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    NCR Voyix (VYX)

    Q2 2024 Earnings Summary

    Reported on Aug 6, 2024 (Before Market Open)
    Pre-Earnings Price$12.50Last close (Aug 5, 2024)
    Post-Earnings Price$13.50Open (Aug 6, 2024)
    Price Change
    $1.00(+8.00%)

    What went well

    • The company is reducing its leverage to approximately 2x net leverage, which will reduce net interest expense and strengthen the balance sheet, providing flexibility for future growth and potential share repurchases. ,
    • The services business, which constitutes around 80% recurring revenue, remains strong and is expected to continue growing, even as hardware sales decline, due to longer asset lifecycles requiring more maintenance. Additionally, over 50% of recurring services revenue is on non-NCR Voyix hardware, indicating a diversified revenue base. ,
    • The company has received positive feedback from customers and partners regarding its strategic changes, with customers understanding and supporting the direction, which may lead to strengthened customer relationships and future growth opportunities.

    What went wrong

    • VYX is experiencing a significant decline in hardware sales, with a $135 million to $170 million reduction in hardware guidance for the year. The majority of this decline (approximately 70%) is due to ongoing macroeconomic weakness in the retail and restaurant sectors and a lack of recovery, impacting hardware sales across point-of-sale (POS) and self-checkout (SCO) systems.
    • The company is undergoing a significant change in its hardware strategy by outsourcing design, manufacturing, and logistics to Ennoconn Corp., effectively becoming a sales agent for hardware. This transition may lead to lower hardware margins, reduced control over hardware quality, and potential risks associated with customer experience and satisfaction.
    • The sale of the high-growth Digital Banking segment, which reported 9% revenue growth and 17% adjusted EBITDA growth in Q2, will remove a significant growth driver for VYX. Divesting this business could negatively impact future earnings and reduce the company's diversification, potentially affecting its overall growth prospects.

    Q&A Summary

    1. Capital Allocation & Leverage Targets
      Q: What is your target leverage and capital allocation plan?
      A: They target 2x net leverage as the right level. They plan to invest in CapEx for products and platform, consider tuck-in acquisitions, and start share repurchases once they allocate the current proceeds.

    2. Growth Outlook Post Digital Banking Sale
      Q: How will you grow after selling Digital Banking?
      A: They believe the transactions provide a foundation for growth in 2025, expecting to turn to growth from a negative top line. By deleveraging the balance sheet, they gain flexibility. They continue to invest in the platform, anticipating mid- to high single-digit ARR growth in retail and restaurant businesses in the back half of the year.

    3. Hardware Strategy Shift and Market Outlook
      Q: What's changed in hardware strategy and market?
      A: There's been no recovery in the hardware market; clients are sweating assets longer. They are shifting to an ODM model with Ennoconn, outsourcing design, manufacturing, inventory risk, and logistics, and acting as a sales agent. This reduces hardware variability, focusing more on software and services.

    4. Cost Savings and Workforce Reduction
      Q: Details on the $75M cost savings and staff cuts?
      A: They eliminated 800 roles, focusing on non-customer-facing, back-office functions to get ahead of stranded costs from the transactions. They are doubling down on sales activities.

    5. Deleveraging Plans and Debt Repayment
      Q: How will you deleverage, and any debt restrictions?
      A: They plan to pay off the Term Loan A, the revolver balance, terminate the $300 million AR facility, and take out a portion of the senior notes. There are no restrictions on how they use the proceeds.

    6. Services Business amid Hardware Slowdown
      Q: Impact of hardware slowdown on services revenue?
      A: As assets are sweated longer, they break more, potentially increasing services revenue. However, there's no direct dollar-for-dollar replacement of lost hardware revenue. Over 50% of recurring services revenue already comes from non-NCR hardware.

    7. Risk of Disruption from Changes
      Q: How are you managing disruption risk from changes?
      A: They've planned thoughtfully, discussing with big customers and partners. The hardware transaction is structured to allow maximum flexibility, minimizing disruption. Customer feedback has been positive.

    8. Changes in Retail and Restaurant Forecasts
      Q: Are you changing forecasts for retail and restaurants?
      A: The $630M to $635M in software revenue removes Digital Banking. The $30M to $35M in services and hardware relates to retail and restaurants, accounting for hardware pressure and the ODM announcement. EBITDA change includes Digital Banking and hardware pressure, partially offset by cost actions.

    9. Stranded Costs and Dis-synergies
      Q: Any stranded costs or dis-synergies from the transaction?
      A: There's roughly $20 million of corporate costs becoming stranded. In the first year, a portion is covered through the TSA, and they've considered this in modeling.

    10. Incremental Services from Hardware Slowdown
      Q: Will hardware slowdown boost services work?
      A: While sweating assets longer may increase services revenue due to more breakages, there's no direct 1-to-1 replacement of lost hardware revenue. They expect continued growth in services and aim to pull through hardware where needed.

    Analyst Coverage

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