NCR Voyix Corp Q4 FY2020 Earnings Call

Please stand by. Good day, ladies and gentlemen and welcome to the NCR Corporation Fourth Quarter Fiscal Year 2020 Earnings Conference Call. Today's call is being recorded. And at this time, I would like to turn things over to Mr. Michael Nelson, Vice President of Investor Relations. Please go ahead.

Good afternoon and thank you for joining our fourth quarter and full year 2020 earnings call. Joining me on the call today are Mike Hayford, President and CEO; Owen Sullivan, COO; and Tim Oliver, CFO. Before we get started, let me remind you that our presentation and discussions will include forward-looking statements. These statements reflect our current expectations and beliefs, but they're subject to risks and uncertainties that could cause actual results to differ materially from those expectations. These risks and uncertainties are described in our earnings release and our periodic filings with the SEC, including our annual report. On today's call, we'll also be discussing certain non-GAAP financial measures. These non-GAAP measures are described and reconciled to their GAAP counterparts in the presentation materials, the press release dated February 9th, 2021 and on the Investor Relations page of our website. A replay of this call will be available later today on our website, ncr.com. With that, I would now like to turn the call over to Mike.

Thanks, Michael and thank you everyone for joining us today for our fourth quarter and full year 2020 earnings call. I will begin with a review of the fourth quarter and full year, as well as provide an update on our shift to NCR becoming a software and services-focused company with a high level of recurring revenue. Tim will then review our financial performance and an outlook into 2021, and then Owen, Tim, and I will take your questions. I'll begin on Slide 4 with some highlights from the fourth quarter and full year. NCR delivered solid performance despite the current environment that continues to be impacted by COVID-19. We continue to experience incremental improvements across our business. However, there remains uncertainty regarding when vaccines will be available to the general population and when businesses will return to normal levels. First, we delivered strong free cash flow. We generated $149 million of free cash flow in the quarter and $448 million of free cash flow for the year. Tim will discuss in more detail the drivers of our strong free cash flow production. Second, we expanded adjusted EBITDA margin sequentially for the third consecutive quarter to 15.8% in the fourth quarter, which represents an increase of 10 basis points from the third quarter. As we discussed last quarter, we have taken actions to replace the temporary cash cost savings when the pandemic began with permanent expense savings. We entered 2021 with $150 million in cost savings that are expected to drive margin expansion. Our performance in the fourth quarter is the result of some of these actions we have taken, and those actions continue to drive margin improvement in 2021 and beyond. Third, we delivered 6% recurring revenue growth in the fourth quarter, bringing recurring revenue to 54% of total revenue. Throughout 2020, we have made steady progress generating increased recurring revenue, which is consistent with our 80/60/20 goals. And finally, we are very excited about the opportunity to combine with Cardtronics. The proposed transaction accelerates the NCR-as-a-Service strategy we laid out at Investor Day in December and further shifts NCR's revenue mix to software, services, and recurring revenues. We continue to expect the proposed transaction to close midyear 2021 and to be 20% to 25% accretive to EPS in its first full year. Now moving to Slide 5, we have continued to progress executing our strategy despite a challenging business environment. We remain focused on a transition to drive NCR-as-a-Service and achieve our 80/60/20 strategic goals. For the full year 2020, software and services represented 72% of our total revenues, up from 65% in 2019 and 54% of our revenues were recurring, up from 46% in 2019. EBITDA margin was 14.4%. In banking, we continue to have positive momentum in our digital banking platform with five new customers signed in the fourth quarter. One of those new customers was Wintrust, a $43 billion bank with 15 branded community bank subsidiaries that selected NCR’s D3 Digital Banking Solution. We have already started off 2021 strong with the signing of another new D3 customer, Associated Bank which is a $35 billion regional bank based in Wisconsin. In the fourth quarter, we also had cross-selling success with existing clients and new products including seven business banking deals. In retail, we are gaining traction with our NCR Emerald offering, which is our next-gen, cloud-based retail point-of-sale solution. As we discussed at our Investor Day, the acceleration in digital transformation is being driven by consumer demand and retailers needing to respond. We believe this is driving an upgrade cycle for retail POS software, and NCR has the largest global install base. We continue to be excited about the sales funnel for NCR Emerald and recently signed our biggest NCR Emerald deal to date with the largest cooperative in Canada with 1,500 stores. We are also seeing increased adoption of our self-checkout solutions. We're experiencing demand across customers and geographies as consumer preferences accelerate. In hospitality, momentum of Aloha Essentials, which bundles software, services, hardware, and payments continued in the fourth quarter. This model is proving itself in our ability to attract new customers as well as better serve existing customers. During the fourth quarter, over 90% of all Aloha sites sold to our direct offices were sold as subscription bundles with payments attach rate also strong at roughly 75% of sales into new sites. As we focus on executing our NCR-as-a-Service strategy, we continue to invest in our strategic growth platforms both organically and inorganically. We recently closed two relatively small, but very strategic acquisitions. We acquired Terafina, a leading provider for customer account opening, which is a digital front-end solution for digital banking. We also acquired Freshop, a digital online ordering platform, which provides retailers the ability to quickly deploy buy online, pick up in store capabilities. With Freshop, NCR can now help grocers capitalize on the growth in e-commerce going forward. These two recent acquisitions are consistent with NCR’s strategy to acquire early-stage software companies, to enhance product capabilities, and extend our leadership in the vertical industries we serve. With that, let me pass the call over to Tim.

Thank you, Mike, and thanks to all of you on the phone for tuning in today. Turning to Slide 6, which presents the top-level overview of our fourth quarter financial performance. Starting on the top left, consolidated revenue was $1.63 billion, down $255 million or 14% versus the 2019 fourth quarter. But as we anticipated, we extended our trend of modest sequential improvement, beginning back with the onset of the pandemic; revenue was up $42 million or 3% sequentially from 2020's third quarter with all three business segments showing increases. As expected, our fourth quarter revenue was negatively impacted by the broader economic pause, and while I dig into the more specific drivers of the year-over-year decline later, in aggregate $203 million or 80% of that decline was attributable to lower hardware revenue, which was down 30%. Importantly, our strategy to shift to recurring revenue streams again accelerated sequentially. Recurring revenue was up 6% year-over-year and 3% sequentially. We shifted $32 million over 2 points of revenue that previously would have been booked upfront as a perpetual sale through a recurring revenue stream. This compared to just $9 million in last year's fourth quarter or $27 million in this year's Q3. In the top right, adjusted EBITDA decreased $41 million or 14% year-over-year to $258 million, in line with a revenue decline, with EBITDA margin rate down only slightly from the prior year, ending at 15.8%. On a sequential basis, adjusted EBITDA was up 4% and EBITDA margin rate expanded 10 basis points. The similar margin rate results obfuscate the impact of a tremendous amount of hard work on our cost structure. The temporary cost reductions that were enacted at the outset of the pandemic were suspended in late Q3 and were replaced with cost action savings finalized in Q4; because they were taken during the quarter, they only had a prorated impact on Q4 results. The productivity improvements implemented in the fourth quarter were both more permanent and of greater magnitude than those that they replaced. These actions were upsides from $100 million to $150 million to allow us to sustain our profitability at pandemic levels of demand and to drive further margin expansion as demand improves and our revenues follow. Similar to the discussion of revenue, the shift to recurring revenue was also an important descriptor of our relative EBITDA results. $27 million of adjusted EBITDA did shift out of the quarter accompanying the respective revenue shift. This compares to $8 million in a year-ago Q4, and $21 million sequentially from Q3. And in the bottom left, non-GAAP EPS was $0.59, down $0.26 from the prior year fourth quarter, and up $0.04 from Q3. The tax rate of 20% for Q4 decreased as a result of being lower than planned income, which causes planned discrete tax items to have an outsized effect on the overall rate. And finally, and maybe most importantly, we generated $149 million of free cash flow in the quarter and $448 million for the full year. This compares to $302 million in the year-ago quarter, but just $281 million for that full year. To say it differently, more than all of 2019's free cash flow was generated in the last quarter of the year. While in 2020, we generated a much more linear free cash flow result, with approximately $150 million in each of the last three successive quarters. Our year-over-year improvement was due to a nine-day improvement in days sales outstanding, a reduction in both raw and finished goods inventories and a more efficient capital spending plan, that more than offset the impact of profitability from the pandemic. Moving to Slide 7, which describes our banking segment results, banking revenue decreased $149 million or 16%, mainly driven by a 36% decline in ATM hardware. Bank customer capital spending constraints continued into the fourth quarter, resulting in lower year-over-year hardware revenue, but consistent with Q3 and our expectations expressed then for Q4. The remaining decline in revenue was driven by lower attached software related to the lower ATM sales; excluding the decline in new ATM hardware and the directly related revenues, our service revenue has shown modest growth year-over-year. Operating income decreased $57 million or 40% and operating margin rate declined by 440 basis points to 10.9%. About 60% of that decline was hardware related and included lower volumes and disadvantageous geography mix, resulting in unabsorbed costs and lower attached software sales. The remainder was from the shift of $17 million of software to future period recurring revenue. Operating expenses were only down 3% and will need to go lower in 2021. On a sequential basis, revenue was up 2% and operating margin decreased by 180 basis points. Sequential profitability declined due to the timing of two vendor payments, and a lag in new cost actions replacing the old ones. At our Investor Day in December, we introduced some key metrics for the banking segment as digital banking revenue, digital banking registered users and recurring revenue. For digital banking revenue, 2020 marked an inflection point as the full year increased 4% over 2019. Digital banking registered users increased 12% compared to the fourth quarter of 2019 and showed nice sequential growth over the last five quarters. Despite the overall declines in revenue, we did grow in the right places. Recurring revenue in this business increased 8% year-over-year, and 3% sequentially. Moving to Slide 8, which shows our retail segment results. Retail revenue decreased $40 million or 7% against a very tough hardware comparison. That was partially mitigated by a year-over-year increase in services revenue. That said, operating income was up $7 million or 17% versus Q4 2019. That increase was driven by a favorable mix of revenue, both by product and by geography. Sequentially, revenue was up 2% and operating margin expanded 50 basis points. This was our third consecutive quarter of modest sequential growth, driving significant margin recovery on a lowered cost structure. Down at the bottom, you will see the three key metrics we introduced for retail. Self-checkout revenue decreased compared to a hardware-rich fourth quarter in 2019. It was down slightly versus Q3. While this metric is somewhat dependent upon the timing of customer rollouts, we continue to see broad-based demand both by customer and by geography for self-checkout. We're actively managing both manufacturing and installation capacity in this business to facilitate more linear revenue. Platform lanes increased 40% compared to prior year fourth quarter; we continue to see positive traction in the implementation of our next generation retail solutions. Recurring revenue in this business increased 11% versus the fourth quarter in 2019 and increased 3% sequentially. Slide 9 shows our hospitality segment results. Hospitality revenue decreased $50 million or 22%, driven primarily by lower hardware sales. As expected, our hospitality segment and its customers have been most impacted by the pandemic, with capacity and service limitations in the Americas and Europe and changes in consumer behavior. Fourth quarter operating income declined $8 million, mainly due to the flow-through impact from lower revenue. As was the case in Q3, we were able to partially preserve profitability by reducing operating expenses by 15%. On a sequential basis, we continue to experience incremental improvement in both revenue and operating margin. While we wait for a more normal operating environment for our customers, we will continue to add functionality to help them acclimate, manage our costs carefully and accelerate our transition to recurring revenue streams. The key metrics added for Hospitality are Aloha Essentials sites and recurring revenue. Aloha Essentials sites, which bundles software, services, hardware and payments into a single offering, grew 42% when compared to prior year fourth quarter, and grew 9% from this year's third quarter. We continue to see the adoption of our Aloha Essentials bundle as we convert our current installed base. We're pleased to see return in recurring revenue; while down 5% year-over-year, it was up 6% sequentially from the third quarter. Turning to Slide 10, we provide our fourth quarter revenue results under a previous operating model for both continuity and added color. Software revenue decreased 9% due primarily to the shift from one-time to recurring revenue, which represented approximately two-thirds of the decline. Lower sales attached to new hardware and challenging conditions for our hospitality business account for the remaining decline. Services revenue remained flat. And finally, as I mentioned previously, hardware revenue was the most impacted in the quarter by the pandemic, declining 30%. ATM revenue declined 36%, while the combination of self-checkout and point-of-sale declined 23%. Software and Services as a percentage of total company revenue increased to 71% from 64% in the prior quarter with lower hardware sales exaggerating our improvement. Recurring revenues increased 6% driven by our programmatic effort to shift our sales away from single sales events with perpetual licensing to predictable multi-year commitments with relatively high certainty of revenue generation. Recurring revenue as a percentage of total company revenue increased to 54% from 44% in Q4 of 2019, also benefiting from lower hardware sales. We continue to experience sequential improvement with all areas increasing compared to the third quarter. On Slide 11, you'll see the same revenue snapshot but for the full year 2020 versus full year 2019. The shift to recurring revenue had a $100 million impact to the full year or roughly 80% of the software decline. Adjusting for that shift, software and services revenue would have shown a modest increase compared to 2019. Service revenue continues to show resiliency with 2% year-over-year growth. Recurring revenue increased 5% year-over-year, living up to its title and validating our emphasis on it. We ended the year with 54% of our revenue as recurring. While admittedly, the increase is aided by the air pocket in hardware sales, we continue to see growth in all three of our segments with a positive mix shift. On Slide 12, we present free cash flow, net debt and adjusted EBITDA metrics. As I mentioned earlier, we continue to have impressive performance on the cash side. Free cash flow was $149 million in the quarter. Although it declined from the prior year period, we ended the year with free cash flow of $448 million, up nearly 60% from the $281 million in the prior year. Our efforts to improve working capital and drive improved linearity in our annual cash generation are working well. Also, during the fourth quarter, we made a $70 million discretionary contribution to the US pension plan that is expected to push our mandatory contributions out until 2023. The slide also shows our net debt to adjusted EBITDA metric, with a net debt leverage ratio of 3.3 times. We ended the year with $338 million of cash, having paid down both our outstanding revolver and our trade receivable securitization facility and having retired 132,000 shares of preferred stock. We remain well within our debt covenant and ended the fourth quarter with a credit facility leverage of approximately 3.3 times, well under a debt covenant maximum of 4.6 times. Turning to Slide 13, late in the third quarter, we released several of our temporary cost actions in anticipation of replacing them in the fourth quarter with more permanent and sustainable cost reductions. Those cost actions and related operational changes or product decisions resulted in approximately $200 million of restructuring charges in our fourth quarter. Approximately $150 million of those were non-cash charges, mainly related to excess inventory and software impairment charges related to strategic changes. The remaining $50 million were cash charges for severance and the resolution of several legacy items. We entered 2021 with an estimated $150 million of run rate cost savings. Approximately 40% of those savings are from operating costs, another 40% from SG&A and the remaining 20% from corporate functions. In my last slide, Slide 14, which provides an outlook for Q1 2021, because our end markets are still being impacted by the economic drag of the pandemic, and because the successful completion of the proposed Cardtronics transaction at midyear will complicate reported results, we are not going to provide full year 2021 guidance for standalone NCR at this point. But for Q1 relative to the year-ago Q1, on a year-over-year basis, we expect revenue growth of 2% to 3%. We expect particularly strong growth in recurring revenue streams. And we anticipate a persistently difficult banking hardware environment. On profitability, we expect adjusted EBITDA margins to expand by 250 basis points to 15%. And finally, we expect free cash flow to be positive, which might seem to buck our recent trend, but remember that we have about $150 million of unavoidable payments in the first quarter related to benefits and compensation that occur in every Q1. We know that you have a complicated modeling effort on your hands and hope to be more prescriptive as we get closer to midyear and to the closing of the transaction. With that, I'll turn it back to Mike for closing comments. Mike?

Thanks, Tim. In closing, I want to first commend the entire NCR team on strong execution in 2020. Despite unprecedented challenges, our employees have continued to take care of our customers and have shown resiliency in these very difficult times. Looking ahead, our key priorities are clear. First, we will continue to accelerate our NCR-as-a-Service, an 80/60/20 strategy. We have made notable progress this year despite some of the challenging conditions. Second, we will return to growth in 2021. We expect to grow both top line revenue and expand margins. We took recurring costs out of the business in 2020 and expect the combination of a lower cost structure along with positive operating leverage to drive margin expansion in 2021. We enter 2021 with positive momentum and are laser-focused on execution. Third, as Tim discussed, we are focused on improving the linearity of both revenue and cash flow. We made significant progress in 2020 and seek to improve our linearity as we shift more of our revenue to recurring. And finally, we are preparing to hit the ground running and executing on the opportunities that Cardtronics will bring us once the transaction closes. Turning to Slide 16, I want to close with a strategic rationale for the proposed transaction with Cardtronics. The combination accelerates our NCR-as-a-Service strategy and expands opportunities in payments. It will enhance our scale and cash flow generation, while advancing our 80/60/20 targets by roughly two years. Additionally, the proposed transaction is expected to be accretive to EPS by 20% to 25% in the first full year. We believe the combination of NCR and Cardtronics will drive significant value for our customers and shareholders. It's a unique opportunity that is both strategically consistent and financially accretive to NCR. And with that, we will open the call for your questions. Thank you for your time today. Operator?

Thank you. And we'll go first to Tim Willi of Wells Fargo.

Hi, thanks and good afternoon, everybody. Quickly a couple of questions if I could. First, in controls, hospitality overall, is there a way to just sort of think about the average transaction size, whether that would be product attachment or sort of annualized revenue from the new sales versus sort of prior experience, just sort of help us think through that revenue as that continues to gain progress?

Tim, as you're breaking up a little bit, but I think you're asking about Hospitality and Aloha Essentials versus the way we used to sell, is that the question?

Yeah, just sort of like a way to think about the average attach rates, number of products people may be buying. I know that's a bundled product. So, revenue lift or just a way to think about the delta of these new customers versus the existing base.

Well, the key to it is first of all, if you just look at it, we're going to bundle everything in an Essentials package; you're going to get all the components in there. So instead of piecemealing it, you're going to get a bigger sale. If you say that’s a percentage bigger than a typical sale, I don't know if it's 1x, it could be 1.5x to 2x to sign a bundle, so you get a bigger sale. The most important thing is attaching payments — by attaching payments, the revenue per account goes up considerably compared to not having payments, and obviously as we get more scale and leverage in payments, that's going to drive margin on those accounts. So it really is that 75% attach rate on payments, which is important to us. Getting those accounts up and running, they are turnkey. They don't start to parse out each component as a separate RFP to separate pricing competition, but over time we think the margins will hold up better and it's just a better revenue stream for us.

Okay, great. And then just a follow-up, I know you can't say a lot, given the merger hasn't closed. But it's been a couple of weeks since that formal announcement. I guess I'm sort of curious, any feedback you've gotten from your existing customer base within the banking industry, whether it's conversations you've initiated or unsolicited feedback from existing customers about how they think about it and your confidence about the deal?

Well, Tim obviously we know Cardtronics well, and they're a very large client of NCR. They go to market today and sell bundled components that we deliver to them; we sell them hardware, services, and software, and they bundle that up and deliver more value-added products in the marketplace, which is one of the reasons that we were interested in this combination. We did not expect any negative feedback from the marketplace, and we haven't seen any. I don't really know what Cardtronics has seen on their side. But I think the general perception and feedback has been positive.

Thank you. And we'll move over to Katy Huberty of Morgan Stanley.

Yes, thank you. Good afternoon. Tim, just clarification first: is the 2% to 3% revenue growth in the first quarter reported or constant currency? And what do you expect the currency impact to be in the March quarter? And just to follow-up on that, guidance implies about half the sequential decline that you typically would see in a first quarter. Does that speak to a more robust recovery in demand in the March quarter or is that just changing shape of seasonality because of higher recurring revenue mix than in the past? I have a follow-up for Mike.

So firstly on the growth rate, on a reported basis, I'd expect to be at the higher end of that range; and then on currency effect, we've left ourselves some room to the downside there if currency happens to be negative. Right now, it looks like currency will be okay in the quarter. On the linearity from Q4 to Q1, you're exactly right. We did not do in the fourth quarter some of the things we've done in the past to put, let's say, unnaturally move revenue into the full year and into the last quarter. We have traditionally had very aggressive selling in the fourth quarter, particularly around hardware. That didn't happen in the fourth quarter of last year. So that leaves us in much better stead coming into Q1 with a better revenue expectation, a better pipeline, and a much more linear revenue pattern for the full year. So we're very pleased to be able to show year-over-year growth in Q1, because you'll recall it was not really a pandemic-affected quarter, only mildly at the back end. We had a little effect as you recall from a tornado, but even adjusted for that impact, we would be showing year-over-year growth.

That's great. And Mike, speaking of capital and hardware spending, if you think about the three segments, which are wholly dependent on a full vaccine rollout versus where could you see a more robust recovery just as we get visibility into a vaccine, but not necessarily a full reopening?

That's a great question. I'll say this: the parts of the business where consumers have to regain confidence and feel comfortable going to restaurants and brick-and-mortar retailers are obviously going to drive our hospitality and retail businesses, with hospitality probably more impacted. The ability to buy food and takeaway in some cases thrived, but hospitality will benefit as people get out and about. Retail is more of a strategic push — we think retailers will need to retool POS technology going forward, which drives demand for our offerings. As for banking, banks have been operating but have expressed caution on capital spending given concerns about financial performance and uncertainty, so banking might be a bit of a trailer to recovery compared to retail and hospitality.

And now we'll move to our next question and that will be with Brett Huff of Stephens.

Great, thanks guys. This is Joel on for Brett. Appreciate you taking the questions. So a couple of questions here. Can you talk about Aloha and maybe the competitive dynamics, any color on win rates or pipeline in a quarter? And then can you provide any color on the JetPay volumes and maybe some of the trends that you've seen of late? That'd be great. Thank you.

Let me start on JetPay. We've integrated JetPay into Aloha and Aloha Essentials, and we've started integrating it into Emerald and other retail products. We've had the most activity in hospitality with Aloha bundling payments; attach rates have been returning. We started in 2017, and in the back half of 2020 we went out to existing clients and upsold JetPay, and have started to get momentum and traction along those lines. We feel really good about both new sales and going back into the marketplace. Our strategy is simple: if you're using our POS at the point of transaction and we tightly integrate our payments, we can have a smoother interface, better information and better data flow compared to separating those functions. That strategy seems to be working and continues to make solid progress. I'll turn it over to Owen on Aloha performance and competition.

I would say the competitive landscape has not changed significantly in terms of the major players. From our performance, Aloha Essentials was clearly the low point. We have seen sequential growth in Aloha Essentials activity in both the third and the fourth quarter. The team on the hospitality side is feeling modestly positive. But until we see the vaccine widely distributed and the pandemic more under control, we're in a hold pattern, albeit with minimal positive momentum going into the year. There's cautious optimism based on the momentum we've seen in the last two quarters. I think we'll probably wait until late second or third quarter before we see significant momentum.

Thank you.

We will now go next to Dan Kurnos of The Benchmark Company.

Thanks, good afternoon. Just two if I could. First, on self-checkout, probably the only real surprise in the quarter, any incremental breakout or color there? What's driving that success and what are you seeing going forward? You talked about increased linearity; that might be one area to focus on. Second, the Q1 guide is above expectations; can you talk through the drivers for both Q1 and into the balance of the year as you see them? Thanks.

So let me take the self-checkout question first. It's tough because the business is lumpy and dependent upon some major orders from very large retailers. Our efforts are to make it look more linear, and you saw a hard comparison in Q4, which depressed the year-over-year number. That said, in the first half of 2021 you're likely to see a strong growth rate in SCO hardware because the comparisons were easier. You should expect linear revenue from us this year: roughly 15% growth across the year in SCO, heavily weighted to the front half in terms of growth rate but more linear performance across the year. Regarding 2021 overall, we feel very good about Q1 momentum to post year-over-year growth. When we talked in December we mentioned a growth rate of approximately 5% over a multi-year period with a linear walk rather than a hockey stick. I expect modest sequential improvement quarter-over-quarter, and we could get a pandemic bump at some point, but that's not planned. We have not planned for a significant recovery in hardware, particularly ATM. On EBITDA, we discussed moving from 14.5% toward 20% by 2024; I think we'll make at least one year's worth of progress this year with full year margin expansion to around 16% and exit the year higher. On free cash flow, I think it will be very similar to what we generated in 2020. While higher profitability suggests a bit more free cash flow, we'll likely need to reinvest working capital as we grow out of the pandemic, offsetting some of that improvement. So for the year, free cash flow should look a lot like the $450 million generated in 2020. Also, to help with modeling: interest expense will be just north of $180 million on an NCR standalone basis; CapEx $275 million to $300 million; depreciation and amortization roughly $302 million to $305 million. For the tax rate, 26% is a fair and conservative number today; shares outstanding for the year about 143.5 million.

On SCO, SCO was very lumpy in the year-ago period and dependent on very large retailer orders. Our efforts to make it more linear are working. You'll see easier comparisons in the first half of 2021 and therefore stronger growth early in the year, and we see good traction, especially in SMB markets where customers are addressing their POS software and technology footprint, which includes self-checkout.

Got it, that's super helpful, guys. Thanks for all the color. I appreciate it.

Sure. Our pleasure.

Our next question will come from Matt Summerville of D.A. Davidson.

Thanks. I want to talk about rig fencing a little bit here. It looks like SG&A was up sequentially and year-over-year, the highest percentage of sales you've had in quite a few quarters. Can you talk about the level of unusual spend in there? I was surprised to see it so high.

There was some unusual spending in Q4. First, we had cost actions coming off and new ones going back on, so we had salary reductions across the organization in Q2 and Q3 that came back online and we started paying people regular salary in Q4. So there was a lift from those temporary cost actions that didn't sync perfectly with the permanent actions. You'll see the impact of the reduction in cost in Q1. Admittedly, those didn't sync up perfectly in Q4. Also, we had a few one-time items settling legacy contracts that caused a bit higher cost in the quarter; those will not recur. There are some non-recurring expenditures in there to the tune of $15 million to $20 million.

Okay, that's very helpful. And then what would you say is a realistic growth rate for the digital banking business in 2021 organically?

We shared at Investor Day that we felt digital banking bottomed out in 2019, saw some growth in 2020 and expect additional growth in 2021. We continue to add products — for example, Terafina adds online account opening — which gives us cross-sell opportunities to existing digital banking clients and will help organic growth. We'll also look for tuck-in acquisitions. We expect to keep putting points on the board and get that business back on track.

Our next question will be from Paul Chung of JPMorgan. Paul, your line is open. If you can check your mute function, we're not hearing your question.

Hi, can you hear me? Great. So just on the restructuring charge, that was quite material this quarter. Can you expand on where the majority of that charge came from? What drove the decision to clean up some of the legacy costs and how does this ultimately benefit your cost base next year? I have a follow-up.

We had about $200 million of charges in Q4: $150 million non-cash and $50 million cash. The cash portion was severance for the cost actions we took in Q4; we'll be about 1,800 fewer people than this year. On the non-cash side, we made changes to how we're going to operate our services business. Adrian and his team believe we can take cost out and bring inventory levels down by having fewer but the right parts in the field and by changing repair decisions. We wrote down parts that were excess, obsolete, or no longer worth repairing. There were also some software and hardware products on the balance sheet that we do not intend to sell any longer as our new product offerings are better, so we took impairments. And we addressed a couple of legacy contract situations to get them off the books. With these charges, you'll see savings, particularly in the services business, over time as we make better decisions on whether to repair or replace parts. You'll also see lower inventory on the balance sheet to start the year. Of the $150 million run-rate cost savings, about $110 million is people-related, so you'll absolutely see that in 2021.

Got it, thanks for that. And then on free cash flow for 2021 — you had a nice finish to 2020. If you see growth in the top line for the year, why can't you exceed the roughly $450 million you generated in 2020? Any puts and takes there?

If revenues grow, receivables will likely grow too, which pressures working capital. My assumption is we will not improve days outstanding by another nine days next year, nor reduce past dues by a full six percentage points. There is still room on inventory in finished goods, but services inventory was already reduced. I am hopeful we'll have working capital improvements that offset investment to support growth, but I wouldn't assume a big step-up from 2020. Think about our conversion rate of net income to free cash flow in the 95% to 105% range going forward; last year we were higher in the 110% to 112% range, which is not sustainable.

We will now move to Ian Zaffino of Oppenheimer.

Hey, good afternoon, guys. This is Mark on for Ian, thanks for taking our questions. I guess I should start from the top line and just put all the moving parts on free cash flow and as for the volume going into 2021, can you give a sense of what capital allocation priorities are? What's the appetite for M&A and the categories you're interested in going forward? Thanks.

I'll start and Mike will follow. First, we are going to de-lever after the transaction is complete.

A bit of color on capital allocation: before and after Cardtronics, our priority is clear. We expect to slow buybacks related to offsetting dilution from the acquisition in 2021, continue to invest organically to build products and differentiate, and continue to do tuck-in acquisitions, although tuck-ins may slow as we preserve cash. Our priority going forward will be to reduce our debt level, particularly after putting on debt to complete the Cardtronics acquisition. Over the next 18 months, the focus will be de-levering the balance sheet.

Because of that commitment to de-lever, we believe we'll be able to borrow at reasonable rates and the market has responded well. We've had a great response from banks and lenders supporting this transaction because of our commitment to get leverage back down. We intend to make good on that.

And now we'll take a question from Kartik Mehta of Northcoast Research.

Mike, you've talked a lot about ATM-as-a-Service, especially now with the combination with Cardtronics coming up. I'm wondering if you have any backlog for financial institutions that are looking for that service and what the characteristics are. Are they credit unions, community banks, regional banks? Some color around the types of customers you see in that demand?

We've been moving upstream to a full-stack offering: ATM-as-a-Service or managed services, delivering transaction functionality including hardware, software, servicing, switching and routing. Globally we've seen more adoption in off-prem ATMs and in countries where standalone footprints and operators run ATMs. In the U.S., midsized and smaller financial institutions, including credit unions and community banks, are evaluating outsourcing ATM operations to scale providers. Those institutions see the cost to operate as higher internally and are attracted to a partner that can operate ATMs more efficiently and provide service levels while simplifying their operations.

And then on JetPay, Mike, what kind of volume growth have you seen in JetPay in 2020 versus 2019?

2020 was a difficult year to measure because of the pandemic. When it hit in March through April, like other on-prem acquirers, transaction volumes fell in Q2. Volumes recovered in the second half of the year as people got out more. If you look at an apples-to-apples basis and the accounts we've been able to keep and upsell, we feel good about 2020 results, but the year-over-year numbers are affected by the pandemic impact.

We were down in the high single-digits for the full year on JetPay, but that was very isolated to the second quarter; third and fourth quarter activity recovered such that we ended the year at a rate similar to where we entered it.

We will now go back to Tim Willi of Wells Fargo Securities for a follow-up.

Hey, thanks for the follow-up opportunity. Mike, on the Wintrust and Associated Bank wins — those are two sizable banks and competitive takeaways. Can you characterize what you think the differentiators were for those wins? Functionality, price, timing? Is there something there you can build upon to continue adding large enterprise customers?

Those wins reflect both feature/function capability of our digital banking and our horizontal platform approach. Digital and mobile banking are critical for banks of all sizes now. These are $30–$45 billion banks with many branches; they need capabilities to compete with the largest banks. We also offer a Client Services Platform that connects mobile, digital, ATMs and branch channels to follow the retail client across channels. That horizontal, platform-centric approach is differentiated and makes it simpler for banks to roll out digital capabilities. We believe that helped us win.

And with that, ladies and gentlemen, that does conclude today's question-and-answer session. I would like to turn the call back to Mr. Mike Hayford for closing remarks.

All right. I just want to thank everybody for joining us today. Just kind of closing comments on the year: 2020 was a very challenging year for NCR. When the global pandemic hit us, sitting here in March 2020 and we actually started to feel that around the globe a little earlier, by March it was really starting to be a global pandemic. The management team at NCR set three simple priorities: number one, take care of our employees; number two, protect the company from the uncertainty; and number three, take care of our customers. We focused on taking care of our employees, we protected the company where we could, and we took care of our customers. Sitting here today, looking back, those priorities served us well even with the uncertainty. I can say thanks to the unbelievable hard work of our 35,000 NCR associates around the world who, through a difficult environment, executed each and every day. I can truly say today that we will be a better company after the pandemic. Thanks for joining us today and we'll talk to you next quarter.

And with that, ladies and gentlemen, that does conclude today's call. We'd like to thank you again for your participation. You may now disconnect.