Q3 2024 NCR Atleos Corp Earnings Call
And, you know, I'm not exactly a fan of the idea of a real-world war. But, you know, I think it's a really interesting idea. And I think that's what makes it so interesting. So, yeah, I'm going to leave it at that. So, thanks for watching. I hope you enjoyed this video. And I'll see you in the next one. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye.
Please stand by.
Speaker Change: Good day and welcome to the NCR at Leo's third quarter earnings call. Today's conference is being recorded. At this time I would like to turn the conference over to Brendan Metrano, Head of Investor Relations. Please go ahead.
Brendan Metrano: Good morning, and thank you for joining the NCR at Leo's third quarter earnings call. Joining me on the call today are Tim Oliver, our CEO, and Paul Campbell, CFO. Tim will start this morning with an overview of third quarter performance and an update on strategic progress. Paul will follow with a review of financial results and our financial outlook.
then we'll move to Q&A.
Brendan Metrano: Before we get started let me remind you that our presentation and discussions will include forward-looking statements which are often expressed by words such as may, will, include, expect.
Brendan Metrano: and words of similar meaning. These statements reflect our current expectations and beliefs and are subject to risks and uncertainties that could cause actual results to differ materially from those expectations.
Brendan Metrano: These risks and uncertainties are described in today's materials and are periodic filings with the SEC, including our annual report.
Also,
Brendan Metrano: In our review of results today, we will refer to certain non-GAAP financial measures, which the company uses to measure its performance.
Brendan Metrano: These non-GAAP measures are described and reconciled to their GAAP counterparts in the presentation materials and on the Investor Relations website. A replay of this call will be available later today on our website, investor.ncratleos.com.
With that, I will turn the call over to Tim.
Tim Oliver: Thank you Brendan, and thank you to everyone for joining this call this morning. First, a belated happy Veterans, happy Armistice, and happy Remembrance Day to all those who have served their countries. We appreciate you.
Tim Oliver: Now, for those following along in the presentation from the Investor Relations website, I'll start on slide 5.
Tim Oliver: I'm pleased to update you on another very successful quarter for NCR at Laos that saw us make consistent progress against our 2024 objectives and further validate our growth strategies.
Tim Oliver: Strong execution across our businesses and functions in the third quarter translated into third quarter financial results that exceed planned.
Tim Oliver: We delivered $1.1 billion of revenue, over $200 million of adjusted EBITDA, $0.89 of adjusted EPS, and for the first nine months have generated over $120 million of free cash flow.
Tim Oliver: Our you-to-date performance coupled with the momentum evident in our businesses gives me confidence we will close out a very successful 2024.
Tim Oliver: Reflecting on what was the best quarter to date and having just celebrated our first birthday as an independent ATM centric company, I cannot overstate what the Atlios team has accomplished over the past year.
Tim Oliver: One year in, our employees are energized and engaged. Our customers recognize a return to best-in-class service levels and appreciate our reinvigorated innovation efforts.
Tim Oliver: Our strategic progress is pushing our revenue per ATM higher, and our financial performance has been solid and steady.
Tim Oliver: Before discussing our third quarter results, I think it's beneficial for those less familiar with our story to provide a quick description of the company and the compelling opportunity we see for all of our constituencies, but with particular focus on our investors.
Tim Oliver: While our employees, customers, partners, and communities have all recognized the compelling outlook for Atlios, the company remains significantly undervalued relative to our peer companies and our strong performance has not yet translated to gains in enterprise value.
Tim Oliver: After separating from legacy NCR through a spin transaction, Atlios is now a pure-play independent company with a leadership position in self-service banking, a clear growth strategy and an emerging pattern of consistent performance and free cash flow generation.
Tim Oliver: Atlios has an installed and serviced fleet of approximately 600,000 ATMs, including over 80,000 that we own and operate in our own network.
Tim Oliver: In a global environment that continues to demonstrate steady cash-based consumer transactions and a stable installed base of ATM hardware, our growth will come from generating more revenue for Atlios for every machine that we support.
Tim Oliver: whether that's from providing high quality, more efficient, and more comprehensive services to our financial institution clients.
Tim Oliver: or by driving more transaction volumes across our network machines located in blue chip retail locations.
Tim Oliver: Both of these strategies are fueled by our customers' desire to improve financial access for their customers while outsourcing more of their cash ecosystem.
Tim Oliver: And importantly, we service both growth vectors from a common infrastructure that is unmatched in scale, is leverageable, and is world class.
Tim Oliver: As global banks continue to seek to improve their customers experience in the most cost-effective way, the importance of self-service devices is increasing.
Tim Oliver: As a result, our customers are reinvesting back into their retail banking footprint and embracing shared financial utilities.
Tim Oliver: For them, this strategy will result in lower costs, higher quality, a better consumer experience, broader reach, and in some instances, higher foot traffic.
Tim Oliver: For Atlios, it will drive higher revenue growth, higher profitability from both scale and richer revenue mix, and predictable free cash flow.
Tim Oliver: Through the first three quarters of 2024, we grew service revenue by 6 percent. We grew ATM as a service revenue by nearly 30 percent and increased the ARPU on our network machines by 7 percent.
Tim Oliver: So, turning to that third quarter, overall financial results were strong again. Revenue was toward the upper end of expectations and profit was above expectations, led by strong growth in both our transaction-based and our services businesses.
Tim Oliver: We again drove solid sequential margin expansion with a beneficial revenue mix coupled with cost productivity from both direct and indirect costs as we eliminate the incremental or duplicate costs left by the separation transaction.
Tim Oliver: And importantly, we are on track to deliver significant positive free cash flow in every quarter of 2024.
Tim Oliver: In addition, in October we successfully refinanced and reworked our credit facilities at lower rates and better availability based on the company's improved credit profile.
Tim Oliver: Paul will run through the details in a few minutes, but we will see meaningful reductions in interest expense beginning in the fourth quarter.
Tim Oliver: As we close out 2024 and starting to think about 2025, our strategy is being validated.
Tim Oliver: Demand for both more capable ATMs, like cash recycling or tap capability, is accelerating in what appears to be the early innings of a hardware replacement cycle. The willingness and desire of banks to outsource non-core ATM servicing to efficient and capable operators is also increasing.
Tim Oliver: And the demand for shared financial utilities that provides immediate and low-cost coverage away from traditional bank branches is glowing globally.
Moving to slide six, self-service banking.
Tim Oliver: Third quarter financial results exceeded the high end of our segment guided ranges. We grew revenue with strong growth in recurring revenue streams led by incremental software and services revenues from our installed base of devices.
Tim Oliver: We increased adjusted EBITDA and EBITDA margin rates sequentially with effective direct and indirect cost savings initiatives coupled with top-line growth and a beneficial business mix.
Tim Oliver: Over the past year we've committed considerable resources to product and service quality and to go-to-market execution to support our strategy. The resulting improvements have been recognized by our customers and contributed to the strategic wins in all regions and businesses and to the high demand and backlog we see in hardware, particularly recyclers.
Tim Oliver: Our ATM as a service solution is progressing well. We grew ATM as a service revenue 23% year over year in the quarter to an annual run rate of about $200 million.
Tim Oliver: We continue to see increasing appetite across a broad range of financial institutions to outsource all or a portion of their ATM-centric services to a singular provider.
Tim Oliver: New active customers, backlog, and a significant sales pipeline give us line of sight for not only our 2024 objectives but also present us very well for 2025 and Paul will give you more there.
Tim Oliver: Our backlog continues to grow, the quality of that backlog is very strong, and some org design changes have improved our onboarding speed.
Speaker Change: As we think about 2025 and beyond for ATM as-a-service, two things have become clearer.
Speaker Change: First, our reported metrics define ATM as a service as a singular product that represents the full opportunity for wallet share increase at Atlios. But many of our customers see the opportunity as a continuum of services that they can migrate piecemeal and over time.
Speaker Change: and our tight definition is causing inaccurate comparisons with competitors who brand any incremental or managed services at the ATM as ATM as a service.
Speaker Change: Going forward, the important descriptor of strategic success will not be units, but rather, ATM as a service revenue, and more broadly, total company services revenue.
Speaker Change: Second, the strategy does not need to be capital intensive. Increasingly, we are signing asset light wins where ATMs are either already in place or are outright purchased by the customer, allowing us to significantly improve our returns.
Moving to slide 7, the network segment.
Speaker Change: The network business continued to deliver solid and consistent performance in the third quarter with revenue and EBITDA up sequentially and in line with their expectations.
Speaker Change: We are executing a utility banking strategy that is focused on driving incremental transaction volume from our fixed base of approximately 80,000 company-owned and operated ATMs.
Speaker Change: and we set another new high in revenue per machine driven by the continued migration of financial transactions from bank branches to our utility banking network.
Speaker Change: We generate strong transaction volumes in both international markets and North America, fueled by adding new high-quality banking and retail partnerships, new transaction types, and new functionality to the network.
Speaker Change: We grew the all-point transactions by 14% year-over-year as more consumers choose to do their regular banking at our convenient and safe ATM locations without paying a surcharge.
Speaker Change: Deposit volumes grew 200% year-over-year as the uptake continues to ramp with key financial institution partners in the U.S. including Capital One, PNC, and Navy Federal Credit Union.
Speaker Change: We activated TAP technology on approximately 10,000 all-point machines that have already generated over 1 million transactions in the third quarter.
Speaker Change: Our other emerging transaction types, like ReadyCode, that enables cardless cash access for gig workers, and business deposits through our partnership with Quip Money, also extended very strong growth trends.
Speaker Change: In international markets, we laid the groundwork for future growth and expansion into Greece.
and the pre-work for the expansion into Italy.
Turning to slide 8 that reiterates our 2024 key objectives.
Speaker Change: These objectives describe a path to both operational and strategic success in 2024.
Speaker Change: I've already discussed many of the highlights for the first three quarters of the year, so I'd like to focus on our objectives for the 2024 homestretch and setting ourselves up for success in 2025.
Speaker Change: starting with differentiate and grow. Last quarter I discussed how the strategies of our two reported segments are converging in response to our bank customers adapting their retail business models to meet evolving consumer and market demands.
Conversations with customers have reinforced our view on this trend.
Speaker Change: We are evolving our go-to-market strategy toward providing solutions that leverage the entirety of our unique, fully vertically integrated capabilities, rather than selling defined product and service steps.
Speaker Change: Our focus will be on finding the right services that meet customer needs today and establish Atlios as a trusted partner eventually for the full outsourcing of ATM.
Speaker Change: Diligent prioritization and application of resources including people, expense, capital, time, and in some instances even components optimize their returns and catalyzes future period growth.
Speaker Change: In preparation for our 2025 savings goals, our service organization will shift from initiatives centered around transaction dis-energies toward extending our continuous improvement efforts and our AI tool rollout.
Speaker Change: Lastly, the process of separating from NCR VoixX is nearly complete.
Speaker Change: Most of our mutual TSAs have been completed. A few new commercial agreements have been added to formalize remaining IT-related separation activities. And the outsourcing of all hardware manufacturing by Voix will truncate our responsibility in that regard and that agreement at year-end.
Speaker Change: It is very likely that the wind-down of the other category in our segmentation will be nearly complete at year-end and will have no significant impact on reported results going forward.
Speaker Change: including my comments. I want to express my gratitude to the 20,000 NCR Atleos team members for achieving another impressive quarter.
Speaker Change: fueled by enthusiastic commitment to our new company's missions and values, diligent effort and a consistently positive disposition even when under pressure.
Tim Oliver: I am extremely proud of what the global NCR-ATLIOS team has accomplished over the past year, and more opportunity awaits this group in 2025. With that, Paul, over to you. Thank you, Tim, and thank you all for joining us today.
Paul Campbell: We will start on slide 10 for a review of the consolidated third quarter results. Total company revenue was $1.08 billion, up 4% year-over-year on a constant currency basis, and marked the third consecutive quarter of solid top-line performance this year.
Paul Campbell: Growth was led by recurring software and services revenue, demonstrating our ability to consistently generate incremental recurring revenue streams from an installed base of approximately 600,000 ATMs.
Paul Campbell: Recurring revenue was 790 million in the quarter and comprised 73 percent of total revenues reflecting the stability and consistency of our businesses.
Paul Campbell: We delivered third quarter adjusted EBITDA of $207 million and margin of 19.2%.
Paul Campbell: Adjusted EBITDA and margin have expanded sequentially each quarter this year due to the growth in higher margin transaction and services coupled with the progression of our continuous improvement productivity initiatives which resulted in a 380 basis points of margin expansion from Q1 to Q3.
Paul Campbell: These benefits, more than offset, expected separation-weighted synergies, higher labor costs and an on-growing macro headwinds.
Paul Campbell: Moving to slide 11, third quarter diluted earnings per share was 89 cents which was well above our expectations driven by better than expected profits and lower than projected tax rate in the quarter.
Paul Campbell: The strong underlying EPS trends through the third quarter and continued momentum of our business exiting Q3 has allowed us to revisit the full year EPS expectations which we will discuss later in the presentation.
Paul Campbell: Moving to the chart on the right, another example of outstanding consistency we have achieved this year, delivering a third quarter of positive adjusted free cash flow with $38 million in the first third quarter.
Paul Campbell: We delivered strong Q3 free cash flow, even with discretionary £50 million working capital use for cash for inventory and accounts payable, which will convert to higher hardware revenue in the fourth quarter.
Paul Campbell: Moving to slide 12, self-service banking is the largest business and is comprised of a stable global install base of approximately 520,000 of our 600,000 ATM units.
Paul Campbell: These 520,000 units primarily generate recurring revenue from services and software.
Paul Campbell: We are transforming this business by leveraging our network infrastructure capabilities to deliver a broader range of services to our customers and a more comprehensive outsourced services model.
Paul Campbell: Self-service banking had a strong third quarter exceeding our guidance ranges.
Paul Campbell: Starting in the upper left, revenue grew 3% year-over-year to $677 million.
Paul Campbell: The primary growth drivers were 23% for ATM as-a-Service and strong software revenues partially offset by hardware revenue deferral associated with the shift to ATM as-a-Service.
Recurring revenue was up 8% year-over-year to $414 million.
Paul Campbell: The chart on the top right illustrates the growth trend of our first three quarters of adjusted EBITDA, which reached $167 million, driven by strong growth in high margin software revenue and productivity initiatives.
Paul Campbell: Additionally, adjusted EBITDA margin increased 120 basis points sequentially to 25% in Q3 and up 340 basis points since Q1.
Paul Campbell: As we continue to focus on higher margin services and drive continuous improvements through cost and expense initiatives, the adjusted EBITDA margin trends continue to grow faster than revenue.
Paul Campbell: Moving to the bottom of the slide, KPIs continue a positive trajectory in the third quarter. The mix of recurring revenue was 61% for the third quarter, up approximately 200 basis points year over year.
Paul Campbell: The third quarter was the 11th consecutive quarter with year-over-year growth and recurring revenue.
Paul Campbell: Annual recurring revenue was up 7% year-over-year, another proof point at our strategy of driving more recurring revenue from our existing install bases progressing.
Paul Campbell: Moving to slide 13. Our ATM as a service solution is 100% recurring services representing only revenue from units fully outsourced to Atlios.
Paul Campbell: These results are included in services within our Self-Service Banking segment.
Paul Campbell: Given the strategic importance of ATM as-a-Service businesses as a key long-term growth opportunity, we want to highlight strategic achievements in the quarter on slide 13.
Paul Campbell: On the top left of the slide, ATM as a Service revenue grew 23% year over year to $49 million for the third quarter, which represents strong continued adoption of our ATM as a Service.
Paul Campbell: Live customer count increased 46% and we expanded into 10 new markets year over year. We are now offering ATMs as a service in 34 markets.
Paul Campbell: On the right, gross profit increased 19% year-over-year to $16.1 million and up to 12% sequentially, which is consistent with the ramp in ATM as-a-service revenue.
Paul Campbell: Moving to the bottom of the slide, ATM as a service KPIs also continue to move in the right direction in the third quarter. On the bottom left, annual recurring revenue continued a consistent upward trend in the third quarter, growing 23% year-over-year to almost 200 million.
Paul Campbell: On the bottom right, the last 12 months average revenue per unit or ARPU continued to build during the third quarter and reached 8,500 per unit up from 8,000 the previous year.
Paul Campbell: The increase in ARPU is largely the result of adding customers in higher yield regions to the base of units.
Paul Campbell: It is important to keep in mind that there is a lot of variability in ARPU between geography, the product type, the set of services included and the institution size.
Paul Campbell: Our focus is to expand the services that we perform for our customers to maximise revenue growth and margin expansion, rather than target a singular measure of number of units fully outsourced to us.
Paul Campbell: That said, this is a KPI that we have referenced and expect to exit this year with approximately 28,000 units live and have a signed backlog of approximately 8,000 units that would roll out in 2025.
Paul Campbell: Demand for ATM as a service is broad-based across all regions and particularly healthy in North America which we expect to become an increasing mix of our ATM as a service unit installed base.
Paul Campbell: Our dialogue with customers causes us to increasingly believe that a majority of financial institutions will continue to outsource more of their ATM fleet operations and will move to a full outsource model at some point.
Paul Campbell: Moving to the network segment on slide 14, our network utility banking strategy focuses on offering financial institutions and retail partners access to the industry-leading scale of our owned and operated ATM network.
Paul Campbell: We are progressively increasing the types of transactions and number of users of our approximately 80,000 unit base of ATMs, driving a higher revenue per unit.
The network segment had another strong quarter.
Paul Campbell: Starting on the top left, revenue increased 2% sequentially to $332 million.
Paul Campbell: We continue to drive new incremental transactions to our ATM fleet, which has driven withdrawal volumes up 9% year-over-year. Withdrawal volumes increased 6% for North America and 11% for international transactions.
Paul Campbell: Also of note, we continue to execute on our nationwide deposit strategy by adding a third US top-tier bank to our deposit network. Deposit transactions continue to accelerate, growing approximately 218% year-over-year and 50% over Q2, albeit from a small base.
Paul Campbell: We are seeing increasing use cases for our ReadyCode product, with volumes increasing 4x sequentially, again from a small base.
Paul Campbell: On the right, adjusted EBIT of £103 million was also on the high end of our guidance range and increased 2% sequentially.
Paul Campbell: Adjusted EBITDA margin remains strong at 31% reflecting the success of our strategy to drive higher margin transactions through our existing managed units.
Paul Campbell: The key metrics at the bottom of the slide highlight the validity and execution of our strategy. On the left shows the last 12 months average revenue per unit was up 7% year-over-year in the third quarter.
Paul Campbell: On the right you can see our ATM portfolio finished the quarter at approximately 80,000 units.
Paul Campbell: The slight decrease in unit count is due to pharmacy partners closing low performing stores, which are also our low volume units
Paul Campbell: This has a negligible impact on our revenue as customers usually visit our other nearby locations.
Paul Campbell: As discussed earlier, transaction volumes continue to reach all-time highs despite the small reduction in the unit base.
Paul Campbell: We expect the number of units to increase in 2025 through the addition of new clients and geographies. On slide 15 we provide a trending, product-centric view of results to help investors assess and model the company.
Paul Campbell: The key takeaway from this is the progress of maximizing monetization of each ATM unit in a 600,000 unit fleet by attaching more transactions, services and software.
Paul Campbell: Success in executing this will be evidenced by growth trends in services and software and in transactional product lines.
Paul Campbell: As a reminder, the other segment represents legacy VOIX Exited Geographies and commercial agreements between Atlios and VOIX. We expect business results to continue to decline in this non-core segment. On slide 16 we present a breakdown of free cash flow and a snapshot of our financial position at the end of the third quarter.
Paul Campbell: The key takeaway in this slide is that we generated 38 million of free cash flow for the third quarter and year-to-date of approximately 123 million.
Paul Campbell: To support higher hardware revenue expected in the fourth quarter, we re-use of cash on inventory and accounts payable for inventory and transit at the end of Q3.
Paul Campbell: This will be a source of cash in the fourth quarter.
Paul Campbell: On the bottom of the slide, year-to-date, our net debt is down by 76 million and net leverage ratio dropped from approximately 3.7 to 3.5 times.
Paul Campbell: We have ample liquidity of $689 million at the end of the third quarter.
The company's consistent and strong fundamentals.
Paul Campbell: and Cash Flow Generation can comfortably support more than our current debt. On slide 17, we highlight the debt refinancing transaction that we executed in October 2024 that will translate to meaningful interest savings and incremental free cash flow in 2025.
Paul Campbell: Based on our strong and consistent financial performance over the past year, lenders and credit investors acknowledged our improved credit profile and were very cooperative in refinancing our credit facilities at lower rates.
Paul Campbell: This also allows us to raise an additional 300 million of Tamloan A to pay down a more expensive Tamloan B.
Paul Campbell: In addition, we approved our liquidity position by adding $100 million to our revolving credit facility capacity, which we have not used and view as dry powder.
Paul Campbell: At the current level of indebtedness these changes reduce the weighted average spread to SOFR by approximately one percentage point for an estimated annual savings of approximately 17 million.
Paul Campbell: Turning to slide 18 on our total company financial outlook for the full year 2024, we now expect fully diluted non-GAAP earnings per share to be approximately $3.12, up from the previous guided range midpoint of $3.05.
Paul Campbell: For revenue, adjusted EBITDA and adjusted free cash flow, we affirm our guidance at the midpoint of the previous guidance ranges. Concluding my comments on slide 19, we have delivered our third consecutive quarter at or above guidance, demonstrated a proven track record and set the stage for a successful full year.
Paul Campbell: We've made great progress in our operational cost-saving initiatives, and we emphasize our strategic objectives with growth in transactional, software and services revenue.
Paul Campbell: We raised our full year non-GAAP EPS guidance and reaffirmed revenue and adjusted EBITDA. With that, I'll turn it back to the operator for questions.
Speaker Change: Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow the signal to reach our equipment.
Speaker Change: Again, press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions.
The End of the World
The first question is from Matt Somerville with DA Davidson
Speaker Change: Thanks. A couple of questions. Given some of the tailwinds that you have when I think about free cash flow, lower cash interest expense,
Speaker Change: and ATM is a service business that is increasingly asset light.
Speaker Change: How should we be thinking about the company's free cash profile ability to...
Speaker Change: with the Free Cash Flow Conversion, if you will, in 2025, realizing you probably don't want to give full guidance, but maybe just a soft look, if you will, at the Free Cash Flow Profile next year, and then I'll have a follow-up.
Speaker Change: Your analysis is exactly right. It is a little early for 2025. We're grinding out here, the close of 2024. We've started our planning process for 2025. I think the way to think about 2025, if we walk all the way down to free cash flow, would be another year not so different from this one, right? We generated about three to four percent growth in our core business this year and expect the very same thing next year.
Speaker Change: And then a much higher conversion rate of EBITDA to free cash flow for the reasons you just described. I think if you apply, you know, a 35% conversion factor, you'd be close to right.
Speaker Change: which suggests a much higher free cash flow number in 2025 than a respectable number in 2024, but a much higher number in 2025.
Speaker Change: And then along those lines, Tim, how is the board thinking about share repurchases if you're on a firm pass, if I'm just doing very quick back-of-the-envelope math in my head?
Speaker Change: to exit the year at probably 2.7 or so times net levered at, you know, a $30 stock price. When can we start to expect Atlios to become more active from a capital deployment standpoint? Thank you.
Speaker Change: I'll pass to Tim for the question. I was referring to exiting, I apologize, I was referring to exiting next year at around 2.7, just doing a quick shout-out.
Tim Oliver: Here's what I'd say, the board is very pleased with our ability to generate cash flow this year and they're excited about our opportunity to generate even more of it next.
The last conversation we had about the deployment of
Tim Oliver: free cash flow, they made very clear to me, and I concur with them, that the reduction of debt and getting it under three times leverage is the absolute right thing to do. When we get to that point, I think, well let's say on our way to that point, on our way to being three times
Tim Oliver: or Les Levert. Every dollar we de-lever with I think is good for both our equity and our debt holders. At that point in time, it would be very fair to have the conversation about returning cash to shareholders. That would be the midpoint of next year.
Tim Oliver: If you ask me currently the best way to return cash to shareholders, it's a no-brainer. We're undervalued, we buy our shares back.
Understood. I'll get back in queue. Thank you guys.
Sure.
George Tong, Matt Summerville,
The next question is from Shlomo Rosenbaum with Stiefel.
Thank you.
Hi, good morning. Thank you for taking my questions.
Tim Oliver: Tim, could you talk a little bit about the strong performance in the self-service banking in the quarter? Like, where are we in the refresh cycle? Were there any pull forward in hardware sales? And, you know, you had a lot of positive commentary. It seems like last quarter, we were thinking we're a little bit further into the cycle, but some of the commentary had now sounded like you think you might be a little bit earlier in the cycle. Maybe you could just talk about that a little bit.
Tim Oliver: Yeah, so any refresh cycle that's going to take place would be the follow-on from the 2019 effect, right? Some of us have significant changes in our hardware.
Tim Oliver: Volumes may be to the tune of 30 or 35 percent above what you would have anticipated or the average trend rate We don't anticipate anything like that. We are lapping those machines Those machines are now aging out at five to seven years And so you will see them get replaced over the next several years. It won't be a singular year event It'll take place over a period of time
Tim Oliver: We are seeing larger orders from some of our bigger bank customers that suggest that they're hitting that repress cycle. I don't think, I think I said in my script earlier that we're probably in the early innings of that. We saw a little bit of lift above expectations.
and Paul Campbell. Thank you. Thank you.
I anticipate
Bye.
Speaker Change: much better hardware revenue. Remember, hardware doesn't make up a tremendous proportion of our total revenue base, but I do expect
Speaker Change: a hardware to actually be a contributor to growth next year, which will not be the case typically, but I do think in 2025 and 2026 it's likely that hardware is a contributor to growth. Our growth this year is almost entirely driven by, and our outsized growth, that which is above our expectations, is driven entirely by service revenue and importantly by outperformance at the network business.
Thank you.
Okay, and then
Speaker Change: Could you talk a little bit about kind of the mix of what's happening in ATM as a service? I know you're saying that it's become more of a continuum as opposed to just one metric.
Speaker Change: Is that, if you look at that LTM ARPU, it declines sequentially and I wanted to know is that due to a higher mix of asset light deals? Is that getting into geographies that are lower revenue geographies? Maybe you could just give us a little bit of a clue as to what's going on beneath the covers over there because if you look at it initially, you would think, hey, why is ARPU going down? I know that there's a story behind that and asset light is positive.
Thanks for watching!
Speaker Change: Yeah, sure. Well, let me take that question if you don't mind. The armpit is a little bit of an imperfect measure in there because the base is so small.
Speaker Change: So we're counting the number of ending units in calculating the ARPUs. So if we put a unit on on the last day of the quarter, it counts as a unit, but there'll be virtually no revenue for it. So it takes time to, you know, it's not a full, it's a full quarter of the unit in the denominator, but only...
We're expecting the RPO to increase.
Speaker Change: steadily on a normalized basis because the majority of our backlog is in higher ARPU regions, particularly North America.
Speaker Change: So we'll expect the ARPU to go up in Q4, and then continue to go up going forward. Just depending, if we had deployed a big batch of units at the end of the quarter, then it would have a timing impact on the ARPU just because of the base size. So Euro rolling 12 is a better way to look at that metric, yeah. And we feel great about where the ARPU is headed. If you think about the spread in ARPUs between a machine in India and a full-function machine in the United States, it's dramatically different. It's three or four or five-fold.
Speaker Change: the annual revenue and so the upward pressure on that metric is terrific and importantly as Paul described We've got a really strong backlog. I think probably 8,000 machines We'll have a backlog as we enter next year and the totality of that that is the backlog
Speaker Change: as an ARPU that is well above the $8,000, so that should be really helpful. Yes, so with this in context, the ARPU in our backlog today is roughly $13,000 or above, so we expect that to increase.
Thank you.
Speaker Change: Okay, great. And then just one last one, if I could just sneak it in. Is there really any change in competitive dynamics in APAC? Just one of your – you know, Diebold noted they're reentering some of the APAC countries over there, including India. Is that some of what might be causing some of the pricing pressure over there, and is that something that you're noticing?
Speaker Change: No, so the pricing pressure we've seen isn't so much a hardware pricing pressure as a service pricing pressure. In India, the total life cycle cost of an ATM is much more heavily weighted to the service component than to the hardware component. And so it's really the servicing that is putting price pressure.
Speaker Change: We've not seen any change in bid pricing behavior by the major players in our space. It's been the same
Speaker Change: Same competitors for a very long time, but we've always competed really well We've always had product sets that are relatively robust and between the three primary players It's been an 80% share globally, I think for a long time. And so I don't anticipate Any changes there?
Great, thank you.
and all of you. Thank you.
The next question is from George Tong with Goldman Sachs.
Hi, thanks, good morning.
You previously had...
Speaker Change: more longer-term targets for ATM as-a-Service units. And now that you're de-emphasizing units more focused on ATM as-a-Service revenue growth, do you have any internal targets to share around ATM as-a-Service revenue, either absolute dollars or mixed or growth trajectory?
Speaker Change: We will. When we give guidance for 2025, we'll give guidance.
Speaker Change: along revenue first and then describe units since some of you modeled that way will help you continue to model that way. But we've not given any guidance on either of those metrics in 2025 yet. The only insight we gave is that
Speaker Change: You know that our ARPU is increasing, you know that it's a $200 million business currently growing, 30% year-to-date, and that we already have 8,000 high-value units in backlog for next year.
Speaker Change: Okay, got it. And then, can you talk a little bit more about what types of customers are preferring to own their own hardware in an APM-as-a-Service lite transaction, and why they would not want to outsource their hardware as well?
Speaker Change: I think it's pretty apparent to our larger bank customers who own large fleets of machines that their cost of capital is far lower than ours.
Speaker Change: and for us to build a cost of capital into our pricing to them doesn't make any sense for either of us and it's more economic and aggregate for folks who already own devices to continue to own devices or importantly the machines already in place and that's that's an even better outcome for us and we thought that most of our ATM as a service revenue would be generated by folks who at the time they're replacing the machines we've had success
Speaker Change: adding ATM as a service to already installed machines. And that's a very good deal for us as well. So it is more likely in some countries or in smaller bank situations, I think less than 200 ATMs.
Speaker Change: But it's more likely they'd prefer for us to put new machines in place and own them It's a much smaller investment in those for us and those transactions tend to be those deals tend to be The most lucrative of the bunch and so we're we're happy to do it
Got it. Very helpful. Thank you.
Thank you.
The next question is from Chris Zanieck with Wolf Research.
Chris Zanieck: Hi guys, good morning. Solid Quarter. How should we be thinking about incremental EBITDA margins going forward? You've had some nice margin expansion year-to-date and
Chris Zanieck: at the roadshow yesterday, you had some good margin targets out there for 2027. Are the past two quarters indicative of the future or should we be thinking about it a little bit differently?
The End of the World
Speaker Change: Yeah, remember that we came into this year, if you go back to legacy NCR, this business is performing at a margin rate closer to 20%.
Speaker Change: And we started this year in the 15s because we added a bunch of costs associated with the separation. So in essence, we're running two functional organizations and two service organizations trying to separate. Across the year, we've seen that margin rate improve. And I think if you do the modeling for the fourth quarter, you're going to have a margin rate that's about 20% as we exit the year. So it took us a year, which is what we thought, to get back to where we entered the year. And I feel great about the progress against those dis-energy costs and where we're at.
From here, we have to generate further productivity.
Speaker Change: And Len and his team have got a continuous improvement culture that's leaning hard on AI tools and other things to keep driving margin higher. Our margin rate is not high enough. It needs to go higher. It needs to be closer to a real service organization margin rate. And we're working through those costs. I'd say this year we saved...
quite a bit of money on indirect costs.
Speaker Change: and some money on direct costs. I think next year we are heavily leaning on the direct cost takeout with some incremental improvements and indirect as we
Speaker Change: go around the world and simplify our business model and make sure we're only doing business in places where we can make a fair return.
Speaker Change: I think margin rates, I think I just said, if you think about 3 or 4 percent growth in revenue next year and you think about 8 or 10 percent growth in dividend, that probably implies a nice, yet again, a nice expansion in margin rate in 2025, and there's no reason to believe that that trend shouldn't continue.
Speaker Change: Okay great and then one more in terms of recurring revenue mix I know there's a goal to let it get to 80% plus over time has anything changed in in the year that would that would make you think that it you can get there quicker or it's going to take a little bit longer to get that kind of you know longer term target
Speaker Change: I think we're still, we're on track, everything we, most of our growth has come in the current revenue space where we're on track to
www.cdc.gov.au
Speaker Change: There is a follow-up question from Matt Somerville with D.A. Davidson.
Thanks. Two quick additional ones.
Be
Speaker Change: The ARPU sitting in the as-a-service backlog at roughly 13,000 a unit
versus, I think you just reported, 8,500 a unit?
Speaker Change: That's a big difference. Help me bridge from point A to point B, if you will, and then where that 13, or I guess where the inbound ARPU will look like from here into that funnel, and then I have a follow-up.
Speaker Change: Yeah, Matt, let me answer that for you. So the ARPU in the base, there's a big portion of our installed bases in India. India was one of the first geographies to go ATM as a service.
So the ARPU there has a larger mix of
Speaker Change: differential in the product type, so a lot of our backlog is cash dispensers, a lot of our install basis cash dispensers, a lot of our backlog is multifunction units, recycling units and even ITMs.
Speaker Change: And it varies by service type, so it depends what services are included, we've got a rich stack of services on the multifunction units relative to the cash dispensers.
Got it. That answer your question, Matt? Um...
Speaker Change: Yeah, you did. Thank you, Paul. As I look at the network business, how should we be thinking about your go-forward cost of cash based on the rate curve and what we've seen from the Fed over the last few months? Thank you.
Speaker Change: Because of the potential exposure in that space, we do derivative swaps.
that even out the interest rate over time.
Speaker Change: So it wouldn't be, if interest rate goes down, a point in our debt indirectly flows through. In the network space, it really smooths out because we layer in forward swap contracts to avoid any buffer. So year on year, we anticipate that the fault cash cost in the cost of goods will be a slight headwind for 2025. And then as we get into 2026-27, it'll become a tailwind.
Speaker Change: It'll be the opposite effect. On our debt cost, it'll be the opposite. We've refinanced, which will give us a good flow-through there, and as SOFR goes down, it'll directly flow through to the variable portion of our debt, which is about £1.7 billion.
and Peter.
Understood. Thanks, Paul.
Thank you very much.
Thanks, Bob.
Speaker Change: There are no further questions at this time. I will turn the conference back to CEO Tim
Oliver for any additional or closing remarks.
Tim Oliver: We appreciate all those questions, they're the most we've had thus far and we're glad to have been able to answer them.
Speaker Change: We won't talk to you again until the new year, so firstly, happy holidays, everybody.
Speaker Change: stay safe out there and have a great time. We're going to work hard here to close out a successful 2024. We feel good about the momentum we're going to carry into 2025 and we'll be back in 90 days or so to talk to you about that completion of a good first year and importantly where we're going from here. So thank you very much and we'll talk soon.
Thank you.
Speaker Change: This concludes today's call. Thank you for your participation. You may now disconnect.