NCR Voyix Corp Q2 FY2023 Earnings Call

Good day, and welcome to the NCR Corporation Second 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 second quarter 2023 earnings call. Joining me on the call today are Mike Hayford, CEO; Owen Sullivan, President and COO; Tim Oliver, CFO and CEO Designate of NCR Atleos; and David Wilkinson, President of our Commerce business and CEO Designate of NCR Voyix. 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 August 2, 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'll also provide an update on our previously announced intention to separate NCR into two publicly traded companies. 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 of the highlights from the first quarter. First, NCR delivered strong performance that included solid recurring revenue growth and significant margin expansion and delivered over $150 million of free cash flow, which has allowed us to delever prior to the spin. Second, we are on track to separate NCR into 2 public companies in the fourth quarter of 2023. Following Tim's comment on our financial results, I will provide an update on those separation activities. Third, in the second quarter, we had slight year-over-year revenue growth on a constant currency basis and 5% recurring revenue growth, also on a constant currency basis. It's important to note that the revenue growth would have been 4% year-over-year without the impact of shifting to subscription. Fourth, adjusted EBITDA increased 17% on a constant currency basis from the second quarter of 2022. Adjusted EBITDA margin expanded to 19.6% this quarter, which represents a 260 basis point increase from the second quarter of 2022. And finally, NCR generated $154 million in free cash flow in the quarter. Over the past 3 quarters, we have generated over $550 million in free cash flow, allowing us to reduce financial leverage ahead of the separation. 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 across all of our KPIs. In Retail, we continue to deliver on our strategy to be the retail platform company of choice. During the second quarter, NCR achieved multiple platform lane wins as retailers choose the best path for them to the platform. The Save Mart companies, a California-based grocery store operating approximately 200 stores, selected Emerald as their next-gen point of sale. We also continue our market leadership position in self-checkout. RBR announced that NCR once again was the market share leader in self-checkout, with more than twice the share of the next largest supplier. This marks the 20th consecutive year that NCR has been the market leader in self-checkout solutions. In Hospitality, we continue to experience strong demand across our enterprise and SMB customers. In SMB, our payments attach rate for customers remains approximately 90%, driving a 45% increase in payment sites. In enterprise, Firebird's Wood-Fired Grill chose the NCR Aloha for point of sale. Aloha, with the NCR Commerce platform, will provide a cloud-based solution to transform and connect all of Firebird's fine dining restaurants across 21 states. In Digital Banking, we continue to have positive momentum. In the second quarter, Digital Banking sales activity was strong with 9 new customer deals and 18 digital banking renewals. We also continue to experience strong cross-sell/upsell momentum. In the second quarter, Cenovus, which has over $60 billion in assets, renewed its digital banking relationship with NCR and added the Terafina small business deposits module. In Payments and Network, we are making progress in both merchant acquiring and the Allpoint network. North America ATM withdrawals and cash expense continued to increase and remain at a 6-year high. International market expansion continues to accelerate. During the second quarter, we signed an agreement to deploy NCR's Cashzone ATMs and provide access to cash for travelers in the Barcelona Airport, which is one of the busiest airports in Europe. In Self-service Banking, we continued our momentum in our ATM as a Service solution. Interest in our offering is accelerating from both community banks and large financial institutions globally. In the second quarter, we signed 10 new ATM service deals, including Kiwi Bank and Union Bank of the Philippines. UIP is transferring operational maintenance and management of its ATM fleet, which includes over 400 ATMs, to NCR. The bank will increase operational efficiencies while strengthening compliance and security. And the Seacoast Bank, which streamlined operations with NCR's ATM as a Service solution, also extended customers' access to cash by joining the Allpoint network. With that, let me pass it over to Tim.

Thanks, Mike, and thanks to all of you for joining us today. I'll start on Slide 7 with a top level overview of our second quarter, which for every guided metric, we are at the higher end or above the guidance we provided back in May. As Mike summarized, in the second quarter, we drove substantial growth in recurring revenue, expanded our profit margins, particularly at gross margin, and generated $154 million of free cash flow. We continue to execute cost productivity actions that are and will generate incremental savings to offset any dissynergies arising from the planned separation. This quarter's results are demonstrative of the exceptional effort of our teams to simultaneously drive financial results, accelerate our strategic plans and ready the company for the pending separation transaction. Starting at the top left, revenue was roughly $2 billion, down 1% year-over-year as reported, and flat on a constant currency basis. The revenue composition consisted of a richer mix of software and services. Hardware revenue had a particularly difficult year-over-year comparison. You will remember then that a year ago Q2, we recognized about $50 million of hardware revenue that was pushed out of the first quarter due to supply chain and transportation issues. Most importantly, recurring revenue was up 4% year-over-year and up 5% adjusted for foreign exchange. We continue to have success transitioning from onetime perpetual sales into multiyear subscription-based revenue streams. In the second quarter, we shifted nearly $80 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 4 full points. The strong U.S. dollar compared to the year ago period had an unfavorable impact of $18 million, primarily within our retail and self-service banking segments. If we were to adjust for foreign exchange and the shift to recurring revenue, total revenue growth would have been about 4%. In the top right, adjusted EBITDA increased $50 million year-over-year to $389 million, up 15% year-over-year as reported and up 17% on a constant currency basis. Foreign currency exchange rates had an unfavorable impact of $6 million. Adjusted EBITDA margin expanded 260 basis points from the second quarter of 2022 to 19.6%. 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 310 basis points to adjusted gross margin rate. In the bottom left, reported non-GAAP EPS was $0.94, up $0.03 or 3% year-over-year as reported and up 9% on a constant currency basis. The strength of the U.S. dollar reduced EPS by about $0.05. The non-GAAP tax rate was 26.2% versus 19.2% in the prior year, and that impacted EPS by another $0.09. The prior year tax rate benefited from a favorable provision and a tax reserve adjustment. And finally, we generated $154 million of free cash flow from both higher profitability and the anticipated improvements in 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 3 quarters of those 5, we have already exceeded that target under a strong financial position heading into the separation. Moving to Slide 8, which shows our retail segment results. Starting at the top left, retail revenue increased 2% year-over-year as reported and increased 3% adjusted for foreign exchange, driven by growth in software and services. We also shifted roughly $30 million of high profit revenue that would previously have occurred upfront to recurring revenue that will be recognized over the next 4 to 7 years. This intentional deferral of upfront revenue to recurring revenue lowered revenue growth in retail by 6 points. Adjusted for foreign exchange and the shift to recurring revenue, retail revenue would have grown at almost 9%. Second quarter adjusted EBITDA increased 18% year-over-year, and 21% 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 in 2023. The adjusted EBITDA rate was 21.4%, up 290 basis points over the prior year. The bottom of the slide shows the retail segment key performance indicators. On the left are platform lanes, 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 28,000 lanes or 81% year-over-year. At the time of conversion, a platform lane drives an incremental $400 in annual recurring revenue or an increase of $11 million versus last year. The platform lane increase was driven by rollouts at 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. And once on the platform, the opportunity to cross-sell and upsell new features and functionality drives further average revenue per user expansion. In the center bottom is our self-checkout revenue. Self-checkout revenue was down 2% year-over-year. Timing of major hardware rollouts in the second quarter of last year versus the third quarter of this year caused that comparative temporal dislocation. And annual recurring revenue was up 3% year-over-year. Similar to the impact on revenue, currency rates did modestly negatively affect the annual recurring revenue calculations, including this one. Turning to Slide 9, showing our Hospitality results. Hospitality revenue declined $3 million or 1%. Lower point of sale hardware sales were largely offset by an increase in services and software revenue, including cloud services and payment processing. Adjusted EBITDA was up 30% year-over-year. Adjusted EBITDA margin rate expanded 620 basis points to a multi-year high of 25.5%, a richer mix of software and services revenue, pricing and cost reductions all helped push margin rates higher. Hospitality's key strategic metrics on the bottom of this slide include platform sites, payment sites and annual recurring revenue. Platform sites increased 9%, payment sites increased 45% and annual recurring revenue was up 8% year-over-year on higher average revenue per user at both new platform and new payment sites. The average conversion to platform sites currently drives incremental $7,000 a year in annual recurring revenue, while the average conversion of payment sites currently drives an incremental $4,000. Combined, the additional platform sites and payment sites contributed an incremental $25 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 increased 7% year-over-year driven by client wins, strong renewal momentum and cross-sell success at Terrafina and the channel service platform. We expect second-half revenue growth in this business to accelerate to about 10%. Adjusted EBITDA was down 5% year-over-year due to an investment in sales, marketing and R&D to grow this business faster. Adjusted EBITDA margin rate was 37.9%. 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% and annual recurring revenue was up a similar 6%. On Slide 11, we do some easy math to help you evaluate the combined segments of retail, Hospitality and digital banking. These segments will form NCR Voyix at 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 profit adjustments that reflect the planned perimeter of the transaction, and by synergies or dissynergies that result from the spin. The combined revenue for these segments increased $20 million or 2% year-over-year as reported, and 3% adjusting for currency. Recurring revenue was up 5% year-over-year. The combined adjusted EBITDA was up 16% year-over-year, adjusted for FX, and adjusted EBITDA margin rate expanded by 270 basis points to 24.8%. Let's move to Slide 12, turning back to our currently reported segments, in this case, the payments and network segment. Starting at the top left, payments and network revenue was flat year-over-year as reported and up 1% adjusted for FX. Adjusted EBITDA increased 2% year-over-year as reported and 3% adjusted for FX. Adjusted EBITDA margin rate expanded 50 basis points to 29.7%, driven by a richer mix of high-value transactions which more than offset higher cash rental costs. Because our cash rental costs are calculated using short-term interest rates and are recognized as cost of goods, they have a significant drag on results. That said, a hedging program, algorithm and operational optimization and pricing adjustments have mitigated much of the impact of interest rates. ATM cash rental costs increased $35 million year-over-year on a gross basis and $12 million on a net basis after these mitigation efforts. The bottom of this slide shows payments and network key strategic metrics. On the bottom left, endpoints increased 1% year-over-year. In the center bottom are transactions, a KPI that illustrates the payments processed across our Allpoint network and across our merchant acquiring networks. Transactions were up 2% year-over-year on a trailing 12-month basis, fueled by an ATM withdrawal growth rate of 7%. The rise in both the frequency of cash withdrawals and the amount of cash withdrawn per transaction led to an increase in the total amount of cash expense globally to a level the highest we've seen in the better part of a decade. Annual recurring revenue in this business increased 1% year-over-year. Slide 13 shows our self-service banking segment results. Self-service banking revenue was down 3% as reported and down 1% on a constant currency basis, primarily due to the intentional shift of recurring revenue which resulted in lower ATM hardware revenue reported in this quarter. Recurring revenue was up 10% on an FX-adjusted basis over the prior year. We continue to have success transitioning our self-service banking business from onetime perpetual sales into multiyear subscription-based revenue streams. During the quarter, we shifted roughly $36 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 5 points. Adjusted for FX and the shift to recurring revenue, self-service banking revenue growth would have been closer to 4%. Adjusted EBITDA increased 19% year-over-year and was up 22% on an FX consistent basis. Adjusted EBITDA margin expanded 470 basis points to 25.6%. 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 higher-margin recurring revenue streams. The bottom of the slide shows our self-service banking key metrics. On the left, software and services revenue mix increased 200 basis points to 69%. ATM as a Service units increased 304% year-over-year to 18,000 units, and the shift to recurring revenue continues to gain traction, driving annual recurring revenue up 7% year-over-year. On Slide 14, similar to the review presented on Slide 11 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 Atleos at the time of the separation. As I said before, the unallocated revenue and corporate costs are not reflected here. The combined revenue for these two segments declined $18 million or 2% year-over-year as reported and 1% adjusted for currency. The reduction was primarily driven by the intentional shift to recurring revenue. Recurring revenue increased 4% year-over-year as reported and 6% adjusted for currency. The combined adjusted EBITDA was up 14% year-over-year adjusted for FX. Adjusted EBITDA margin expanded 330 basis points to 26.4%. 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 $154 million of free cash flow in the quarter driven by higher profitability and an improvement in working capital. Days sales outstanding improved by 3 days and days of inventory improved by 2 days sequentially. 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 over $550 million of free cash flow in the first 3 of those 5 quarters. The slide also displays our net debt to adjusted EBITDA metric, which has improved to a leverage ratio of 3.4x, down from 4x in Q2 of 2022, driven by higher profitability and higher cash generation. We remain well within our debt covenants and have significant liquidity, with over $900 million available under our revolving credit facility. We have a robust balance sheet, ample liquidity and strong financial stability to support our growth and the spin transaction. And finally, on Slide 16, we reiterate our full year 2023 guidance that we provided back at the beginning of the year. That said, after a solid first quarter and a very strong Q2, we now expect to be at the higher end of all of these guided ranges for all financial metrics. And for those of you building models, we expect to further the trend of sequential quarterly improvement in revenue and profitability in each of the remaining 2 quarters of 2023. With that, Mike, I'll send it back to you.

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 general manager unit. These teams are ready and have been ready for the spin. Additionally, there are areas of shared services functions such as legal, tax, HR, treasury, IT and others that are well underway in the process of preparing for the separation. We continue to make progress in our process with the SEC and recently submitted an amendment to our Form 10 registration statement. We have already submitted a letter with the internal revenue service regarding the tax-free nature of the separation. At this time, we are expecting the timing of the separation to be in the fourth quarter. As disclosed in the Form 10, the timing of the separation is subject to a number of conditions, in particular, being declared effective by the SEC and the state of the capital markets. At this time, we believe the capital markets are favorable to us completing a spin. Once we receive regulatory approval, we will raise new debt and then execute the spin. In closing on Slide 18, looking forward, our key priorities are clear. First, we are on track to separate NCR into 2 public companies in the fourth quarter. Upon separation, we believe each company will benefit from increased operating and financial flexibility in pursuit of its respective and distinct opportunity sets. Second, we believe that spinning off NCR Atleos in a tax-free distribution is the best path to unlock shareholder value. But should 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. Third, we have made significant strategic progress transforming NCR to a software-led as-a-service company. We have momentum and a clear strategic vision as we transition customers onto our software and payments platforms, with customers on the platform increasing their spend with NCR. Fourth, we expect to continue our quarterly operating and financial improvements. And finally, I'd like to extend an invitation to each of you to participate in our virtual Investor Day for both debt and equity investors, which is scheduled for September 5 of this year. We are looking forward to the event and intend to take a deep dive into our strategy and strategic goals for both NCR Voyix and NCR Atleos. This concludes our prepared remarks for today. With that, we will open the call for questions.

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

I had a two-part question on free cash flows and leverage post spin. First, on the free cash flow, it's good to see things trending seemingly ahead of schedule. I know you're guiding to the top end of that $400 million to $500 million range. My question there is, given the trajectory of free cash flows, is it presumable to potentially expect upside to that $500 million? Or are there any factors that were positive factors that were pulled forward? And then, my second part of that question is just how to think about leverage initially post spin? I know you haven't recapitalized the businesses yet, but any color around that would be helpful.

Yes, sure. So on cash generation thus far this year, we knew that we had about $200 million of cash flow that we should have delivered last year that we used to support working capital as we went through some supply chain issues in 2022, and we committed to harvesting that across Q4, 1 and 2. And so, it's been a very strong cash conversion period. And we've, for instance, a year ago, we're down $149 million in inventory loan. Our receivables past dues are down, so we've done a great job of managing working capital and get us back to a level that's, let's call it, sustainable. There's not a lot of cash to be harvested from excess working capital at this point for the remainder of the year, so our conversion at this point will be more closer to profitability. I expect profitability to be higher in each of the next 2 quarters, and I expect to generate around $100 million or so a quarter, over the next 2 quarters. That would put us through the high end of our range. But remember that there are going to be onetime cash costs associated with this spin that we need to absorb. I didn't take that range up only to say we will need to invest some cash back into the transaction and pay all of our advisors and all the rest to get this thing done. But even with that $100 million or so outflow associated with onetime cost during the spin period, we'll be at the high end of our guided range.

Got it. That's really helpful.

The other half is related to leverage coming out. Yes, we'll be in the market right after Labor Day weekend to begin placing the debt we need. We anticipate about $2.5 billion of debt on a net basis, which translates to roughly $2.9 billion on a gross basis for SpinCo. Atleos will then have a leverage ratio over 3.5x, estimated to be around 3.7x initially, and we will strive to reduce that to the 3x range as soon as possible. RemainCo, or Voyix, will have a leverage ratio above 3x but below 3.5x, likely around 3.2x or 3.3x as we finish. They will retain most of the current debt, which carries a favorable coupon, resulting in lower interest expenses. I believe that business will also likely deleverage further post-spin and could safely drop below 3x before eventually moving toward 2.5x over time.

Got it. Okay. And as a follow-up, one of your peers and I guess, customers as well in Euronet noted some slowdown in cash withdrawal activity in Europe. And I know you're not as exposed to DCC and cross-border as they are, but if you could just quickly comment on some of the trends you're seeing across Europe in terms of cash withdrawal activity?

Globally, our cash withdrawal activity increased. As I mentioned earlier, not only did the number of cash withdrawal transactions rise, but the total amount of cash withdrawn also increased. This trend is more pronounced in the U.S. than in Europe, but the U.K. still experienced an increase in both cash dispensed and transactions. In our new markets in Portugal, Greece, and some Southern European regions where we opened new endpoints, we are observing strong growth activity. This contrasts with your concern.

Got it. Appreciate the color, guys.

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

Just a couple of questions. First, on the retail business, Tim, in your prepared remarks, you mentioned a little bit of a timing dynamic. Could you touch on that again? Because it sounded like it may impact the third quarter of this year, if I heard you correctly. Could you just talk through that?

Yes. I should have been clear. We had a very big second quarter a year ago in scope shipments. We had a large rollout for one of our major customers. We did not have that in Q2 of this year, but we'll have a similar rollout in Q3. And so it made the comparison in this year's Q2 easier or harder, and should make the one in Q3 a little bit easier.

Got it. Okay. And then, just with respect to the self-service banking business, can you maybe comment just globally on what you're seeing overall in terms of ATM demand? And I thought you did a great job in Hospitality, talking about how adding an incremental site for platform and payment is worth X and Y. Could you do the same thing? What does that math look like for ATM as a service?

Yes. The ATM as a service business, if you take the revenue stream over the first 7 years of the life of that ATM, it's going to be about 2.5 times the revenue that you would have gotten from an upfront sale with perpetual license and a service agreement. When we wrap the totality of the ATM as a service business around the unit, you should expect 2.5 times of revenue over that 7-year period with a crossover point at about 22 months of when your crossover revenue starts to accrue to the upside. As you know, as in the traditional sale, our current model, much of that revenue occurs in year 1. In the new ATM as a service model, that new 2.5 times revenue will occur linearly across the 7-year period with a crossover point at about 22 months of when your crossover revenue starts to accrue to the upside. Yes, everything is looking good. As we mentioned in the first quarter, we expected our revenue in this business to decline by 3% or 4% for the year, mainly due to flat unit sales and the transition to recurring revenue from ATM as a Service. However, we will meet or surpass our ATM as a Service targets for the year, and this business will likely have revenue that is either flat or slightly up for the full year. This means we are performing 3 to 4 points better in terms of growth than we anticipated at the start of the year, and the demand is strong across the board. We enter the third quarter with a slightly larger backlog than we did at the start of the second quarter.

And I'll just add some comments. So we think the demand environment is still good out there for ATMs, but we're also benefiting from maybe the challenges one of our close competitors is facing right now. And then, I think the other big part is Tim talks about ATM as a service. I think we hit that market just about right in terms of when we came out with an offering. As the demand side has shifted to have more full service full stack outsourcing, we just have to be there with, we think, the best offering. So, I think those two things combined have created a much stronger year in self-service banking for us than we anticipated.

Great.

And the next question will come from Kartik Mehta with Northcoast Research.

Tim, you alluded to this a little bit, but I want to make sure I understood. You had a fantastic second quarter but you didn't increase your guidance, you kind of said the higher end of the guidance. And I'm wondering, is that strictly because of the separation of the company, concerns about the macro environment and want to be cautious in the second half? Or something else completely?

Yes. No reason to be cautious. I think, look, we're well ahead of our budget for both revenue and profit at this point in the half. We're about $25 million ahead from where we thought we'd be from an EBITDA perspective and somewhat ahead of revenue as well. If you project those forward, we will pay the high end of our range. If you presume, we started at the midpoint of our range, we'll pay at the high end of this range. If I thought that the most likely outcome was above the high end of the range, I would have raised our guidance, but I don't believe that's the case. I believe that we're pacing the high end of that range is a likely outcome for us, so we left it in place. But that wasn't meant to caution any excitement on this quarter. It was a terrific quarter. It came in much better in every regard than we thought. We made great progress nearly everywhere strategically. And what's really important is the cost actions we've taken, and you can see it in gross margin, up some 300 basis points year-over-year. And we're keeping all the, let's call it, indirect costs out, that we took out last year when it was a little harder to control direct costs. So, I feel very good about where we are. We're going to have a great year, and the second half will be better than the first. I think we'll post growth in the second half that looks relatively similar to the first half.

And then, David, just on the retail/Hospitality business. Toast and the companies like that are making a lot of noise and seem to be gaining share. And I'm just wondering, how you think your product is positioned and how you would portray kind of market share, and what's happening with NCR's products?

Yes. Sure, Kartik. So I agree that we see Toast growing their share in the market, adding sites. We too are adding sites as we look, as Tim described, we're adding both payment sites and sites connected to our platform that allows us to expand the recurring revenue. It's not a zero-sum game in that space either, so they're playing in a slightly different segment than the core enterprise segment that we play in as well. So from a product side, we're very well positioned. We're seeing good feedback from our customers in terms of what we're hearing on Net Promoter Score and net new wins, so we're continuing to win. We're continuing to win against the competition, and we think we're well positioned.

And our next question will come from Erik Woodring with Morgan Stanley.

I have two questions as well. Firstly, it's encouraging to see strong growth in several of your key performance indicators, such as platform lane conversions in retail, platform payment sites, and Hospitality, as well as units in ATM as a service, all showing significant growth. I understand that the shift to subscription represents a 4-point headwind, and as you indicated, it may take some time to see the revenue benefits from this change. Can you help clarify when we might expect a noticeable increase in these KPIs to actually contribute to an inflection in total revenue growth, ideally bringing it closer to the targeted range of 6% to 9% at the Holdco level? I also have a follow-up question.

Yes. Let me discuss the segments we currently report. In Hospitality, there was significant growth in software and services this quarter, leading to substantial margin expansion due to the favorable revenue mix. However, they fell short in POS hardware, which isn't the main focus for that business or our two commerce sectors at this time. Overall, it was a strong quarter, and I believe this trend will continue in retail. As Hospitality and retail make up a larger share of the overall business, the platform will start to have a more significant impact. We're calculating the numbers and translating them to ARR to help illustrate these metrics. While they're currently small, they are crucial for our future growth. When you integrate a lane onto the platform, the ARPU tends to double right away, generating about $400 initially, and then it increases from there. Unlike the Hospitality business, where you quickly see the upside from software and services, the retail side requires a bit more time to realize that benefit. Initially, you double your revenue stream with the new platform lane, but it takes about 12 to 18 months to upsell and cross-sell additional products, significantly increasing the average revenue per user. I anticipate that for 2024, this business will experience relatively modest growth as it shifts toward a service model, but still within the mid-single digits. So, future growth periods are expected to grow in the mid-single digits, which I don't think is a negative result.

Awesome. That was really helpful color. And then maybe, Michael, I know you keep kind of acknowledging NCR would consider alternative scenarios beyond the current spin that they emerge. But, can you maybe share if you've had any of those conversations? Or separately, at what point is it too close to the proposed spin, where you'd kind of have to shut the door on any alternative options? And that's it for me.

Yes, I want to emphasize that it's somewhat rhetorical to claim that a public company, including its CEO and Board, is open to suggestions for increasing shareholder value. We have made this clear over the last 18 months. We initiated the spin process nearly a year ago, at the end of September, believing it was a course we could manage and, crucially, one that would enhance shareholder value by separating the two companies. This is the strategy we intend to pursue. That said, we do get inquiries frequently; discussions about options are a constant for public companies. Currently, our entire team is focused on the spin, which we expect to complete in the fourth quarter, and that remains our primary plan.

And we have a question from Ian Zaffino with Oppenheimer.

This is Isaac on for Ian. I just had one question regarding costs. I know you mentioned it in the prepared remarks, but what have you observed in terms of component, labor, and freight inflation? It seems that things have been improving, but I'm curious about what your guidance assumes. Does it suggest a continued normalization or that inflation will remain in the same range?

Yes. The guidance for the full year always presumed that we would lap those difficult environments as we started this year. We've seen the savings in premium freight and premium labor such as the lack of linear manufacturing and the need to ship products much more quickly last year. We've lapped that now. The component shortages that we experienced have been solved not just because there's more availability, but because we went and requalified a bunch of new vendors and new designs to make sure that we're insulated or somewhat more insulated from that dynamic going forward. So good old-fashioned hard work from a productivity perspective, better work from our supply chain group, and the elimination of some of the premium freight is all coming through as we expected. It will continue in the second half of the year. As I said earlier, we'll expand margin in the second half of the year about 2 points, then we were able to get to almost 2.5 points of margin expansion in the first half of the year. So, it's very similar improvement. It continues on through. And the cost-saving actions that were taken in Q4 of last year and in Q1 of this year are also showing nice returns.

And that does conclude the question-and-answer session. I'll now turn the conference back over to Mike Hayford.

Thanks. Thanks, everybody, for joining us today on NCR's second quarter earnings call. As you can all see, the NCR team delivered on an outstanding quarter, literally across the board. And we exceeded all the expectations that we came into the quarter to deliver. I would say, given the potential for the distractions across our entire company during this time of guiding towards the spin, especially proud of the way the team kept the focus, kept the focus on the customers, kept the focus on execution, kept the focus on delivering really tremendous numbers for the quarter. So I want to thank everybody on the NCR team for making that happen. As we get closer to the spin reflected in the last 5 years at NCR, our team here is very proud of the fact that we have been able to transform NCR into a software-led as a service company. We've increased our recurring revenues close to 65%. That was in the 40%, 45% range that was about 5 years ago. We've expanded adjusted EBITDA, as you saw this quarter, close to 20%, to the 500 basis point improvement from when we started, when we were a more hardware-centric company, and we continue to approach almost 80% of our revenue coming from software and services. We started about 5 years ago with the customer first strategy. In 2018, we rolled that out. When we did that, our Net Promoter Score was 14. And for those of you that follow Net Promoter Score, 14 is not very good. Each year, we've continued to improve. Our whole team has put a focus on it. And I'm proud to say in our most recent survey, we scored a 61, which is quite an improvement over 14, 5 years ago. If you think about the future of NCR, I could say that that indicator of strong customer set and that strong improvement over the time period is possibly the best indicator of future success, in this case, both companies. We now have happy customers. Happy customers are keen to executing the strategy, accelerating the growth and transforming NCR into software services-led company. That success is driven by the efforts of every NCR team member each and every day as they take care of our customers. Over the last 5 years, I had the chance, Owen has been with me on a lot of trips, David, Tim, and we've got to meet with our customers around the globe and our employees around the globe. And when you get out in the field and see that and you see what makes this special, it really is the 35,000-plus NCR employees literally at every corner of the globe that work every day hard, work hard to make NCR, the company, put us in a strong position and put us in a real good position to create these two great companies out of one. I know Owen sitting here would agree with me that we're very excited to be turning over the reins to Tim and David at NCR Voyix and NCR Atleos to continue to execute the strategy, take care of our customers, take care of our employees, increase shareholder value. I'm confident that both will do great running their respective companies, and that both new companies will create long-term shareholder value. I'm going to thank everybody for joining us today, on our second quarter call.

Well, thank you. That does conclude today's conference. We do thank you for your participation, and have an excellent day.