to pick up again, so we'd like the funnel.
We now need to focus on the conversion to order across all three.
Yeah, and I think you one of the early questions as the what does a ton of tenor of.
Bankers are the same would be the same for the retailers or.
Hospitality and I think everybody is looking for the same thing when is there when do they have certainty in an end to this crisis.
We do need that to happen before people start to release, the capital and turned those prospects actually into order so were.
We're going to be a little cost its other than the good words around some upside to.
Activity, but in terms of until those turned into orders and revenue will have to wait and see how this thing plays out the let the last comment I'd make about the bank at the pipeline activity in the mindset.
We are seeing sick, they really nice build of pipeline and conversion from the banks on the software side and as I talk to Frank How crew now runs banking for us and his team. They would suggest that there is much more strategic.
Focus and investment into the platforms that differentiate and create the right customer experience for their customers that their positioning with the software.
Hardware will follow it's a bit more did as he described that discretionary spend the hardware is but again, we're seeing the funnel build.
The conversion to from it is a little slower, but where we really like the activity. We've been seeing on the software side, which is really strategic investment on the part of the banks.
And then just as a follow up how do you guys see hardware profitability or hardware losses, playing out in 2020, maybe relative to how you ended 2019.
Yeah, obviously with the reduction in volume, it's going to be a difficult year first the challenging year to get the same.
As you as you would call 19 of 18 as a very good improvement in our in our margin. We said the number of very specific actions. So.
2020 is going to be it a challenging year, meaning.
Just going to be down over 29 team.
And.
Part of that's going to depend on how much how much of the Red comes back in the second half if any or whether that starts to come back in 2021 I think at this stage were very focused on getting our cost structures in place for where we anticipate a 21 calendar year to be and that's what we'll do in the second half the year.
We'll take our next question from this along with Oppenheimer.
Hey, guys. This is mark on that yet thanks for taking my questions.
Just a quick follow up on Mitch just give a sense of note the momentum between sort of put domestic market and international sounds like you know momentum that's fairly strong on digital crippled hospitality and thinking is that more.
Domestic or international what sort of both Oh, I guess like you'll start to catch up.
Yeah. This is all that I would think I mentioned, we're starting to see on the retail side momentum in.
Asia Pacific market and in the European market, which you know the corollary to there is that they were dealing with Covance ahead of us.
Not that likes clean.
Covance going away, but I think people have put enough shock absorbers on to understand that they're gonna have to deal with round to around three or covance here to stay and they're starting to do that but the retailers the big box retailers the grocery stores.
You know as you would understand that see they've been doing fine and and were benefiting from that and we're starting to see that.
Momentum move across the globe on the retail site.
Most of our hospitality is U.S. based except for our large quick service clients and we're seeing those who are outside the U.S.
Like I said, there were starting to see order momentum it and that's picking up and on the banking side I would say you know.
Not as dramatic eight delineation in terms of.
How Europe is responding to all of this it's probably as more consistent in the U.S. in Europe right now.
Where they've been cautious, but the pipeline is building and the order rate activity, albeit a little slow has his going into right direction.
Okay final question from Kartik Mehta with.
Northcoast research.
Hey, good afternoon.
As you looked at banking orders or retail orders are fully ought to know prices I think there were being deferred and I'm wondering today as you look at those orders are they still being deferred before are you seeing cancellations.
Yeah, we haven't seen any you had the challenge is very early on.
Logistics timing again, a lot of uncertainty when people couldn't style. So we had some.
Hurdles, we see no cancellations related to that so it's just a question when we're able to get the implementations done we talked about a very large retail client of ours and the second quarter, who typically would be implementing a lot of SCO just has been too busy to do it we don't.
I think any of those are lost its just a timing issue when they actually.
Take.
Take the self checkout devices and implement so.
We we feel good about the fact that people are still holding tight to moving forward.
And then just on the ATM side.
Right a lot about.
Branch closures and banks to the rethinking what the.
Brands configuration should be how do you think that will impact your banking business, though on the ATM side and then on the DIY side.
Yes, correct, yes.
Its an interesting question again like we we've talked to it's hard to get data like as adults in new and everybody's got a point of view. So we've we've done a lot of just direct outreach with.
The banks.
And the credit unions and the people who are buying from us and interesting perspective is they they tell the story around.
In the old days right, so retail banking with a brand centric model and it went from branched into an ATM.
Now to push out be more efficient cover more hours seven by 24 and.
I moved from transaction soon ATM and then it was and then in the mid to late Ninetys Digital banking came in digital banking was kind of an extension of the brands and the ATM network and now the way bank to thinking about it is that we tell relationships touch with digital banking, so they flip that around.
But then it goes to an ATM to do transactions and then lastly, it goes to branches. So they think about reconfiguring retail banking, they think about reconfiguring branches.
And their branch network, reducing the number branches, but.
At least the Parago feedback were getting is that there is still doing h. him as a critical component in their retail delivery.
That concludes today's question and answer session.
My keeper I'll, just tell me I'll turn the conference back to use any additional closing remarks.
Thanks.
Clothing, we feel really good about the progress we made during a difficult second quarter.
While we took care of our employees.
Okay for customers.
We managed our cash flow and continued to invest in strategic software solution.
We are confident we have the financial flexibility to continue to navigate through the covert 19 crisis successfully.
In the second half a 2020, we will shift to offense and focus on executing our 80 60 20 strategy.
Thank you all for joining US today, we look forward to speaking with you at the end of the third quarter. Thank you.
This concludes todays call. Thank you for your participation you may now disconnect.
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