Q2 2021 NCR Corp Earnings Call
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Good day and welcome to the MTR Corporation second quarter fiscal year 2021earnings Conference call Today's conference is being recorded.
This time I would turn the conference over to Mr. Michael Nelson, Vice President of Investor Relations.
Please go ahead Sir.
Good afternoon, and thank you for joining our second quarter 2021 earnings call. Joining me on the call today are Mike Hayford, President and CEO Owen Sullivan C O O and Tim all of her CFO before we get started let me remind you that out.
Our presentation and discussions will include forward looking statements. These statements reflect our current expectations and beliefs, but they're subject to risks and uncertainties that could cause actual results to differ materially from those expectations. These risks and uncertainties are described in our earnings release and our peers.
<unk> filings with the SEC, including our annual report on today's call. We will also be discussing certain non-GAAP financial measures. These non-GAAP measures are described and reconciled to their GAAP counterparts in the presentation materials. The press release dated August 3rd 2021 and on the <unk>.
Bester relations page of our website a replay of this call will be available later today on our website NCR dot com with that I would now like to turn the call over to Mike.
Thanks, Michael and thank you everyone for joining us today for our second quarter 2021 earnings call I will begin with some of my views on the business, including an update on the Cardtronics transaction and the Liberty ex acquisition, we announced yesterday.
Tim will then review our financial performance and an outlook into the second half of 2021 and then Owen Tim and I will take your questions.
Let's begin on slide 4 with some highlights from the second quarter.
NCR delivered strong performance that included accelerated revenue growth significant margin expansion and strong cash flow production. The team drove solid execution across all segments and we are continuing to build momentum in our NCR as a service strategy.
In the second quarter, we delivered 13% total revenue growth. This includes 11% growth for NCR stand alone and an incremental 2% growth for the 10 days following the close of the Cardtronics transaction.
NCR Standalone recurring revenue growth true grew 11% over second quarter of 2020.
Adjusted EBITDA increased 40%, while adjusted EBITDA margin expanded 330 basis points to 16, 8%.
We delivered strong free cash flow, we generated 142 million of free cash flow in the quarter. This is the fifth consecutive quarter of positive free cash flow.
And finally, we closed the Cardtronics transaction and announced the definitive agreement to acquire Liberty ex a leading crypto currency software provider. The combination of NCR Cardtronics and Liberty Act, we accelerated our digital first strategy and enable NCR to offer a digital currency solutions to our customers.
Now moving to slide 5 I want to provide an update on the Cardtronics transaction.
Although the transaction closed on June 21st.
It is still as we expected under U K antitrust regulatory review.
Now under review, we are required to operate independently and although integration activities had been planned execution of these integration activities will not start until we have received PMA approval.
We remain very excited about the transaction as the addition of Cardtronics will accelerate our NCR as a service strategy and is expected to be accretive to non-GAAP EPS for the first full year by 20% to 25% it will enhance our scale and cash flow generation, while advancing our 80.60 20 strategic target by.
Roughly 2 years.
We believe the combination of NCR and Cardtronics will drive significant value for our customers and our shareholders.
In the second quarter Cardtronics contributed $32 million of revenue and 8 million of adjusted EBITDA to NCR result for the 10 days following the close of the transaction.
Tim will provide more color on cardtronics performance during his remarks.
Now moving to slide 6 the second quarter execution was strong both tactically and strategically as we executed on our financial objectives, while continuing our strategic progress toward NCR as a service as we enter the second half of the year, we have strong momentum across all segments.
In banking or digital banking platform signed 8 new deals in the second quarter, including a long term agreement with tumor financial a leader in the credit Union industry with 2.7 billion in assets.
We also had success cross selling new products to existing clients, including digital business banking and online digital account opening with.
With digital account opening which we obtained through the acquisition of tariff seen in the first quarter NCR can now onboard a broad array of accounts across multiple channels. During the second quarter Terrapin of signed the largest deal in its history and also on the 2021javelin Research award for best in Class business account opening.
In retail we continue to gain traction with our NCR Emerald offering which is our next gen cloud based retail point of sales solution. We have positive momentum in winning that I've paid imperative for retail P. O S. Softwood, we recently signed a new NCR Amarelle deal with a top 5 U S. Grocer. This is our largest.
Emerald deal to date and include <unk> software self checkout, NCR Commerce platform API module for pharmacy, and the N C. P API module for fuel.
During the quarter, we signed 13 contracts, where our digital first retail finance App first hub, which we also acquired in the first quarter of this year.
And self checkout. We're also seeing continued adoption of our market leading solutions.
We are experiencing demand across customers and geographies driven by labor shortages wage pressures and changing consumer preferences.
In hospitality, the momentum of Aloha, Essentials, which bundle software services hardware and payments into a single offering continued in the second quarter. This model is proving itself in our ability to attract new customers and better service to existing customers.
During the second quarter, we increased the number of restaurants payment processing sites by 50% from the first quarter.
Our strategy to run the restaurant a significant win with firehouse subs recently entering into a 5 year contract with NCR support firehouse subs across 1100 locations with subscription based point of sales software consumer marketing soccer and end to end managed services.
As we focus on executing our NCR as a service strategy and drive business transformation, we will strive to become an even more efficient stewards of our resources. We continue to focus on taking care of our customers and advancing our product capabilities with investments in our strategic growth platforms.
In addition, we will continue tuck in acquisitions like Liberty ex tariffs and trash app, which strengthened our digital engagement with creating better consumer experiences for our clients.
With that let me pass it over to Tim.
Thank you, Mike and thanks to all of you joining us today as Mike mentioned, our second quarter results are reflective of strong operational execution accompanied by significant strategic progress.
We closed the Cardtronics transaction on June the 20 <unk>.
And the 10 days that followed Cardtronics contributed $32 million of revenue and $8 million of adjusted EBITDA that is included in our banking segment.
While our financial results will only include those 10 days for context, where Cardtronics have reported a standalone second quarter on their historical basis. They would've described a very successful quarter with approximately 26% revenue growth and 77 per cent EBITDA growth year over year.
They would've reported gross margin of more than 40 per cent and record EBITDA margins of 28 per cent.
My first slide slide 7 which presents a top level overview of our second quarter financial performance.
So starting in the top left consolidated revenue was $1.68 billion up $193 million or 13% versus the 'twenty 'twenty second quarter, driven by very strong growth in both our retail and hospitality segments and more modest growth in banking.
Our software and services businesses grew in the high single digits, while hardware paced by Cisco and P. O S grew faster than that for the quarter.
Revenue was up $133 million or 9% sequentially on an NCR standalone basis revenue increased 11% year over year and 7% sequentially.
Importantly, our strategy to shift to recurring revenue streams again accelerated recurring revenue was up 11% calculated on a standalone basis and comprised 50.555 per cent of our revenue in the quarter.
In the top right adjusted EBITDA increased $80 million or 40% year over year to $281 million, including $8 million from Cardtronics.
Adjusted EBITDA margin rate expanded 330 basis points to 16, 8%.
This improvement is a direct result of the more than $150 million in recurring cost savings executed at the end of 2020.
Direct cost productivity from cost reductions and volume leverage together allowed us to more than offset significant cost inflation related to materials labor and freight all caused by the strength global supply chain.
Reductions in indirect costs were more than sufficient to offset the dramatic short term actions that we launched in the depths of the pandemic induced uncertainty in the year ago quarter.
Similar to the discussion on revenue, we are driving improved linearity and profitability.
Adjusted EBITDA was up 9% sequentially and adjusted EBITDA margin expanded 10 basis points.
In the bottom left non-GAAP EPS was <unk> 62 sets up 35 cents or 130% from the prior year second quarter.
NCR a standalone non-GAAP EPS was 2 cents higher at 64 sets.
The tax rate of 26.6% is in line with our full year guidance of 26.
And finally, and maybe most importantly, we delivered another strong quarter of free cash flow with generation of $142 million adjusted for the effects of the closing process.
This compares to $160 million in the second quarter of 2020, which benefited from the cash preservation actions, we put in place at the beginning of the pandemic and an insurance payment from the Nashville tornado last year.
Consistent with our goal to drive modest sequential improvement and more linear free cash flow production, our free cash flow was up from $93 million in the first quarter of 'twenty 1.
And free cash flow during the first 6 months of 2021 is up more than 60% over 'twenty 'twenty results.
Moving to slide 8 for our banking segment results, which includes 10 days of Cardtronics operations.
Banking revenue increased $46 million or 6% year over year, with cardtronics, comprising $32 million or 4% of that increase.
On a standalone basis software and services revenues, both increased in the high single digit percentages to more than offset the decline in ATM hardware revenue.
We continue to successfully replace or 1 time revenue that was traditionally recognized with the sale of ATM hardware with more durable predictable and valuable software and services revenue streams subscription total contract value signed in this segment more than doubled from the prior year with significant increases in both annual.
Value and duration.
Banking, adjusted EBITDA increased $21 million or 16% year over year with cardtronics, adding $8 million.
Adjusted EBITDA margin rate expanded by 170 basis points to 18, 7%.
On a sequential basis revenue was up 7%, while adjusted EBITDA decreased 2% in the adjusted EBITDA margin rate declined 170 basis points against the extremely strong Q1. The sequential decline was driven by a less favorable mix of hardware by geography and by customer as well as escalating some.
Fly chain costs.
The bottom of the slide shows our key metrics for the banking segment.
On the left while current quarter wins have a typical lag that conversion and eventual revenue generation prior period Windsor digital banking drove an 8% year over year growth rate in the second quarter.
The rate of growth in digital banking has accelerated in the last several quarters, we expect digital banking could generate roughly 8% revenue growth in the second half of 2021 and exit the year at double digit revenue growth rates as we lap most of the attrition caused by the 2019 customer losses.
Digital banking registered users increased 11% compared to Q2 of 'twenty 'twenty and we are seeing commensurate growth in recurring revenue, which increased 12% year over year and 4% sequentially.
Moving to slide 9 which shows our retail segment results.
Retail revenue increased $93 million or 19% year over year, driven by strong self checkout and point of sales solutions revenue.
Retail adjusted EBITDA increased $43 million or 88% year over year while.
While adjusted EBITDA margin rate expanded by 590 basis points to 16%. This second quarter performance demonstrates the power of double digit revenue growth company.
Accompanied by cost absorption and control.
Incremental EBITDA conversion was 46 cents on every dollar.
Lower on the page we depicted the 3 key metrics for retail.
Self checkout revenue increased 42% year over year to $273 million with particular strength in hardware due to a customer request to accelerate in order that would otherwise have been delivered in Q3.
For the full year, we expect low double digit growth for scope with revenue split almost evenly between hardware and the accompanying software and services.
Platform lanes increased 63% compared to the prior year's second quarter and we expect this rate of growth continued to accelerate in the second half and importantly recurring revenue in this business increased 14% versus the second quarter of last year.
Slide 10 shows our hospitality segment results, which is participating fully in the recovery of the restaurant industry.
Hospitality revenue increased $55 million or 34% as restaurants, reopen rework existing locations and expand.
Our signed subscription total contract value in this business tripled from a year ago second quarter.
Our sales pipeline is getting stronger and we continue to hire to increase our feet on the street and catalyze growth.
Second quarter, adjusted EBITDA increased $30 million double from the second quarter of last year.
While adjusted EBITDA margin rate expanded by 460 basis points to 14%.
This improved profitability was driven by higher revenue and.
And lower operating expenses.
Hospitality is key metrics on the bottom of this slide include Aloha essentials sites and recurring revenue.
Although how essentials sites grew 88% when compared to the prior year second quarter and grew 18% sequentially. We expect this rate of growth to also accelerate in the second half of the year.
And the graph at the bottom right recurring revenue increased 7% from last year and 5% sequentially.
Turning to slide 11, we provide our second quarter results for 80, 60.20 strategic targets.
Note that this is the last time, we will present these metrics if NCR stand alone as next quarter, we will reflect our combined results including Cardtronics.
First we strive to generate 80% of our revenue from software and services or less than 20 per cent of our revenue from discreet hardware sales.
In the second quarter software and services represented 69% of our revenue, which is a modest decrease from the 72% in the year ago, driven by go and P. O S hardware revenue this year.
The pandemic induced spending pause in 'twenty 'twenty was particularly severe in hardware and the similar and similarly, the recovery is heavy and pent up demand for that same hardware.
We aim for 60% of our revenues to be recurring to drive more resilient more predictable and more valuable revenue recurring revenue represented 55 per cent of total revenue this quarter flat compared to last year's second quarter.
Our recurring revenue streams outpaced growth during the pandemic and the growth rates are now converging as hardware spending returns.
And we aspire to a 20% adjusted EBITDA margin rate, we made significant progress in this metric with adjusted EBITDA margin of $16.6 per cent compared to 13.5 in the second quarter of 2020.
On slide 12, we present free cash flow net debt and adjusted EBITDA metrics to facilitate leverage calculations.
We continued the trend of strong more linear free cash flow, we generated total free cash flow of $142 million, including 10 days from Cardtronics and excluding the items associated with the closing of that transaction.
From a working capital perspective versus Q2 of 'twenty 'twenty all categories of inventory, we're down in aggregate 11%.
With days on hand down 11 days.
NCR Standalone receivables were down 5% with an 8 point improvement in those longer than 90 days and days sales outstanding improved by 11 full days to 65 days.
This slide also shows our net debt to adjusted EBITDA metric with a pro forma leverage ratio of 4.2 times.
We are pleased to report that our pro forma leverage is well below the 4.5, we estimated when we announced the cardtronics transaction due to higher than forecasted cash generation by both companies.
We ended the second quarter with $449 million of cash and remained well within our debt covenants, which include a maximum pro forma leverage ratio of 5.5 times.
We have significant liquidity with over $1 billion available under our revolving credit facility.
And my last slide is slide 13, which provides an outlook for the second half of 'twenty 1.
For both NCR stand alone and Cardtronics, and then I combine them.
Remember that both NCR cardtronics suspended guidance during the pandemic.
Paul Cardtronics is currently operating separately and independently from NCR pending the completion of the merger review by the U K competition and markets Authority. We have received sufficient information from them to provide an outlook for cardtronics.
For revenue, we expect NCR Standalone of 3.43 billion to $3.$4.8 billion, representing 6.5 to 7.5% year over year growth.
This growth rate is negatively impacted by about a point and a half due to the elimination of revenue per sales from NCR to cardtronics.
Cardtronics operations are expected to generate revenue of about $600 million, representing approximately 8% year over growth year over year growth for that.
Total company revenue that is expected to be $4 billion to $4.1 billion, including intercompany eliminations.
For adjusted EBITDA margin, we expect NCR standalone rate of approximately 16% slightly below the rate we demonstrated from our very hot start to the first half anticipating higher second half supply chain costs.
And we expect cardtronics rate of approximately 28% very similar to their historically high Q2 level.
Total company adjusted EBITDA is then expected to be between 700 and $750 million.
For EPS, we expect a range of $1.30 to $1.51.
Which includes the immediate accretion from cardtronics of more than 10%.
That accretion will increase to our targeted 20% to 25% within the first full year of the combination.
We expect strong free cash flow generation in the range of $325 million to $375 million.
This performance should allow us to reduce leverage more quickly than our plan at the time of the acquisition to calculate this guidance we've assumed a few things first.
I E are approximately $150 million.
A tax rate of 26%.
And a share count of 148 million shares.
This share count is higher due to the conversion of shares owned by Cardtronics employees.
The recently announced Liberty ex transaction could put a little more upward pressure on share count. Both of these uses of equity will line of retain key employees and these 2 very important strategic acquisitions.
I do want to highlight some assumption that its outlook.
Around some obvious risk factors.
First we've assumed that we will continue to prioritize customer delivery and revenue growth over temporal cost increases from supply chain challenges in materials labor and freight.
While we absorbed about $20 million of premium costs in the first half we were able to meet customer commitments or even accelerate delivery on request.
We expect $40 million a further escalation in these same cost in the second half as we continue to maintain availability and meet customer needs.
We're hopeful that further productivity efforts strong vendor relationships and price increases can help offset some of the impact to both profit and cash flow.
Second it's not lost on any of you that there remains uncertainty regarding the pace of the global post pandemic recovery.
Each new cycle brings more discussion of regional challenges vaccination efficacy and uptake and consumer disposition.
We are assuming that the current state of play in the U S remains as is and that other key markets like Canada and the U K begin to reopen as is currently scheduled.
By this time next quarter, we expect to be more articulate on the combined entity of a more integrated outlook and have more to say about the progress of the integration effort and centered and its synergy execution with that.
I'll turn it over to you Mike.
Thanks, Tim now turning to slide 14, I want to provide an update on the definitive agreement to acquire Liberty Act, which is a software based crypto currency solution. This is a unique opportunity that will enable NCR to provide a complete digital currency solutions, including the ability to buy and sell crippa currency conduct cross border.
We met in and accept digital currency payments across digital and physical channel.
Liberty Act has 1 of the largest deployment flip trends through partnerships with ATM operators like tektronix at physical locations, including convenience stores pharmacy and supermarkets.
Our key markets have very complementary and will help both companies quell this acquisition continues our strategy to digitally engage with consumers and provide retailers and banks additional solutions for their customers to pay transact and we met.
Now turning to slide 15 looking.
Looking forward our key priorities are clear.
First we are eager to capitalize on the opportunities that Cardtronics brings us. We are excited till average cardtronics took salary ATM as a service broaden our retail business and increased our payment offering.
Second we will expand our solution portfolio to include a complete crypto currency offering our digital currency platform will allow consumers to buy and sell pippa.
Hit the currency across digital and physical channel increasingly retailers are looking for a broader set of financial transaction capabilities, which we are uniquely positioned to deliver on financial kiosks and Atms.
Third we will continue to allocate capital to the highest growth and return opportunity with the goal of driving free cash flow and increasingly turns for our shareholders.
Fourth we will continue to focus on customer satisfaction initiatives.
Since I arrived at NCR 3 years ago, we have been keenly focused on improving customer satisfaction with the simple belief that happy customers will buy more we.
We strive to garner a larger share of wallet with the mission to help our customers run the store when.
On the restaurant and when self directed banking.
Our focus is paying dividends as our net promoter scores are significant improvement last year and we continue to strive for further improvements.
And lastly, I'd like to extend an invitation to each of you to participate in their Investor day, which is scheduled for December 9th of 'twenty 'twenty..1 we are looking forward to the event and intend to take a deep dive into our strategy and update on our strategic goals.
That concludes our prepared remarks for today with that we will open the call for questions. Thank you for your time and operator, please open the line.
Thank you.
If you wish to ask a question Pete Sigma by pressing star 1 on the telephone keypad.
You're using a speaker phone. Please make sure that you need function is turned off to the receiver a chance to reach our equipment again press Star..1 quick question, we know Paul just 1 moment.
Our first question comes from Katy Huberty from Morgan Stanley. Please go ahead.
Thank you good afternoon, Ken first question for you around just reconciling the second half EPS guide if I think about the business stand alone in the first half you did $1.15 of EPS normal seasonality would put you in a you know what.
140, plus range just for the core business and in the back half and you're talking about accretion from Cardtronics. So.
Just if you can help us understand if if there are some pressures in the core business that that is suggesting last day normal earning seasonality or if there's some below the line items that we should be thinking about the net of a follow up.
Yeah. So I don't think it's on the revenue line. It is very much the way we expected it to play out. We've we've tried very hard over the last 6 quarters to stop doing the unnatural things that cause our years to be more backend loaded in fact.
Last fourth quarter was not that much higher than the third certainly relative to prior fourth quarters. I think the same will be true. This year. So that this pattern of modest sequential improvement that we've been on I was.
What I expect to continue and I think another 3 or so percent organic growth quarter to quarter into the third and then another sequential growth into the fourth but probably a little bit higher maybe 4% going into the force so modestly backend loaded, but we're trying not to naturally pull things in to do things at end of quarters.
It caused us to maybe compromise on price or anything else. So I think that was planned and probably.
Compares reasonably well with 1 year back anyway from 2020 on the line.
I think the biggest disconnect first half second half is going to be the old say.
50 to 60 basis points of margin contraction EBITDA margin contraction that I built into the model.
Almost entirely attributable to a pressure that we're seeing in.
The cost structure I think its temporal I think it goes away.
Once this passes but we've got some premium costs associated with parts with freight.
With Expedites and with premium labor, we're trying not to miss a customer delivery and thus far we've not yet missed 1 in fact, we've allowed our customers even pull forward some delivery dates as they need them and we've been able to to make our supply chain work. So I think if there's a disconnect.
In People's models, especially when you play out the categorization it would be in margin rate cash flow still very strong tax.
Tax rate at 26% in the second half similar to the first probably a little lumpy I think it's going to be 29 in the third and 22 in the in the fourth do some.
Some tax stuff around the transaction that we just completed and some discrete events.
Back into the fourth quarter, but I don't know if does that gets you closer.
Yeah. That's helpful. Just just a follow up on your comment around supply chain and prioritizing timeliness in revenue over over cost does that open up market share opportunity to take some of your competitors.
We're talking about missing some revenue opportunities just given that's exactly our thought.
Katie that's exactly our thoughts we do not think this is a time that we should miss on orders.
And I would say Katy we're seeing that this is.
On across the industry.
That it is opening an opportunity for us and I will tell you that.
Adrian and George Sloan, who those are.
Chief Procurement officer came in about 18 months ago, they've done a phenomenal job on a day to day basis, keeping the supply chain.
Operating at a level that is allowing us to meet our customers' needs and I will tell you along with that is the quality has not taking taken any hits along that so Tim.
Tim's point, we will take a little cost, but if it positions us to grab customer confidence in <unk> and market share that that's a trade off were willing to make so if you think about the productivity we generated on a direct basis and our manufacturing services base all of that was in place. When we started the year. So we came we came into the year.
With significant productivity you saw in the first half prices price inflation, we're getting good feedback.
Still hear us.
Yeah, I can hear you.
Hey, sorry price inflation was relatively muted in the first half we did a good job of holding onto with our vendors. It's clear in the second half, we're going to need to relate to a bit on our cost on a on both freight and on parts and so I think thats, what youre seeing in terms of relative margin rate from first half the second.
Thank you for that and then just lastly, when maybe you can comment on the timeline and the potential outcomes of the U K regulatory review and if theres any scenario, where that would impact your synergy assumptions.
Katy this is Mike.
Yes, so we have a very good conversations with the CMA.
To our legal team and as you may be aware they posted a August 10th date, where we expect to get some feedback from them. So.
We'll look to that day to determine you know.
What next steps we have.
You know based on based on their feedback. So we don't we don't have any color relative to what they're going to do at this stage, but we will get that soon and we don't anticipate any impact to our assumptions on cost synergies.
Thank you congrats on the quarter.
Thank you thanks.
Our next question comes from Dan Perlin from RBC capital markets. Please go ahead.
Thanks, Hey, I just wanted to revisit the supply chain question again a bit.
I know its kind of doubling what you're absorbing in the second half is that you.
Is that a function of.
As you said earlier, you know conceding too you know.
People within the supply chain or is that because you've got a larger footprint with cardtronics.
And then secondly, if I could just sorry go ahead I'll, let James that require no. No go ahead I am sorry.
I would just say is there any risk that there is no finished goods inventory that this doesn't doesn't get completed.
And or that even though you are willing to pony up price for logistics, there's just not enough to go around like I'm, just trying to really handicap that net 40 million absorption number.
Yeah, No. So 40 is our best guess as to what were going experience primarily on cost associated with with parts and frame up where we can see that pricing now we're able to hold off a lot of that in the first half of the year. So I don't know, we're very hopeful there are ways to get that back right. We can ramp up our productivity efforts and we're trying to do that we can.
Go back from vendors and asked them for a little bit more help as we get into the second half of the year and hold onto this a little bit longer we're doing that.
We can try to pass some of that onto our customers and price and we will try to do that as well so I'm not giving up on that $40 million I just think as we sit here today its the prudent thing to do and to the point you made earlier.
We'd much prefer to spend that $40 million and drive our revenue growth and make sure our customers are happier and particularly happy with us than to not spend at $40 million.
And then that the idea around logistics, let's say not associated with cost if you're willing to Tony at the point, but what kind of supply and demand.
Yes, it would be on the on the cash flow side, I guess, where would you be getting our inventory levels are down significantly year over year, thus far and you're down about 11% in the second quarter really good progress in fact every category of out of inventory was down.
I suspect we may choose to invest a little bit in inventory as the year plays out but I do not expect you saw our free cash flow guidance is pretty it's pretty terrific, maybe our best metric on the page.
I don't anticipate having to compromise on that to invest in inventory.
And I would say Dan we've talked about this before we've done an awful lot 1 and rebuilding that supply chain.
As you recall.
Long ago wasn't where we needed to be so we've got great partners and the quality that they are delivering for us and the collaboration is really outstanding I would say the other thing, which the business lines has done a really good job at simplifying our product offerings. So what was a high customization and the market was looking for with simplified our.
Products across all 3 business lines, it's allowing us to be much more responsive in terms of delivery time frames, it's also allowing us to be much more efficient with our our raw material inventory, which is to tim's point across the board our inventory right now is really in good shape.
Yep.
No. That's that's really good to hear and then just quickly on the.
On the banking side ex Cardtronics, I think you'd called out weakness in ATM.
I'm wondering if you could just comment around what are some of the dynamics that you're seeing in the market. What are your bank partners, suggesting to you are they holding off for some reason that we need to be mindful of.
And is there are there is there any expectation that there's lumpiness in terms of how we think about it from a.
Cadence perspective over the next couple of quarters. Thank you.
I'll hand, it to Mike here, but the banking business in aggregate is performing well, it's up actually from it on a revenue basis, which means those things are not ATM hardware are doing very well and so ATM hardware down close to close to 10% about 9% I guess in the quarter, we were clearly making that up with the right types of revenue so.
While we wait to see if our big U S customers have major orders North American comes from major orders in Atms as the year plays out.
Back on the replenishment cycle, we were on.
We don't need those to make our numbers.
Yes.
Colored or that you referenced.
Your question that the banking segment performance in the second quarter has nothing to do with Cardtronics other than the 10 days ago book there.
So the only the only softness we saw in banking with ATM hardware sales and as we talked about through all of last year, we've really built our.
Business around focusing on on recurring non focused around driving a softer footprint in our service footprint, which is clearly part of the.
The desire and the deal flow it is cardtronics ATM as a service if you look at our numbers in the second quarter, even with ATM hardware down our EBIT margins are up considerably our EBIT.
EBIT numbers for our cash flow is up so our business is really built to perform and deliver even at these levels of Atms. So having said all that if the market because the banks continue to.
Ill get get a little more clarity in light at the end of the pandemic set to free up the capital we would still expect at some point.
To see some of that recovery, but if it doesn't we still have a very solid execution in the second half of the year and going into 'twenty 2.
Yeah, that's great and hard to very much has run several several quarters ROE now hardware at Ats its been right around $210 million and that's kind of what we built going forward.
Okay Super Thank you.
Our next question comes from.
Kartik Mehta from Northcoast Research. Please go ahead.
Hi, Good afternoon. This is Alex on for Carter.
Quick question I was wondering if you could speak about the competitive landscape in the domestic business and any type of market share dynamics that you're seeing right now that would be great.
Yeah. This is Owen.
So I think to the point of the ATM business, it's performing where we anticipated it would be.
Net 200 to 10 range.
As we look across the landscape.
We actually feel really good about the competitive position of the ATM business.
I would say the discipline that the team has put in place.
Has really allowed us to.
Be selective about deals that we want to stay actively engaged in and you can see that to Tim's point in the performance of the banking business on the EBITDA side. So as we look at the business you know the market.
It is still slow in terms of their capital spend but we feel pretty good about our market position. Both here in the U S in Europe and EMEA, yes.
Yes.
Feeling pretty good about where we're at right now you look at our.
The overall growth of the business.
In banking in particular.
Our teams are feeling pretty good about position.
Okay, Great and then also I believe on the on the last call you guys called out that the payments attach rate for Lohan I think it was somewhere around 85 per cent and I'm just wondering if that trend.
Trend is somewhat the same or are you seeing any improvement or somewhere in maintaining that attach rate.
Thank you.
Yeah, I mean again, we share.
Sure.
Quarter over quarter.
Right.
Tremendous growth in the number of restaurants that we're processing payments for the hospitality space. So you know the attach rate is similar numbers.
We're continuing to see very high attach rate on new Aloha Essentials sales and then the team actually had a fair amount of success going back into existing accounts and starting to convert them over for payments.
Yeah.
Okay, great. Thank you.
Yeah.
Our next question comes from not so long ago from.
D. A davidson. Please go ahead.
Thanks, Tim to get back to 1 of your answers to a prior question that 40 million.
Just wanted to put a finer point on it that is an unmitigated number that is prior to anything you can do productivity wise going back to vendors and trying to move pricing do I have that accurate.
Yeah, I would say that is a that is a gross number in the second half of the year relative to the first half. So I absorbed 20 million in the first half I think that there's an incremental 40 over and above that in the second and.
This point, we're working lots of different angles. So we'll have to keep the productivity we generate in the first half of the year, which covered that first 20, and now go find another $40 million or $80 million annual run rate and productivity to get that back.
The reason I called it out, but I'm not sure that we can get all of that back, but I want to make clear, we're not giving up and theres, probably some messaging in here for our partners that we could use our help to get there.
Sure and then how should we be splitting that out between Q3, and Q4 and across the lines of across the industry groups as we try and model the back half and think about how to cadence this out.
Yeah, So I think margin rate will be north of 16%.
Around 60% of both quarters, if there's upside to that number it's going to be in the fourth quarter, So and it will be closer to 16.
Q3, and then.
When we're able to cover some of that would be higher in the fourth.
Think revenue I described earlier.
Kt's question I think the growth rate sequentially will be stronger in the fourth quarter than it is in the third.
And I think I have a higher tax rate in Q3, I know I was going to have our tax rate Q3 than in Q4. So all things point to a stronger Q4 modestly stronger Q4 non is back end loaded as we've seen in the past, but we always have.
Spend it or lose it mentality with some of our customers as we enter the fourth quarter net.
Causes and some renewals and as such the take place in the fourth quarter that caused us to perform better.
Got it thank you very much.
Yeah.
And our next question comes from Paul Chung from Jpmorgan. Please go ahead.
Hi, Thanks for taking my questions. So on Cat M. You have projected at 600 million for the second half from what I see.
You know if I caught this against 19 levels, it's down around 13%. So what are the steps you're taking to accelerate this business and if you could expand on sort of examples of revenue synergies do you expect to see in the coming quarters.
Yeah. So let me try if there's only so much I can do here. So we're still run as 2 separate companies right. We've not completed the transaction.
In terms of the regulatory authorities in the UK, So I'm not able to note too terribly much about the causal analysis of the results I just get to know the results that said that.
Net margin rate is incredibly impressive and what it says is they're getting traction in the right places when they can deliver a margin that much on revenue that's not up very much not nearly as much there growing the right places as you know if you've followed them. They have some revenue streams that are much more profitable than others and it's obvious to me that those must be growing.
More quickly than the average.
Speaking with them about their expectations going forward that margin rate.
As I described is the same in the second half as the record they generated in the second quarter, which again speaks to where that growth is coming from so remember that.
They're changing their business model and their revenue mix much like we're trying to do 2 hours and I think they are being successful.
We focused on their EBITDA and not so much on the top line.
Thank you that's very helpful. And then on Liberty ex any metrics you can provide on.
Purchase price revenue margins et cetera.
So it's a technology rich transaction that doesn't bring with it a tremendous amount of impact to our reported financials youll see.
Our release from US we're filing from us for $1.6 6 million shares, which you can do the math on that it was the we used to purchase Liberty ex.
So it's exciting to watch the guys in this space who look.
Look to see things move upward in terms of valuation relatively rapidly are excited.
Currency, so we pay for the deal entirely in cash and stock.
I think you have to look at a transaction like that similar to what we deal with per fine Oh, well, what we do with fresh half, where we bought technology, we bought a product to get speed to market and maybe get into a project, where we didn't have the expertise and then integrate it into our channel. So if you look at.
The ability to take a liberty ex.
The digital translation and then you look at our footprint that NCR N F footprint combined with Cardtronics. We believe we'll have a blended electric distribution channels to do these transactions in the industry. So we will push it through a distribution channel and grow it rapidly.
Cool and then lastly can you talk about kind of the long term strategy and maybe give US. An example of monetizing kind of along the edge and experience the.
The restaurant example, maybe you know where jet play Aloha Liberty ex Cat M kind of all play a role of generating revenue and recurring revenue would be helpful.
Okay.
Yeah, let me.
Let me break those out into a few components. So.
If you take a cardtronics and what they do.
Retail side think about it as a capability to do a financial kiosk or financial.
At maybe a a grocery store or big box store or a pharmacy.
Traditionally those have been maybe a cash out maybe a cash deposit or is it.
Again think of Cardtronics delivering.
A physical presence with a lot of endpoints, where bank customers, where the banks may not have physical presence himself. So think of about Aneel bank that doesn't have physical presence so they create.
Transaction point for their customers, so whether it's cash out with its cash and whether it is now the ability to get a digital currency like like a liberty ex whether its ability to pay bill for this ability to other transactions as it at the physical kiosks.
He asks so that on that side when you talk about jet pay that strategy has been fairly straightforward the ability to connect and passes the backend of the payment transaction behind all of our Pls whether it's in.
Hospitality in the restaurants, like we've done with Aloha and silver or whether it's in retail we're going to start doing that as a retail point of sale price. That's really completing a payment transaction on the back end of a point of sale.
Initiation, so really getting end to end and then we started to look at how do we connect across retail and payments with a net looks like I'll point network. So as.
As we lay out the components, we really look at physical points of presence whether to Pos with it.
I'll check out whether its an ATM, whether it's a financing and then what products, we can push the bank consumer or the retail consumer and then what transaction fees, we can obtain from those products.
Thanks very helpful.
Okay.
Question comes from Covid.
Most of the benchmark company. Please go ahead.
Yeah. Thanks, maybe just 1 Mike can we just follow up on that a little bit I don't know, if I'm, making too big a deal out of this but.
We've had all of the credit card companies get deeper into crypto. This year, we've had all of the payment companies announce solutions for you bought the largest bitcoin ATM operator.
It's clearly within all of the vertical that cardtronics plays within so.
I know you just bought it and I'm sure you're thinking about this stuff, but just maybe help us think through.
How you think about even to the last question just sort of deeper integration.
And how do you think about whether it is on the payments side.
How you deal with some of the issues around.
And translation as well as does this provide an incremental opportunity for something that the banks themselves.
Are asking for.
Yeah, you got it a lot.
I'll just try to focus on kind of the macro trends. So you know.
Liberty ex the largest crypto software provider out there and as you pointed out the endpoint.
With NCR, coupled with Cardtronics and Cardtronics had already partnered with Liberty ex to offer the ability to.
Load declined to buy bitcoin on you allow it at a at a cardtronics a point of presence. So clearly that's a piece of it.
We will continue to expand that if you look at NCR, we need to continue to move beyond cash and be able to look at the future of currencies and the future payment. So we believe that crypto or digital currency is a part of that the product today is really a big claim centric.
You can expect to see us move to a stable currency to really allow for payments, where you don't have the risk of a.
Looking at the currency like the claim that's fluctuating.
Envision the ability to load up on your wallet.
Digital currency and then transact at NCR point of presence at NCR point of sales at self checkout devices or to do transactions that are financial kiosks.
As we as we talked about you could envision the ability to low digital currency and to make payments.
Again at that point or to do person to person payments or to transfer money.
To another person would have transfer cross border. So we.
We just think as a as a macro trend where that's gonna go we need to be in the middle of it we think our ability to connect physical and digital planks is very unique in the industry. So we saw an opportunity and jumped in and did the deal.
Do you become the 1 to now kind of proselytized category or do you, let somebody else kind of continue to push that given your retail or youre really youre scho presence and is there any difference longer term do you think in sort of the margin profile if things migrate in that direction.
Yeah, I don't right now today, you wouldn't view NCR to be the.
Privatizing 2.
The retail consumer that's just not the brand that we have today.
I do think we have a very good friend as it comes through retailers as it comes to restaurants as it comes to financial institutions, and then again with Tektronix, we have tremendous amount of distribution point.
Our ability to then take it from a day trying to maybe stable currency, maybe build their own wallet and then to start to connect those dots.
Clearly as we go down the road.
You might look at those opportunities.
Got it thanks.
Okay.
It appears there are no further questions at this time, Mr. Hedrick book.
Like why would you for any additional or closing remarks.
Alright. Thanks.
Thank you everybody for again, joining us today for our second quarter earnings update.
We feel very good about our performance we feel very good about our performance in the second quarter.
Based on where we would expect it to be we actually feel very good year to date and as Tim talked about our outlook for the year, we're very optimistic as we look at the 2021.
At mid year going to the end versus where even we thought we would have been starting starting the year. We're very excited about the upcoming integration with Cardtronics.
Excited about the recent announcement, we did this week with the Liberty ex I think more importantly, as we look at progress in the first half.
We are continuing to see that our strategy the strategy that we outlined a number of years ago to shift the software shift us after services led.
Our investment in strategic platforms. The strength, we're seeing in digital banking the strength, we're seeing in hospitality with the growth of Aloha essentials strength.
In the payments World.
We are seeing in wins in the retail cloud base solution with Emerald.
We look forward.
The thing you all on the December 9th at our at our Investor Day that we announced today, where we can tuck.
Little bit more in depth about our strategy, our execution and our plans for the future again. Thank you for joining us and we'll see you next quarter.
This concludes today's call. Thank you for your participation.
Yeah.
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