Good day and welcome to the NCR Corporation Fourth Quarter Fiscal Year 2022 Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Mr. Michael Nelson, Treasurer and Investor Relations. Please go ahead, sir.

Good afternoon and thank you for joining our fourth quarter and full year 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 are 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. 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 February 7, 2023, 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.

Thanks, Michael. I will begin with some of my views on the business, and I will also provide an update on our previously announced intention to separate NCR into two public companies. Tim will then review our financial performance and provide an outlook for 2023. And then Owen, Tim and I will take your questions. Let’s begin on Slide 4 with some highlights from this past year. We closed out 2022 with strong demand and positive momentum in the business. Maybe a different way to say this is across all five of our business segments, our products are winning in the marketplace. We continue to make significant progress against our strategic initiatives to advance our strategy of becoming a software-led as-a-service company with higher recurring revenue streams. A key part of our strategy is to run the store, run the restaurant and run self-directed banking. It is contingent on our ability to cross-sell and upsell additional services to our clients. To do so, we have a maniacal focus on customer satisfaction, which we measure as net promoter score, or NPS. When we initiated the strategy in 2018, our NPS was 14, which is not very good. Each year, we continue to improve. We went the following year to an 18 on our NPS score, then to a 36, then to a 48. And in 2022, I am proud to say we improved to 52. So in 4 years, we improved our net promoter score from 14 to 52. That’s quite a significant improvement. We now have happy customers, which is a key to executing our strategy and transforming NCR into a software-led as-a-service company. In 2022, NCR delivered 13% total revenue growth, recurring revenue growth of 20% and adjusted EBITDA growth of 16%, all on a constant currency basis. These…

Thanks, Mike and thanks to all of you for joining us today. As Mike described, our solid fourth quarter completes a year described by a determined effort to drive sequential quarterly improvement after a very difficult start to the year while confronting a litany of external challenges. Last April, during our first quarter 2022 earnings call, we described unexpected impacts from the Omicron COVID wave to the then new war in Russia, extraordinary supply chain costs due to scarcity and modestly higher interest rates that totaled about $75 million of negative impact on Q1 EBITDA. At the time, we forecasted that these issues would have an additional $75 million of impact over the remainder of the year for a total of $150 million. That forecast accurately predicted the eventual full year impact of our exit from Russia and the COVID wave, but could not then anticipate worsening supply chain challenges and component availability, historically rapid interest rate increases, a 40-year high inflation and dramatic strengthening of the U.S. dollar. In aggregate, those extrinsic factors eventually impacted EBITDA by almost $500 million. In response, cost productivity and pricing actions that were launched in March were expanded and enhanced to insulate the P&L against further deterioration in macroeconomic factors and allowed EBITDA margin rates to expand to 19% in the second half of the year, up 450 basis points from the difficult start in Q1. Even more impressive than the success of the tactical grind that preserves the P&L through cost control and incremental productivity with our team’s ability to simultaneously drive strategic KPIs above our stretch targets. We exited 2022 with significant momentum across our platform and as-a-service offerings. I’ll start on Slide 7 with a top level overview of our fourth quarter financial performance. As we guided back in October,…

Thanks, Tim. Moving to Slide 17. Let me provide an update on our thoughts on separating NCR into two public companies. We intend to separate NCR’s existing payments and network and self-service banking businesses to form a new entity via tax-free spin-off and distribution of shares to existing shareholders. NCR’s ATMCo includes NCR’s self-service banking. In other words, our traditional ATM hardware, software and services business, and all of our payments and network business, except for the merchant services payment, which is integrated tightly into the retail and hospitality segments of NCR. NCR will include our retail, hospitality, Digital First Banking and our Merchant Services payment business. NCR will continue its transformation to a software-led as a service growth company. These businesses operate in markets where we expect to see continued spending on technology to run the store, run the restaurant and deliver digital-first banking solutions. We believe NCR continue to be positioned to win the business for those upgrade imperatives. Moving to Slide 18. NCR has made significant strides over the past 5 years to transform our company into a customer-first software-led as a services company. The actions we have taken to align our organization around customers and markets will help us move into two organizations. We believe we are number one in the markets we serve. They represent enormous opportunity for us, and our goal is to make sure we continue to take advantage of our market-leading position. Our NCR RemainCo on the left side of Page 18, will be the number one provider of point-of-sale software in the world and the number one provider of self-checkout, and NCR will be the leading provider of DFB or digital-first banking solutions. NCR RemainCo is anticipated to be a higher-growth company serving markets that have growing demand for integrated platforms…

[Operator Instructions] And our first question will come from Paul Chung with JPMorgan.

Hi. Thanks for taking my question. So, just on the free cash flow guide, can you talk about some of the puts and takes there? Where do you expect CapEx levels, expectations for working cap? And I would have thought there would be somewhat a more outsized benefit on working cap after a heavy investment year. And then you guys did a good job of more uniform cash flow over the course of the year back in ‘20 and ‘21, 2022 saw a reversion back due to kind of back-end loaded free cash flow. How do we think about cash flow kind of throughout the year this year?

Yes. A lot of questions in there. CapEx, I would expect it – we have about $400 million this year. I think it’s going to be on $400 million is slightly higher. I do expect the cash flow to be much more linear this year. As we have said in the script, there were some – as we took cost out of the organization, the P&L benefit outstripped the cash flow benefit, and we will see that benefit come back in the first half of this year from a timing perspective. We harvested some of the investment in working capital in Q4. You can see that in our cash flow performance. And I think that we are going to make more progress on inventory in the first quarter. So, I think our cash flow guidance is very consistent with what we described a quarter ago, right, that we are going to have a very good fourth quarter. We are going to have a strong first quarter, and then we will get back on a more linear path after that. So, that’s the – it’s not perfectly easy to predict to the dollar, but I guess that we are closer to the high end of the range I described on the guidance page for Q1, which will give us a nice head start in the full year.

Got it. And then just a follow-up on self-checkout, so, you had a very strong performance in ‘21, and then some monitoring pace here in ‘22. Talk about the expectations for ‘23 and longer term? And where you are seeing momentum across regions, verticals? And then can you talk about the Halo product, too, where you showcasing NRF? How impactful can that solution be kind of near-term, long-term? Thank you.

Yes. I will let Mike take the product questions. The 3% growth in SCO this year was on an as-reported basis. There is actually three full points of growth that went to currency. So, on a constant currency basis, that 6% growth is very much in line with what we would have expected that mid to high-single digit growth at SCO. And next year, I would expect about the same.

Yes. Paul, on the Halo product, which you saw at NRF, we are pretty excited about it. It kind of does the best of both worlds. It has the vision-based ability to scan items and identify what they are. But it also has a capability for those that can’t scan appropriately, which is one of the challenges that, that technology has. You can still scan the UBC code. So, it’s easy to use. A lot of the growth we have seen in self-checkout is in convenience stores and fast food restaurants, and it’s a perfect fit for that environment.

And our next question comes from Matt Summerville with D.A. Davidson.

Thanks. A couple of questions. Obviously, you are baking in, it sounds like some level of moderate recession into your outlook for ‘23. Can you talk maybe about incoming order rates and what you may be seeing there relative to your guidance framework? Are you seeing things indicative of a slowdown? Are your go forward look at the funnel suggesting some whom perhaps becoming more pronounced in that regard? And then I have a follow-up.

No. I think the order book is strong. It’s about as strong as we would hope it would be at the beginning of the year. The uptake on our as-a-service efforts have been very strong. So, we have not yet seen any rollback of the order book. Let me give you some color on the total growth for the year because I think if you think about a 2% growth rate across the total company as reported. Self-service banking is likely to be down 4% reported. Now, that’s up 2% if you add back the shift to recurring revenue, but we are accelerating the shift in recurring revenue in that business. And so it’s going to be a 4% decline, we think, with really nice margin expansion. I think there is probably 3 points to 4 points of margin expansion in that business. We have got two businesses, Payments & Network and Digital Banking that are both going to grow nearly 10%. Both those businesses are going to invest back into growth. And so their margin rates are likely to come down a little bit, maybe a couple of points there as they invest in growth, which then leaves the retail and hospitality businesses that will grow low-single digits each hospitality coming off a rip roaring year. And retail, really, when we think about building in a consumer-led recession into our model, we took a little bit of – if you think about where the non-recurring revenue streams occur, it’s in hardware. It’s in POS and self-checkout and it’s in ATMs. And so we moderate our expectations for our hardware revenue in the year. If we are wrong and there isn’t a recession and our customers aren’t affected by it or don’t adjust for it, there could be upside to this plan.

Yes. Matt, just to add to Tim’s comments, so specifically, have we seen a moderation in demand to-date, the simple answer is no. And as you look at Tim walking through the numbers, so some of the growth impact is literally the ability for us to execute our strategic plan and to shift our revenue streams to subscription. And so we are – it’s taken off the fastest a little faster than maybe we anticipated. It was ATM as-a-service in that backlog. The sales success in 2022 was very strong. The backlog continues to be very strong into 2023. And so that will portend for the future to have a very, very strong business there, but we have got to get through 2023 since have Payments & Network, strong business outlook. Digital Banking had an extremely strong fourth quarter, a lot of renewals, a lot of new logos, continues to have a very strong backlog in terms of potential I would say, backlog sales pipeline and then recon hospitality, the migration to platform lanes and platform sites. So, we haven’t seen that yet. We look at the outlook for the marketplace probably a little more concerned about banking, just as banks taking advantage of some margin spread, interest margin spread in ‘22. I think they are all looking at the same risk. And so later on in the year, will they start to slowdown in capital spending. But again, to-date, we haven’t seen that. And I think our outlook for the year is just trying to be cautious based on the economic outlooks that we are reading.

Got it. And then just as a follow-up, and I only had a quick second to look at this, just given the timing of the call, but in Payments & Network, it looked like on a quarter-over-quarter basis. So, it’s not in your current slide deck, I had to go back and look at Q3, but it looked like endpoints were down a little bit quarter-on-quarter. Transactions appeared to be down a little bit quarter-on-quarter as was ARR. I realize there is an FX dynamic perhaps driving ARR. But if you can just kind of speak to that, that would be helpful. Thank you.

Yes. That’s a typical seasonality in what we do. You are going to see a nice pickup in Q1 as tax season comes around. So, the end points are moving in the right direction annually. I don’t know if there is a modest downdraft in Q4, I can’t remember. The transaction numbers are higher. They will go higher. There is a seasonality to them. That’s why we moved the key – the transaction numbers to full year because it takes the seasonality out. But good transaction growth and the fact that we are going to be able to deliver that 9% top line growth in that business is heavily dependent on more endpoints and more transactions.

Thank you, guys.

And our next question will come from Charles Nabhan with Stephens.

Hi. Good afternoon and thank you for taking my questions. Just wanted to drill into the segments a little more. First of all, within Payments, if you were to take out LibertyX what would the organic growth rate look like for the fourth quarter? And then secondly, as far as Digital Banking goes, I know in the past, you referred to it as a double-digit grower. Is it fair to still think of that as a trajectory for that business on the top line?

Yes. Let me start with Digital Banking. Absolutely, it was a little light in the fourth quarter. We – again, we had an extremely high renewal quarter, which drove extending our terms with our customers, which may be impacted revenue a little bit in the fourth quarter. But I don’t think that there is anything in the trends to cause us concern. I do think, as Tim referenced, high-single digit, low-double digit in 2023 based on what we are seeing for Digital Banking. I think the overall – without LibertyX, what do you get in mind.

LibertyX is about $15 million to $20 million a quarter.

Got it. And then just as a quick follow-up, if I could refer back to some of your guidance from the prior quarter when you talked about $200 million in cost take-outs for ‘23 and $80 million to $100 million in dissynergies. Is that still a ballpark range of thinking about ‘23?

Yes. I think if you get your ruler out and that EBITDA, it’s supposed to say causal walk, it says casual walk. The casual walk in the deck on Page 16, I tried to kind of roll all of these different efforts at cost take-out as they played out across this year and next because they don’t necessarily calendarize to any one fiscal year. We did see $500 million or so of pressure from both the discrete items we called out, external forces and then inflation in aggregate. And we have got about $400 million of cost actions or permanent actions – total actions done in 2022. About 60% of those were more temporal in nature. So, the raining and discretionary spending hard not backfilling positions that have been opened, and we need to add back some costs there and about 40% of that cost-out was permanent. Moving into ‘23 then, since we expect the external impacts and the inflation to moderate really considerably and in fact, a couple of the items turned around in our net benefits to us this year. We simply need to then cover the $100 million or so of wrap effect from the negative impacts last year and cover those temporal actions. So, if you add those together, it looks like in aggregate, about $350 million of permanent actions in 2023, which will then allow us to hit the numbers on this page. If there is – we have talked about $80 million to $100 million of let’s call it, negative synergies, dissynergies associated with the spin transaction. We have presumed across this model that it will be when we split, it will be $80 million, about $40 million on each side of the NewCo. We think as we – as the year plays out, we will be able to keep that cost down and offset it across the year. So, we found several opportunities for efficiency beyond the actions that we have described here to help keep that from being a negative at the time of the launch of the two companies.

And we will take a question from Erik Woodring with Morgan Stanley.

Hey guys. Thanks for taking the question. You look at 2023, and it looks like you plan to do more with less, I guess. Meaning your revenue guide is flat to up 2%, and we talked through some of the factors there. EBITDA is up much nicer kind of around 9% at the midpoint. Can you maybe just talk us through, Tim, I know you have talked about kind of like high level, but maybe walk us through how you are thinking about gross margins and the puts and takes there in 2023 versus OpEx just to help us maybe where the leverage in the model comes from next year? And then I have a follow-up next.

Yes. That’s a good question because you will remember that this year, most of the savings came at OpEx, right. It came from indirect costs because that was we have more quickly act there. It’s going to be nearly entirely gross margin savings this year. The actions that we took to re-qualify parts and to diversify our supply chain, the efforts we have made to reduce our transportation costs and other direct cost efficiencies are going to help pay back nicely in 2023. So, I would expect most of the recovery to be in gross margin rather than at OpEx.

Okay. Super. That’s really helpful. And then as a follow-up, I just want to make sure I get some of these items, right? So, I am obviously guiding to some nice year-over-year improvements in EBITDA and free cash flow. EPS has held back a bit more regardless of the kind of change in disclosures. Is that mostly tax rate, interest rate – sorry, tax rate, interest expense and share count. Was there anything else that I am missing? I just want to make sure I kind of understand why that measure maybe as much as the others.

You are exactly right. There is $0.29 associated with interest expense and there is a little more than $0.10 associated with both share count and tax rate.

Okay. Perfect. Thank you, guys.

That’s what that $0.40 in aggregate.

Thank you. And that does conclude the question-and-answer session. I will now turn the call back over to Mr. Mike Hayford for any additional or closing remarks.

Thank you. Thanks everybody for joining us today. I think our team is pretty excited about a strong finish to 2022. Obviously, we had some challenges at the start of the year and just a great big thank you to our whole team for working through the last three quarters and delivering a very solid 2022. We look forward to 2023. We expect it to be, again, a modestly challenging environment. This what’s going on out there, but we feel very good about our products. We feel very good about our strategic initiatives, and we are looking forward to executing the spin-off later in 2023. Again, thank you for joining us today.

Well, thank you. And that does conclude today’s conference. We do thank you for your participation. Have an excellent day.