NCR Voyix Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
April 26, 2022

Key Takeaways

  • Positive Sentiment: While facing macro challenges, NCR reported 21% year-over-year revenue growth, 35% recurring revenue increase, and 5% rise in adjusted EBITDA in Q1.
  • Negative Sentiment: Inflation, supply-chain shortages, rising interest rates, the Omicron wave, and the war in Ukraine delayed hardware shipments and caused about $90 million of lost revenue in the quarter.
  • Positive Sentiment: NCR achieved strong strategic momentum across segments, including 29% endpoint growth in Payments & Networks, 11% revenue gain in Digital Banking, and a 6× increase in ATM-as-a-Service units.
  • Negative Sentiment: Due to these headwinds, full‐year guidance was lowered to $8.0–8.2 billion in revenue, $1.4–1.5 billion in adjusted EBITDA, and $2.70–3.20 in non-GAAP EPS.
  • Positive Sentiment: NCR maintains a 3.9× net debt to EBITDA ratio, $412 million in cash, and over $860 million of available revolver liquidity to support its growth.
AI Generated. May Contain Errors.
Earnings Conference Call
NCR Voyix Q1 2022
00:00 / 00:00

There are 8 speakers on the call.

Operator

Good day, and welcome to the NCR Corporation First Quarter Fiscal Year 2022 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Michael Nelson, Treasurer and Vice President of Investor Relations. Please go ahead.

Speaker 1

Good afternoon and thank you for joining our Q1 2022 earnings call. Joining me on the call today are Mike Hayford, CEO Owen Sullivan, President and COO and Tim Oliver, CFO. Before we get started, let me remind you that our presentation and discussions will include forward looking statements. These statements reflect our current expectations and beliefs, but they'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 periodic filings with the SEC, including our annual report.

Speaker 1

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 April 26, 2022 and on the Investor Relations page of our website. A replay of this call will be available later today on our website, ncr.com. With that, I would now like to turn the call over to Mike.

Speaker 2

All right. I'm assuming by now you've seen our numbers for the quarter. And while the external macro impacts resulted in disappointing financial results, Our teams continue to execute in the business segment. And overall, I would say our Q1 was very good, with strong sales contributing to build order backlog, Competitive wins, strategic transformation momentum and execution on our KPIs. Inflation, interest, Pandemic and war all impacted us in the Q1 and caused us to miss our expected number.

Speaker 2

Tim will cover more specifics later, but let me give you a high level. Acceleration of costs led by microprocessors, fuel and shipping costs impacted us in the Q1. We think many of these impacts will be mitigated throughout the year by things we can control, prices and or cost actions. Interest rates moved quickly in the Q1. We don't see this improving during 2022, so we'll have to address costs elsewhere.

Speaker 2

The Omicron strain caused impact to transaction volumes as numerous countries slowed down during the Q1. We have already started to see improved volumes in the Q2. And lastly, the war in the Ukraine has impacted our business in Ukraine and Russia. Tim will cover the impacts and actions we are taking. The bulk of the financial impacts were due to the inflationary cost pressures and the Omicron impacts.

Speaker 2

On Slide 4, over the past 3 years, we have successfully balanced transforming NCR into software led as a service company, While continuing to deliver on our quarterly financial performance, during the Q1, we continue to focus on that balance. In the Q1, NCR made significant progress against our strategic initiatives with strong execution across our KPIs. Despite the significant challenges we faced, our teams executed extremely well and delivered to our customers. In quarter 1, NCR delivered 21 total revenue growth with recurring revenue growth of 35%. Adjusted EBITDA increased 5%.

Speaker 2

Importantly, we are experiencing strong customer demand for solutions across our business segments and continue to successfully transform NCR into a software as a services company with a higher shift recurring revenue streams. Now moving to the business update on Slide 5. We have had strong momentum across our strategic growth platforms, which support our company transformation. In payments and network, we are making progress against both merchant acquiring and the Allpoint We are seeing an accelerating number of merchant applications for integrated payments. In the Q1, we also extended our Allpoint network with key merchant partners, most notably Circle K, which expanded its relationship with NCR with the addition of more than 6 50 locations across 13 states.

Speaker 2

We are also expanding NCR Pay360, which provides nationwide cardless access to NCR cash endpoint And through strategic partnerships, NCR Pay360 facilitates money transfer for nearly any business vertical. NCR Page 360 also brings more transaction types, including digital currency solutions and the ability to buy and sell cryptocurrency at NCR Cash Endpoints. In Digital Banking, we continue to have positive momentum. In the Q1, Digital Banking had 23 renewals and a new logo deal and the continued expansion of Tarafina with 3 new clients for our online digital account opening platform. In self-service Banking, we continued momentum in the transformative shift to software based solutions, which deliver recurring revenue.

Speaker 2

We are also receiving increased interest in our ATM as a Service solution and integrated go to market model combining the NCR and Cardtronics Teams capabilities that provides a key point of competitive differentiation. In the Q1, we secured 4 new ATMs and service customers, including Directions Credit Union, which is embracing NCR's 18 with a service to enhance and modernize their member experience. Are helping Saudi National Bank deliver a richer customer experience with our enterprise ATM software suite providing targeted interactions and increased efficiencies. In retail, we have positive momentum in winning the upgrade imperative for retail point of sale solutions. NCR was named the world's largest POS software provider for the 5th consecutive year by RBR.

Speaker 2

During the quarter, we began deploying NCR Freshhub At Big Y, to be used as the front end of Big Y's micro fulfillment center. This SaaS solution helps grocers implement their own e commerce and delivery services through the NCR Commerce platform. In self checkout, we're also seeing continued adoption with our market leading solutions, including the supermarket retailer Kohl's based in Australia who recently refreshed their self checkout estate. In hospitality, we continue to attract new customers And cross sell to existing customers, including First Watch Restaurant Group, where we partnered on kitchen innovation technologies to better serve their staff and customers. We also continued to expand our strategic relationship with Noodles and Company by adding additional services to our software platform.

Speaker 2

We saw increased momentum with our distribution partnership for our SMB product with a large bank in America through their Merchant Services division. And finally, I'll provide an update on our strategic review process, which is ongoing. Last call, we announced the initiation of a strategic review to enhance to review strategic alternatives available to NCR to enhance shareholder value. We continue to evaluate a number of different paths and have made good progress to date. With that, let me pass it over to Tim.

Speaker 1

Thanks, Mike, and thanks to all of you for joining us today. I echo Mike. Our Q1 results represent a tremendous effort across our strategic growth initiatives, while simultaneously battling a surge in existing challenges compounded with new exogenous shocks. As a reminder, beginning this quarter, we'll report our results relative to 5 new segments described under December Investor Day. And the legacy Cardtronics results are now included primarily in the Payments and Networks segment.

Speaker 1

So let's begin on Slide 6 with a top level overview of our Q1 financial performance. Because these results are significantly different than we anticipated, I've added an additional chart that follows to provide a deeper condyl analysis. Starting in the top left, revenue was $1,900,000,000 up $322,000,000 or 21% versus the 2021 Q1. Recurring revenue was up 35% year over year. On a pro form a basis, including Cardtronics for the full year of 2021, revenue was up about 4%.

Speaker 1

In the top right, adjusted EBITDA increased $13,000,000 or 5 percent year over year to $271,000,000 In the bottom left, non GAAP EPS was $0.33 down $0.18 or 35% from the prior year Q1. The tax rate, while similar to prior year, was much higher than our full year expectation due to the lower level of profit and the follow on effect on discrete items and deductibility. Assuming profitability improves as we expect, the tax rate will decline across the remaining quarters of 2022. And finally, Q1 free cash flow was a modest use of $10,000,000 due to seasonal compensation expense that was not funded in 2021 and a one time adjustment to our annual 401 match. This result was slightly better than our expectations.

Speaker 1

Before I walk through the segment results, I want to quantify the macro impacts to our revenue and EBITDA as the themes across all of the segments will be similar. This chart categorizes the impact on revenue and EBITDA for the results realized in Q1 and then projects the anticipated impact for the remainder of 2022. For revenue, supply disruptions late in the quarter in Eastern Europe due to the war and in China due to new COVID lockdowns, Both caused our hardware revenue to be extremely back end loaded and caused us to miss revenue recognition for ATMs and SCO at the end of the quarter. This accounted for a little more than half of the shortfall and we expect to recover most of this revenue as the year plays out. The persistence of the Omicron COVID wave around the world and the resulting decrease in transaction volumes suppressed revenue by more than $25,000,000 relative to our expectations.

Speaker 1

While transaction volumes are not backlogged like hardware, we are seeing better volumes now in the U. S. And anticipate similar improvements in the crown countries. We expect volumes to continue to recover across the 2nd quarter and have a strong second half. And lastly on revenue, NCR has suspended all operations in Russia.

Speaker 1

In the quarter, we wrote down all of our receivables and inventory, paid severance to our Russian employees and aided our Ukrainian employees' relocation. Direct revenue in Russia and Ukraine would have been about $15,000,000 in the Q1 In the full year, the direct impact is approximately $90,000,000 We do expect another $10,000,000 or so of follow on impact in other parts of Eastern Europe. Switching to EBITDA. The 1st quarter hardware revenue miss would have converted to about $15,000,000 and should be mostly recoverable as we eventually ship that impacted hardware. The payments transaction volume shortfall would have converted to a similar $15,000,000 of EBITDA And we are as I said before, are seeing better trends currently.

Speaker 1

Adding the impact of the war in Eastern Europe, about 40% of the EBITDA challenge in Q1 was directly linked to revenue and its conversion. The other 60% of the EBITDA miss is attributable to significantly higher than forecasted inflation. Component prices jumped well above 2021 levels even with extended lead times and freight particularly expedite cost Continued to escalate with surcharges increasing. These are direct costs to our manufacturing operations and push margin rates on some of our hardware products down to breakeven levels. The standard cost of some of our POS devices has increased over 35% year over year.

Speaker 1

Fuel costs are pressuring the margins in our services businesses. NCR purchases about 10,000,000 gallons of fuel a year for our service fleet And spend significantly more through employee mileage and contractors. And interest rates are an operating expense for us. We rent more than $4,000,000,000 of cash from our bank partners to supply our ATM fleet. The cost of that rental goes through the EBITDA line as cost Good.

Speaker 1

We planned for 3 rate increases in 2022. We did not plan for 6 or more. There are operational adjustments we can make to offset some of the higher interest rates, such as reducing the amount of cash in the ATMs as well as passing through contractual protections triggered by higher rates. The obvious offset to cost inflation are price increases and cost productivity. We're actively working on both.

Speaker 1

While we've been implementing price increases beginning all the way back in July of 2021, we have not yet seen full realization of those increases. Hardware sold from backlog and longer term contracts with only annual escalators caused a lag in price realization that is particularly painful in an environment of runaway inflation. The full year impact on EBITDA on the far right captures our expectation for those exogenous factors that impacted our Q1 performance. The ranges at the bottom of the page for mitigating actions describes our ability to impact those things we can control like price and cost. These actions are all reflected in the adjustment we are making to our full year guidance.

Speaker 1

Let's move to the segments on slide 8, which shows our Payments and Network segment for the quarter. Please note that the results and key metrics in this slide are presented on a pro form a basis and reflect Cardtronics' historical results as well. In general, this was a very good quarter strategically for this business and a decent operating quarter. Starting at the top left, Payments and network revenue increased $32,000,000 or 12% year over year with Allpoint growth more than offsetting the Omicron driven shortfall and global transaction volumes. Payments and Network adjusted EBITDA increased 10% year over year, while adjusted EBITDA margin rate was a strong 33%.

Speaker 1

At the bottom of the slide shows Payments and Network segment key metrics. On the bottom left, endpoints increased 29% year over year. These access points to the Allpoint network and merchanting acquiring terminals are increasing as we migrate them to an NCR installed base. In the center bottom are transactions, a KPI that illustrates the payments processed across our Allpoint and merchant acquiring networks. Transactions increased 6% year over year, but fell slightly sequentially.

Speaker 1

As I said before, the global impact of the Omicron wave is evident in this metric for both Q4 and Q1. And annual recurring revenue in this business increased 13% compared to the Q1 of 2021. Turning to slide 9. This slide emphasizes the continued momentum in our Digital Banking segment. Digital Banking had a very good start to the year with revenue increasing $13,000,000 or 11%.

Speaker 1

1st quarter adjusted EBITDA was up 4% from Active users and ARR, all of which were about flat in the quarter. Remember that only about 2 thirds of the revenue in this business is driven by user count And that user counts can have some short temporal dislocations from revenue. We expect all three of these metrics to be up about 10% at year end. The AirPacket in user counts is caused by 2 long known customer consolidation deconversions, which will be closely followed by the onboarding of 2 of last year's major wins in Q3, WynTrust and Associated Bank. Slide 10 shows our self-service banking segment results.

Speaker 1

Self-service banking revenue declined $17,000,000 or 3% year over year with strong software revenue more than offset by lower onetime hardware sales. Self-service Banking adjusted EBITDA decreased $25,000,000 or 18 percent year over year. The EBITDA margin rate declined by 3 50 basis points to 18%. This business suffered the most from the back end loaded revenue quarter due to component availability and the dramatic inflation in freight and fuel. This business also had the largest presence in Russia.

Speaker 1

The bottom of the slide shows our self-service banking segment key results. On the left, We made significant progress increasing our software and services revenue mix to 72%, up 4 points year over year. We saw a 6x increase in units served as ATM as a Service compared to the same quarter of 2021. We are ahead of our plan to get this metric to more than 11,000 machines by year end. The shift to recurring revenue continues to gain traction with ARR up 6% year over year.

Speaker 1

Moving to Slide 11, which shows our Retail segment results. Starting at the top left, retail and revenue increased $26,000,000 or 5% year over year, driven by higher self checkout and point of sale solutions revenue. Order activity in this business is very strong, backlog is high and lead times are extending. Retail adjusted EBITDA declined 32% year over year and adjusted EBITDA margin rate was 12%. This business was most impacted the component cost inflation, particularly on POS devices, which accounted for most of the decline in profitability.

Speaker 1

Retail did also have a presence in Russia. The bottom of the slide shows retail segment key metrics. On the left, our platform lanes, a KPI that illustrates the success of our strategy to convert Our retail customers to our platform based subscription model. We increased our number of platform lanes by 6x compared to the same period a year ago. The implementation of software defined store at Circle K describes this quarter's jump.

Speaker 1

We see accelerating momentum for the conversion of our traditional lanes to platform lanes and have a substantial lane conversion backlog. In the center bottom, self checkout revenue increased 8% year over year. Recurring revenue in this business increased 3% compared to Q1 of 2021. Slide 12 shows our Hospitality segment results It illustrates the momentum across this business with particular strength in enterprise market caused by an uptick in new restaurant openings and technology refreshes. Hospitality revenue increased $32,000,000 or 18% as restaurants reopen, rework their existing locations and expand.

Speaker 1

Our pipeline is strong, our backlog is significantly higher and we continue to hire to increase our feet on the street and catalyze growth. 1st quarter adjusted EBITDA was up 14% year over year, while adjusted EBITDA margin rate was 19%. Hospitality's key metrics in the bottom of this slide include platform payment sites and ARR. Platform sites increased 37%, Payment sites tripled and the ARR was up 14% year over year compared to Q1 of 2021. Before I move to free cash flow, I want to remind you of our new reporting segments and the inclusion of a corporate and other and eliminations bucket.

Speaker 1

They are comprised of 3 things: our TNT operating unit, our total corporate overhead and the elimination of the merchant acquiring business that is counted in both the Payments and Network segment that owns the technology and in the Retail and Hospitality segments to drive the customer growth. On slide 13, we present free cash flow, net debt and adjusted EBITDA metrics to facilitate leverage calculations. As I previously stated, we ended the quarter with a $10,000,000 use of cash due to typical and planned seasonal factors. Receivable days outstanding and finished goods inventory both increased sequentially due to the lack of linearity in revenue caused by component availability. This slide also shows our net debt to adjusted EBITDA metric with a leverage ratio of 3.9 times.

Speaker 1

We ended the Q1 with $412,000,000 of cash and remain well within our debt covenants, which include a maximum pro form a leverage ratio of 5.5 times. We also have significant liquidity with over $860,000,000 available under our revolving credit facility. We have a strong balance sheet, ample liquidity and the financial strength to support our growth strategy. And finally, on Slide 14, I summarize the adjustments down that we needed to make to our guidance to reflect what we just experienced what we think we know about the remainder of the year. Slide 7 describe these causes for revenue and EBITDA And then I flow those same adjustments through to EPS and cash flow here.

Speaker 1

So for full year 2022, we now expect Revenue of approximately $8,000,000,000 down from $8,000,000,000 to $8,200,000,000 previously. Adjusted EBITDA of $1,400,000,000 to $1,500,000,000 down from $1,500,000,000 to $1,575,000,000 and non GAAP EPS of $2.70 to $3.20 Free cash Flow generation will be between $400,000,000 $500,000,000 reflecting the decline in profitability. With that, I'll turn it back to you, Mike.

Speaker 2

Thanks, Tim. In closing, on slide 15, we have made significant strategic progress transforming NCR to a software led as a services company. And while the external forces of inflation, interest, pandemic and war negatively impacted our financial results, We really feel good about the underlying business execution during the Q1. As we continue to transform the company, we will address the external headwinds with price actions, cost takeout and efficiency gains. And finally, we feel confident that we will find strategic actions that will unlock That concludes our prepared remarks for today.

Speaker 2

With that, we will open the call for questions. Operator, please open the line.

Operator

Thank And we will go to our first question from Eric Wiederink of Morgan Stanley.

Speaker 3

Hey guys, thank you for taking the question. Maybe you could just help us think Or detail a little bit more about the linearity in the March quarter. Obviously, we spoke 90 days or I should say less than 90 days ago And you guided to the year and the quarter. And so was the 1Q miss largely from March? How did April trend versus March?

Speaker 3

Just looking to get a better understanding of when and where the impact was and perhaps how it was unforeseen when the last And then I have a follow-up. Thanks.

Speaker 1

Yes, sure. So the last time we spoke was February 8, and I hadn't yet seen January results. So, we truly hadn't seen much in the way of results in Q1. The As you know, the war in Russia that accounts for most of the adjustment in revenue had not yet started. Interest rates had yet started to climb.

Speaker 1

Gas prices climbed even further and really because most of this has to do with cost on hardware, our hardware revenue was We could not get the chips we needed, so we assembled the devices early in the quarter, waiting for the last piece, which were the chips and got them out the door in December and in many instances in the last 2 weeks of December. So the miss on hardware in the quarter, About $45,000,000 let's say across ATMs and SCO together pushed from Q1 out into successive quarters, But that we didn't see that coming. We didn't know at the time we wouldn't get the chips In order, in sequence. And so we scrambled to get hardware out the door at the end of the quarter.

Speaker 3

Okay. That's helpful. And When you talk about the mitigation efforts on, I think it was Slide 6, maybe just help us Detail those a bit further beyond pricing, what exactly what efforts or Actions are you taking? When should we expect those to kick in? Maybe just detail there would be great.

Speaker 3

Thank you.

Speaker 1

Yes. So let me set that up and I'll hand over to Owen to This will be his project to drive. We had pricing actions underway and those pricing actions will pay dividends in Qs 2 through 4. We also had cost actions underway, efficiency primarily around the Cardtronics acquisition, those were on schedule and on budget. The difference then is the change in cost between January and now.

Speaker 1

We have to act more proactively to go chase yet more price More cost. My best guess is that we will have about $200,000,000 of pricing actions that we put through, which we've net about $100,000,000 in 2022 and we'll put through a couple of $100,000,000 of cost savings, which we'd likely net 100 and a quarter of that as the year played out. So we're going to try to over solve with internal actions against what we know today in anticipation of further deterioration in And some of these macro indicators. Owen?

Speaker 4

Yes. I think I'd add a couple of comments. It's been, to say, a while since any of us have dealt in a hyperinflationary environment would be an understatement. It's been decades and I think what Tim described in terms of catching the falling knife, we had backlog built Then Q3 that we actually put price increases and surcharges on. As we came into the Q1 and dealt with this Back end loaded linearity to our build plan, the cost escalation was extreme.

Speaker 4

Some of it is inflationary and I'll be candid, some of it is gouging in the marketplace. I'll just give you a couple of examples that we dealt with. Chips that we were buying at $41 in the second half of the year are now in the open market that we had to go to for almost $2,900 We had chips that were we were paying $0.42 for our power supplies, I Say that we're now paying $114 for. So I will tell you that we wanted to meet customer demand. We did that.

Speaker 4

We missed on the escalation and acceleration of costs from our backlog in the 3rd quarter what we were building and delivering at the end of the Q1. The lesson learned is the actions we're taking and have taken As everything in the second, 3rd and 4th quarter backlog, we have now gone and looked at the selling price, Projected out what our costs will be and we'll continue to stay on top of that and we're taking corrective pricing action. So You take the lesson learned and it wasn't it's been a tough one. We are going to continue to deal with Hyperinflationary environments, we're going to be continuously dealing with some of the over market issues. And What we will continue to do now is figure out how best to take pricing actions to mitigate those discrepancies as we go forward.

Speaker 4

So between those and cost actions out that we're taking, addressing the fuel escalation, As Tim described, that happened within the quarter. And as a cure of about 10,000,000 gallons a year, That's a material impact. We have now started to address that through surcharging and price increases. So I think the action we understand the magnitude of the issue that we just went through. We've done our best to project forward and we believe the actions that we're taking We'll mitigate the risk as we look out through the year.

Speaker 1

Got it. Thank you, guys.

Speaker 2

Sure.

Operator

And we'll move to our next question from Matt Summerville with D. A. Davidson.

Speaker 5

Thanks. A couple of questions. It would be really helpful, I think Tim mentioned across a number of the businesses how Strong orders, backlog, the momentum you're seeing there. Is there any sort of numerical are you able to give us something more tangible from a So both from a numerical standpoint, that really can underscore how strong the fundamental demand side is in the business other than to Say it's strong and then I have a follow-up.

Speaker 1

So you can see in the KPIs across The bottom most of those charts that strategically we made tremendous progress in the quarter. And with those conversions to platform lanes and platform sites, It drives really nice conversion on revenue in future periods. When we talk about backlog, we're really talking about hardware. And the backlog in SCO, it's as high it's historically high. The backlog in POS is high And actually, I wish it was a little bit higher in that we delivered a lot of POS devices to keep our customers happy in the quarter That we probably were at breakeven or less on as Owen described this chip escalations on a device that only costs $1200 to have a $400 increase in a chip is So we have not broadcast our backlog numbers before, but I think No, that they only apply to hardware and part of the reason you see us recovering the hardware revenue we missed in Quarter has to do with the fact that that backlog is still there.

Speaker 1

It didn't get out the door because of chip availability, but that backlog is still there.

Speaker 2

Matt, this is Mike. I would ask you again just to go back and look at the strategic KPIs, Telecom sites up year over year, 37 percent retail platform lanes up 400% year over year, tremendous growth Digital Banking up 11% in RAB endpoint. Endpoints for our payment business both out of the Allpoint As well as merchant up almost 30%. So across the board, the Strategic metrics did really, really well. We got hit in hardware and we got hit in hardware late in the quarter on some areas we couldn't react to.

Speaker 2

If you Look at the full year, where we sit today, we have 8 months to make adjustments. We can adjust on price, we can adjust on cost. We didn't have an opportunity in the Q1 to make the adjustments. So again, the strategic KPIs, the strategic transformation, we were extremely excited about

Speaker 1

a really, really strong Q1. Just to try and give you something to grasp on to, the backlog in hardware, particularly in retail and hospitality, Was up more than 30% year over year in the quarter.

Speaker 5

Got it. And then As a follow-up, did I effectively hear you correctly, in that you're repricing some of the backlog? And then, Owen, maybe Just a little more context, we're kind of a year into this inflation and I clearly understand it's gotten worse, hands down, No doubt about it. Every single company who's going to report is going to say the same thing. Is there a way in your business and NCR's business To better align inbound cost versus how you're pricing the product, As you guys are probably aware, I follow some of the more industrial tech type names and the majority of them are actually in a favorable price cost spread position right now.

Speaker 5

And I guess I'm trying to understand more around your business, maybe what makes it so much different? Thank you.

Speaker 1

Yes. No, that's a very good question. I Owen and I asked that ourselves as well. The when you sell as a solution You sell long dated contracts, 4 or 5 year contracts with only annual escalators. It's really hard to catch up in an environment where Prices increasing so quickly.

Speaker 1

We also have very long lead times on particularly because of availability of parts, Long lead times on our SCO and ATM units and I guess POS now as well. When we sell those units to our customers, they we commit to a price And we get revenue recognition when they implement those devices. And the change in cost for us over that 4 month period of time When a step function changes like it did in Q1 is painful. And so we need to find a way Contracting with our customers that we protect ourselves against that extension of implementation.

Speaker 6

Got it. Thank you, guys. Sure.

Operator

And we'll move on to our next question from Charles Madigan of Stephens.

Speaker 6

Hi, good afternoon and thank you for taking my question. Given some of

Speaker 7

the visibility you have into consumer behavior through your businesses, whether it's All Point or hospitality. Just curious what you're seeing in terms of spending trends given some of the inflationary pressures? And also Curious if stimulus, the lapping of stimulus disbursements through 2021 has any impact on your businesses or the cadence of Results over through 2022?

Speaker 2

Yes. On the first part, whether Seeing customers impacted by spending trends, we have not seen that yet. If you look at our Commerce Business, Retail and Hospitality, the 2 Biggest challenges the executive teams, the managers of those entities have is the implementation of technology and the pace of some of the change, Around opening up new channels and integration of channels, a lot of that brought on by the pandemic, quite frankly. And then secondly, their second biggest issue is labor, the cost of labor, the availability of labor. And so as you look at NCR, as they look at us, it's our software, our technology and our self Service equipment that allows them to deliver lower costs.

Speaker 2

So we actually and Tim talked about SCO and the retail, That's a pretty active area just as people try to roll that out and help to impact their labor costs. I don't so on the stimulus Stimulus hit all point, some of that in 2020, a little bit that hit 2021. You could see the months for that roll through, so that did have a little bit of Spikes and some revenue pickup. The Q1 impact to Allpoint and transaction volume was really related to Offshore, Australia, UK, Canada, South Africa, some of the other countries where They did shut down probably a little bit in the States where some regions maybe slowed down due to Omicron. And I suspect as most of you know, Omicron kind of Came out of late December, early January and just rolled through and shut down parts of the business.

Speaker 2

So I don't think the impacts in the Q1 relates to impact of stimulants. We've kind of mapped it out. We still as you look at it, we still grew. Even with those impacts, our payments grew year over year quite nicely. So it was more of a where we thought we were going to begin Plan

Speaker 1

versus year over year growth? Right. The segment grew, Mike, and so did the total transaction volumes. So the U. S.

Speaker 1

Did grow better than others, but in aggregate, Payments volumes were up year over year, just not up as much as we would have thought. Got it. And just as

Speaker 7

a quick follow-up on Supply chain, and I apologize if you touched on this earlier. Could you speak to the receptiveness of your customers in accepting Price actions from inflation, for example, obviously nobody's happy about it, but are you seeing any orders just delayed indefinitely or are the majority of our clients accepting. And I guess as a parallel to that, if I think about the difference between the $50,000,000 and the $100,000,000 in Mitigating actions, if you could speak to what would lead us to come at the low end versus the high end of that range?

Speaker 2

Yes. Let me take

Speaker 4

that from the customer perspective. There isn't a customer who's not Dealing with it on their end of things, and I think if you listen to many of our customers as they have reported and talked about the issue, They are trying to stay out ahead of this cost curve as well. So we have been as transparent with our customers as possible Regarding the cost escalation, the fuel costs, the hardware costs, the freight costs, Which have all escalated and it's to no one's surprise that we're having the conversation. Most of our customers Our understanding it and I think there is to this point a tolerance. I think all of us are going We'll be taxed on the level of tolerance, but thus far, as we've gone back to our customers and explained and met their need, and I think that's a Hugely important issue.

Speaker 4

We have met the needs of our customers throughout all of this as they have Expanded as they've opened up as they've refreshed. And I think that's a really important element of our commitment to Support our customers. And in that conversation, especially in the last 30, 45 days, we have been very clear about our need to make sure that we're regaining Pricing because of the cost escalations. Yes.

Speaker 1

I agree. Yes. I think on the 50 versus 100, I think we need to look at all that whole page in aggregate. We tried to estimate where we think that The macro environment is going to take us over the next three quarters, and I think we're reasonable in our expectations. We don't know whether we're right, but we think they're the right expectations.

Speaker 1

Well, I also said we're going to over solve against that because we're not sure that the world might not deteriorate further. And so when I talked about couple of $100,000,000 of cost or a couple of $100,000,000 of pricing actions to try and net 2, 2.25 this year. That would be over and above the $50,000,000 to $100,000,000 I described We need to get $50,000,000 to $100,000,000 to get back to the guidance we provided. I feel very good about the guidance range we provided and these are the actions necessary to get there. When and if we overachieve this $50,000,000 to $100,000,000 it should be accretive presuming the growth Doesn't continue to get worse.

Speaker 7

Got it. I appreciate the color. Thank you.

Operator

And we'll go next to Kartik Mehta of Northcoast Research.

Speaker 6

Good evening. Mike or Tim or Ohan even, you've talked about obviously delays because of what's happening in the marketplace. Are any of your customers canceling orders maybe because of the price increase or maybe not being able to get the product on time?

Speaker 2

Yes. Again, Kartik, you think about what we're delivering. So think about A restaurant, we're delivering POS system, so it's a device, but it's also all the software and the technology. They need that to open the store or in some cases, Refresh the Storey Investor restaurant. It's the same with a store, and again, it's the same with our banking business.

Speaker 2

So I think our challenges have been getting the price increases and then another one is just getting the surcharges for expediting orders Push through the customers and I think the team is confident we can get that done.

Speaker 4

And I think the profile of the customer relationship is Dramatically different because it's not hardware focused independent. To Mike's point, and I'll go back to the strategic KPIs, These are about installing systems to run the restaurant to address the conversion to The latest version of POS for our retailers and coming along with that is the hardware. So our customers are not backing off. These are strategic initiatives on their part, which include hardware. It's why we've worked so hard to make sure we're Getting the hardware product to them and in the total scheme of the imperative that they're trying to gain, I think that's where right now the cost discussion with them is holding up.

Speaker 4

So They're not backing off because it's not a single hardware transaction. It's more most of these are

Speaker 1

part of a bigger imperative.

Speaker 6

And then just one last question. Just on the merchant acquiring business, I know you've talked about integrating that business to at least NCR Silver And obviously, Aloha. And I'm wondering how that's progressing and what the uptake might be from a customer standpoint?

Speaker 2

Yes. So for our SMB market, the silver product and the Aloha! And then again, we go to market Aloha, mostly it's Aloha Essentials where we bundle it. For new installs, we're running about 90% attach rate on payments. So we're actually doing quite well.

Speaker 2

We've continued to make progress with larger hospitality sites, some enterprise sites upselling our payment Into those sites as well. And then this year, our goal is to get up and running in the retail side as well with the cash payment.

Speaker 6

Thank you very much. Appreciate it.

Speaker 1

Sure.

Operator

And we'll go next to Paul Chung of JPMorgan.

Speaker 6

Hi, thanks for taking my question. So just on digital banking, you saw EBITDA growth coming at a relatively kind of slower pace than revenues, but at 11%, which was quite strong. No. Is mix driving some of that or some of the overall macro headwinds you mentioned or some of the consolidation you also mentioned?

Speaker 1

No, digital banking doesn't inflation doesn't impact this business nearly as much as the others. I think it's just a temporal mix shift in the quarter. There was not a noticeable there's nothing to worry about in that margin rate. It's still very high. Yes, it's

Speaker 6

very high. Got you. And then what are features active users are using the most? And how is the firm kind of driving higher users there, what are some main reasons clients don't become active? And then I have one final.

Speaker 2

Yes. I mean digital banking across the board for the whole retail enterprise, whether it's our clients or in the broader market. Most everybody uses your digital device to do payments as a retail client, as a consumer. So payments are very active, reviewing accounts, transferring money. The big movement in digital banking is account origination.

Speaker 2

Our Terafina product is actually doing Really strong as we go back and cross sell into banks and credit unions across our customer base. So we actually competitively in the Digital Banking product space are really doing strong this year. The slight dip is really one of those customers got acquired about 1.5 years ago that was deconverting, large large client that Got merged, merged with equal and then another one that had notified us, I think, 4 years ago that they were going to go in house, quite frankly, which Very odd. We haven't really seen one of those. And as Owen mentioned or Tim mentioned at the early Q3 In July, we anticipate bringing on 2 new clients.

Speaker 2

So it's really a slight dip in the account volume. The Registered versus active, we look at the delta as a great opportunity to add new active accounts, we get paid on active. So the team has a very strong program to go back. You work with the banks, so you do a branded with the bank that we believe with NCR to go back to existing clients and say, did you know you could do your bill pays using your digital device? Did you know you could open your you know, you could transfer money and try to get people back using that account

Speaker 6

so we get paid. Got you. And then Lastly, on self checkout, if you could give us an update on how the Bed Bath rollout is progressing. Are you seeing kind of more traction with other Key retailers here beyond Grocers and Home Improvement and what are your kind of expectations there as we last some tough comps here moving forward? Thank you.

Speaker 2

Yes, it's really, so Bevaf and Beyond is going great. Again, at Skol, we have a great product, both hardware and its software, right, its usability. And we clearly lead the marketplace in that regard. So the big boxes that moved down market to grocery stores, large grocery chains now to midsize and then very strong in the CFR Convenience fuel space, where they're starting to be challenged by labor, cost of labor and availability of labor and really moving aggressively to roll out self checkout.

Speaker 6

Thank you.

Speaker 1

Thank you.

Operator

And with no further questions in the queue, I would now like to turn the call over to Mike Hayford for closing remarks.

Speaker 2

Thank you. So the team here is obviously disappointed in the numbers. It is a result of things moving at a Pace, some of us haven't seen before in terms of multiple external factors. So the pace of the costs moving very aggressively in the Q1, The pace of interest rates that we anticipated changes this year, but they moved very aggressively in the Q1. The pandemic, which I know we're all tired of 2 years into it, the Omicron wave, we had not expected those kind of impacts.

Speaker 2

I don't think anybody did having Businesses cycle back through a little bit of a slowdown. And then lastly, we did not really predict the war and the impacts that it would have on our business in Russia and the Ukraine. So while our numbers are disappointing, our performance during the quarter was not. We feel very positive about our performance. We had good momentum and good execution across all of our strategic initiatives.

Speaker 2

Our whole team worked really, really hard in quarter, we continue to win in the market. We continue to drive execution, platform lanes. And the retail business Dramatically up. Digital Banking, strong growth again. Customer wins again, both cross sell as well as new logos.

Speaker 2

Hospitality sites, Hospitality is on a great tear the last number of quarters and this quarter was no exception. So number of sites, particularly in some of the SMB markets with the relaunch Of our SMB product, the cloud based product that we're excited about. Payment attached revenue, payment attached in hospitality, Very strong year over year. And then what we're doing in the Pay360 and Liberty X rolling out new products into our endpoints and off point exchange. So we looked at strategically and you can see the strategic metrics.

Speaker 2

We had a really strong 2022 Q1. The difference I'll tell you on the cost, whereas the Q1, we didn't have the time to make the adjustments that we needed to the impact Q1. We have the time to make those Yes, The numbers that we have identified for impacting our cost structure throughout the rest of the year. Our Teams again have continued just a great shout out to everybody performing in a very difficult environment, not only some of the external forces that we talked about, but still Continue to work in this hybrid environment where we're not all sitting arm in arm at our chairs. We continue to win in the marketplace, beat the competition, and we feel that we will do that through the rest of the year.

Speaker 2

So I want to thank everybody for joining us today and we'll talk to you next quarter.

Operator

And so that does conclude this call. Thank you for your participation. You may now disconnect.

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