Q3 2020 NCR Corp Earnings Call
[music].
Good day, ladies and gentlemen, welcome to todays.
See our corporation third quarter.
2020 earnings call.
Correct.
Is being recorded.
The floor over to Mr., Michael Nelson.
Right.
Please go ahead Sir.
Good afternoon, and thank you for joining our third quarter earnings call. Joining me on the call today, <unk>, President and CEO <unk> C O Jim Oliver CFO.
Before we get started let me remind you that our presentation and discussions will include forward looking statements. These statements reflect our current expectations and beliefs, but they are subject to risks and uncertainties that could cause actual results to differ materially from those expectations. These risks and uncertainties or describe.
In our earnings release, and our periodic filings with the FTC, including our annual report.
Today's call will also be discussing certain non-GAAP financial measures. These non.
GAAP measures are described and reconciled to their GAAP counterparts in the presentation materials. The press release dated October 27th 2020, and on the Investor Relations page of our web site.
<unk>.
Replay of this call will be available later today on our website at <unk> Dot com with that I would now like to turn the call over to Mike.
Thanks, Michael and thank you everyone for joining us today.
I'll begin with an overview of our third quarter performance and an update on the progress executing against our strategic initiatives.
Before turning it over to Tim who will review, our third quarter financial numbers.
Oh, and Jim and I will take your questions.
I'll begin on slide four with the highlights from the third quarter.
NCR delivered solid performance. Despite the current business an operating challenges that continue to be impacted by cold at night cheap. Our teams have continued to show resiliency in the unprecedented times continue focus on taking care of our customers.
On our last call I noted that it's yeah lets start shifting management attention from the pen down there and then start to get more focused on growing our business. During the second half the 2020 person at the first half of the year in the third quarter, we have successfully taken steps down that path.
First one of the primary highlights of the third quarter with a strong free cash flow generation, we delivered 150 million of free cash flow in the quarter.
And 299 million of free cash flow through.
Through the first three quarters of the year.
Tim will discuss in more detail the drivers of our strong free cash flow production.
Second we expanded EBITDA margins of 15.7% in the third quarter, which represents an increase of 220 basis points from the second quarter and an increase of 10 basis points from third quarter of 29 feet.
As we discussed on our second quarter earnings call when the pandemic again, we focused on reducing cash cost in the third quarter, we began to execute the productivity improvement initiatives.
Temporary sidelined by the pandemic these.
Even if it says our focus on reducing recurring costs to drive margin expansion and our performance in the third quarter is the result of some of these early actions we have taken.
Third we delivered 7% recurring revenue growth in the third quarter. This marked our third consecutive quarter delivering that level of year over year growth, which speaks to the steady progress we are making generating increased recurring revenue, which is consistent with our 80 60 20 goals.
Fourth we began taking steps to reduce leverage and simplify our capital structure. While also maintaining a strong liquidity position Tim will speak to this in his remarks.
And finally, while we don't expect a near term and to the COVID-19 pandemic. We are adjusting to this new environment for both our customers and our NCR team, we continue to expect impacts to our business.
<unk> sales to be the most challenged now moving to slide five we have forged ahead executing our strategy. Despite unprecedented market disruption, we have added new customers deepened our relationship with existing customers and continued to invest in our strategic growth projects like digital banking Hello cloud.
Emerald or retail cloud Pos and payments.
We will continue to focus on their transformation to drive NCR the services and achieve 80 60 20 strategic goals in the third quarter software and services were 71% of our total revenues and 53% of revenues were recurring EBITDA margin was 15.7% in bank.
We continue to have positive momentum in our digital banking platform. The six new customers signed in the third quarter. We've also had success cross selling existing clients with new products, including 12 business banking deals done in the court also.
Also in the quarter and digital banking registered users increased 12% to more than $24 million on a year over year basis.
We're also having increased success shifting our thinking softer revenues recurring revenues.
Both software starkly attached to an ATM sell as well as softer unrelated to an 18 himself in the third quarter, we signed nearly 250 baking deals to recurring revenue model that previously would have been so that's an EPS on software license.
One example of the top five U S Bank that recently agreed to a multiyear recurring software agreement supposed to activate enterprise Nexgen platform modernize their software stack that serves a multi vendor ATM environment in retail we are seeing increased adoption of our self checkout solutions we.
We experienced demand across customers and geography as consumer preferences accelerate we continue to be excited about the sales funnel of our Emerald offering which is our next gen cloud based retail I point of sales solution.
In hospitality the momentum of the lot essential which bundle software services hardware and payments continued in the third quarter. This model is proving itself and our ability to track new customers as well as better service existing customers during the third quarter, roughly 80% of all SNB Aloha.
Oh I see.
Our direct offices was sold as a subscription bundle, but payments attach rate also strong at roughly 80% for sales into new sites as we drive the transformation of our business, we will strive to be even more efficient and effective stewards of our resources.
We continue to focus on taking care of our customers advanced.
Advancing I've tried to keep abilities with investments in our strategic growth platforms, and continuing to strive to improve our productivity.
With that let me pass the call over to Tim. Thank.
Thank you Mike Thanks to all of you on the phone for tuning in today as it's been our practice my comments will again presume a constant currency adjustment that removes the impact of foreign exchange this quarter currency had only a minor impact.
Starting on slide six which presents a top level overview of our third quarter financial performance as you can see we added a rolling five quarter view to these metrics.
They typically focus on year over year comparisons the significant disruption to economic activity caused by the pandemic may overwhelm typical seasonality and make sequential comparisons are illustrative at least for the next couple of quarters.
Starting at the top left consolidated revenue was $1.59 billion down $194 million or 11% versus the 29 <unk> third quarter.
As expected revenue was negatively impacted by the broader economic pause what the year over year decline did improve from the second quarter and in fact revenue was up 7%.
Our second quarter results.
We'll dig into the more specific drivers of the decline by business unit, but an aggregate $165 million or 85% of that decline is attributable to lower hardware revenue, which was down 26%.
As Mike described in his remarks, our continued effort to shift to recurring revenue streams again accelerated sequentially we.
We shipped a $27 million or over 1.5 points of revenue that previously would have been booked upfront as a perpetual sales.
To a recurring revenue stream.
This compares to just $11 million in last year's third quarter or $22 million and this years second quarter.
Sequentially all of our business units showed growth and impressively revenue in our retail business was actually up year over year.
On the top right adjusted EBITDA decreased $29 million or 10% year over year to $249 million in line with the revenue decline.
And we were able to expand EBITDA margin rate by 10 basis points to 15.7%.
Sequentially adjusted EBITDA grew 24% EBIT.
EBITDA margin rate expanded by 220 basis points.
The expansion was the result of cost reductions we initiated during the second quarter, but that reached their full impact in Q3.
As Mike mentioned, we have now begun to drive significant productivity improvement initiatives across the entire organization.
Our plan for the spring, but were delayed by the pandemic.
Well actually taken a Q2.
Like salary reductions in discretionary spending constraints were immediate and significant never.
Never more temporary nature.
Our ongoing productivity efforts are more permit and have larger magnitude, which will assure sustainable margin expansion, even that pandemic levels of revenue.
Similar to the discussion of revenue.
Shift to recurring revenue was important to script or have a relative EBITDA results $21 million of adjusted EBITDA did shift out of the quarter accompanying the respective revenue shift this compares to $7 million in the year ago Q3 <unk>.
$18 million sequentially from Q2.
In the bottom left non-GAAP EPS was 54 cents down 19 cents from the prior year third quarter and doubled to 27 cents, we posted in Q2.
The tax rate of 15% for Q3 declined due to lower annual income and the relative size and timing of discrete tax benefits within the year.
And finally, and maybe most importantly, we delivered an exceptionally strong $150 million of free cash flow versus $57 million in the year ago quarter. This increase was due primarily to an increased focus on working capital improvements, particularly on past due receivables our cash cycle linearity and I'm wrong finished good inventory.
To date, our free cash flow generation is $299 million versus a use of cash of $27 million through the first three quarters of last year.
Moving to slide seven which describes our banking segment results.
Banking revenue decreased to $165 million or 17%, mainly driven by a 40% decline in ATM hardware sales.
Hardware sales remained soft due to the banks pandemic spending constraints you remember that we also are comparing to a very extraordinary quarter in last year's third quarter ATM sales were up 60%.
On an absolute basis ATM hardware sales seem to have settled into a relatively consistent range of $200 million to $250 million per quarter, and we anticipate this range will persist at least for the next couple of quarters.
Most of the remaining decline in banking revenue can be attributed to the service revenue associated with the foregone installation of those new machines and the continued expansion of our recurring revenue model X.
Excluding the decline in new ATM hardware and the directly related revenues, our remaining baking businesses would have shown modest growth year over year.
Operating income decreased $47 million or 32% operating margin rate dropped by 280 basis points to 12.7%.
These declines were driven by lower revenue and the resulting unabsorbed costs, partially offset by lower discretionary spending and other cost initiatives put in place earlier in the year operating expenses were down 4%.
On a sequential basis revenue was up 2%.
Operating margin expanded by 60 basis points.
Moving to slide eight which shows our retail segment results.
Retail revenue increased $17 million or 2%.
Last quarter, we discussed the delay for installing self checkout units at several of our largest customers as many of these customers were too busy operating their stores during the pandemic to undertake an installation project I think dissipated. These orders are delayed and not cancelled in the third quarter. We delivered some of those orders as a result self checkout revenue experienced.
<unk> double digit growth.
In concert with revenue operating income was up $9 million or 25% increase.
The increase was driven by higher revenue as well as by discretionary spending and cost initiatives taken earlier this year operating expenses were down 7%.
On a sequential basis revenue was up 15% and operating margin expanded by 460 basis points.
Turning to slide nine slide nine shows our hospitality segment results.
Hospitality revenue decreased $43 million or 20%.
Driven primarily by lower hardware sales I.
As expected our hospitality segment has been the most impacted by the current a virus with capacity limitations and changes to our customers' behaviors.
Third quarter operating income declined $3 million, mainly due to the flow through impact from lower revenue well.
While we were able to reduce operating expenses by 17% with our cost initiatives prudently higher reserves on accounts receivable offset some of those savings.
On a sequential basis revenue was up 8% and operating margin expanded by 400 basis points turning to slide 10, we provide our third quarter revenue results under our previous operating segments for both continuity in color.
Software revenue decreased $44 million or 9% due.
Due to the shift from one time to recurring revenue lower sales attached to new hardware and challenging conditions for our hospitality business.
Services revenue increased $15 million or 3% driven by an increase in recurring services revenue, including hardware maintenance managed services and digital connected services revenues, all partially offset by lower installation revenues.
Finally, as I mentioned previously hardware revenue was most impacted the quarter by the pandemic declining $165 million or 26%.
ATM revenue declined 40%, while the combination of self checkout and point of sales declined 7%.
Software and services as a percentage of total company revenue increased to 71% from 65 in Q3 were 2019 admittedly in large part due to lower hardware sales.
Recurring revenues increased $50 million or 70% driven by a programmatic effort to shift our sales away from single sales events characterized by perpetual licensing and on certain service revenues to predictable multiyear commitments with relatively high certainty of revenue generation.
This quarter's improvement came from shifting our professional services contracts to provide more stand ready services shifting our software licenses to term licenses that include appropriate termination clauses and providing more services in the cloud Rick.
Recurring revenue as a percentage of total company revenue increased to 53% from 45% also benefiting from lower hardware sales.
On slide 11, we present free cash flow net debt and adjusted EBITDA metrics as I mentioned earlier, we were very pleased with our performance on the cash side free cash flow was $150 million for the quarter, which was a significant improvement from the $57 million in the prior year.
To date free cash flow of $299 million up from a use of $21 million in the prior year.
Our efforts to improve working capital and drive more linear already in our annual cash flow generation are working well.
This slide also shows our net debt to adjusted EBITDA metric with a net debt leverage ratio of 3.1 times, which is consistent with last quarter and with the prior year.
As you know at the end of March we drew down over $600 million on our revolver and the beginning of April we issued a $400 million bond as a precautionary measure to de risk our balance sheet and sure financial flexibility in uncertain times <unk>.
The cumulative effect of all those actions was a very solid balance sheet with sufficient liquidity and no significant near term debt maturities.
We ended the third quarter with $1.6 billion of cash having already reduced our termed out debt by $200 million.
Since that time, we've executed a couple of other transaction to de lever, which I'll update on the next slide we remain well within our debt covenants and ended the third quarter with credit facility leverage of approximately 3.3 times well under our debt covenant maximum of 4.75 times.
And my last slide Slide 12, which provides a description of the three different but related redeployment of excess cash to reduce leverage and describe the impact of those transactions.
As we discussed last quarter as we become less uncertain about the economic environment and become more certain about our ability to operate effectively these pandemic impacted levels of demand.
We have begun to reduce some of that precautionary leverage that we added back in the spring.
First we addressed an approaching debt maturity stack and 2022 and 23.
And took advantage of a favorable credit market environment.
In August we closed two new bond offerings for $650 million at 5% and $450 million at 5.25% with maturities of eight and 10 years respectively.
We use these proceeds augmented by $200 million of existing cash to redeem our prior $600 million, 5% senior notes and $700 million six in three eight senior notes. These.
These transactions extended our weighted average debt maturities limited near term refinancing risk and lowered our interest expense.
These new debt offerings will result in lower annual interest expense of approximately $19 million and as a result are expected to be accretive to EPS in both 2020 and in 2021.
Second.
At the beginning of the fourth quarter, we purchased and retired 132000 shares of the outstanding series, a convertible preferred stock, which represented about 32% events yards outstanding convertible preferred stock.
This transaction will reduce our annual dividend burden by more than $7 million and is expected to be net accretive due to the $4.4 million share reduction and our diluted share count on an annual basis.
And third based on the strong free cash flow performance year to date and our confidence in the outlook for our business early in the fourth quarter, we paid down $470 million of a revolver.
This will further reduce our interest expense by $8 million.
In total since the beginning of the third quarter, we have redeployed that $800 million in capital transactions for an annual savings of $34 million through lower interest and dividends and with that I'll turn it back to Mike for his closing comments.
Thanks, Tim in closing, our key priorities moving Florida Claire.
First we will continue to further execute on our NCR. The services and 80 60 20 strategy. We have made notable progress this year. Despite some of the challenging conditions.
Second our financial position is sound, we have ample liquidity and financial flexibility. While also investing in our innovative solutions. We will continue to allocate capital in our strategic growth platforms, such as digital banking Emerald next generation Aloha payment and digital connected services. We will also consider acquisition.
And paying down debt.
Third we will continue to focus on driving significant free cash flow generation, let's go hand in hand with advancing our strategy.
Fourth we are building momentum across the business for improved execution and then in performance in 2021.
Lastly, I'd like to extend an invitation to each of you to participate in our virtual Investor day, which is scheduled for December 3rd we are looking forward to an event and tend to take a deep dive into our strategy and path forward in achieving our 80 60 20 girls.
Thank you for your time today and with that we'll open up the call for your questions operator.
Operator.
Thank you, Sir and ladies and gentlemen for any questions here at this time, Please press star one to join the queue.
Just make sure yes.
Some turned off to allow services that signal.
Again at this time that star one for any questions.
<unk>.
And first from RBC capital markets, we have Dan Perlin.
Yes can you touch area not Roswell filling in for Bob <unk>.
Hello Hello.
Couple of quick questions.
First of all on the on the margins and cost reduction efforts how much of what you had planned to you earlier in the year before and that no pandemic start to conceive accomplish can sort of how much is left.
Yeah. So.
Originally announced beginning of yet.
<unk> million of cost takeout, and 2020 and <unk>.
Because now they.
[laughter].
Oh, that's appropriate.
Oh I am to be letting go.
Oh, so we lead hard cardiac some others on I got that we can do that we took on some signs that some of these.
Discretionary spend going to be good.
So oh savings starting into second quarter on the second quarter.
Getting back to focus on getting a bit.
Second half of the year I think because the 2020 point insight and a weak part of that we're going to get our cost structure.
Line with our <unk> business elite.
We had some of those actions and corridor.
We have plans to continue into the fourth.
Corridor.
He I will certainly be 90 million, but under the yourself meeting.
How about 90 million run rate.
2021.
[music].
Okay switching to the Bakken does not with hardware I think he is with the ATM business would have been 200 250 million a quarter because like you said.
Given the growth in digital and the other products when when do you sort of see a kind of a crossover point won't ATM business is kind of flattish, but then you actually see who are the effect of the other pieces.
[noise] Yeah, you know, obviously, we had a strong EPS.
Sure I'll be seeing the bank.
Hotspots on some of their spending on discretionary spending.
I mean.
Side, they continue to make that decision, making some of the other products as well.
Additional services.
Yeah.
Uh huh.
During 2020.
I don't know that we have a specific timeframe.
As we talked the last couple of years are telling them what kind of a strategy. We have shifted the focus to the digital side digital banking digital car stockpiling and they'll continue to have a pretty good strength in 20, 20%. These youngsters have slowed down.
Tim if you want to add to Jeff's, we've been running for the last several quarters at about $220 million a quarter. You have said, it's been relatively consistent for the last three I would expect for the next couple though remain true as well I don't know at what point in time banks loosen up their capital spending we would hope that there would be a little pick up when that happens.
But we ought to have easier comparisons in Q1 next year and be relatively flattish from an ATM perspective, which allow the rest of our banking business to demonstrate its growth, but I'd also like sales in this quarter.
First one in a while not ATM hardware was higher in terms of revenue that age at Harlows.
Okay. One more question looking a lot more switching over to hospitality looks like a lot of seeing great demand.
Are you are you seeing an acceleration in the shift to sort of the services model you mentioned the central bundle is that denim trend. Then this that you all doing that or is that just.
It's time, but it's happening.
Well I.
Hi, Marelli I focused shift.
Dale that Ron the restaurant.
So I'm filling up the softer bundling up the hardware bundling of services to it.
And then.
Hey, Matt.
That's not the shift.
So.
And that's why you know.
Those numbers, we talked about 80% of our uptake.
No I mean, it tests are very.
Hi, Scott.
The Bakken as well.
I think it's playing well and at current market where people are.
That's I mean, the market need help getting up and running and they loved it puts it in the last thing.
To deliver a faltering sheet around it.
Restaurants, so I think that's probably the primary driver shifts in our business model.
All right moving on our next question's from Stephens, we have friends huh.
Please go ahead.
Yeah, Hey, guys. This is Joel on for Brian. Thanks for taking our questions. So just on digital banking could you talk about maybe the competitive environment you guys seem to be more competitive and any color. You can provide on that would be extremely helpful. And then just the follow up to that any color around penetration or.
What's in rates among your bank clients using digital banking thank.
Thank you.
[noise] Oh, yeah.
Yeah, I can talk about that.
Lastly, I will talk about that.
Sure So last year.
And there are a lot of that around that nominal.
Really changing.
And just to go to Atlanta insight in terms of focus on the customer as I have said and the being able to start adding it oh.
As I get it's funny funny, they continue to do that and we make sure that everybody out there. We certainly believe we're winning.
Absolutely.
Hi, good time, where we're probably going to lose one or two of those.
Well here and there, but we feel really good that we're not adding 19 now that at 2020.
The marketplace, So I think I had to.
Yes that is exactly that doesn't happen I D b product is doing.
Well as well so we feel pretty good about digital banking as we move forward the take up rate and the adoption.
Oh and speak to it but that's.
That's a tough first talk about to what potential Oh.
And that's the color there I think consistent with what I call. It seven like talked about what we are clearly seeing as I say.
Say, a step up in investment from the banks on their digital platforms.
We're seeing it both with the digital insight and D train product we're seeing.
Rest of the banking platform that we have in the market.
And it's coming across in license its coming across in the professional services space and I believe we have talked about the step up although we haven't disclosed the <unk>.
That's not something we put out there yet in terms of.
Market growth rates, but we clearly are seeing this is called bit.
Enhanced a pickup in our customers and.
And consumer activity on the digital platform.
[noise] [noise] beyond our next question will come from Dan Kurnos with the benchmark company.
Well.
Great. Thanks.
Maybe like you could just give us some game.
Geographic color on what you're seeing in we'll just be helpful. Insight altitude. If you want to break it down by segment or not and then just as we think about sort of you know this tobin driven evolution of the entire landscape I know that you know you guys have done a great job of free cash right. Now is probably gives you some of that.
Andy do you want to go back and getting Samir tuck ins, but how do you view that on the tech side versus maybe partnership opportunities that can get you deeper penetrated into you know some of the verticals that were seeing develop there.
[noise], Yeah, let me Oh I'm sorry.
The last time in terms of you know sort of a.
Covenant access rarely see that late.
Hockey These quarterly call and obviously back in March and April.
Well I just think from Teva it was kind of hard to.
C.
The DAP or the duration.
Okay endemic to help health issue.
And then like we had to make some sense I think we like the second quarter is going to be difficult.
I was going to be similar on a year, we did a little better than third quarter than the second quarter.
Comparisons I think were 12% constant currency.
Second part of the third quarter.
I think I'll leave it looked at it we don't we don't see that healthcare installed.
And so it's probably going to lead lead a little bit into 21, certainly Oh, we don't think its going to be over with the first quarter. So when do we expect to see when we say Oh I get my mouth.
About the restaurants I've got to go to stores.
Right not all so we do think that pushed into next year.
Well as you pointed out and.
And.
But a lot of focus the whole year on cash flow, yet right test national third quarter based on managing our costs, even though even with lower revenues and managing our cash flow itself.
Year to date.
We're actually not only ahead of where we were last are you today, but I think it's Tim referenced a threat I remember it now to full year last year. So we feel really good about the castle that gets after sandy we took some of our debt off the table, we bought back some of that.
I heard stack up to the next.
That's at a capital structure and then we announced in the second quarter call that we would start looking at opportunities to do tuck ins, but which we will do a tuck in acquisitions or other acquisitions that will help us grow and aggressively forward. So we will we will continue to do that.
Glenn far right.
I had and maybe Kevin just wanted to comment that the Holly how we kind of view.
2020, and the 2021 about.
Nonres perspective.
Yeah, I think the.
I could see that this quarter play out again in the third quarter to fourth quarter will look a lot like the third quarter from a revenue perspective.
No reason to think that the markets that our customers sell and youre going to get any better.
I would expect similar demand for us in Q4 to be soft Q3 actually the same places I suspect indexed relatively similar as well I also expect a margin rate similar to what you want me just achieved in this quarter.
He said the cost actions, we took in Q2 were relatively temporary intermediate or make it gets shifted much more permanent productivity initiatives that will drive future profitability and make that a more sustainable improvement to March great I think in the cash flow side Mike.
We're getting much more linear in the way we conduct our business from the top down for revenue on down through it's not a huge difference on cash flow and the performance. You saw Q3 was outsized short typical Q3 performance in Q4, we every good when they bought forward a little bit.
We very strong Q4 cash flow into Q, great it'll still be a positive thing and demonstrably so.
And then just maybe Mike you know obviously, there you're all in <unk> 18 and.
Understandable I know that nobody really spending right now, but I'm just wondering how the conversations are going around I can kind of future branch closure of any trying to get stuff on paper now are you thinking about how are you thinking about that in conjunction with obviously the strength you're seeing vision.
Right.
Yeah, I would say that the conversations.
That we're having across the markets.
The European market Middle East.
Australia. It here in the U.S. the banking community is focused on the cell surface Bank plan for.
As I mentioned before we're seeing it any investments you're making in the software.
The digital platform and what we are seeing is a clear pause and the use of capital and that has impacted the ATM.
Activity.
Tens combat we are we have been seeing.
<unk> to 20% range on H. habits, we think that's probably a fair number as we move forward and we think the market will role.
Were all from an ATM perspective, as we've talked about it for a while which is held relatively flat over the next.
Several years, but the ATM I am still a key part of the strategy going forward.
We just think there is a little bit of preservation of capital are going on right now with our bank customers. So we're not hearing anyone run from the ATM or ITM or touting that money's going away or the need to deploy.
The ATM ITM as part of a distribution strategy has has shipped.
[noise] moving on we have Matt Summerville with D.A. Davidson.
So just a couple of questions first Oh, and I want to make sure I heard you correctly, you're not anticipating a sort of normal seasonal sequential uptick in revenue for any of the businesses in Q4 relative to Q3.
Oh, no we're not and.
Well I think there's a couple of things clearly the market dynamic that we're seeing which is.
Uh huh.
More of a oh.
Contemplated spend on.
She is clearly what we're hearing from our bank customers.
The other thing which both.
Tend to Mike touched on this a little bit of a cultural shift that were trained on still here in the company which is to.
Create more of a predictable quarter to quarter level.
Performance from a revenue standpoint from a.
The EBITDA performance standpoint, and from a free cash flow perspective. So we have tried to instill, let's not keep pulling things artificially lasts.
You will see it even in the way that we have moved our software to from perpetual to subscription, which has clearly changed behavior and order and certainly at end of year of our sales people out there trying to get that last big deal in <unk> in the door.
Which creates a pricing erosion, what do we do that because.
We're playing with the customers timeline. So we're consciously tried to make an effort to smooth out our outperformance quarter to quarter, which we think allows us to be a better performing business and I think that the fact that right now the ATM market is behaving the way. It is just the core core.
So that older than anything else.
Got it and then maybe it's you guys announced them a couple of minutes or a couple of seconds, just talking a little bit about what aid in the self checkout environment. It's demand there remains strong incoming orders backlog and its you state that strength.
As you know multi year sort of legs underneath it given you know the the <unk> those shifts towards more friction.
Lite transactions.
Yeah, I mean, we you know oh, saft out or being able to manage.
You know our interaction with a yeah actually south at a store that making a a chef and lead that saying that salad or a pen Danny.
Crisis, obviously, we think accelerated that and well continue to push that fall and suddenly tells you a lot so our NGL in South Texas.
In South Chicago without having a person touched your items.
You talked on the last quarterly call, we actually have held a number of very large client.
They came from Oh pay from the App on your thoughts you know you've got the test itself.
When you do the scanning so we think that that Uh huh.
It's all of that we think that that's all I've given some some strength going forward.
The.
A corridor.
Tim do you want to speak to that.
Merger, yes, what so self checkout accounted for more than all of the growth in the retail business three took or this was up year over year. So I'd.
I'd say, a bright spot in our quarter and and they are looking for the order book is strong.
[noise] [noise] from JP Morgan we have also.
[noise], Hey, guys. Thanks for taking my questions. So.
Just a follow up on self checkout can you sort of walk us through the unit economics of sales. So you know the S.P. of the solution for our hardware standpoint, and then the relevant operating margins and then the services and software offering over time and then you have the lifecycle. So for example, the Watson.
Britain announcement.
You know based on number of stores and we get to the number of free cash flow number from this deal overtime.
[noise], Yeah, Yeah I'm positive.
You know generically.
Yeah, I mean, you made.
Maybe a little differently depending on.
Yeah, where they're at.
Hi, there its just a pure hardware deal obviously, when we tell self checkout. There's a piece of software that goes with that some clients are moving forward with a little bit more comprehensive.
POS software upgrade potentially on the ability to develop Matt that's delaying and self checkout Lane there.
Friends before as we got into 10 Downing the ability to do more x. I'm not answering you.
Okay and at Checkout, and then a pay off your around mobile device.
<unk> services team has had a lot of activity supporting and helping clients.
Now I'd like to take part of it also second quarter. So I don't know if I can.
Really in a position to kind of a breakout as you said you know what the average selling price and what gets dragged along I don't I think self checkout as even more.
<unk> unique it's each individual sales or maybe but we should see it in the h.
End market.
Well, thanks for that and then nice momentum on D. Three with a first horizon can you give a sense of how to size up this win as.
Well then how quickly can you deploy the solution and whats the timing of revenues and earnings potential over time.
That's.
Definitely a they are already a D D train hi, Ed.
It's about what we announced in the press release.
That's a tough and out part and they weren't running that out and then obviously part of that well, we're now managing or managing and then how do we want to do that and.
And since we're seeing most of the DTV clients wanting to move to the cloud.
The flexibility the ability to scale up rapidly get to peak. That's why the huge advantage is that that product and were seeing most people I shouldn't say most mission clients like that and we want you care to help around that for us.
At times and also had no lives acquisition. So we brought on a that additional volume onto the <unk> platform and then they add mother nature concert. So Oh, that's right deals a nice sales, it's really an expansion and a shift.
Let's turn to that we've had for a number of years.
Okay.
And our next question comes from Katy Huberty with Morgan Stanley.
Thank you good afternoon, Ken I, just want to revisit your comment about the December quarter. When you talk about similar demand does that mean.
You're thinking about a year on year decline in the 13% range that you've seen the last couple of quarters or does that mean that.
On the revenue is flat sequentially.
Well I I. So I think revenue will be up modestly sequentially. So the number you ascribe is probably about right.
You know because there's a lot left to go in the quarter and anyone feel can swing that a percent or two right choice, but what I do think that as we sit here today.
Demand, particularly in the things that we can measure easily like hardware looks to be very similar to what demand was in Q3.
[laughter].
Hi, a question around <unk>, eight and a quarter end of your spike in the <unk> and stuff I think all we're saying is when we see that occurring that's here or how does that due to the shift in our business model and trying to Oh Dude.
Okay, and probably more so the bank it's.
It's really it's really a tale. It's it has the banks sitting there, saying, let's see what happens, but he likes the economy before we start spending money or an ATM. So while we think that will affect.
We're not sure that's going to hit in the fourth quarter here and that of the top checkout, yet the normal end of year. They there.
There were there shouldn't busy.
Including in this you haven't taken the two busy running they're running their stores to really be popping a bunch of new skoal. It on the floor. So you know again I think.
It's going to be slightly a sequential EPS from third quarter, but maybe not the big path we've seen in prior quarters.
And if we think about EBITDA margins into next year, just from a high level, obviously, the weaker mix of hardware is helping this year as hardware starts to recover in 2021 do you think you can take out.
[noise] fast enough that that you will be able to offset the odd and you can continue to expand EBITDA margins.
In the meantime, yes, yes, absolutely so the cost take out that we're working on currently I would say, it's more indirect or associate with our services and software businesses and not necessarily their production or manufacturing footprint, that's being a plan to now and you can imagine we're going to size our capacity.
To a level of output honorable intentions goes more like what we're seeing now.
So that a drastic has had some cost come out every year, we expect to get that done over the course of next year.
Okay, and then lastly, Tim you mentioned higher been services. The hospitality business can you just talk about where losses are running right now when and where the parole set and services say, what you saw in the business and the financial downturn.
Yes, we have not seen an increase in a number of defaults and in fact, we've been very pleased with the reserve levels. We had aggregate we did take a little bit more on specific customer accounts that that turned negative. So these are very specific targeted adjustments on the remainder of the reserve I'd say that we are very good.
Okay.
Oh for that.
Smaller accounts it for the more general reserves.
That's great. Thank you.
Sure.
[noise] moving on from Oppenheimer, we have a unique pheno.
Great. Thank you.
Yes sure.
Delve, a little bit more into maybe hospitality retail and.
Just a sense of what you know.
Driving that business, particularly in the <unk> is that all larger customers is that no one large customer who bought like base.
What do you think that maybe smaller customers and well maybe the consumer insights for.
Hospitality business.
Thanks.
[noise], Yeah, I mean, it again kind of back at a macro level. So.
We are we did a CPA and it might be something much there has been an update call and share the mix of our business because I do believe so.
A look at our business and the.
The mix underneath the covers.
So we must do we tell them we talk about.
Oh, that's the amount or or large grocery store chain big box chain.
Our specialty which is where the risk is.
Oh, our SMB, where there might be more of it in retail we did the same thing and hospitality, but we said it will serve a small business says they're going to be a little bit more at risk.
Hi service restaurants are large chain restaurant and so.
If you recall, we can kind of out of those out and and it.
Large restaurants quick service restaurants are really doing well and in some cases, there do you ever your numbers are actually quite a bit better than 19 are thriving and try to do the same thing on a take away and so those continue to buy Andy I'd be solid as you can imagine we.
Spoke to some of the deals.
Yes, hi, restaurants, who are not able to open their doors because.
Maybe they haven't got restrictions are they haven't been able to get the doors that open it or get the volumes some of those wherever saying some of the other.
That business has held up quite frankly, you know all things considered pretty well for us retail the large players are continuing to buy and you're seeing that in our retail bank you over here the impact on small and the numbers I've SMB channel, it's always hyper sad about two.
2% of our total revenue so that really hasn't done.
Heck so that's in terms of Uh huh.
Remember that even though.
Especially to some of those customers are doing a really nice job on mine that shift online to shift the model start pick up and up.
They're doing well others have not.
Done quite as well, but again, the total numbers or that risk and retail total company <unk>.
Around 6% of our total revenue stream. So if you think in totality the at risk.
It's not a big number.
You mean like a company and we don't generally well hospitality the at risk is against one another six up six.
X percent of our total.
The company and that had a little bit more impact on a go at it.
<unk>.
Okay, and then also just turning over to banking.
You know you mentioned sort of the hesitation so.
Customers is that's driven just overdone certainty are they are they seeing a trend it's somewhere that their customers are.
And then give away that they had no <unk> no.
Or is there some other parts of the bank.
That comes from his house, that's just not.
[music].
Doesn't <unk>.
Yeah. So the bank you know I've talked about this though the bank on that.
A lot of the time.
What they can do you have on digital banking away all the nightly news on it or not.
Not only in our Pennsylvania crackpots hottest topic. So that spending has continued to be very strong I mean.
The ATM side, but we.
On the call customers every week on top banking about what they're doing.
In the second quarter, they thought some smaller transactions that Ah imagine that in April but.
But the amount of assets being what Ron was up you ever hit harder.
Part of that they're probably touch on that by coming back. So they don't see the transaction volume forecast has been coming together are rather Saturday tower.
It's really the top line.
Mother ups, the machine and what we're saying banks look at drilling is what are they going to do with it.
Branch, they might change the branch footprint or branch hours, they're talking about how a multi function age had might pick up some of that slack. So there are the feedback we're getting the mines that were getting is that ATM that part of their strategy and actually called out as a gentle patchy going forward has not changed at all for the banks.
They're spending in tiny tiny.
Hold on to the mining has held onto the capital a little bit more than we thought it was half due purely just called it.
Okay, great. Thanks for the color.
And moving on ladies and gentlemen, we have our last question from Charles Nathan whose with Wells Fargo.
Hi, Thank you for taking my question.
I wanted to ask about the competitive landscape in the hospitality space some of your plumbing quad.
Here in the states.
I've had some struggles and helping to fund that.
You know maybe give us some color on why there.
Inbound interest from some of their some of their clients and whether you've been able to gain some market share.
In that space.
Well I you know so.
Yeah, I'd say again that market was more impacted than anybody ocular EMEA able to set aside.
Hello.
Ivan.
Really plays but we're actually has done and helping our clients navigate so call that a I'd say, we're really pleased but suddenly innovation they've done well in the middle of the endemic or a team there as a team rolled out a order at April which is very different than the other or order cables.
Taking a look at the many X order from here.
Overnight when you're in a well pilot order at table and then you can hey at that angle, what that aimed as I.
When you're not when you're done a meal. So there wasn't a basin that really made the conversation and the ability to walk into a customer whether existing customer or new customer and they translate a capability that gene has let Pat comment that you made around some of our competitors and said we're going to double down.
Virginia blends in the major cities as we were putting feet on the street with our local channel whether that doing that burchill, it whether they actually going around restaurants or open having a conversation and so we we actually I guess.
Thats right now, but we actually feel good about where we're going to come out of the back end of it adding adding customers are picking new products with existing clients and.
Focusing on executing our strategy either.
He doesn't it.
Downtick on your thoughts on that yet.
Clearly are seeing quarter to quarter the momentum they are getting validation that to Mike's point, our core product Aloha central is really being well received the notion of being able to go in and offer in total turnkey solution to our customers to do it on a subscription basis. So.
All of those customers, whether they are working their way through this cold it curious or there.
New startups were minimizing the capital investment upfront by being able to walk and set them up and put them on a subscription basis and as Mike talked about the pace that we have moved our functionality around this.
Hi Tech list Commerce, especially in the restaurant is really being viewed as a positive and aggressive response to quite frankly effort more customer say their survival than ER than anything else. So.
To Mikes point were feeling actually pretty good you mentioned some of our competitors. We know they have been hit you've probably seen some of their announcements what the actions that we've taken.
And contrary to that comply as Mike said, we're doubling down on our product investment smooths out in the field and what we like early returns that we're getting.
Got it and it's a follow up on the M&A strategy.
Sounds like you're moving closer to that being part of the conversation again and I was wondering.
Are there any several points on that strategy that you could highlight and you know relative to where you've been and where what you've done in the past where the focus has been <unk> point of sale and the digital banking space.
[noise], Yeah I I.
They know the.
China will be the same so we that we different buckets one is.
Products helped us pratik.
Our side and we've got three.
We are going to get deals for us we did a D train that Ah, that's showing it Jeff and and all the formula.
Hi, early stage companies, who have failed a really solid product that will fit in with our strategy and allows the plug it in integrated and then costs out of our distribution channel. So we'll continue to look at.
Got it that well file it thank god, but I would say it would be Oh, hey, banking retail and hospitality, where we have an opportunity up there.
Got the deal done on shale upscaling hospitality, where we've.
Gone out and.
But channel about distribution those have worked out the way. We you know we talked about kind of Reenergizing that channel organization structure, how we go to market and Oh.
No that's worked well for us in terms of not only business, but also financial accretion and then looking.
Sales for Sarah opportunity.
Special service or level of break fix services and managed services. We think we have the scale and the ability to leverage up if we can find either businesses that arranged center business.
The CLO, so oh, well loved how that formula.
And Ah yeah. The team, but there are other products like Castlight you can see we either very nice out the team did a really phenomenal job managing cash flow through the first three quarters, and we feel much much better better clarity in the future or not to call that but we like all oil today and they intend to use the word left.
Uncertainties on their children, but we'll be left out in March.
We use that drilling to see clearly, where we cannot find and buy that we pay down a portion of our debt that we had put on the balance sheet just in recognition that we feel much better about the future for our company [noise].
[noise] right, ladies and gentlemen that will conclude our acuity session I'd like to turn the floor over to Mr. My kafer for any additional or closing remarks today.
Thanks.
Hi, again reiterate.
You know what we said we were they played with the third quarter performance in a very challenging environment I came did a great job.
Focusing and an execution and.
Hi, I'm.
President at 10, Downing, we focused number one I think ever client Ah Onez I bought the ability to not take care of our clients.
And actually add hyun.
Secondly, we continued to make comments on our strategic calls we continue to make investment on our strategic product.
We continue to make the shift to softer and service focused company even during these difficult times.
There are some time deposits, we improved productivity, we talk how caused a temporary basis. But then we also took actions that would allow the cost savings to carry forward into 21 and beyond.
A number of RV, Joe phenomenal cash flow performance for the third quarter. So we we said we're going to hop on cash flow. It started here sorry at the turn of the pandemic and the team did even better and we kinda this non cash management.
And then lastly that allowed us to pay down some of the data, we able to de leverage and feel very good about where we sit today just with less uncertainty in the environment recognizing that we can operate at this level and not earn cash, but rather generate positive cash flows that's what I've seen.
You take down some of our debt.
And then lastly, just wanted to you might get a vacancy.
Joining us on December 3rd virtual Investor Day, and we'll talk more about our strategic all to drive a week a tough in services revenue to 80% recurring revenue to 60, and our EBITDA margins to 20%.
In our age 60 2062 calls so thank you for joining us today I, thank everybody for participating on our third quarter earnings call.
And once again, everyone. We do thank you for joining us.
That does conclude our conference today you may now disconnect.
[noise].