NCR Voyix Corp Q1 FY2023 Earnings Call

Good day, and welcome to the NCR Corporation First Quarter Fiscal Year 2023 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Michael Nelson, Treasurer and Vice President of Investor Relations. Please go ahead.

Good afternoon, and thank you for joining our first quarter 2023 earnings call. Joining me on the call today are Mike Hayford, CEO; Owen Sullivan, President and COO; Tim Oliver, CFO. Before we get started, let me remind you that our presentation and discussions will include forward-looking statements. These statements reflect our current expectations and beliefs, but they are subject to risks and uncertainties that could cause actual results to differ materially from those expectations. These risks and uncertainties are described in our earnings release and our periodic filings with the SEC, including our annual report. On today's call, we will also be discussing certain non-GAAP financial measures. These non-GAAP measures are described and reconciled to their GAAP counterparts in the presentation materials, the press release dated May 4, 2023, and on the Investor Relations page of our website. A replay of this call will be available later today on our website, ncr.com. With that, I would now like to turn the call over to Mike.

Thanks, Michael. I will begin with some of my views on the business, and I will also provide an update on our previously announced intention to separate NCR into two public companies, including our recent announcement of our leadership team. Tim will then review our financial performance, and then Owen, Tim, and I will take your questions. Let's begin on Slide 5 with some highlights from the first quarter. First, NCR delivered strong performance that included solid top-line revenue growth and significant margin expansion and delivered over $200 million of free cash flow, which puts us on track to delever prior to the spin. Second, we are on track to separate NCR into two public companies in the fourth quarter of 2023. Following Tim's comments on our financial results, I will provide an update on those separation activities. Third, we delivered 4% year-over-year total revenue growth on a constant currency basis and 7% recurring revenue growth also on a constant currency basis in the quarter. I think it's important to note that the 4% growth would have been 7% without the impact of shifting to subscription. Fourth, adjusted EBITDA increased 19% on a constant currency basis from the first quarter of 2022. Adjusted EBITDA margin expanded to 16% this quarter, which represents a 150 basis point increase over the first quarter of 2022. Fifth, NCR generated $209 million in free cash flow in the quarter. Over the past two quarters, we have generated over $400 million of free cash flow, allowing us to reduce financial leverage ahead of the separation. Finally, I want to provide an update on the cybersecurity incident we experienced. On April 13, we determined that a single data center outage that impacted some functionality for a subset of our commerce customers was caused by a cyber ransomware incident. At this time, we are well on our way to recovering the majority of the most critical functions impacting our customers. None of our ATM, digital banking, all point payments, or other retail products were impacted by this incident. While this was contained to a relatively limited set of our overall customer base, we absolutely understand how difficult this incident has been for those impacted customers. We take their business extremely seriously, and we sincerely apologize for any disruption this has caused. Now moving to the business update on Slide 6. We have strong momentum across all five of our business segments with progress against our strategic initiatives along all of our KPIs. In retail, we continue to deliver on our strategy to be the retail platform company of choice. During the first quarter, NCR expanded its relationship with the second biggest retailer in the U.K. The customer committed to increasing the number of NCR self-checkout units while also signing a special services agreement to a multiyear subscription model to help transform their in-store solutions. In hospitality, we continue to experience strong demand across our enterprise and SMB customers. In SMB, our payment attachment for new customers remained roughly 90%, driving a 50% increase in payment site. In enterprise, we expanded our relationship with the world's largest fast-food chain to be the sole provider for digital menu boards in the U.S. In digital banking, we continue to have positive momentum in the first quarter. Digital banking sales activity was strong with 12 new customer deals and 12 digital banking renewals. Last week, NCR signed an agreement with North Carolina State Employees Credit Union, SECU, the second largest credit union in the U.S. with over 2.7 million members and more than $50 billion in assets to transform its members' digital banking experience. This new partnership will help deliver more modernized digital banking capabilities for SECU's members and employees. This will deliver a modernized digital technology platform for the credit union and will advance NCR's digital-first market position in the large regional financial institution segment. In payments and network, we are making progress against both merchant acquiring and the Allpoint network. North America ATM withdrawals and cash dispense are at a six-plus year high. International market expansion continues to accelerate with over 100 merchant contracts signed in Portugal and over 50 merchant contracts signed in Greece. During the first quarter, we added new payment transaction capability to our Pay360 platform through a partnership with Payfare, which allows gig workers to access cash in their accounts with a simple, secure code via Payfare's digital banking app. In self-service banking, we continued momentum in our ATM-as-a-Service solution. There has been concern from our investors regarding the potential impact of NCR in the current banking crisis. We had a strong first quarter in self-service banking and do not expect a slowdown given the current macro environment. Interest in our offering is accelerating from both community banks and large financial institutions globally. In the first quarter, we signed six ATM-as-a-Service deals, including First Citizens Bank with over $100 billion in total assets and over 500 ATMs and full end-to-end ATM management solutions. We partnered with Members ATM Alliance, where NCR is now the exclusive provider of ATM-as-a-Service solutions for the Alliance's credit union members. With that, let me pass it over to Tim.

Thanks, Mike, and thanks to all of you for joining us today. As Mike just summarized, in the first quarter, we drove substantial growth in recurring revenue, expanded our profit margins, particularly at gross margin, and generated over $200 million of free cash flow. A year ago, we faced a series of unanticipated geopolitical and macroeconomic challenges that had a significant impact on our business in the first quarter and compounded across the remainder of the year. At that time, we outlined our efforts to control the things that we could: productivity, price, cost efficiency, and customer support levels. Those efforts enabled the recovery of our reported financial metrics and insulated our customers from our supply chain disruption and labor challenges. These early 2022 actions have now been augmented with further cost productivity actions in both Q4 and in this Q1 to generate incremental savings to offset any dis-synergies arising from the planned separation into two separate public companies. This quarter's results are demonstrative of an exceptional effort by our teams to simultaneously drive financial results, accelerate our strategic plan, and ready the company for a pending separation transaction. I'll start on Slide 7 with a top-level overview of our first quarter, which for every guided metric, we painted the high end of the ranges we provided back in February. Starting in the top left, revenue was $1.9 billion, up 1% year-over-year as reported and up 4% on a constant currency basis. Recurring revenue was up 4% year-over-year and up 7% adjusted for foreign exchange. We continue to have success transitioning from one-time perpetual sales into multiyear subscription-based revenue streams. The nature of these contracts shifted $60 million of high-profit revenue from what would have been previously recognized upfront to recurring revenue that will convert over the next several years. This intentional deferral of upfront revenue to recurring revenue lowered total revenue growth by three full points. The strong U.S. dollar compared to the year-ago period had an unfavorable impact of $45 million primarily within our retail and self-service banking segments. Adjusted then for foreign exchange and the shift to recurring revenue, total revenue growth would have been about 7%. In the top right, adjusted EBITDA increased $31 million year-over-year to $302 million, up 11% year-over-year as reported and up 19% on a constant currency basis. Foreign currency exchange rates had an unfavorable impact of $18 million. Adjusted EBITDA margin expanded 150 basis points from the first quarter of 2022 to 16%. The increase in margin was driven by lower direct costs such as reductions in fuel, shipping, and component costs, as well as the impact of indirect cost mitigation actions and a higher-margin revenue mix. The benefit of lower direct costs similarly added to a 190 basis points increase in adjusted gross margin rate. On the bottom left, reported non-GAAP EPS was $0.56, up $0.03 or 6% year-over-year as reported and up 27% on a constant currency basis. The strength of the U.S. dollar reduced EPS by $0.09. The non-GAAP tax rate was 27.4% versus 24.8% in the prior year, which reduced EPS by about another $0.02. Finally, we generated $209 million of free cash flow from both higher profitability and the anticipated improvements in our working capital. Back in October, we described our desire to generate at least $500 million of free cash flow before the separation transaction to reduce our financial leverage. In the first two quarters, of those $500 million, we've already generated $400 million of that goal. Moving to Slide 8, which shows our retail segment results. Starting in the top left, retail revenue increased 1% year-over-year as reported and increased 4% adjusted for foreign exchange, driven by growth in services and point-of-sale hardware. We also shifted roughly $15 million of high-profit revenue that would have previously occurred upfront to recurring revenue that will be recognized over the next four to seven years. This intentional deferral of upfront revenue to recurring revenue lowered revenue growth in retail by three points. Adjusted for foreign exchange and the shift to recurring revenue, retail revenue would have grown at 7%. First quarter adjusted EBITDA increased 45% year-over-year and 70% adjusted for constant currency, resulting from improvements in component, labor, and freight costs as well as other cost mitigation and pricing actions taken in the latter part of 2022 and early 2023. The adjusted EBITDA rate was 17.6%, up 530 basis points over the prior year. The bottom of the slide shows retail segment key performance indicators. On the left, platform lane, a KPI that illustrates the success of our strategy to convert our retail customers to our platform-based subscription model. We increased our number of platform lanes by 33,000 lanes or 125% year-over-year. At the time of conversion, platform lanes drive an incremental $400 of annual recurring revenue for an increase of $12 million versus last year. The platform lane increase was driven by rollouts in major convenience and fuel customers. While platform lanes currently represent less than 5% of our total lanes, we see accelerating momentum for the conversion of our traditional lanes and have a substantial lane conversion backlog. Once on the platform, the opportunity to upsell and cross-sell new features and functionality drives further ARPU expansion. In the center bottom is our self-checkout revenue. Self-checkout revenue was flat year-over-year on a trailing 12-month basis, and annual recurring revenue was flat year-over-year. Similar to the impact on revenue, currency rates did affect all of our annual recurring revenue calculations, including this one. Hospitality segment results. This chart shows results and illustrates the momentum across this business. Hospitality revenue increased $12 million or 6% year-over-year as reported and 7% adjusting for currency, driven by an increase in services and software revenue, including cloud services and payment processing. Adjusted EBITDA was up 29% year-over-year. Adjusted EBITDA margin rate expanded 440 basis points to 24%. A richer mix of software and services revenue, pricing, and cost reductions all helped push margin rate higher. Hospitality's key strategic metrics on the bottom of this slide include platform sites, payment sites, and annual recurring revenue. Platform sites increased 16%, payment sites increased 50%, and annual recurring revenue was up 12% year-over-year on higher ARPU at both platform and new payment sites. The average conversion to platform sites currently drives an incremental $7,000 a year in annual recurring revenue, while the average conversion to payment sites currently drives an incremental $4,000. Combined, the additional platform sites and payment sites contributed an incremental $35 million in annual recurring revenue year-over-year. We continue to see strategic momentum in this business as enterprise clients transition to the platform and expand their functionality and SMB clients attach payments. Turning to Slide 10, which shows our digital banking segment. Digital banking revenue was flat year-over-year. The two-thirds of our revenue that is driven by user count increased in this quarter on higher used accounts and led to higher recurring revenue. This increase was offset, however, by lower nonrecurring revenue that can be lumpy. Adjusted EBITDA was down 13% year-over-year due to lower nonrecurring software revenue and enhanced investment in sales, marketing, and R&D to grow this business faster. Adjusted EBITDA margin rate was 36%. Digital banking's key strategic metrics on the bottom of this slide include registered users, active users, and annual recurring revenue. Registered users increased 8%, active users increased 6% year-over-year, and digital banking's core business growth is evident in our year-over-year increase of 7% in annual recurring revenue. On Slide 11, we do some easy math to help you evaluate the combined segment of retail, hospitality, and digital banking. These segments will form NCR RemainCo after the separation transaction. This roll-up is for directional indications only. The eventual financials for this company will be impacted by currently unallocated corporate costs, by revenue and profit adjustments that reflect the planned perimeter of the transaction, and by synergies or dis-synergies that result from the spin. The combined adjusted EBITDA was up 29% year-over-year adjusted for foreign exchange, with an adjusted EBITDA margin rate of 22%. Let's move to Slide 12. This is our payments and network segment. Starting in the top left, payment and network revenue increased $24 million or 8% year-over-year and 11% adjusted for foreign exchange, driven by higher transaction volumes and an increase in payment processing. Adjusted EBITDA declined $15 million or 15% year-over-year and 14% adjusted for foreign exchange. More than all of this decline was caused by ten interest rate hikes aggregating five full points over the last three quarters, raising our ATM cash rental costs this quarter by approximately $40 million on a gross basis and $22 million on a net basis after our mitigation efforts. Adjusted EBITDA margin rate was 26%, down compared to the previous year on the same cash rental costs. Our cash rental costs are calculated using short-term interest rates, which have been and will continue to affect our results. That said, the hedging program, algorithm and operational optimization, and pricing adjustments or protection mitigate some of the impact of interest rates. As a result, the interest rate net impact during the quarter was $22 million, and we project an additional impact of $20 million across the rest of the year. The bottom of this slide shows payments and network key strategic metrics. On the bottom left, endpoints increased 2% year-over-year. In the center bottom, our transaction, a KPI that illustrates payment process across all of our Allpoint network and across our merchant acquiring network. Transactions were up 2% year-over-year on a trailing 12-month basis, fueled by ATM withdrawal growth of 6%. The rise in both the frequency of withdrawals and the amount withdrawn per transaction led to a 13% year-over-year increase in the total amount of cash dispensed globally. Annual recurring revenue in this business increased 8% year-over-year. Slide 13 shows our self-service banking segment results. Self-service banking revenue was flat as reported and up 4% on a constant currency basis, primarily due to growth in recurring revenue, which was up 10% on an FX-adjusted basis over the prior year. We continue to have success transitioning our self-service banking business from one-time perpetual sales into a multiyear subscription-based revenue stream. During the quarter, we shifted roughly $38 million in revenue that would have been upfront previously to recurring revenue. The intentional deferral of upfront revenue from recurring revenue lowered revenue growth by six points. Adjusted for foreign exchange and the shift to recurring revenue, self-service banking revenue growth would have been 10%. While a quarter ago, our outlook for this business suggested a full year 2023 decline in revenue, strong results and strong demand in Q1 suggest that this business could now deliver full year revenue similar to that in 2022, even after $150 million or nearly six points of growth is shifted to recurring revenue as part of our ATM-as-a-Service offering. Adjusted EBITDA increased 23% year-over-year and was up 33% FX consistent basis. Adjusted EBITDA margin rate was 23%. The remarkable margin expansion from the previous year can be credited to the reduction in direct costs, particularly in expenses related to fuel and components, as well as the increase in the higher-margin recurring revenue stream. The bottom of the slide shows our self-service banking segment key metrics. On the left, software and services revenue mix was flat. ATM-as-a-Service units increased 293% year-over-year to 17,000 units. We experienced significant growth in India and incremental growth in the United States. The shift to recurring revenue continues to gain traction with annual recurring revenue up 5% year-over-year. On Slide 14, similar to the view presented on Slide 10 for NCR RemainCo and with similar caveats, this slide showcases the combined segment results for payments and network and self-service banking, which are the segments that will comprise NCR ATMCo after the separation transaction. As I said before, unallocated revenue and corporate costs are not reflected here. The combined revenue for these segments increased $24 million or 3% year-over-year as reported and 6% adjusted for currency. The combined adjusted EBITDA was up 10% year-over-year adjusted for FX, with an adjusted EBITDA margin rate of 23%. Turning to Slide 15, which describes free cash flow, net debt, and adjusted EBITDA metrics to facilitate leverage calculations. As we said before, we generated $209 million of free cash flow in the quarter, driven by higher profitability and an improvement in working capital with the cash conversion cycle improving by two days. Our goal to generate $500 million in free cash flow before the separation transaction to reduce financial leverage has been well communicated. We have now generated $400 million of free cash flow over the last two quarters and are positioned well to meet our targeted leverage. The slide also displays our net debt to adjusted EBITDA metric, which has improved to a leverage ratio of 3.6x, down from 4.1 in Q1 of 2022, driven by higher profitability and cash generation. We remain well within our debt covenants and have significant liquidity with over $875 million available under our revolving credit facility. We possess a robust balance sheet, ample liquidity, and strong financial stability to support our growth and the spin transaction. On Slide 16, we present our second quarter outlook and reaffirm our full year 2023 guidance. For Q2 2023, we expect revenue of $1.9 billion to $2.0 billion, adjusted EBITDA of $340 million to $360 million, and non-GAAP EPS of $0.70 to $0.76. We anticipate generating free cash flow of approximately $50 million. For the quarter, we have assumed a tax rate of 27% to 29%, a share count range of 153 million to 154 million shares, and interest expense of $88 million. For the remaining two quarters of 2023, we expect relatively linear sequential quarterly improvements across most financial metrics.

Thanks, Tim. And I'm going to continue on Slide 17 with the NCR separation roadmap. Our go-to-market teams are organized by industry under our general manager unit. These teams are ready and have been ready for the spin. Additionally, there are areas of shared service functions, such as legal, tax, HR, treasury, IT, and others that are well underway in the process of preparing for the separation. We are planning on submitting our Form 10 registration statement very shortly, and then the timing of the separation will be largely dependent on the SEC process and the state of the capital markets. We have already submitted a letter with the internal revenue service regarding the tax-free nature of the separation. We intend to delever through the generation of free cash flow between now and the separation, which is expected to occur in the fourth quarter of 2023. At this time, we're expecting the timing to be early in the fourth quarter. This, of course, is dependent on clearing the SEC process and a favorable capital markets environment. In closing, on Slide 18, looking forward, our key priorities are clear. First, we are on track to separate NCR into two public companies in the fourth quarter. Upon separation, we believe each company will benefit from increased operating and financial flexibility in pursuit of their respective and distinct opportunities. We believe that spinning off NCR's ATMCo in a tax-free distribution is the best path to unlock shareholder value. But if other alternative options become available in the future that could deliver superior value, such as a whole or partial company sale of NCR, the Board continues to remain open to considering these alternative scenarios. Second, we expect the cybersecurity recovery to be mostly behind us in the near future. While our recovery process is ongoing, we quickly established a path that includes building out a new cloud environment. At this time, our most critical applications have been brought fully back online, safely and securely, and the majority of customer functionality has been restored. Over the next six months, we will redouble our efforts to protect our system from cyberattacks. Third, our teams are focused on our customers and executing our plan for 2023. As our success in the first quarter shows, we are off to a good start in 2023, and expect to drive sequential quarterly operating and financial improvement throughout the remainder of the year. Finally, I want to congratulate our CEO Designate post-separation, Tim Oliver and David Wilkinson. Tim and David have contributed greatly to NCR and are highly qualified to lead the two companies. On separation, Tim will assume the CEO leadership role of NCR ATMCo SpinCo, while David will assume the CEO role of NCR RemainCo. Until the separation, Tim will continue in his role as CFO of NCR, and David will continue as well as President of NCR Commerce. I look forward to working with both of them to execute a smooth and effective transition as the companies take their final form. On a personal note, I couldn't be more excited for both Tim and David, taking our companies forward and creating two great NCRs. I also want to congratulate Joe Reece, who was elected the Chair of the NCR Board earlier this week. Lastly, a special thanks to Frank Martire, who retired on Tuesday as Executive Chair after five years in that role at NCR. This concludes our prepared remarks for today. With that, we will open the call for questions. Operator, please open the line for questions.

And our first question comes from Paul Chung with JPMorgan.

Nice execution here. So just on digital banking, are you seeing pressure on your active user base kind of given some of the tough macro backdrop across regional banks? And then are you seeing any emerging trends developing? And can you also expand on the kind of new deals that were signed, were they competitive wins, renewals, and any nice momentum you're seeing there?

Yes. Thanks, Paul. On the first question around some of the impacts taking place in regional banks, I think we addressed this a couple of months ago when some of these issues first came up. We literally looked across all of our businesses, including digital banking, self-service banking, and based on the banks that were at risk or being impacted, it's really not a material number to us. On the digital banking side, at least what we've seen so far, there's not been any impact at all. So there's a little bit here and there, but it doesn't even add up to anything meaningful. We'll watch it, as we have in prior years, but we always look at a situation like this and consider that all those accounts are still out there for small businesses, consumers, and they’re going to end up somewhere. We have such a strong market share that we would expect, even with some shifts, that we'll end up in a good place. So at this stage, we're not concerned about that at all. On your second question about competitive nature, yes, everything we do right now is competitive. The nice one for us is SECU. It's not that the rest weren't nice, but that is a very large win for us — very competitive, second largest credit union in the country, over 2.5 million accounts. So that's very meaningful. We're excited to help them on their digital journey and really change how they engage with their clients. I think everybody showed up to compete there, and we’re very excited that we secured that particular deal.

Okay. Great. And then on the ATM side, are you still seeing regional customers remain engaged? Given some pressures occurring with your nearest competitor, can you expand on the competitive environment there? And then separately, what is spurring some of these larger ATM-as-a-Service deals?

Yes. I think in the first part, competitively, we chose a number of years ago to invest for growth, to build out our products, build out our services to be the best in the industry, build out our software and have industry-leading hardware. It's showing up now. As Tim mentioned earlier, it's a little stronger than we anticipated so far this year. We expect it to be strong for the full year, and we’re continuing to win in the marketplace for ATMs. The ATM-as-a-Service strategy we embarked on almost two years ago is yielding results. We genuinely believe this is a leverage business where if you can deliver it at a better price point and scale, not only across the country but globally, there's a strong opportunity here to drive a high-growth business. We’re seeing a desire to outsource and have someone deliver better quality and service levels, which we believe we can do because of our scale, capabilities, and partnerships like with Cardtronics. The sales team is very excited, and we’re looking forward to a strong quarter and a successful year ahead with ATM-as-a-Service continuing to expand.

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

Tim, David, congrats on the appointment. I wanted to ask about the capital structure. You talked about refinancing a couple of your notes recently, and I know the credit markets are a huge variable, but could you speak to your intentions regarding the capital structure going forward?

Sure. As we've talked a lot about delevering in preparation for the spin. We've not deployed that cash yet. We’ve paid down the revolver so far because the revolver rate is not that different from our long-term rate. That said, there are, as you know, two bonds we will have to take out. If those trade at a point where we think it's a good trade for us to go take them out in advance of the transaction that we feel comfortable about, we're likely to go out and buy some of those bonds in the open market. I’d love to go after some of the converts. We have $275 million of converts out there still; they are expensive. We just haven't seen any opportunities where it makes economic sense yet. So all the cash we're generating now is to delever to get us ready for the spin.

Got it. And just as a follow-up, if I was to think about the range of cash flow guidance, in your mind, what are the biggest variable factors that could take you from the high end of the range to the low end of the range? I know there are a lot of moving parts in the business, but I'm curious how you view the variables with respect to cash flows.

Working capital is the biggest variable coming into this quarter, but we did a great job. We generated $150 million in working capital in a singular quarter, which allowed us to outpace the $500 million high end of this range. Having done fully half of the low end in the first quarter of the year, I feel very good about reaching the high end of this range.

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

A couple of questions. Tim, you mentioned some numbers around ATM transactions, withdrawals, etc. If you could maybe go over those again, I couldn’t write them down fast enough. And maybe talk about what you feel is driving that, because I would imagine that comes to many as being a bit counterintuitive to see that kind of growth in that kind of resurgence.

We've been big believers in cash all along. Others have tried to talk us out of it. We felt good about the volume of transactions for some time. In this quarter, ATM withdrawals and cash dispense were at a six-year high. ATM withdrawals were up 6% year-over-year. Importantly, the amount of cash withdrawn per transaction was up another 13% year-over-year. So, consider that almost a 20% increase in the total cash we dispensed in the quarter. We feel very good about both our fleet and the efficiency of that fleet and the consumer behavior we're seeing.

Yes, I completely agree with everything you said there. Maybe, if you could spend a few minutes on the self-service banking business. Can you walk us through the demand standpoint regionally between the four parts of the world? Where are you seeing greater uptake from an as-a-service standpoint? Also, could you comment on the self-checkout flat? I believe that was an LTM metric that you shared. What's your view on that business for the full year?

Let me start with self-service, and Tim can jump in with any additional context. Overall, as Tim pointed out, the first quarter started out a little stronger than we had anticipated. As we look at the outlook for the year, it feels stronger than we might have even expected. This is true for self-service banking in total and also our shift to ATM-as-a-Service. Our shift to ATM-as-a-Service, as I pointed out in my numbers, cost us three points of growth across the board. We would have been at 7% adjusted growth instead of 4%. Regionally, I don’t see any region that’s more or less impacted; they are all doing reasonably well. We've seen good strength in North America. The ATM-as-a-Service uptake includes some nice deals in India last year, a significant partnership in the U.K. with Santander, and strong activity in the U.S with a lot of deals in the pipeline. We're seeing growing interest from community banks, credit unions, and larger global banks like Santander. This business is doing better than we previously expected, and we’re successfully transitioning towards ATM-as-a-Service model.

I’d add that all of the regions are performing well. We're seeing significant uptake in the North American market, which is our strongest margin market. We closed several notable deals, including an $80 million plus contract with First Citizens Bank. Our sales pipeline is strong, and we've held up well through supply chain challenges while maintaining customer commitments throughout last year. The supply chain is functioning effectively with improving costs, so we’re feeling positive about our continued growth and success in the ATM-as-a-Service model.

Running the math from what we thought just 90 days ago when we provided guidance for the full year, we anticipated a $150 million impact from shifting hardware to a as-a-service model for the year, which would put about a 7 point reduction in growth expectations. Now, I actually think we will not only exceed that $150 million but will also return to flat revenue for the full year. Our order book is strong, our business is doing great, and our outlook is optimistic.

And our next question will come from Ian Zaffino with Oppenheimer.

Great job on the cash flow side this quarter. How do we now think about the cash flow cadence? Typically, you see it mainly in the back half; now you're seeing it earlier on. Maybe walk us through how you're thinking about the cadence. Were there levers that you pulled in this quarter that you may not be able to pull again? I'm trying to understand it because it's fantastic free cash flow in the quarter, and I'd like to get my arms around it.

Some line items and free cash flow are zero-sum; you can only reduce working capital so far. We underperformed in working capital last year, so we had some dry powder coming into the year. We suggested we would likely overachieve in the first quarter against a more linear expectation. I’ve guided for approximately $50 million of free cash flow on about $4 billion of working capital outstanding in various forms. While it is a modest percentage, I’m confident in that number, and we could be slightly above or below it. However, being halfway towards the $500 million target at the midpoint of the year, with significantly more profitability expected in the latter half versus the first, I believe we will be in a strong position for the second half of the year.

Okay, great. Great job there. And then also on the dis-synergies, I know you touched on that a little. If you were to think about or bucket the dis-synergies or potentially quantify what these dis-synergies are, I don't know if you can address it now or if we'll have to wait for the Form 10 filing, but any additional color you could provide?

The $80 million to $100 million of dis-synergy costs we mentioned remains a good estimate. The cost actions we initiated last fall should offset those dis-synergies. We're getting clearer visibility and are confident in achieving our projections, especially as we see the margin benefits stemming from our actions.

Regarding actions we can implement on Day 2 following the separation, the scope for the ideas we discuss expands with every meeting we have. We're not going to make significant changes leading up to the spin, but once separated, both businesses will have opportunities for cost reductions that should provide upward pressure on performance. So, the $80 million to $100 million we’re expecting for dis-synergies appears to be accurate, and we do not see this impacting the future cost structure of either company.

And our next question will come from Matthew Roswell with RBC Capital Markets.

It's Matt Roswell here in for Dan Perlin. If we could take a look at the hospitality unit, what are your thoughts on trends through the quarter into April and what's been the recent demand for Aloha given that some of your competitors have been aggressive, especially at the lower end of the market?

Most of the growth in that business came from recurring revenue, which suggests that Aloha is competing exceptionally well at both SMB and enterprise levels. The business was a bit challenged on the hardware side; the post-COVID balance we experienced last year on POS in hospitality really voided revenue last year. However, we are still growing through it. Importantly, the majority of growth this quarter came from our recurring revenue streams.

And that does conclude the question-and-answer session. I'll now turn the conference back over to Mr. Mike Hayford for any additional or closing remarks.

Just a couple of closing thoughts. First, we're off to a really good start in 2023, and we're excited as we head into a very important year for us. The cash flow success in the first quarter, coupled with the cash flow we generated in the fourth quarter — $400 million in two quarters against the target we had of $500 million to delever — creates a lot of confidence in our team that we can get to the spin with the balance sheet at the right leverage ratio. Secondly, the activities around the spin that is planned to be completed early in the fourth quarter of this year are on schedule and on track. The teams are performing well. Lastly, as you saw from the announcement today, we've announced the leadership of the spin. Again, I want to add my congratulations to Tim and David. I know Owen will join me in this. We're excited that they're set to take the reins and execute our strategy for our shareholders. So, we look forward to providing an update next quarter. Thank you.

Thanks all.

Thanks.

Thank you. That does conclude today's conference call. We do thank you for your participation. Have an excellent day.