U.S. Markets closed

Edited Transcript of NCR earnings conference call or presentation 7-Nov-19 9:30pm GMT

Q3 2019 NCR Corp Earnings Call

DULUTH Nov 27, 2019 (Thomson StreetEvents) -- Edited Transcript of NCR Corp earnings conference call or presentation Thursday, November 7, 2019 at 9:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Andre J. Fernandez

NCR Corporation - CFO & Executive VP

* Michael Dale Hayford

NCR Corporation - President, CEO & Director

* Michael Gary Nelson

NCR Corporation - VP of IR

* Owen J. Sullivan

NCR Corporation - COO

================================================================================

Conference Call Participants

================================================================================

* Daniel Rock Perlin

RBC Capital Markets, Research Division - Information Technology Analyst

* Kathryn Lynn Huberty

Morgan Stanley, Research Division - MD and Research Analyst

* Mark Zhang

Oppenheimer & Co. Inc., Research Division - Associate

* Matt J. Summerville

D.A. Davidson & Co., Research Division - MD & Senior Analyst

* Paul Chung

JP Morgan Chase & Co, Research Division - VP & IT Hardware Analyst

* Robert Henry Wildhack

Autonomous Research LLP - Analyst of Payments and Financial Technology

* Timothy Wayne Willi

Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, and welcome to the NCR Corporation Third Quarter Fiscal Year 2019 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Michael Nelson, Vice President of Investor Relations. Please go ahead.

--------------------------------------------------------------------------------

Michael Gary Nelson, NCR Corporation - VP of IR [2]

--------------------------------------------------------------------------------

Good afternoon, and thank you for joining our third quarter earnings call. Joining me on the call today are Mike Hayford, President and CEO; Owen Sullivan, COO; and Andre Fernandez, 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.

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 November 7, 2019, 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.

--------------------------------------------------------------------------------

Michael Dale Hayford, NCR Corporation - President, CEO & Director [3]

--------------------------------------------------------------------------------

Thanks, Michael. And thank you, everyone, for joining us today for our third quarter earnings call. I will begin with an overview of our third quarter performance and an update on our progress executing against our strategic initiatives before turning it over to Andre, who will review our financial performance as well as discuss our updated outlook for 2019. And Owen, Andre and I will take your questions.

I'll begin on Slide 4 with the highlights from the third quarter. Our third quarter results marked the continuation of several key trends, including improved execution and a strong top line growth. During the quarter, revenues increased 17% on a constant currency basis. Growth was once again led by our banking segment with 21% constant currency growth and ATM revenues up 60% constant currency, but it also included diversified sales growth as each of our business segments generated double-digit gains.

We are building on the momentum in our core business through the further advancement of our strategic growth platform. While we remain in the early stage of our rollout, customer response thus far has been positive. I'll provide an update on our strategic growth platforms in a few minutes as well as our broader payments integration, which also remains on track.

We took multiple strategic steps this past quarter to simplify our capital structure and improve our liquidity and financial flexibility, including refinancing our debt to extend our debt maturities and retiring 57% of our preferred stock. This enhanced financial position is critical as we continue to invest in organic and inorganic opportunities to accelerate our growth and advance our recurring revenue strategy.

Finally, we are again raising our full year 2019 revenue outlook and reaffirming our earnings and cash flow guidance. Andre will discuss this in greater detail during his remarks.

Moving to Slide 5, and an overview of our financial performance in the third quarter. Consolidated revenue was $1.78 billion, up 15% as reported and up 17% on a constant currency basis. As I mentioned, this strong top line performance was driven by diversified revenue growth across all of our businesses and all segments posting double-digit gains.

Adjusted EBITDA increased 27% compared to the third quarter of last year. And adjusted EBITDA margin expanded 150 basis points year-over-year to 15.6%.

Non-GAAP EPS was $0.73 per share, which was up 26% as reported and 30% on a constant currency basis. FX headwinds lowered EPS by $0.02 in the quarter.

Lastly, free cash flow was $57 million, which was up from a negative cash flow of $22 million a year ago due to increased earnings. We continue to remain confident in our full year free cash flow guidance.

Now turning to Slide 6, and an update on our strategic growth platforms. These 6 areas are where we are increasing investment with the goal of accelerating our higher-margin recurring software and services revenue. The execution of these strategies are critical to driving profitable growth in the years ahead. We continue to make steady progress bundling our software, services and hardware and shifting from a onetime upfront purchase to subscription-based relationships.

Starting with banking, where we have successfully shifted 8 products from a perpetual license to recurring during the third quarter. We also signed 29 deals on recurring contracts that in the past would have been an upfront payment. We also continue to improve performance in NCR's digital banking solution as we introduce some new features that are driving sales to both new and existing customers while improving retention rate. These features include business banking, Zelle money transfer and market campaign solutions.

Also, shortly after closing our acquisition of D3 Technology, NYMBUS, a leading clinical services provider, licensed D3 Digital Banking platform to allow financial institutions to rapidly deploy new digital bank brand to consumers and business.

In digital first restaurant, we have achieved early success with Aloha Essentials, which bundles software, services, hardware and payment. During the third quarter, 65% of all SMB Aloha sites sold through our direct sales channel were sold as an Aloha Essentials subscription bundle.

In digital first retail, Emerald, our next-generation cloud-based retail point-of-sale solution includes all the technology required to run a grocery store. This includes point of sale, loyalty, payments and frictionless shopping components. The value proposition Emerald offers was demonstrated by a recent survey of customers with 90% saying they desired or required all the components of an Emerald package. During the third quarter, we signed Bashas', an Arizona-based family of stores, to deploy Emerald at all its locations.

In digital connected services, we continue to innovate in the 3 key areas of device connectivity, process automation and data visualization. We have a group of strategic customers across banking, retail and hospitality that are in the process of deploying digital connected services with many more in the pipeline. In digital convenience and fuel, we have successfully bundled the software, services and hardware required to run a convenience and fuel retail chain into one offering. We have been rolling out our software-defined store, which enables a convenience and fuel retail chain to virtualize their in-store technology and provide significant cost savings.

And finally, in digital small business essentials, our all-in-one point-of-sale offering is complete with integrated payment and available in a monthly subscription package.

Overall, we are making solid progress deploying our strategic growth platform. The feedback and survey results from customers has been positive and should continue to lead to sustainable long-term growth and increasing recurring revenues.

Now on to Slide 7 and an update on payments. We remain on track with our integration for our Aloha product with controlled deployments beginning in the fourth quarter followed by general availability in Q1 of 2020. In addition, we have begun integration into our retail product suite initially started with Counterpoint retail solution that is targeted for controlled deployments in late quarter 1 and anticipated general availability in quarter 2 of 2020. Integration work is also underway on Emerald, our next-generation retail platform, with pilots being planned for the second half of next year. We look forward to sharing more about these plans in future earnings calls.

With that, let me pass the call over to Andre.

--------------------------------------------------------------------------------

Andre J. Fernandez, NCR Corporation - CFO & Executive VP [4]

--------------------------------------------------------------------------------

Thank you, Mike. Slide #8 shows our banking segment results. Banking revenue increased 21% in constant currency led by a 60% constant currency increase in ATM hardware revenue. Driving ATM revenue this quarter was both double-digit growth in ATM orders as well as a significantly higher backlog conversion rate as our manufacturing initiatives have resolved many of the supply capacity constraints we experienced last year. While the fourth quarter will be a difficult comp for us on the ATM side due to a strong Q4 of last year, we exited Q3 with a solid backlog position. Software related to ATMs combined with growth in services revenue also contributed to the increase in segment revenue. We continue to grow our hardware maintenance backlog, a future annuity stream, both from the ATM revenue as well as from large customer win this year to service non-NCR fleets. We continue to see a stronger-than-expected ATM replacement cycle in addition to Win 10 upgrade, with strength in the quarter in the Americas and in Europe.

Finally, as Mike said in his remarks, we signed an increasing number of deals in banking software this quarter on which revenue and margin is being recorded over time compared with perpetual license deals in prior years via which revenue and margin had been recorded upfront. As a result, we are growing both ACV and TCV in this segment and as we've mentioned on prior calls are working to determine the appropriate metrics to communicate our progress in 2020 and beyond as we shift to a higher recurring revenue model. While embedded in the financial performance of our banking segment this quarter and year is the success we've had in migrating from perpetual to subscription-type deals, this shift to recurring is representing an increasing headwind to our financial results for 2019.

Operating income increased 47% constant currency driven by higher volume and a favorable mix for our ATMs as well as higher ATM-related software revenue. We also benefited from significantly improved performance in our hardware manufacturing business, which positively impacted all segments.

Moving on now to Slide #9, which shows our retail segment results. Retail revenue increased 13% constant currency driven by a double-digit increase in self-checkout revenue. The acceleration in self-checkout growth was broad-based in terms of customers and geographies. Services generated solid growth driven by higher hardware maintenance activity as well as new managed service contracts. In addition, our JetPay acquisition is on track and contributed approximately 4 points of growth year-over-year. Operating income increased 28% constant currency primarily driven by improved hardware profitability.

Slide #10 shows our hospitality segment results. Hospitality revenue increased 13% constant currency, driven by an increase in cloud revenue from our NCR Silver and Aloha products, payments revenue from our JetPay acquisition as well as an increase in point-of-sale revenue. Operating income was down 34% constant currency driven by continued investment in NCR Silver and NCR Aloha partially offset by improved hardware profitability.

On the expense side, we continue to invest in programs to enhance our technology to improve customer satisfaction and to support the rollout of our new products. Additionally, as Mike mentioned earlier, we received positive customer feedback on our bundled subscription packages via our Aloha Essentials offering. Although the financial impact during the third quarter from the move to subscription was minimal and significantly less than our banking segment, this shift is a strategic focus for us as we accelerate the investment in these programs.

Now to Slide #11 where we provide our third quarter revenue results under our previous operating segments. Software revenue increased 7% constant currency driven primarily from ATM-related software revenue and still grew 3%, excluding our JetPay acquisition. Services revenue increased 6% constant currency driven by increases in hardware sales and managed service offerings. Our installation services and hardware maintenance backlogs both grew in the quarter. And finally, hardware revenue was the standout this quarter, increasing 42% constant currency and growing across all of our segments. ATM revenue grew by 60% constant currency while the combination of self-checkout and point of sale grew by 22% constant currency.

On Slide #12, you can see free cash flow, net debt and adjusted EBITDA for the quarter. Free cash flow was $57 million in the quarter, up from a free cash use of $22 million in the prior year due to increased earnings. We exceeded our internal plan this quarter and remain on track to hit our free cash flow target for the full year. As you know, the majority of our annual free cash flow is typically generated in the fourth quarter.

Slide 12 also shows our net debt to adjusted EBITDA metric, with leverage ratio of 3.1x for the third quarter of 2019, up from 2.8x at the end of the second quarter. The higher leverage was driven by $302 million repurchase of Series A convertible preferred stock previously owned by Blackstone, a $96 million repurchase of common stock from our share repurchase program, and $74 million net from the closing of our acquisition of D3 Technology in the quarter.

Moving on now, the third quarter was very active for us on the capital structure side, and we summarized our activities for you here on Slide #13. First, in order to address an approaching debt maturity stack in 2021 and to take advantage of a very favorable credit market environment, we amended and extended our senior secured credit facility. We maintained our revolver size at $1.1 billion and extended the maturity to 5 years and also issued a new $750 million delayed draw term loan B with a 7-year maturity.

We also issued 2 new unsecured senior notes with maturities of 8 and 10 years for a total of $1 billion. We used a portion of the proceeds to call the $500 million 4 5/8% senior notes and expect to use the remaining proceeds to call the $400 million 5 7/8% senior notes by the end of this year.

Overall, these transactions improved our liquidity, extended our weighted average debt maturities, and eliminated near-term refinancing risk, improved our financial covenants and enabled us to lock in competitive rates on our debt capital. As the average interest rate on the new debt is higher than the old debt, the refinancing represent an EPS headwind to both 2019 and 2020.

In the third quarter, we also retired all of the outstanding Series A convertible preferred stock held by Blackstone, which represented approximately 57% of NCR's preferred stock. We redeemed roughly half of the preferred stock for $302 million in cash and converted the remaining into 9.16 million shares of common stock. This transaction is expected to be net accretive to earnings per share in 2019 and 2020 driven by a 7.9 million share reduction in our diluted share count partially offset by interest on the cash consideration.

And finally, as mentioned previously, we repurchased $96 million of common stock in the quarter as part of our existing share repurchase programs to offset the dilutive effects of our stock-based awards and in-kind dividend at an average price of $31.55. Despite the repurchases in the quarter, share repurchase remains a slight EPS headwind for 2019 due primarily to the timing of the repurchase. Overall, the debt refinancing, convertible preferred repurchase and common stock repurchase combined are expected to be dilutive to 2019 EPS by approximately $0.03 and neutral to EPS in 2020.

On Slide #14, you will find our full year guidance for 2019. We are raising our revenue growth guidance to a range of 5% to 6%, up from the previous range of 3% to 4%. The increase in guidance is primarily attributable to our solid revenue performance in all segments through Q3, largely driven by higher hardware sales. Recall the margin on these sales is lower than the company average, which will limit the flow-through to EPS.

Also included in this revenue guidance are FX headwinds of approximately 2%, stronger than our estimate at the beginning of the year driven by ongoing strength in the dollar versus other major currencies this year. From an FX margin standpoint, we are also closely monitoring the currency environment in several emerging market countries where we have significant operations.

As I mentioned previously, as our business model changes and we bring new products to market that are subscription-based while also shifting existing products away from perpetual licenses to more term or subscription-based offerings, this is beginning to have a dampening effect on our overall revenue and margin and has grown sequentially this year. While this shift was immaterial to revenue in the third quarter, the impact to operating margin is growing due to higher-margin software sales that are now being recognized over time. As we enter next year and roll out our new offerings, we'll update you as to our progress as well as the impact of this shift on our financials along with the metrics we are using to track.

We are reaffirming our full year earnings and cash flow guidance. We are also seeing the benefits of cost actions taken the last several quarters, including the $100 million cost savings action which is now essentially completed as well as improvements in services productivity and in our hardware manufacturing. We are on track to reduce the loss in our hardware manufacturing business by more than half compared to 2018 and have reduced the ratio of operating expenses to revenue the first 9 months of 2019 versus the same period last year despite higher employee-related costs and real estate expenses. And as Mike outlined, we continue to invest in new offerings and in efforts that improve customer satisfaction.

Our 2019 adjusted EBITDA guidance remains unchanged at $1.04 billion to $1.08 billion. Our non-GAAP EPS is expected to be $2.75 to $2.85 for the year.

We have assumed a tax rate of 23% to 24% and a share count of 150 million shares. We enjoyed a lower tax rate in the first 3 quarters of this year due to several discrete tax items that are not expected to repeat in the last quarter of the year.

Again, we expect free cash flow for the year to be in the $300 million to $350 million range. We expect the linearity of our cash flows to follow a similar pattern to previous years, with most of the free cash flow generated in the fourth quarter. And as I mentioned before, the fourth quarter will be a tougher revenue comp for us due to the revenue strength we recorded in the fourth quarter of last year.

With that, I'll turn it back to Mike for closing comments.

--------------------------------------------------------------------------------

Michael Dale Hayford, NCR Corporation - President, CEO & Director [5]

--------------------------------------------------------------------------------

Thanks, Andre. In closing, we delivered solid third quarter results that included a number of financial, strategic and operational highlights. First, we continue to execute at a high level and have increased our outlook for the year, given the strong top line growth we generated in quarter 3. At the same time, our targeted investments in our strategic growth platforms remain on target, and early response from our customers has been very positive. The progress we have made with our strategic growth platforms and our broader integrated payments offerings are clear indications of our commitment to driving increasing recurring revenues. We are in the early innings of a multiyear journey to shift revenues to recurring model and continue to be pleased with the progress we are making. In addition, execution of our growth plan will be supported by increased strategic flexibility provided by improved capital structure.

We entered the fourth quarter with momentum across all of our business and a clear commitment to further executing on our strategy and driving accelerated growth. We will continue to allocate capital to the highest growth and return opportunities, with the goal of driving free cash flow generation and increasing returns for our shareholders.

Thank you for your time today. And with that, Andre, Owen and I will take your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions)

And we'll go first to Dan Perlin with RBC Capital Markets.

--------------------------------------------------------------------------------

Daniel Rock Perlin, RBC Capital Markets, Research Division - Information Technology Analyst [2]

--------------------------------------------------------------------------------

Nice progress. I wanted to start, if I could, on the shift towards subscription. Mike, you outlined a lot of meaningful transitions in these products that you're bringing to market. The one I really want to hone in a little bit more on is in the banking side. So the first part of the question is you talked about signing 29, I think, new deals that would otherwise have been upfront license. I'm trying to make sure I understand what that piece of software is. Is this more branch-related? Or is there something else that's happening? It’s clearly not digital insight, so I'm just trying to wonder where is that coming from.

--------------------------------------------------------------------------------

Michael Dale Hayford, NCR Corporation - President, CEO & Director [3]

--------------------------------------------------------------------------------

All right. I mean so obviously digital insight is already a SaaS-based product. But the other products that we were selling in banking that might have been some of the transaction switching products, might have been some of the branch products, it might have been some of the add-on ATM product, fraud products. What we did at the start of the year, as we said, we would prefer not to do perpetual licenses anymore, and we would like to move to hopefully subscription, if not subscription move to a term-based license that recurs over a period. And the team has actually done a very nice job of getting out and marketing to that. And so that's what we just -- we were reflecting in the third quarter that we've had very strong success. That particular team has really marched through all their product set. And as they go to sell that, that's the way that they're selling. And third quarter, I think that was what we did on every transaction we did. So we just want to call out that we're moving probably a little bit faster than we had anticipated at the beginning of the year. But as I said in my close, this is a multiyear journey to get it shifted to all of our products. But in that particular segment, we did a good job.

--------------------------------------------------------------------------------

Daniel Rock Perlin, RBC Capital Markets, Research Division - Information Technology Analyst [4]

--------------------------------------------------------------------------------

Okay. In -- and just in order of magnitude, I was always kind of under the impression that Aloha in particular, just hospitality in general, was going to be a big area that we needed to focus on in terms of the shift. But again you kind of outlined this very broad brush of products. So one, I guess, are we be right to assume that we need to maybe stay more focused on Aloha in that transition? Or are there other things that you'd point us to? I suspect you're not going to give us any insight yet in terms of 2020, kind of just as a first look there. If you wanted to, that'd be great. But if not, just point us in the right direction there.

--------------------------------------------------------------------------------

Michael Dale Hayford, NCR Corporation - President, CEO & Director [5]

--------------------------------------------------------------------------------

Yes. You're correct about that, Dan. We probably won't talk about 2020 today. But with respect to 2019 and where we're going to see, what we're starting to see in terms of transition to recurring, we will move and we are moving. We referenced to the bulk of the Aloha deals that are being sold as Aloha Essentials, which is a bundling of our software, our hardware, our service footprint, the support footprint as well as payments attached to that. And so we've actually had a lot of success in the markets where we control the direct channel. I think we said 65% of those sales are Aloha Essentials. And naturally, we actually hope those numbers continue to tick up. The only caveat I'll say to that, so each one we do, we've already -- historically, there was a component of Aloha that was sold as a cloud. The service side was really done as a subscription. So there's a piece of it that is now shifting from an upfront fee to a subscription-based fee. So that is actually having -- had an effect of stretching out revenues as opposed to taken upfront.

The banking side, those were coming in as upfront license. And although those numbers at a macro level in terms of revenue numbers aren't huge, those numbers typically would drop all to the bottom line. So they do have adapting impact on earnings as we go through '19. And again, we talked at the beginning of the year that we plan to have some level of transition. We're seeing the transition. It's going a little better than we had anticipated. But it's still just a bunch of small transactions that eventually will add up to big numbers, but that will take literally years to get there.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

And we'll go next to Matt Summerville with D.A. Davidson.

--------------------------------------------------------------------------------

Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [7]

--------------------------------------------------------------------------------

A couple of questions. With respect to the hospitality business, can you talk about in Q3 and maybe on a year-to-date basis, the dampening impact that you're seeing as it relates to the investments you're making in Silver, the investments you're making in the Aloha product, and when we start to see that taper off and therefore margins and profitability inflect to the upside?

--------------------------------------------------------------------------------

Michael Dale Hayford, NCR Corporation - President, CEO & Director [8]

--------------------------------------------------------------------------------

Specifically to the third quarter, the third quarter, obviously we were down a little bit year-over-year. There were a number of things that hit. Some are coming off the balance sheet in terms of actually some receivables and some other spend that we had done that came off the balance sheet. And then others were direct expenses in the quarter to really improve service, service delivery. And then again as you referenced that driving some of the Silver wasn't related to marketing spend. So had we not had some of those items, we actually would have minted a pretty decent quarter for hospitality.

Fourth quarter, I'd say we still continue. And just to put it into perspective, we are still very bullish on hospitality. So we're actually -- what I would say, is invest mode. Invest mode on products. So we're building out all our next gen. We're already half cloud. We're just finishing up some of the other products, putting them as a cloud-based subscription substitution product. We talked about rolling out Aloha Essentials that's just going to market, bundling all the products along with payment. And that's been very successful. But we're also spending money to improve our service or quality of the product because we're out there competing with a lot of small competitors who quite frankly don't have to make earnings. And we want to make sure that we can pick up market share and compete in that market.

So I think fourth quarter, I wouldn't see the inflection point bouncing back up as we head into next year. We talked about our outlook into 2020. At the beginning of the year, we'll kind of share where we think hospitality is going into next year.

--------------------------------------------------------------------------------

Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [9]

--------------------------------------------------------------------------------

And then as a follow-up, just with respect to Digital Insight. In the past couple of quarters, you maybe talked on the call about what you've done there in terms of new wins. Any attrition, maybe some commentary there, and if there's any initial successes that you could talk about with respect to D3, realizing it was only acquired a couple of months ago, nonetheless looking at that as well.

--------------------------------------------------------------------------------

Michael Dale Hayford, NCR Corporation - President, CEO & Director [10]

--------------------------------------------------------------------------------

Yes. I mean, I'll start with D3. We talked about the one really right after we closed that deal. We signed a provider, it goes as a whole solution set of banking products in the marketplace, NYMBUS. And they signed up to use D3 as their digital banking platform. So we completed that transaction. On DI, to help you bore down with some numbers on deals, I will say that in '19 -- and again a lot of us got here kind of mid-'18. In '18 and into '19, we've been very focused on retention, and we feel really good about '19. I don't know. We were scratching our heads the other day. We couldn't come up with a single name of a law for our DI customer base in '19. And hopefully, we'll get through the year. So I think we talked the first quarter about picking up about 7 new deals, right? And we didn't give you all the business banking add-on, these type of new flags that we were planting to customers. We had a good second quarter and third quarter. I don't know, Owen, if we have the numbers. But we continue to see momentum rebuilding. We had our digital banking client conference in Atlanta in the third quarter and had a record crowd attend. And just a great reception for not only the product, but all the enhancements we've done, specifically focused around adding business banking DI. We've opened up the API, so people could extend and customize on their end. And we've improved the delivery on the mobile side and have what we think is the best mobile platform out there. So we're still very excited about DI.

--------------------------------------------------------------------------------

Owen J. Sullivan, NCR Corporation - COO [11]

--------------------------------------------------------------------------------

Yes, the only thing I'd add to that is in terms of our renewal rate, we had no losses this year and that was down substantially from the number that we had last year. And on average, our renewal rate was about 11% increase on revenue under these renewals. So we're seeing good organic growth within the customer base as they add users, and we're able to capitalize on that. So really good momentum. Our customer satisfaction level, as Mike referenced, our conference, but we do Net Promoters Score and it was materially improved year-over-year. So team's doing a nice job.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

And we'll go next to Katy Huberty with Morgan Stanley.

--------------------------------------------------------------------------------

Kathryn Lynn Huberty, Morgan Stanley, Research Division - MD and Research Analyst [13]

--------------------------------------------------------------------------------

Congrats on the strong quarter. A couple of questions on guidance. The new full year revenue range implies, I think, 4% decline in December. What drives the slowdown, which is a little bit worse than prior guidance would have implied? And then you're raising the full year revenue, but not adjusted EBITDA. Why aren't you seeing the margin flow through, which seem to come through some in the third quarter?

--------------------------------------------------------------------------------

Michael Dale Hayford, NCR Corporation - President, CEO & Director [14]

--------------------------------------------------------------------------------

Yes, let me just start and then Andre can give you a little more detail. So we're -- as we look at the revenue beat, second quarter, we had a revenue beat. Third quarter, as we look at the full year, we brought up our revenue outlook. Just keep in mind, we had a little bit easier comps in the second and third quarter. Fourth quarter of last year was a very difficult comp because we had a lot of backlog particularly on the hybrid side of the ATM on the SCO side. If you remember last year, third quarter, we had a lot of challenges in the manufacturing plant. So this year, third quarter was very strong, as you can see. And so as we look at going into fourth quarter year-over-year, last year, we had the shift of third quarter orders that ended up being shipped and booked in fourth quarter. So we don't have that phenomenon this year. I mean, we still feel really good about where we're going to end up the year. But as you look at the math, maybe it's -- our outlook came back, like you said.

On the earnings, so with revenue going up, a lot of the revenues going up from the hardware, which, as we've talked about in the past, the hardware has been running at a negative margin. So we don't pick up a lot of margin there. But just maybe a little color around earnings for the year. We really -- if you think about 3 different buckets, and I'll go through the 3.

So if we put together all the kind of transactional things, the refi had a negative effect. We did the Blackstone preferred where we took that out. We had a negative FX. And then I'm talking about on a full year basis, as you look at the full year outlook, keeping our EPS guidance the same and raising the rev. And then some of the M&A we did is dilutive in the current year. So that is one bucket.

Second bucket is the shift to recurring I referenced earlier. Our movement is a little bit faster than we had anticipated at the beginning of the year. So the full year impact of the shift to recurring has a dampening impact on earnings. An example would be if we book $1 million perpetual license, it all drops to earnings. When we stretch that over a 5- year agreement on a monthly subscription, very little drops to earnings in 2019.

And then the third bucket is just the investment in business units, and specifically hospitality where we've talked about continuing to put some more money to work on improving quality, improving implementation, driving some more sales and marketing costs to compete in that business.

So those 3 buckets roughly total up about $0.25 to $0.30 for 2019 is kind of the range that we're looking at. And they're about equal, not exactly equal, but if you think about it, 1/3, 1/3, 1/3. So that's the magnitude of why if you look at the revenue beat, why the earnings aren't being pulled through.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

And we'll go next to Tim Willi with Wells Fargo.

--------------------------------------------------------------------------------

Timothy Wayne Willi, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [16]

--------------------------------------------------------------------------------

I have 2 questions. One, you referenced strength in Europe. And I'm sure you're aware of the competitor that seem to point to some weakness in that market. I guess I'm just sort of curious if you have any color on context as to why, I guess, you experienced different outputs during the third quarter around that region. And I had a quick follow-up.

--------------------------------------------------------------------------------

Michael Dale Hayford, NCR Corporation - President, CEO & Director [17]

--------------------------------------------------------------------------------

Yes. I don't want to try to anticipate or predict what one of our competitors said. But looking at some of the points they raised, we just haven't seen some of those things. We looked at challenges in different marketplace, whether it's EMEA or Europe or Asia or Latin America. Certainly, North America has been strong. But I don't -- we clearly haven't seen a dampening impact either in the third quarter. As we look forward, we don't have any less optimism about the future than we'd have going into any other year. So I -- we felt really good about third quarter, as you can probably tell by the numbers that we minted. And just haven't seen some of those things impact us. We feel that our product, particularly the ATM side, the Series 80 product is winning the marketplace against our 2 major competitors. And that's probably what we're starting to see flow through the numbers in the third quarter. We also think our service delivery on our global services that we deliver along with ATMs and with SCO is starting to differentiate in the market. And we're picking up some market share there, and we're starting to see that impact positively. So I can't really tell you anything relative to our competitors other than we're continuing to have really good success.

--------------------------------------------------------------------------------

Timothy Wayne Willi, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [18]

--------------------------------------------------------------------------------

Second (inaudible) I know people pull or I think were (inaudible)

--------------------------------------------------------------------------------

Michael Gary Nelson, NCR Corporation - VP of IR [19]

--------------------------------------------------------------------------------

You're breaking up there, Tim.

--------------------------------------------------------------------------------

Timothy Wayne Willi, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [20]

--------------------------------------------------------------------------------

It didn’t come across -- no, I apologize. Can you hear me?

--------------------------------------------------------------------------------

Michael Dale Hayford, NCR Corporation - President, CEO & Director [21]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Timothy Wayne Willi, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [22]

--------------------------------------------------------------------------------

Could you just talk about the 6 (inaudible) and improving sort of (inaudible) at the HR at the personnel level? I know that's one of the things you started working on (inaudible) any thoughts around the success (inaudible) or that aspect around the enterprise?

--------------------------------------------------------------------------------

Michael Dale Hayford, NCR Corporation - President, CEO & Director [23]

--------------------------------------------------------------------------------

Did you guys -- I can't really...

--------------------------------------------------------------------------------

Michael Gary Nelson, NCR Corporation - VP of IR [24]

--------------------------------------------------------------------------------

Yes, Tim. We did not...

--------------------------------------------------------------------------------

Michael Dale Hayford, NCR Corporation - President, CEO & Director [25]

--------------------------------------------------------------------------------

Tim, give us a -- like a subject area that you're trying to get us to respond.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

And we'll go next to Ian Zaffino with Oppenheimer.

--------------------------------------------------------------------------------

Mark Zhang, Oppenheimer & Co. Inc., Research Division - Associate [27]

--------------------------------------------------------------------------------

This is Mark on for Ian. Just a quick one on the balance sheet. It seems like leverage has ticked up a bit this quarter. Are you guys comfortable here? Or is there a target you guys are looking to get to? And are there any changes in your thinking around capital allocation?

--------------------------------------------------------------------------------

Michael Dale Hayford, NCR Corporation - President, CEO & Director [28]

--------------------------------------------------------------------------------

Let me -- yes, it ticked up slight. And again, we executed the transaction to take the preferred that Blackstone had held. So we had an opportunity in talking to them. And from our perspective, we were not -- at least this management team is not all that fond of that preferred in our capital structure, so we saw an opportunity to take it out. And we've had a very attractive price. And as part of that, we had to take on a little debt to buy them out. But I don't -- we're not changing the range of debt that we plan to be in. We are a little ahead on our share repurchase because of that transaction. I'll let kind of Andre just give a sense of where we expect to be.

--------------------------------------------------------------------------------

Andre J. Fernandez, NCR Corporation - CFO & Executive VP [29]

--------------------------------------------------------------------------------

Yes. I think I touched on it in my prepared remarks. Our debt ticked up a little. We bought back shares, the $96 million. There was the D3 acquisition, which was 74 net, and then the 300 on the preferred. So -- but you can see on, I think, Slide 12, we're only at 3.1 net debt to EBITDA. And even within the construct that we've laid out at the beginning of the year and continue to follow that. And we generate, recall, most of our free cash flow in the fourth quarter. That should put us under 3x net debt to EBITDA by the end of the year.

--------------------------------------------------------------------------------

Michael Dale Hayford, NCR Corporation - President, CEO & Director [30]

--------------------------------------------------------------------------------

And what just -- so what we have said, and we still -- so we like to be around 3. We'll flex up to 3.5 if needed, which we did a little bit here to go above 3. We -- our capital allocation policy has been to take out dilution from stock issued as part of compensation plans or stock issued as part of the PIK on the preferred. We've done that. We did that with the buyback that we did about the $96 million. We're ahead of that a little bit because of the preferred buyback. So our share repurchase is a little bit higher than we had anticipated or would plan to do. We're going to look to do M&A. So you see us doing M&A at a level. And then we'll always look and see. If we don't have M&A, we don't have other opportunities, we would pay down debt if appropriate. But we haven't really changed how we're going to treat capital allocation.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

And we'll go next to Paul Coster with JPMorgan.

--------------------------------------------------------------------------------

Paul Chung, JP Morgan Chase & Co, Research Division - VP & IT Hardware Analyst [32]

--------------------------------------------------------------------------------

It's Paul Chung on for Coster. So just on ATMs, can you talk about the growth drivers in the quarter? Where do you see some particular strength in regions? Did you have any kind of large deals in the quarter? And can you share how regional bank demand is trending? And finally, how -- is there any kind of ASP lift you're getting relative to last year?

--------------------------------------------------------------------------------

Michael Dale Hayford, NCR Corporation - President, CEO & Director [33]

--------------------------------------------------------------------------------

I mean, I'll have -- I want to kind of walk through the regions. And again -- so we still believe that we're continuing to, I don't want to say, outsell. Our sales teams have been doing a phenomenal job this year. But we think our product, our Series 80 product, which really tried to roll out at scale in '18 is winning in the marketplace literally around the globe. So that helped drive a lot of our sales. Obviously, our manufacturing plant is up and running versus last year. It's been phenomenal. The team has done a great job. But Owen, you want to kind of cover regions?

--------------------------------------------------------------------------------

Owen J. Sullivan, NCR Corporation - COO [34]

--------------------------------------------------------------------------------

Yes. I would say across all of the regions, EMEA, North America and South America, all teams fired fairly well. We saw contributions from all of those markets within the segments. Here in the U.S., the large banks continue to refresh. A lot of them driven by Win 10, but not all of that activity is Win 10 based. We're clearly seeing the community bank market respond. And I think what we're seeing across the board is response to a Series 80 product line. It's -- the receptivity was tremendous last year. It has only continued to improve. So we're seeing all the geographies. Asia Pacific, as we've talked about in the past, has not been a growth market for us for a while since we stepped out of China. But all of our other markets contributed well. And within those markets, all of the segments continued to perform well for us. And to Mike's point, our sales team has done a great job capitalizing on opportunities, working with our own installed base and looking at opportunities and other installed bases to capitalize on. So...

--------------------------------------------------------------------------------

Paul Chung, JP Morgan Chase & Co, Research Division - VP & IT Hardware Analyst [35]

--------------------------------------------------------------------------------

Great. And then as we kind of think about and shape next year, you're hitting some tough comps in 4Q as we move forward. But how should we think about kind of the momentum heading into next year? I know that it's early, but if you could give any kind of color there, that would be great.

--------------------------------------------------------------------------------

Michael Dale Hayford, NCR Corporation - President, CEO & Director [36]

--------------------------------------------------------------------------------

Yes. And again, we don't want to really get into -- give you an outlook for 2020 yet. But as we looked at our business, we had a really good second quarter. We had an even better third quarter. ATM growth year-over-year was 60%. Now we had a little bit easier comp, but we still had outstanding ATM numbers in the third quarter. As we start to look forward, we talk -- people have talked about Win 10. We still look at our footprint, and we still see about 2/3 of our installed fleet as not being Win 10 ready, so we don't think everybody's addressed Win 10 yet. Those tend to come in. Sometimes specifically Win 10 order because it's a core upgrade. But many times, it's hard for us to differentiate when somebody orders a new box, whether they're replacing it to get ready for a Win 10 or whether it's just a normal upgrade cycle. So we have highlights to look forward a few quarters in its own reference. Really all the geographies, all our lines of business of community banks, the regional banks, larger banks continue to look positive for us.

--------------------------------------------------------------------------------

Operator [37]

--------------------------------------------------------------------------------

And we'll go next to Rob Wildhack with Autonomous Research.

--------------------------------------------------------------------------------

Robert Henry Wildhack, Autonomous Research LLP - Analyst of Payments and Financial Technology [38]

--------------------------------------------------------------------------------

I wanted to ask about the most recent acquisition, which was Midwest POS. That follows on from Texas P.O.S. earlier in the year. Can you remind us of the strategy around these smaller regional-type deals? And do you think there's a long list of potentially attractive targets here, such that you keep pursuing these types of acquisitions?

--------------------------------------------------------------------------------

Michael Dale Hayford, NCR Corporation - President, CEO & Director [39]

--------------------------------------------------------------------------------

Yes. So effectively, we're teaming up with distributors or partners that have been serving in a region. Our point of sale is paying itself for hospitality for the restaurant space. And we look at it from a couple of different aspects. One is quite frankly these deals generally are accretive very quickly. So certainly in year and sometimes quickly the same quarter. So financially, it's a good transaction for us. But more importantly, as we look at how we go-to-market with our hospitality product specifically with Aloha, whereas in the past, we are selling hardware and then a software stack, we're now going on and selling a bundle where we're selling hardware, software, services all together. We're selling it as a subscription, and we're selling it with payment. So the Aloha product that we're going out to market. And we talked about where we have local channels, where we actually own the local market, -- and we're going out marketing a bundle, we're seeing a 65% success rate selling Aloha Essentials versus the traditional way of selling point solutions. When we don't control that channel, the numbers are much lower. It's just more difficult to get the channel partners who are doing a good job of just getting them scaled and getting it and go out in market not only bundle, but subscription and also payments attached to that. So from business strategy, we'd like to do that.

And then lastly, defensively, we've seen competitors, particularly some of the ISOs go out and got left for a payment stream go up in the POS. So we feel it's a strategy that, a, we can make money at very quickly; two, strategically, it helps us grow that business; and three, helps us defend our position.

So I guess the quick answer is, yes, we would continue to look where there's opportunities. Sometimes we approach a distributor, sometimes they approach us. But we would continue to look and try to do more of those. I think we have a...

--------------------------------------------------------------------------------

Operator [40]

--------------------------------------------------------------------------------

At this time, I would like to hand the call back to Mike Hayford for any additional or closing remarks.

--------------------------------------------------------------------------------

Michael Dale Hayford, NCR Corporation - President, CEO & Director [41]

--------------------------------------------------------------------------------

Thanks. Thanks, everyone, for joining us today. Just to close, we're pretty excited and proud of the progress that we made in the first 3 quarters of this year. As I mentioned before, we're in the early innings of a multiyear strategy to do the shift to recurring revenues under a subscription model. We continue to remain confident that this strategy will pan out and create long-term shareholder value.

I want to thank everybody for joining us today. We look forward to speaking with you over to the fourth quarter call in early next year. And then hopefully, you can all join us in early May. We're planning in early May to hold an Investor Day. We're going to do that here in Atlanta at our headquarters. Thank you again.

--------------------------------------------------------------------------------

Operator [42]

--------------------------------------------------------------------------------

That does conclude today's conference. We thank you for your participation.