Earnings Call Transcript
NCR Atleos Corp (NATL)
Earnings Call Transcript - NATL Q2 2025
Operator, Operator
Good day, and welcome to the NCR Atleos Q2 2025 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Melanie Skijus. Please go ahead.
Melanie Skijus, Moderator
Good morning, and thank you for joining the Atleos Second Quarter 2025 Earnings Call. Joining me on the call today are Tim Oliver, Chief Executive Officer; Andy Wamser, Chief Financial Officer; and Stuart MacKinnon, Chief Operating Officer. During this call, we will reference our second quarter 2025 earnings presentation, which is available on the Investor Relations section of our website at investor.ncratleos.com. Today's presentation will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in today's earnings materials and our periodic filings with the SEC, including our annual report. In our review of results today, we will also refer to certain non-GAAP financial measures. These non-GAAP measures are reconciled to their GAAP counterparts in the presentation materials. A replay of our earnings call will be available later this afternoon and can be accessed through our website. I will now turn the call over to Tim.
Timothy C. Oliver, CEO
Thank you, Melanie, and welcome to the Atleos team. First week on the job with right into an earnings release. We appreciate you being here, and we look forward to great things. Thank you to everyone for joining our call this morning. I'll start by quickly reviewing the quarterly operational performance and strategic progress from a more forward-looking and qualitative perspective. I'll leave the quantitative review to Andy. I will then provide some context on the current business environment and its consideration in our outlook. I'll end by reiterating the compelling Atleos story and describing a capital allocation strategy that anticipates steady growth and free cash flow. I'll be back after Andy's review to take your questions. For those following along in the presentation posted to the Investor Relations website, I'll start on Slide 5. In the second quarter, our sixth full quarter as a separate publicly traded company, Atleos reported another solid quarter relative to financial metrics and delivered an exceptional quarter from a strategic and competitive perspective. We grew efficiently by delivering robust hardware revenue that extends our leading installed base and drove incremental revenue from the global service fleet by accelerating our outsourced services business. Our Service First initiative elevated service levels to new all-time highs and is being recognized by our partners and rewarded by our customers. And we embrace simplicity, reducing inefficiencies across the company, optimizing our production and supply chain operations, redesigning the organization to speed decision-making and investing in systems and people to make us easier to do business with. The exceptional effort across the company translated to strong financial results. Revenue was $1.1 billion. Core top line growth was on pace with our plan led typically but not unexpectedly by traditional hardware revenue and the conversion of services growth backlog. This growth was partially offset by lower cardless payroll transactions in the U.S. and by lower T&T segment revenue. Profitability ramped nicely and was at the high end of our expectations due to an advantageous hardware revenue mix, accretive outsourced ATM service revenue growth, fixed cost leverage and direct cost productivity, particularly in our service organization. These were all partially offset by higher cash rental costs and higher tariffs. Considering NCR Atleos solid first half results, we continue to believe our full year 2025 guidance is appropriate. Backlog that supports both multiyear high traditional ATM deliveries and strong ATM outsourced service growth coupled with cost productivity momentum should together be sufficient to offset lower cardless transactions in the Network business and persistently high interest rates that impact our cash rental costs. Shifting to Chart 6, which describes the self-service banking segment. This is primarily a services business comprised of a global installed base of over 500,000 ATMs sold to financial institutions that then run on our subscription software and rely on the Atleos servicing agreement for the duration of their deployment. Traditionally, ATM services have been centered on maintenance and repairs, but increasingly, banks are opting to outsource more or even all of their other services that are necessarily run in ATM. We now have over 120,000 machines that we support beyond traditional break fix, including over 33,000 that are now fully outsourced to Atleos. Segment financial performance was strong. Revenue grew an impressive 9% in the second quarter, benefiting from increased demand for our recycled product, coupled with acceleration in outsourced services. Services and software grew combined 5%. ATM-as-a-Service was a primary source of services growth and continued to gain momentum with meaningful additions to total contract value to customer count and backlog. This segment generated significant profit growth with margins up across each hardware, software and services. The higher margin hardware mix and services growth augmented by productivity initiatives contributed to the margin expansion. We also continue to make good progress on our 3 objectives for 2025, which I'll remind you are: grow efficiently, prioritize service and embrace simplicity. From a growth perspective, product innovation efforts are allowing our products to compete exceptionally well. Demand across the product portfolio and especially at the recycled product has exceeded expectations. Accelerating demand in the simultaneous relocation of the preponderance of our manufacturing and assembly to a singular plant has challenged our logistics organization, but their diligent efforts allowed us to make every delivery commitment in the second quarter, and they stand ready for a further ramp in the second half of 2025. While we consider ourselves a services company, growth in our hardware installed base catalyzes future period success. After 8 years running the ship share leader in our collective ATM markets, in 2024, we moved into the first position for installed base and expect to extend that lead in 2025. We will increase the number of machines that we put into service in 2025 by almost 20% over what was a solid year in 2024. Demand for our ATM outsourcing services was also strong and accelerating. We streamlined the sales process and improved conversion rates, resulting in our best quarter ever for ATM-as-a-Service bookings. $177 million of new total contract value, including several orders for enterprise-level customers, and in new geographies, including ING Spain, the State Bank of India and Bank National Canada. Our Service First initiative is working. Already industry-leading service levels continue to trend upward in the second quarter, setting another new high and further enhancing customer satisfaction. Over the first half of the year, customer health scores have increased by 160 basis points. The happier customers are buying more. Our efforts to simplify how we operate are generating positive business outcomes. Following the successful test run of our AI-driven dispatch and service optimization model in Canada, we launched this product for all of North America in the second quarter. These AI tools are delivering improvement across our service performance metrics and are already allowing over 65% of our total dispatches in those regions to be scheduled without intervention. Now turning to Chart 7, summarizing the Network segment. The Network segment is a utility banking business that consists of approximately 80,000 owned and operated ATMs in 13 countries placed in blue-chip retail locations where consumers can meet their regular banking needs. The Network business continues to grow the number of Network cardholders, the number of client financial institutions, the types of transactions resident on the devices and geographies. While second quarter trends for both transaction types and regions increased both year-over-year and sequentially, lower dynamic currency conversion due to less international traveling and lower U.S. prepaid card transactions in cities with large migrant populations resulted in an overall modest decline in segment revenue. We do anticipate both of these to be transitory and temporal rather than trends. Adjusted EBITDA margin rate was on budget but decreased year-over-year due to the known expiration of interest rate hedges on our vault cash rental costs that were put in place at the time of the Cardtronics acquisition. Growth opportunities and investments in this segment typically expand the footprint of the network or the transaction capability of the machines in the network. In Q2, we welcomed the return of 7-Eleven locations to our Allpoint network and activated the first 1,000 locations for FCTI for processing. We will also deploy 5,000 Atleos devices backed by our service and support into the 7-Eleven U.S. fleet with the rollout beginning in the fourth quarter. More recently, we announced that we will add convenience retailer Casey's and their 2,900 locations for surcharge-free transactions for our 75 million cardholders at Allpoint, and we added 6,500 ATMs in the Access Cash brand in Canada. Our new transaction types performed well. ReadyCode further expanded its presence in digital payments through an agreement with InComm Payments, providing additional cardless use cases for the ATM. And cash deposit transactions grew 170% for the first half of the year in our U.S. retail portfolio. We continue to build a pipeline of partnerships and integrations to increase transaction opportunities and volumes with a focus on fintech issuers and wallet providers. Flipping to Chart 8, I will use this as a backdrop to restate our strategy and illustrate our unique position. In separating from legacy NCR through a spin transaction in late 2023, Atleos is now a pure-play independent company with a leadership position in Self-Service Banking and a clear growth strategy. In a global environment that continues to demonstrate steady cash-based consumer transactions and a stable installed base of ATM hardware, our growth will come from generating more revenue for every Atleos device that we support. Whether that's been providing high quality and more efficient and more comprehensive services to our financial institution clients, or by driving more transaction volume across our own network machines. Both of these strategies are fueled by our customers' desire to improve financial access for their customers while also outsourcing more of their cash ecosystem. And NCR Atleos is uniquely positioned to benefit from either solution, a shared financial utility estate or an outsourced bank-specific fleet. Both vectors leverage a common Atleos infrastructure that has unmatched scale and is world-class. And finally, on Chart 9, I summarize our investment thesis. Our separation is done, our TSAs are completed, and we have no new commercial agreements with our former sister company. Nearly 2 years since our launch roadshow, the key tenets of our value creation strategy remain unchanged. Our strategy and the investment to support that strategy is supremely focused on the ATM and on physical to digital transaction types. Over the past 6 quarters, we have launched our innovation efforts and reclaimed our leadership position, we've expanded our installed base. We've grown our capabilities. We've returned to best-in-class service levels and engaged our global employee base and the Service First culture. We've also improved our balance sheet and are about to cross a critical milestone of being under 3x net leverage. With free cash flow projected to ramp considerably over the next several years, and net leverage expected to drop below 3x in the third quarter of this year, we believe a more balanced approach to capital allocation that favors the highest incremental ROI is now appropriate. To that end, the NCR Atleos Board of Directors has authorized a $200 million share repurchase program with a 2-year duration. On nearly every measure and every multiple, I believe our company remains undervalued relative to our industry and relative to our peers. And as the return of the shares repurchased at these levels is very compelling. We plan to execute the repurchase program using a 10b5-1 plan while also driving further reductions in net leverage and pursuing small bolt-on acquisitions that are accretive and reduce net leverage. Before I hand off to Andy, I want to thank our 20,000 employees all over the world for their dedication to our company, dedication to each other, and to our customers. Their Service First bias is driving our success and their unrelenting effort allowed us to deliver yet another strong quarter for the company. We will continue to be innovative to drive impactful outcomes and to lead our industry from the front. The separation transaction is now behind us. Our balance sheet continues to improve, and our outlook is very bright. With that, Andy, over to you.
R. Andrew Wamser, CFO
Thank you, Tim. Building on Tim's comments, the company continued to perform well in the second quarter, making good progress on our plans for the year, advancing our long-term growth strategy and delivering solid financial results. The strong momentum we've built through the first half of the year, coupled with our robust hardware order book and sales pipeline, sets us up well to meet our operating and financial objectives for the year. Importantly, over the past 6 quarters, the company has demonstrated the ability to generate profitable growth and significant free cash flow, which has enabled us to reduce financial net leverage from 3.7x at the time of the split from legacy NCR to approximately 3.1x at the end of the second quarter. Our confidence in the company's ability to continue growing profit and free cash flow in conjunction with good visibility into reaching net leverage of approximately 2.8x as we close out the year supports shifting to a more balanced approach for capital allocation. Given the company's current valuation and significant incremental earnings power, repurchasing our shares offers one of the most compelling value-enhancing uses of our capital. So we are pleased to announce that the Board has authorized a $200 million share repurchase program that represents approximately 10% of our current market capitalization. The repurchase authorization has a 2-year term. Moving forward, our goal is to continue to invest in the business and balance share repurchases with further debt reduction at a pace that optimizes sustainable shareholder value creation. Starting on Slide 11, I will focus my comments on core results for the second quarter. Because of the wind down of Voyix-related business impact comparability with the prior year period, note that Voyix-related comps will continue to be less meaningful during the second half of the year. The key message you should take away from this slide is that we delivered solid second quarter financial results with mid-single-digit core top line and EBITDA growth, margin expansion and high single-digit EPS growth, all within or above the upper end of our outlook. Core revenue of just under $1.1 billion grew 4% year-over-year with 3% growth in our services and software businesses, including acceleration in ATM-as-a-Service growth. Hardware was up 18% year-over-year, in line with our expectations, which drove 3% growth for the first half of the year. We demonstrated continued progress in our services-focused growth strategy with recurring revenue streams accounting for over 70% of total revenue in the quarter. We achieved strong results with high recurring revenue alongside one of our best quarters for hardware sales in recent years. Strong growth in our higher margin recurring businesses, coupled with good early progress on productivity initiatives drove 4% growth in adjusted EBITDA to $205 million. The primary source of EBITDA growth was the Self-Service Banking segment, partially offset by a decrease in Network EBITDA which was expected and a slight increase to corporate costs. Adjusted EBITDA margin of almost 19% expanded approximately 40 basis points from the prior year, with strong margin expansion for Self-Service Banking, more than offsetting margin compression from the Network segment. Below the line, net interest expense decreased $9 million compared to the prior year benefiting from a lower debt balance, lower variable rates and lower credit spreads achieved in our credit facility refinancing late last year. The other income and expense line improved by $3 million year-over-year. The non-GAAP effective tax rate was approximately 26% for the second quarter compared to 17% in the prior year. Non-GAAP fully diluted earnings per share increased an impressive 9% year-over-year to $0.93. We generated modest free cash flow in the second quarter due to ongoing investment in working capital to support another step-up in hardware deliveries for the third quarter. Turning to Slide 12. The Self-Service Banking segment delivered exceptional financial results in the second quarter. Starting in the upper left, revenue grew 9% year-over-year and reached a new quarterly high of $733 million. The primary factor that drove the top line strength was 21% growth in hardware deliveries, which reflects higher demand related to the industry refresh cycle, uptake of our recently upgraded recycler products and the anticipated shift towards the second quarter for our first half order book. Hardware demand remains robust and should drive another step-up in revenue for the second half of the year. Our services and software businesses continued to generate healthy growth of 5% on a combined basis with banks increasingly outsourcing more services to us. We estimate that the impact of deferred hardware revenue related to new ATM-as-a-Service agreements was approximately a 130 basis point headwind on second quarter revenue growth. Moving to the chart on the top right, SSB grew adjusted EBITDA an impressive 20% in the second quarter to $189 million, also a new quarterly high. The key takeaway here is our ability to drive significant incremental profit through efficient, profitable growth and continuous productivity improvement. Segment adjusted EBITDA margin expanded 240 basis points year-over-year to almost 26% with margins up across each line of business. Tariffs had a gross impact of approximately $5 million in the quarter. Moving to the bottom of the slide, KPIs reflect the healthy fundamentals of the business. On the bottom left of slide, the mix of recurring revenue was 57%, with recurring revenue comprising the majority of the business, even in one of the strongest hardware quarters in recent years. Normalizing for hardware volumes, we estimate the mix of recurring revenue would have been 60% in Q2. ARR was up year-over-year, reflecting the continued build in recurring services and software revenue from our existing installed base. Next to Slide 13 and our ATM-as-a-Service outsourcing business. As a reminder, our bank outsourcing solutions business resides within our Self-Service Banking segment. Advancing our customers through the continuum of ATM outsourced services towards full outsourcing is a key strategic priority for the company. We break out primary operational metrics separately to help investors better understand and track our progress. As previously mentioned, we will continue to evolve how we discuss the outsourcing business in the coming quarters for better comparability with industry reporting practices. Starting at the top left of the slide, revenue grew 32% year-over-year to $62 million for the second quarter, led by 25% growth in unique customers and a favorable mix shift to high margin regions, which is our highest margin geography. We also expanded to a new geography in Q2, closing our first deal in Spain. The chart on the right highlights the strong profitability of our ATM outsource services business. With gross profit up 72% year-over-year and gross margin up 900 basis points to 40%, benefiting from faster growth and margin expansion in our most profitable region. Moving to the bottom of the slide, KPIs also demonstrate the positive trajectory of the business. On the left, ARR continues to build and was up 32% year-over-year to $249 million. We finished the quarter with a strong backlog and sales pipeline that puts us on track with our growth targets for the year. On the right, you can see the healthy revenue uplift we generate from our ATM-as-a-Service business with second quarter ARPU of $8,300. The modest sequential downtick in ARPU for the second quarter was influenced by a higher mix of asset-light customers onboarded in recent quarters. Such fluctuations are expected because the base is still relatively small for variables like region, scope and timing of onboarding can impact ARPU for the quarter. Over the longer term, it should continue to trend upward from growth in higher ARPU regions like North America and Europe. Moving to the Network segment on Slide 14. Second quarter results were at the lower end of our expectations. Segment revenue of $320 million was down 2% year-over-year on a reported basis. Digging into business results, cash withdrawal transactions were approximately 4% lower than the prior year, with mid-single-digit decreases in the U.K. and North America. As Tim noted, North America was impacted by several factors beyond our control, disruption in one of ReadyCode's key digital payment partners, coupled with shifts in government policy have affected certain consumer segments. As Tim mentioned, we've seen a decrease in dynamic currency conversion transactions as fewer people are traveling to the United States and also lower utilization of prepaid payment cards given certain government policies. Excluding those items, we estimate North America withdrawals would have grown low to mid-single digits. On a positive note, our ReadyCode solution continues to garner interest from a variety of wallet, fintech and money services providers. Several new participants are in the process of coming live. We expect ReadyCode to return to growth in the coming months as these new partners such as InComm aggregate programs and funnel existing transactions to self-service. Additionally, we've completed certifications for our ATMs in South Africa, and we're seeing strong growth of 13% year-over-year in the region driven by a mixture of product and operational enhancements. We generated strong top line trends for sources other than withdrawals, helping to diversify the business and support future growth. We continue to see strong momentum across our utility deposit network as deposit volumes were up 170% year-over-year with volumes exceeding $1 billion of annualized deposits for the first time. Moving to the upper right, adjusted EBITDA of $86 million was at the low end of our expectations. The year-over-year decrease in EBITDA was expected and was primarily due to a $12 million increase in vault cash costs resulting from the wind down of previous hedges and macro-related transactional headwinds. Adjusted EBITDA margin was 27% in the quarter. The metrics at the bottom of the slide highlight key elements of our strategy. The chart on the left shows our last 12 months average revenue per unit continues to move higher sequentially and was up 3% year-over-year in the second quarter. On the right, you can see our ATM portfolio finished the quarter at approximately 77,000 units, which is flat sequentially. Looking forward, we expect the number of ATM Network units to increase in 2025 through the addition of both retail partners and geographies. Slide 15 presents a trending product-centric view of our results. This helps visualize how the complementary nature of our businesses creates a company that operates in attractive, growing and highly profitable markets. Most notably, it reinforces that Atleos is primarily a services business that generates recurring streams of revenue and profit. Second, the trend demonstrates that our strategy is working. Our services and software businesses have accelerated coupled with the solid momentum in hardware revenues fueling top line and profit growth. The consistent performance in our transactional business reaffirms the resilience of our business strategy. As a reminder, the other Voyix operations represent legacy NCR Voyix exited geographies and commercial agreements between Atleos and NCR Voyix. We expect business results to continue to decline in these non-core operations. On Slide 16, we present a reconciliation of our second quarter free cash flow and a snapshot of our financial position at quarter end. We generated $15 million of free cash flow for the second quarter, which includes investments in our inventory to support our robust hardware delivery that is scheduled for the third and fourth quarters and is consistent with our outlook for the year. We expect to generate significant free cash flow in each of the remaining quarters as adjusted EBITDA progressively builds in the second half of the year. Net leverage was 3.1x in the second quarter and was down approximately 0.5 turn compared to the prior year. We made $20 million of debt principal payments in the second quarter and finished with $2.9 billion of gross debt. Our unrestricted cash balance was just under $360 million at quarter end and resulted in a net debt balance of $2.5 billion. Based on our financial outlook and capital allocation priorities, we expect net leverage to be below 3x in the third quarter. Moving to Slide 17 for financial outlook. Given our solid second quarter results and positive momentum heading into the third quarter, we've reaffirmed the full year 2025 guidance ranges presented earlier this year. For the third quarter, we expect consolidated core revenue to grow in the mid-single-digit range. The Voyix related impact on the top line should diminish further in the third quarter and result in low to mid-single-digit growth for the total company. We expect Self-Service Banking revenue should grow mid- to high single digits benefiting from approximately 20% year-over-year growth in hardware and positive top line growth for services and software. We expect Network revenue will be flat year-over-year with growth in the core ATM Network business offset by lower Liberty crypto revenues. Adjusted EBITDA is projected to be between $210 million and $225 million, with margins in the mid-20s for Self-Service Banking, high 20s for Network and high teens for T&T. Below the line, interest expense should be similar to Q2. The effective tax rate is expected to be approximately 25% and share count of approximately 75 million. Putting the pieces together, we expect adjusted EPS to be in the range of $0.95 to $1.10. We expect free cash flow to meaningfully step up in the third quarter. As a reminder, the midpoint of our free cash flow guidance was $280 million, and we expect a 40%, 60% split between quarters 3 and 4. Concluding my comments, Atleos had a successful second quarter and first half of the year and sets us up well to achieve our plan for the year. We delivered solid financial results, had great operational execution and made progress on our key strategic priorities to grow efficiently, prioritize service and embrace simplicity. We have reaffirmed our guidance for 2025 despite continued tariff uncertainty and macro-related transactional headwinds and developed plans to mitigate risks. We move into the second half of 2025 with confidence in our approach and ability to drive profitable growth with our unmatched platform of ATM solutions for our customers, which will ultimately translate to shareholder value. With that, I will turn it back to the operator.
Operator, Operator
We will take our first question from Matt Summerville with D.A. Davidson.
Matt J. Summerville, Analyst
A couple of questions. Can you talk about with respect to the as-a-service business, what the average ARPU is in the as-a-service backlog and how that's trending? And speaking of backlog, can we put a finer point or some level of quantification on the as-a-service backlog? And then I have a follow-up.
Timothy C. Oliver, CEO
Yes. It's, thanks, Matt, north of $9,000. I think it's $9,100 of ARPU in the backlog, that moves much like, of course, it does in the installed base, right? It depends on the mix that's in there, but it's a very lucrative mix, a little bit of asset light in there, which means that you don't get the pop from the hardware sales that come upfront. But north of $9,000, it's $9,100. And I think we're north of 8,000 units at this point in backlog. So a really good quarter. As I said, it's our best quarter from a bookings perspective since we started this initiative some 2.5 years ago.
R. Andrew Wamser, CFO
Yes. And just to add, I mean, that backlog of 105% up year-over-year. That really does set us up well for the balance of this year and then gives us momentum into '26 as we continue to expand this product offering.
Matt J. Summerville, Analyst
And then in your prepared remarks, Tim, you made the point to talk about some of the achievements you've had in the services side of the organization. Can you put a finer point on that? And any sort of metric quantification. I remember you said 160 basis points, but I don't actually know what metric you're actually using there. And then relative to the stock price and the share buyback announcement, given where you're at, $32, $33, how would you expect Atleos' relative aggressiveness to look with repo?
Timothy C. Oliver, CEO
Yes, I'll address the first question. From a performance standpoint, we've steadily improved our service levels since the separation. You may recall that from October 2023 through January or February 2024, we encountered some challenges that frustrated our customers. We merged two service organizations staffed primarily by generalists who repaired equipment across both businesses, narrowing to specialized teams. However, we initially lacked the right personnel in place, leading to some machines going unrepaired. At that time, our primary issue was with a few outlier machines that lingered for days without repairs, which upset our customers. Currently, we're back on track. The service team's efforts were tremendous, and we are now fully separated in almost every area, providing minimal support to Voyix, while they no longer assist us. We've transitioned completely to specialists instead of generalists. We assess our Net Promoter Score annually, supplemented by mid-year pulse surveys targeting previous detractors to inquire if we're improving. The latest survey results were overwhelmingly positive. The feedback encompasses various aspects of our service, including previous issues with our complicated invoicing. We are enhancing all components of customer service, and improvements are evident across the board. Regarding stock buybacks, they're difficult to predict. I estimate we could operate in the low $30 range. We're ready to repurchase as much stock as possible. Keep in mind, there are specific conditions under which we can buy back stock, such as only during certain market fluctuations and daily volume limits. We plan to establish a 10b5-1 plan to facilitate this process, even though I'm not certain about its exact structure now. This plan will expedite purchases at lower stock prices and help us capitalize on market discrepancies. In recent months, our stock has traded unpredictably without any news, creating buying opportunities that we missed. We want to ensure we're maintaining a leverage ratio below 3x before starting any buybacks. We will collaborate with our legal team to implement the 10b5-1 plan promptly to begin share repurchases. We're grateful to the Board for authorizing this measure, and we intend to use it judiciously, targeting $200 million over the next two years. If our free cash flow develops as anticipated, we may not need the full two years. I hope this clarifies things.
Dominick Joseph Gabriele, Analyst
Really good results and really excited to hear the capital return for sure. I know you've been waiting to get the approval and investors have been waiting to jump in when they see something like this. And so it really seems to me, Tim, that you're moving really beyond the spin now, right? You're shedding your old skin, the business is starting to accelerate in many ways, and you're really starting to transform the business. And so there's a lot of investors, I think, that are going to revisit this name. So if you could just give us kind of your 2- to 3-year vision as you see it today given some of the developments in the quarter and over the last one or two quarters, I think that would be really excellent. I just have a follow-up, if you don't mind.
Timothy C. Oliver, CEO
Yes. Separation is complicated and challenging, more so than I expected. We have substantial work ahead to establish a solid foundation for our growth as a company and a leadership team, ensuring that our customers feel secure with the new NCR Atleos. We have reached that point. The reported results this quarter were impressive. While we've only been a public company for 90 days, the significant competitive progress we've made is what truly matters. We're successfully winning more business, and our customers are increasingly trusting us and providing more service revenue. I would prefer the strategic outcomes we've achieved over short-term financial results. The confidence you hear from Andy and me today reflects this success, which is evident to our customers. Our business model leverages an unmatched portfolio of capabilities in our industry. We are uniquely positioned to support economies that choose a fully shared financial utility, as seen in New Zealand, as well as those that prefer a multitude of banks, like the U.S., that maintain their own fleets. We can manage these fleets for our banking clients more efficiently than they might themselves. This traditional approach has proven extremely effective, particularly this quarter. We are the only ones able to operate successfully in both scenarios, which is a source of our confidence. We tell customers, 'We offer a hybrid solution. You decide your preferred setup, and we will optimize it for you.' Our vertical integration is becoming a significant advantage, as the new machines we introduce, whether for service or network expansion, are cost-efficient to operate. This allows us to enhance margins or create additional profit from new revenue streams, surpassing the average margin of the company. Furthermore, we anticipated that our business would generate reliable and substantial free cash flows, though these would only become clear after a few quarters post-separation due to cash costs related to that process and other factors. Currently, we are reinvesting in innovation and growth, reducing debt, and repurchasing shares. We have regained strategic and balance sheet flexibility. We will continue our efforts to lower debt, and while I can't predict whether we'll reach a debt level of 2.5x, we will have opportunities over the coming years to reinvest that cash flow to benefit all our stakeholders—customers, shareholders, bondholders, and employees. I hope that provides clarity.
Dominick Joseph Gabriele, Analyst
Absolutely. It feels like the leverage target actually jumped the quarter but was brought forward a little bit to get below 3x, too, if I remember right? And so that's really positive. And I guess the only thing I was curious about, I think there is a misconception when investors first look at this company. They think hardware, and that's just not the case. And so I think what some people worry about is some of the India impact when you see the tariffs from 25% to 50%. But just remind everybody how small the hardware really is and kind of what those impacts are from the change in tariffs.
Timothy C. Oliver, CEO
Hardware represents an $800 million segment for us, and we have consistently stated that we will not differentiate ourselves based on hardware. Our true differentiation lies in the services we provide. The installed base of devices we have is arguably the strongest asset of our company. Each additional device placed into service generates revenue for the next five to seven years, whether through transactions or monthly payments. We're currently enthusiastic about hardware not because it's driving immediate revenue growth, but because it seems like we're gaining market share and expanding our installed base, which is crucial for our future success. However, hardware revenue still constitutes only $800 million for us. We have made significant efforts to consolidate our manufacturing in India, which is a vital market for us, employing over 6,000 people. Just four or five years ago, we operated in multiple manufacturing locations, but now we have streamlined that process. We also have capacity in Europe and Mexico that we can leverage to manage tariffs effectively. I do not foresee a 50% tariff in India being a long-lasting issue. It won't impact our third quarter as most shipments are already in transit; however, fourth quarter could see a slight impact that we would have to navigate. If the 50% tariff persists, we will find alternative solutions, but I don't expect that will be the case. Tariffs will not create competitive advantages since most companies source their components globally. There are very few manufacturers in the U.S. involved in assembling wiring harnesses or circuit boards, and I don't expect that to change. If we break down our manufacturing too much, we risk losing scalability, and I doubt there is sufficient demand in the U.S. to justify opening a domestic assembly plant. Even if we did, the labor cost savings would only apply to about 30% of total manufacturing costs. We're constantly assessing our manufacturing strategy with a focus on costs, the supply chain, and logistics. We will adapt as necessary, but nothing is set in stone. I see India as a strong ally for the United States, and I believe a resolution will be reached between the two sides. If manufacturing remains advantageous at a 25% tariff rate, we will continue that approach. As of now, there are no changes for the third quarter, and we will have sufficient inventory on hand to cover the first month of the fourth quarter. This is not a concern for 2025, but it may become relevant for 2026 and 2027, and we will take steps to mitigate the impact of any tariffs.
Operator, Operator
We will take our next question from George Tong with Goldman Sachs.
Keen Fai Tong, Analyst
Your ATM-as-a-Service business saw 32% revenue growth in the quarter from an increase in unique customers and high ARPU geographies. Can you elaborate on how sustainable this growth is and how you expect the growth drivers to evolve over time?
R. Andrew Wamser, CFO
Yes, that's a great question. First, when considering sustainability, we should look at the year-over-year backlog, which has increased by 105%. As we engage more with customers regarding our product portfolio and service offerings, we see strong validation of our comprehensive ATM-as-a-Service solution. For instance, ATM-as-a-Service grew by 32% in Q2, and we anticipate further acceleration into Q3 and Q4, aiming for growth rates above 40% for the remainder of the year. This backlog suggests continued growth, potentially exceeding expectations for 2026. Each week, we are reviewing new deals and proposals from customers, and our activity pipeline remains strong. Therefore, we have high confidence in the outlook for this growth segment for this year and beyond.
Keen Fai Tong, Analyst
Got it. That's helpful. And then do you expect the Network business to see managed units swing back to positive growth on a full year basis? Can you talk about how much of this growth you expect to come from new partners that you signed versus a stabilization of unit declines from existing retail partners?
Timothy C. Oliver, CEO
Yes. I believe there may still be a slight decline in the pharmacy sector, but this will be overshadowed by the new machines we are introducing. I'm optimistic about the trajectory of that number. As you may know, the average revenue per user has been growing at a faster rate than the decline in devices, particularly in the Allpoint network in the United States, thanks to recent agreements with 7-Eleven and Casey's, as well as the addition of devices in Canada. These developments are very encouraging for our fleet size. Furthermore, some of our new partners in the Network business have fleets that enhance our presence, adding density in areas where it is needed. For example, Casey's often serves more rural locations, and we see potential to boost the number of devices in Canada. In most urban areas in the United States, we do not require additional devices; the access points we are adding now are quite impressive.
R. Andrew Wamser, CFO
And George, I'd like to add that we are seeing sequential improvement in the Network businesses as we look towards Q3. We believe Q2 was the lowest point for profitability. We have absorbed all the vault cash kit and are now at a steady state. As I mentioned earlier, with new partners and the different transaction types being introduced, we expect to see further sequential improvement in the Network, especially in EBITDA next quarter.
Operator, Operator
We will take our next question from Antoine Legault with Wedbush Securities.
Antoine Legault, Analyst
I have a question about the refresh cycle. Are you noticing any changes in customer demand with the Windows end of life approaching in October? Is there anything you can share about that?
Timothy C. Oliver, CEO
Certainly. The current situation will not lead to an increase in device orders this year or next. Since the mandatory transition to Windows 10 in 2019, we have ensured that we won't face similar issues again. Therefore, there won’t be any forced device upgrades due to upcoming changes in Windows. What we are witnessing is a normal refresh cycle following the significant hardware demand we saw in 2019, as those devices reach their 5- to 7-year life spans. This results in a slight increase in hardware revenue. However, this alone does not account for all the growth in the hardware sector. There are two additional factors: we are winning more contracts than before, capturing a larger share of bids, which is encouraging. Additionally, upgrades are driven by the device's capabilities rather than a mandatory software update. This includes factors like recycling and multipurpose devices, as well as improvements in transaction technology. We are seeing a growing demand for higher-end, more capable devices globally. We anticipate that the design and functionality of devices will evolve significantly over the coming years, as users will focus more on interaction rather than just screen size. Hence, there is indeed an increase in hardware demand linked to these advancements, though not necessarily due to changes in the operating system.
Operator, Operator
We will take our next question from Chris Senyek with Wolfe Research.
Christopher Michael Senyek, Analyst
Solid quarter. Could you talk about the trends you're seeing in ATM-as-a-Service heavy versus asset-light deals? I know there has been a mix change a little bit in some of the past quarters? And then if you could break that out U.S. versus international, that would be super helpful. And then I have a follow-up question.
Timothy C. Oliver, CEO
The asset-light product is primarily a developed world, North America, Western Europe opportunity. The asset-heavy deals more often are in places where the machines cost less and the ARPU per device is somewhat lower. So I think India or Brazil. The mix, as you can see by the ARPU and the backlog is relatively strong from a North American and Europe perspective, which will bode well for a better mix of asset-light deals. It's also true that Andy and his team have finally after many quarters of trying, found a way to finance some of these devices off of our balance sheet nonrecourse financing, which is really helpful from an asset-light perspective.
R. Andrew Wamser, CFO
Yes. Looking ahead to next quarter, I anticipate an increase in SSB, which will continue to grow with as-a-service offerings, offsetting some of the strong hardware growth. I expect to see a sequential improvement in Network, despite a year-over-year decline due to the vault cash situation. I also predict a modest increase in T&T, as indicated by our Q2 results. For Q4, I expect continued sequential improvement driven by the same factors; SSB will keep stepping up as we progress through the year, contributing significantly to our margins.
Timothy C. Oliver, CEO
Yes, the SSB business is the main focus of our productivity initiatives, which are progressing well. We mentioned some of the AI tools and other developments in our service organization. This is a traditional approach to total quality, aimed at enhancing productivity. We anticipate delivering $40 million to $50 million this year on a net basis, with gross business closer to $100 million. These initiatives are on track and expected to gain momentum in the second half of the year, providing a significant boost. It's notable that we're seeing improved margins despite a higher mix of hardware, which may seem counterintuitive. However, with the volume of devices we've experienced and the right mix, it can positively impact hardware profitability compared to the previous period, and that's what has occurred.
Operator, Operator
We'll take our next question from Shlomo Rosenbaum with Stifel.
James Franklin Holmes, Analyst
This is James Holmes on for Shlomo Rosenbaum. I just wanted to take a deeper look at ATM-as-a-Service gross margin. It continues to be really strong with margins up 900 bps year-over-year. Is there anything in the backlog that could impact the margins going forward such as a large deal in India or any other geography? And what can the margins in this segment reach sustainably?
R. Andrew Wamser, CFO
So in my comments, I talked about in terms of the margin profile can change based on the scope, the region and really, frankly, the number of devices. When we think about this, I'll say, the flow-through in terms of revenue being up 32% and the gross profit being up 74%, that margin is really healthy. It's really going to change and sort of evolve, but we expect it to continue to grind higher, particularly as we get more neighbor deals or deals done in North America done. So we're looking at opportunities all around the globe and there frankly are attractive opportunities everywhere. But we expect this margin for a while to continue to go up as we continue to get more productivity, as we launched this product offering globally.
Timothy C. Oliver, CEO
I think what Andy was saying is do not expect 72% profit growth on 39% revenue, correct? Frankly speaking, this is a very advantageous mix. What it does describe is a business that is entirely scalable. And the conversion on those incremental service dollars is exceptionally high. It may not be as exceptionally high as it just was in the quarter just passed, but it will remain exceptionally high. And that's the beauty of this model is that you should see profitability grow well in excess of revenue. And that revenue growth rate, as somebody asked earlier, is going to be north of 30% for a long time to come.
R. Andrew Wamser, CFO
Yes. If we consider the rates for vault cash, they will range between SOFR plus 70 to 90 basis points based on the debt we borrow. Simplifying it, if you borrow $3.8 billion and there's a 1 point decrease in the SOFR rate, that results in a $38 million benefit. If we anticipate a forward curve that suggests four cuts over the next year to year and a half, it would positively impact profitability. While Tim and I can't predict when the Fed will cut rates or the pace of those cuts, we believe the outlook is positive for our vault cash, which should be at a low point now and is expected to improve in the coming years.
Timothy C. Oliver, CEO
Yes. And when we put this plan together, we anticipated four rate cuts this year for a full point. And of course, as you know, we've not seen them. So we've absorbed that into our guidance, and we're figuring out how to cover that, but it would be a one full point across the year, assuming it was played out across the year would have been half of $38 million or $19 million pickup for us. So we found ways to cover that. But in future periods, when those rates come down, we should see some nice lift in EBITDA.
Operator, Operator
We will take a follow-up question from Matt Summerville with D.A. Davidson.
Matt J. Summerville, Analyst
I'll be quick here. I just want to make sure I understand within the Network business. Can you parse out the impacts of the couple of dynamics you pointed out, ReadyCode being one of them that weighed on absolute withdrawal volumes this quarter and when you expect withdrawal volumes to reaccelerate in absolute terms?
Timothy C. Oliver, CEO
Yes, the pause in the ReadyCode growth linked to an acquisition and then resigning an agreement amounts to about $2 million for the quarter. And what was the other, Andy?
R. Andrew Wamser, CFO
DTC and prepaid increased directionally about $2 million to $3 million in aggregate. So that was responsible for an addition to the vault cash.
Timothy C. Oliver, CEO
I think we have concerns regarding cardless payments. In certain immigrant-heavy economies in blue states, the situation worsened at the end of the quarter, and we are unsure of the next steps. We believe that other areas will adjust, as they typically do, but we need to be cautious in our expectations. We will explore alternative strategies to regain profitability in that sector, particularly as we anticipate that challenges may persist into the third quarter. We are also ready to address the ReadyCode issue and will monitor other developments closely.
R. Andrew Wamser, CFO
I would like to add that we fully expect ReadyCode to ramp up over the next few months with partners like InComm. As Tim mentioned, we have plans to recover the business with FCTI, Casey's, and others.
Timothy C. Oliver, CEO
All other vectors of growth feel great in that business. We encountered a modest unanticipated change in U.S. consumption and payment behavior, and we will need to adjust accordingly. I believe we've reached the end of our time. I don’t want to keep anyone longer than necessary. Thank you to the operator for your assistance today. In summary, it was a great quarter with solid financial results and key performance indicators, and we made exceptional progress in our competitive positioning and strategic initiatives. We are pleased to announce that our separation transaction is behind us, as one of you inquired, and it is gratifying to make that statement. The journey may have taken longer than expected, and we are very happy to be here. The confidence our Board has shown in us by approving a share repurchase program indicates that they, like us, believe we will generate strong free cash flows for many quarters and years ahead. Since this business is not capital-intensive, the demand for capital will be low. We expect to continue returning capital to both shareholders and debt holders in the upcoming quarters and years. Thank you very much for your interest. We appreciate your time and will speak with you again in 90 days.
Operator, Operator
This concludes today's call. Thank you for your participation. You may now disconnect.