Greetings, and welcome to the NCR Voyix Q2 2024 Earnings Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the presentation. [Operator Instructions] As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Alan Katz, VP of Investor Relations. Thank you. You may begin.

Good morning, and thank you for joining our second quarter 2024 earnings conference call. This morning, we issued our earnings release reporting financials for the quarter ended June 30, 2024. A copy of the earnings release and the presentation that we will reference during this call are available on the Investor Relations section of our website, which can be found at www.ncrvoyix.com, and have been filed with the SEC. With me on the call today are David Wilkinson, our Chief Executive Officer; and Brian Webb-Walsh, our Chief Financial Officer. This call is being recorded, and the webcast is available on the Investor Relations section of our website. Before we begin, please be advised that remarks today will contain forward-looking statements. These forward-looking statements are subject to risks, uncertainties and other factors, which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. For additional information on these factors, please refer to our earnings release and our other reports filed with the SEC. We caution you not to place undue reliance on these statements. Forward-looking statements during this call speak only as of the date of this call, and we undertake no obligation to update them. In addition, we will be discussing or providing certain non-GAAP financial measures today, which we believe will provide additional clarity regarding our ongoing performance. For a full reconciliation of the non-GAAP financial measures discussed in this call to the most comparable GAAP measure in accordance with SEC regulations, please see our press release furnished as an exhibit on our Form 8-K filed this morning and our supplemental materials available on the Investor Relations section of our website. With that, I would now like to turn the call over to David.

Thanks, Alan, and good morning, everyone. I would like to welcome all of you to our second quarter 2024 earnings call. In addition to discussing our quarterly financial results, we will also provide details concerning the strategic actions announced this morning, including the sale of our Digital Banking business, our expanded partner agreements with a leading provider for point-of-sale and self-checkout hardware and our recent cost-alignment initiatives. I would like to remind everyone that the strategic review to optimize the company's operations and drive enhanced long-term shareholder value began in 2022. The initial part of this multifaceted plan was realized in October 2023 with the completion of the spin-off of our ATM business into NCR Atleos. Following the spin, the NCR Voyix Board continued efforts to streamline the business and sharpen the company's focus to better serve our customers and drive enhanced value to our shareholders. As you will see on Slide 6, we have taken the following actions. First, we announced the definitive agreement to divest our Digital Banking segment to Veritas Capital for a $2.45 billion purchase price, plus up to $100 million of contingent consideration. Second, we announced partnering with Ennoconn Corp., a leading hardware provider for both point-of-sale and self-checkout. And third, we implemented a multiphase cost-alignment program, which began with the elimination of approximately 800 staff globally or approximately $75 million in annualized operating and capitalized payroll-related costs at the end of Q2. This program contemplates an ongoing assessment of all costs. These actions will significantly reduce leverage, moderate the variability of hardware-related revenue beginning in 2025, align our current operating cost to the new structure and position NCR Voyix for accelerated topline growth and margin expansion. Brian will discuss the details of the cost-alignment program and our improved future capital profile later on the…

Thank you, David, and good morning, everyone. I will begin my remarks today by discussing the financial impact of the strategic actions announced this morning before commenting on our second quarter results, our updated 2024 outlook and a pro forma view of the company giving effect to the strategic actions. I will start with the sale of the Digital Banking business on Slide 13. As David mentioned, we have entered into a definitive agreement to sell our Digital Banking business for $2.45 billion plus a potential contingent consideration of up to $100 million. This reflects a 20x multiple on the last 12 months of adjusted free cash flow. Upon closing, we intend to use the proceeds primarily to pay down our debt, including all outstanding amounts under our term loan, repurchase of certain bonds and to terminate our AR facility. These efforts are designed to result in a net leverage ratio of approximately 2 turns based on our pro forma 2024 adjusted EBITDA. This will reduce the net interest expense of the company. The net impact of the interest reduction and our cost takeout will offset the cash flow impact from the divestiture. Turning to Hardware. As David indicated, we have executed an agreement with a leading manufacturer to provide hardware solutions to our valued customers. Once implemented, Ennoconn will design, manufacture, warranty, supply and ship self-checkout and point-of-sale hardware directly to the customer. We will continue to sell hardware to our customers as an agent and expect to record commission revenue from these hardware sales on a net basis. These revenues are expected to be modestly lower than the net margins from past hardware sales. We have retained the IP on all designs pertaining to point-of-sale and self-checkout hardware. With the exit of the ATM and Digital Banking businesses…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] The first question is from Will Nance from Goldman Sachs. Please go ahead.

Hi, guys. Appreciate taking the question this morning. I wanted to go ahead and ask – oh, and congrats on all of the strategic announcements. I wanted to ask on the pro forma balance sheet at roughly 2x EBITDA, it sounds like somewhere in the 4x to 5x free cash flow. Just how are you thinking about capital allocation and sort of steady-state targeted leverage once the transaction is completed?

Yes. So thanks, Will. So right now, we think that 2x net leverage is the right target. And as we think about capital allocation, we would continue to invest in CapEx for our products and platform. We'd consider tuck-in acquisitions to add capabilities to the platform that we can then provide to our customer base. And lastly, we'd start to consider share repurchase on a go-forward basis once we get through allocating the current proceeds.

Got it. I appreciate that. And then just as a quick follow-up, and I apologize if I missed this, a lot of details this morning. Could you just clarify, are there any considerations for like stranded costs or dis-synergies associated with the transaction? And just are those included in sort of the pro forma numbers?

Yes, there's roughly $20 million of corporate costs to become stranded. In the first year, we'll get coverage of a portion of that through the TSA and it's all been considered in the modeling, and we will then remove the cost as the TSA rolls off.

Got it. Appreciate that. Thanks for taking the questions this morning. Congrats again.

Thanks, Will.

The next question is from Mayank Tandon from Needham & Company. Please go ahead.

Thank you. Good morning. Maybe for Brian first. Brian, just looking at Slide 17, again, trying to digest all the news today, wanted to ask you are you also in any way changing your forecast for the restaurants and retail segments? Just looking at the numbers, I see that you obviously take out the impact of the Digital Banking fees. But just want to make sure there is no change, or if there is a change, if you could just kind of quantify it on the restaurant and retail side of the business.

Sure, Mayank. So if you look at Slide 17, the $630 million to $635 million on the software line is removing the revenue for Digital Banking. And then the $30 million to $35 million in services in the hardware line, those are related to retail and restaurants and the hardware pressure we're seeing in the second half plus we've derisked it a bit because of the ODM announcement. And then from an EBITDA perspective, if you look at the EBITDA change, $258 million is related to Digital Banking and the rest is the hardware pressure, partially offset by the added cost actions.

Got it. Very helpful. That clears that up. And then the next question, maybe more just around the deleveraging. What is sort of the flow-through, or over the course of time, how do you delever – given are there any restrictions – let me ask you this way. Are there any sort of restrictions on sort of the debt where you might not be able to pay down certain portions, certain portions you can. So I just want to understand the dynamics of how that deleveraging will take place over time?

Yes. So our plan is to pay off the Term Loan A and the revolver balance and then to take out a portion of the senior notes and we're going to terminate the AR facility, which is $300 million. So that's how we plan to use the incoming proceeds.

And no restrictions, Mayank, on what – how we use the proceeds.

Yes. That’s good. Thank you so much. Appreciate it.

The next question is from Matt Summerville from D.A. Davidson. Please go ahead.

Thanks. A couple of questions. What's changed in the hardware environment relative to 90 days ago? And if you can delineate between the retail side of things in terms of both point-of-sale and self-checkout and then also touch on the restaurant business separately from retail?

Yes, a couple of things. The recovery of the hardware market is much of a change or the lack of a change. There hasn't been the recovery. We're still seeing the large enterprise clients sweat those assets a little longer and not go through the refresh cycle. Part of the reason we did the strategic transaction that we did with Ennoconn is to reduce the variability. As we focus on software and services, that hardware variability and volatility will become much less relevant in our overall numbers. And it's a pretty good mix between SCO and POS, probably equal in terms of what we're seeing on the refresh rate decline and it's fairly equal across restaurant and retail as well. It's just a general enterprise market trend that we're seeing.

And then as you think about the Digital Banking sale, is there – does any of Voyix's debt go away and exit the company and stay with Digital Banking? Or does Voyix retain all of the indebtedness that obviously you'll be working down with transactional proceeds? I just want to be very clear on the capital structure?

Yes. It's debt-free and we retain the debt and pay – we had and we'll pay it down with the proceeds.

Got it. Thank you.

The next question is from Parker Lane from Stifel. Please go ahead.

Hi, guys. Thanks for taking the questions. Just wanted to double back to the hardware ODM model and relate that to the $135 million to $170 million decline in hardware guidance. Can you talk about how much of that's related to that hardware ODM model that you guys just announced versus the broader market trends that you just talked about?

Yes. I would say the majority of it is related to the macro environment and the trends that we're seeing across retail and restaurants and the lack of recovery. And then we've discounted it maybe 30% more given the ODM transition and the risk that, that could create. So I would think about it as 70-30.

Understood. Appreciate the color. And then on the $75 million of cost savings or 800 employees that – or the roles that were eliminated at the end of 2Q, can you just provide a little color on what aspects of the organization were most impacted by that cost savings initiatives?

Yes. We focused on roles that were non-customer-facing. I mean, we're clearly doubling down on what we're doing in sales activity as we described in our prepared remarks. So these were a lot of back office corporate functions and we were getting ahead of the stranded cost that we knew would be left in the business with the two transactions that we announced so we were really just getting ahead of those.

Perfect. Got it. Thanks guys.

The next question is from Ian Zaffino of Oppenheimer. Please go ahead.

Thank you very much. Just wanted to talk on the services side, I guess two questions on that. Anything changed with the new outsourcing agreement? Anything for like the trajectory of growth or anything like that or ability to service different parts made by other people? And then as far as – yes, then I'll ask follow-up? Thanks.

Yes. So when I look at our services business overall, that's clearly a core piece of what helps us differentiate ourselves in the market. 80% of that services business that Brian described in the pro forma is recurring. We purposefully selected a partner that would allow us to maintain the servicing relationships with our clients. So that – obviously, that was critical in how we maintained – or how we did the selection and we maintained all the IP in that transaction. So when we look at this overall, outside of the one-time installs that go with some of the decline we're seeing in the macro market trend and particularly some of the maybe hardware-only sales that will be less in focus for us, clearly we don't see a big impact to the services business. And today, we actually service – almost over 50% of our recurring services revenue is on non-NCR Voyix hardware today. So it's already third-party. So we just see this as the next extension of the strategy that we've been executing.

Okay. And then just a follow-up on that. As far as the services, if we're seeing a slowdown in hardware or sweating, I think, of the assets you have mentioned, does that then mean you're going to get incremental services work from that? And if so, what's kind of the ratio? So every dollar you might lose on the hardware side, it will return into x amount of services revenues? And then also if you could just touch upon leverage ratio as far as like ultimate leverage ratio and where you want to be?

Yes, I'll take the service, the hardware. So yes, the bottom line is if you sweat assets longer, they break more and services revenues go up. I would say there's a direct correlation, I'm not looking at a 1-to-1 dollar replacement or whatever for the hardware that we lose. Where we will be focused and where our sales teams will focus is on software and services, specifically, and then we'll pull through hardware where customers need it to complete a solution and that's where the referral arrangement back to the ODM partner will come into play. But I do see continued growth in services as we look through the back half of the year as we described. As we've separated those things out, we're looking at both software and services area or we see services area growing in the back half of the year. Brian, do you want to talk about capital?

Yes. So the 2 turns of net leverage is the current view and what seems we expect at the company at this point.

Yes. I think that gives us flexibility and options as we turn to growth. In terms of – in 2025, we'll get these transactions as we described, the Digital Banking transaction will close before the year-end. We'll move to the ODM model for hardware. That will take effect year-end going into January 1. So we'll get those transactions behind us, and then that gives us a lot of options to look at 2025 with a clean balance sheet.

Okay. Thanks very much.

[Operator Instructions] The next question is from Erik Woodring from Morgan Stanley. Please go ahead.

Good morning. Congrats on all the announcements this morning. I realize that there is a lot of moving pieces, but Digital Banking was kind of viewed as the growth stalwart of your existing business. Can you maybe share some early thoughts just on how to think about the multiyear growth EBITDA and margin trajectory of this business? Obviously, you shared a lot of details over the last six to 12 months following the spin from Atleos. How relevant are those? I imagine not as much, but even maybe just at the segment level, given some of the changes to the hardware model, it seems like some of the prior revenue and EBITDA margin guidance by segment might change. So just any updates that you have on how to think about this maybe longer term over a multiyear period, at least initially, would be helpful. And then I have a follow-up? Thank you.

Yes, Erik. If you look at the business overall, we came out at the beginning of this year and you looked at our topline because of the hardware volatility, and we were a topline negative grower. So we were not growing. We believe these transactions, even with Digital Banking included in that mix, we believe with these transactions as we go to 2025 and the new baseline that Brian's outlined in the pro forma that, that gives us the foundation that we'll grow off of. So yes, we will turn to growth when we go into 2025. The deleveraging – so the whole premise of the Digital Banking sale, I don't think is a surprise to you or anyone else. When we look at the feedback from the market around the ability to unlock value and the new perimeter when we spun out Atleos, we thought exposing it would give us the value. It didn't. So we had to unlock value in some way that we had committed to our shareholders. And we do, now we can delever the balance sheet. That gives us a lot of flexibility as we look into growth in 2025. We continue to invest in the platform and so the product is in really good shape. We're winning. When you look at software ARR and services ARR growth in the two businesses that are remaining, in retail and restaurant, the back half of the year looks like mid to high single-digit ARR growth in both of those businesses. So we're seeing the strength of our software and services focus. And as I described, as we get the go-to-market teams better aligned to cover the market, better incented to drive true growth, I mean, I think we'll continue to see growth in 2025. Brian, I don't know if you want to give more detail?

I would just say we're going to be primarily a software and services company, $2.15 billion, a 20% EBITDA margin, 40% free cash flow conversion with a strong balance sheet. So the profile of the business, the starting point, the pro forma profile is a great foundation to then grow off.

Okay. That's helpful. Thank you, guys. And then maybe just as a follow-up. Obviously, a lot of moving pieces within what you've announced this morning. Can you just maybe help us understand how exactly you're accounting for the risk of disruption from these changes, both with customers, with some of your partners? And any early feedback that, again, I don't know if you've gotten any feedback from partners or customers, but just any early feedback that you've gotten on some of these changes would be super helpful. And that's it for me. Thanks so much.

Sure. Clearly, we went into this very thoughtfully. We had three things – three core things we needed to focus on. One was Digital Banking, monetizing that asset and getting the value back to our shareholders. Two was finding a way to solve the hardware volatility and get better focus on software and services. And the third was we had to address costs as we got into this new structure. So we have executed on all three of the things that we said we needed to do and the right priority. So that's number one. So we had a thoughtful plan against that. Part of that plan was having conversations with our big customers, having conversations with our partners, having conversations with the employees inside of the company that understand the business the best. When you look at the hardware transaction, the way we structured that allows us the maximum flexibility in terms of how we manage the relationships with those big clients. So if they want one single provider of an end-to-end solution, we can still provide that to our clients and we've done that in a way that allows us to minimize disruption. And we can still offer them the complete service offerings and the platform technology to support that. So the feedback that we've heard has been positive to the customers that we've previewed this with. On the Digital Banking side, I think the customers are happy as well. We've had a handful of conversations with those customers last night, into this morning. So overall, the feedback has been really positive over the changes, and our customers understand what we're doing and why we're doing it and believe in the strength that it creates for us coming out of this.

Great. That’s really helpful. Thank you guys and congrats again.

Thank you.

The next question is from Matt Summerville from D.A. Davidson. Please go ahead.

Yes. Thanks. I just want to add – just a couple of follow-ups. Can you compare and contrast what you were doing from a hardware manufacturing sort of strategy previously and how and what exactly is changing with this other than the revenue recognition component only being the expected commission generation?

Yes. So what I would say is the – we're now outsourcing design in addition to manufacturing. Ennoconn is also going to be taking inventory risk. They're going to be fulfilling and delivering to our customers, so doing all the logistics. They're going to be setting the MSRPs. So there's a lot of change in the relationship. We're really now acting as the sales agent and so there's a lot that's changing.

We had a whole supply chain on our side for purchasing. We would do the design, we would purchase. Even though we did outsource manufacturing, this takes it one step further and it pushes all of our supply chain out to the third party.

Got it. Thank you. That’s it for me.

This concludes the question-and-answer session. I would like to turn the floor back over to David Wilkinson, NCR Voyix CEO, for closing comments.

Thank you, everyone, for joining today. As I stated earlier, today's announcements represent another step on our journey to move the company forward and create incremental value for both our shareholders and our customers. I'd like to thank all of our NCR Voyix colleagues around the globe for their contribution to the progress we've made on delivering on our commitments. I would also like to reiterate my appreciation for our customers and the trust they put in us every day to help them achieve their strategic objectives. We remain committed to serving our restaurant and retail segments and bringing them on the platform journey. Our new operational structure provides a more acute focus and fortifies our foundation to go from both within our existing base and through signing new customers. I look forward to updating you on our continued progress of our strategic initiatives and our execution of our growth objectives on our call in November. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.