NCR Voyix Corp (VYX) 2019 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to today's NCR Corporation Second Quarter Fiscal Year 2019 Earnings Call.

As a reminder, today's conference is being recorded.

And at this time, I'd like to turn the floor over to Mr. Michael Nelson, Vice President of Investor Relations.

Please go ahead, sir.

Good afternoon, and thank you for joining our second quarter earnings call.

Joining me on the call today are Mike Hayford, President and CEO; Owen Sullivan, COO; and Andre Fernandez, CFO.

Before we get started, let me remind you that our presentation and discussions will include forward-looking statements.

These statements reflect our current expectations and beliefs, but they're subject to risks and uncertainties that could cause actual results to differ materially from those expectations.

These risks and uncertainties are described in our earnings release and our periodic filings with the SEC, including our annual report.

On today's call, we will also be discussing certain non-GAAP financial measures.

These non-GAAP measures are described and reconciled to their GAAP counterparts in the presentation materials, the press release dated July 30, 2019, and on the Investor Relations page of our website.

A replay of this call will be available later today on our website, ncr.com.

With that, I would now like to turn the call over to Mike.

Thanks, Michael, and thank you, everyone, for joining us today for our second quarter earnings call.

I will begin with some of my views on the business before turning it over to Andre, who will review our financial performance as well as discuss our updated outlook for 2019.

Then Owen, Andre and I will take your questions.

I'll begin on Slide 4 and an overview of our second quarter performance.

We continue to drive improved execution and our second quarter results exceeded our expectations.

We generated consolidated revenue growth of 14% on a constant currency basis, with higher revenues in each of our segments.

A key driver of our second quarter performance was strong results in our Banking segment, where total revenues were up 23% constant currency and ATM revenues were up 78% constant currency.

The strong ATM revenue growth was driven by strength in the Americas and Europe.

This was supported by increased ATM-related software and services revenue growth.

This quarter, we also made progress advancing our strategic growth platforms as well as staying on track for a broader integrated payments processing platform launch later this year.

We also successfully targeted inorganic M&A opportunities that are consistent with our digital first and recurring revenue focus.

Finally, we are raising our full year 2019 revenue outlook and reaffirming earnings and cash flow guidance.

Andre will discuss this in greater detail during his remarks.

Moving to Slide 5 and an overview of our financial performance in the second quarter.

Consolidated revenue was $1.71 billion, up 11% as reported and up 14% on a constant currency basis.

Again, the strong top line performance was driven primarily by our Banking segment.

Adjusted EBITDA increased 12% compared to the second quarter of last year.

Non-GAAP EPS was $0.76 per share, which was up 17% as reported and 27% constant currency.

FX headwinds lowered EPS by $0.05 year-over-year.

Lastly, free cash flow was $9 million, which was down from $27 million during the second quarter of 2018, due to higher working capital.

As a reminder, our historical free cash flow linearity includes higher working capital requirements earlier in the first half of the year.

We remain confident in our full year free cash flow guidance.

Now turning to Slide 6 and an update on our strategic growth platforms.

These are the 6 areas where we are accelerating investment with a goal of advancing our shift to higher-margin between software and services revenue and driving accelerated revenue growth in the future.

We are making steady progress on the journey to bundle solutions that drive a shift to subscription pricing.

Our goal is to provide a better purchasing experience for our customers and simplify quoting and configuration process for our sales team, which should lead to profitable growth for NCR.

We'll begin with digital first banking, where we continue to see improved organic growth.

We recently shifted 8 products from perpetual licensing to recurring, continuing our journey to becoming a recurring software and services-led company.

We also acquired D3 Technology earlier this month, which extends the reach of our digital banking solutions.

In digital first restaurants, we recently launched Aloha Essentials, which bundle software, services, hardware and payment and have received positive customer feedback.

We have been making steady progress on Aloha's migration to the cloud with general availability targeted for early next year.

In digital first retail, Emerald, our next-generation cloud-based retail point-of-sale solution is currently in pilot and on track for general availability later this year.

We have created an offering that includes all the essentials required to run a grocery retail environment, including point-of-sale, loyalty, payments and frictionless shopping components.

In digital connected services, we continue to expand our customer base.

A top U.S. bank recently selected NCR's digital connected services capability for multivendor service for the bank's fleet of more than 12,000 ATMs.

Our digital connected services include a portfolio of managed and support services that will help the bank reduce total cost of ownership, drive higher ATM availability and enhance the customer experience.

In digital convenience and fuel, we have created a package that bundles the software, services and hardware required to run a convenience and fuel retail chain.

And finally, in digital small business essentials, we launched NCR Silver One, our all-in-one point-of-sale solution that integrates payment processing with NCR Silver in a monthly subscription package.

Overall, these 6 strategic growth platforms will remain investment priorities for NCR as we look to strengthen our software and services products for sustainable long-term growth and increase in recurring revenue.

Now to Slide 7. We made great progress in our payments business during quarter 2 and continue to execute to plan.

We have completed payments integration for NCR Silver and are in controlled deployment with a broad array of customers.

Our integrated NCR Silver One offering is scheduled for general availability in August.

In parallel, we are executing on our plan to integrate payments with Aloha and will be moving to a controlled deployment in the fourth quarter.

We have begun planning payments integration with other NCR POS systems that serve other market segments.

We anticipate further profitable growth in our payments business as we penetrate additional market segments with those systems.

We look forward to sharing more about these plans in future earnings calls.

Now turning to Slide 8 and an update in our recent M&A activity.

Our recent acquisitions are consistent with our strategy to add to our software product portfolio, further expand our global distribution and increase our services revenue.

Earlier this month, we announced the acquisition of D3 Technology, a provider of online and mobile banking solutions for the large FI institution markets.

The addition of D3 immediately unlocks new market segments for NCR's digital banking, including large U.S. banks and eventually expansion into international markets.

Several months ago, we acquired Texas P.O.S., which increases our sales and services presence through the local office in the Texas region, allowing us to reach more customers with our expanded product offerings.

We will expand the reach of our services offerings in Brazil through the acquisition of OKI Brasil IT services.

Upon closing, this transaction will allow us to deliver expanded service offerings, including additional support options for banks, retailers and restaurants.

And finally, we recently announced our intention to purchase minority interest in NCR Manaus that is indirectly owned by Banco Bradesco.

Once approved under local requirements, this deal will enable NCR to more broadly service our customers in Brazil by leveraging our manufacturing and engineering operations.

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

Thank you, Mike.

Slide #9 shows our Banking segment results.

Banking revenue increased 23% constant currency, led by a 78% constant currency increase in ATM revenue, driven by both higher backlog conversion and still healthy order rates.

Software and services related to ATMs also contributed to the year-over-year increase in segment revenue and we grew our hardware maintenance backlog, a future annuity stream, both from the ATM revenue and several meaningful large customer wins in the quarter.

We are seeing a stronger than expected ATM replacement cycle in addition to Win 10 upgrades, with particular strength in the quarter in the Americas and in Europe.

Operating income increased 47% constant currency, driven by higher volume and a favorable mix for our ATMs as well as higher software margin pulled through from the ATMs and lower third-party content on non-ATM software sales.

As I just mentioned, we continue to see strength in both orders and backlog in our Banking segment.

Additionally, our digital banking unit is poised for its next phase of growth, with the addition of Omaha-based D3 Technology to our Digital Banking business.

Now moving on to Slide #10, which shows our Retail segment results.

Retail revenue increased 6% constant currency, helped by our JetPay acquisition, which represented about 2 points of this growth.

In addition, our self-checkout solution recorded solid revenue gains in the quarter, while the services side also grew due to higher hardware maintenance activity, both driven by customers in North America.

Operating income increased 14% constant currency, primarily driven by services productivity improvement initiatives, partially offset by JetPay-related expenses.

Slide #11 shows our Hospitality segment results.

Hospitality revenue increased 3% constant currency, driven by an increase in cloud revenue from our NCR Silver and Aloha products as well as payments revenue from our JetPay acquisition.

Operating income decreased 36% constant currency, driven by an unfavorable revenue mix and continued investment in customer satisfaction initiatives, including our channel programs.

We are also investing in programs to enhance our technology and shift revenue to a recurring model, which includes Aloha's migration to the cloud.

During the quarter, we launched bundled subscription packages via our Aloha Essentials offering.

Although there was minimal financial impact during the second quarter from the shift to subscription pricing, the change is a strategic focus for us as we will look to accelerate the investment in these programs.

Now to Slide #12, where we provide our second quarter revenue results under our previous operating segments.

Software revenue increased 7% constant currency driven primarily from our JetPay acquisition as well as ATM-related software revenue.

Services revenue increased 5% constant currency driven primarily by an increase in recurring maintenance revenue, while both our installation and hardware maintenance backlogs grew in the quarter.

And finally, hardware revenue increased 33% constant currency driven primarily by ATM revenue growth of 78% constant currency, while the combination of self-checkout and point-of-sale added additional growth.

On Slide #13, you can see free cash flow, net debt and adjusted EBITDA for the quarter.

Free cash flow was $9 million in the quarter, down from $27 million in the prior year due to higher accounts receivable as a result of increased billings.

We exceeded our internal plan this quarter and remain on track to hit our free cash flow target for the full year.

Slide 13 also shows our net debt to adjusted EBITDA metric, with a leverage ratio of 2.8x for the second quarter of 2019, which is down slightly from 2.9x at the end of the first quarter.

With no share repurchase this quarter, good cash repatriation and limited M&A activity as our acquisition of D3 Technology closed early in the third quarter, we were able to reduce our leverage sequentially from the first quarter.

We are comfortable with our current debt, leverage and maturity profile.

While the next maturities in our debt stack are not until early 2021, both the bank pro rata and high-yield bond markets are strong at the moment for a company with our credit profile and we believe represents a unique opportunity to refinance a portion of our debt.

As a result, we have initiated conversations with several members of our bank group and are proactively evaluating alternatives to optimize our debt capital structure in light of these favorable market conditions.

While the exact instruments, pricing and tenors are being evaluated, it is possible that we will complete a portion of this debt refinancing by the end of the third quarter.

On Slide #14, you will find our full year guidance for 2019.

We are raising our revenue growth guidance to a range of 3% to 4%, up from the previous range of 1% to 2%.

The increase in guidance is primarily attributable to our solid revenue performance through Q2 driven primarily by higher ATM sales.

Recall the margin on these sales is lower than the company average, which will limit the flow-through to EPS.

Also included in this revenue guidance are expected FX headwinds of approximately 1.5%, although it could trend slightly higher if the dollar strengthens against other major currencies due to the global nature of our business.

Also, as our business model changes and we begin to bring new products to market that will generate higher recurring revenue streams, we will begin to shift from perpetual license revenue that is recognized upfront to either term or subscription-based revenue that is recorded over time.

This shift may have a dampening effect on our overall revenue as we grow our recurring revenue base.

While this shift was immaterial in the second quarter, as we move through the remainder of 2019 and beyond and roll out our new offerings, we'll update you as to our progress as well as the impact of this shift on our financials.

We are reaffirming our full year earnings and cash flow guidance.

We are also seeing the benefits of cost actions taken the last several quarters, including the $100 million action taken at the end of last year.

In the second quarter, operating expenses as a percentage of revenue was down 130 basis points constant currency, year-over-year.

Although we expect further benefits, we will continue to invest in solutions that enhance the competitiveness of our products and in efforts that improve customer satisfaction.

As we stated on our last call, our 2019 adjusted EBITDA is expected to be $1.04 billion to $1.08 billion.

Our 2019 GAAP EPS is expected to be $1.91 to $2.01 and includes restructuring and transformation charges of approximately $60 million.

Our non-GAAP EPS is expected to be $2.75 to $2.85 for the year.

We have assumed a tax rate of 23% to 24% and a share count of 153 million shares.

We enjoyed a lower tax rate in both the second quarter and the first half of this year due to several discrete tax items that are not expected to repeat in the second half of the year.

Our guidance includes roughly $0.05 of dilution in the second half of the year related to our acquisitions year-to-date, while excluding any costs that may result from a potential refinancing of our debt.

Again, we expect free cash flow for the year to be in the $300 million to $350 million range.

We expect the linearity of our cash flows to follow a similar pattern to previous years, with the majority of free cash flow generated in the fourth quarter.

The fourth quarter will represent a tougher revenue comp for us due to the revenue strength we recorded in the fourth quarter of last year.

We expect approximately 23% to 24% of the full year EPS to be generated in the third quarter.

Our Banking segment should have another strong revenue quarter in Q3 driven by our increased ATM backlog position.

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

Thanks, Andre.

In closing, we delivered a solid first half to 2019 through improved execution and a relentless focus on our customers.

We will continue to invest in the strategic growth platforms that will help power the future of our industries and customers.

The targeted investment in our key growth initiatives will be supported by the broader rollout of our integrated payments platform later this year in an ongoing commitment to driving productivity enhancements across our operations.

In addition, we are unlocking new markets for our solutions through strategic tuck-in acquisitions and further advancing our mix shift to software, services and recurring revenues.

All of this is consistent with our goal of building a stronger NCR.

We have made notable progress, strengthening our foundation for sustainable, long-term value creation.

The entire NCR team enters the second half of the year with a clear commitment to delivering competitive differentiation and success to our customers.

Thank you for your time.

And now, Andre, Owen and I will take your questions.

(Operator Instructions) And first from RBC Capital Markets, we have Dan Perlin.

Congratulations on a nice print.

Obviously, there will be a lot of [spend] on the ATM, but I wanted to start on the area that looked a little weaker to us, which is really in Hospitality.

And specifically, I'm just trying to make sure I understand how the cadence of that business segment transitions from legacy license on Aloha to more of these recurring revenues.

And the margin in the quarter was definitely below our expectation, and you called out mix, but I'm just wondering if you could put a little finer point on that and then how that might shift in the back half of the year as you make that transition.

Yes, Dan, thanks.

I'd say 2 things on Hospitality.

The first one I'd say is -- maybe impacting margins is just we continue to focus on -- and that's predominantly our restaurant business, focus on customer sat execution and we put a little money into that this year, which is bringing down the margins a little bit, and that was something we did by design.

And then secondly, on the transition, Andre talked about his comments that we are continuing and I spoke to some of the specific products that we've rolled out.

We're continuing in second quarter, we did a number of different areas, including the Aloha Essentials, where we started bundling and selling it on a monthly basis.

Those numbers that we saw roll through where in the bandwidth that we expected for the second quarter and we expect to see that for the full year in the guidance that we've given, just to see that kind of numbers and the impact.

But it does have an impact when you look at year-over-year.

We are taking some what would have been sold as a license or hardware upfront and we're rolling that into monthly subscription fees in Hospitality.

So I don't think there's anything for us that is of concern.

We know we've got to focus on customers, customer sat, and we know we have to focus on getting our next-gen product out and at the same time, we're shifting the whole model for how we sell and book revenues.

I was just going to say the third leg of that stool is the channel strategy.

So we've spent a fair amount of time along with the customer sat challenges and issues and responding to that money beyond that is addressing the channel strategy and I think there were some -- our view was there were some steps, missteps in that area we are trying to resolve those, invest back in those and so there's some effort going into that group as well.

And we feel good about the progress we're making there.

Can I just shift gears for a second on the digital first banking?

You talked about 8 clients, I guess converting over to recurring revenues.

I'm wondering -- you have D3 now and then you had Digital Insight, I'm trying to understand kind of the interplay between those 2, I think they go after different sizes of the market.

And I'm just wondering what kind of success you're kind of having with the digital banking strategy in the quarter around DI and then how that again, kind of dovetails into D3, given they are different sized banks.

Well, kind of 2 different questions.

The one -- on the 8 that converted, those were software license deals that we'd typically had done perpetual.

They're not really in digital banking, they're not in DI.

But they are in our other suite of products that we got market around the globe.

And we have again made a conscious decision not to sell perpetual license.

So as we go out market during the quarter, we would sell -- and recurring to us, we'd like to do monthly subscription or we'll do term, if we have to, based on how that market, how the customer wants to purchase.

So that's -- so those were not related to the DI.

DI, we had a really good sales quarter in the first quarter.

We had really good sales [from that] in the second quarter.

I don't think we announced a lot of new deals.

But I think we feel pretty good about where that product is today, particularly versus a year ago in terms of product feature, function.

We've addressed a couple of areas that we felt competitively we needed to address.

We've put money into that.

We've rebuilt the team.

We've rebuilt the sales channel.

And as we go out and compete with some of the newer companies out there, we actually think our products have a deeper, more rich feature function and we've got a really strong platform to go and deliver and support and install at customers.

So DI will continue to get investments and the focus on a segment of the market that wants a shared platform, that gets them a really cost-effective, very strong feature function product that we feel is one of the best out there.

D3 is going to focus on larger FIs in the U.S., so think $20 billion, $30 billion UIs, who want a customized platform where we take our code, that is also a cloud product so it's going to run as a subscription product.

And then we eventually plan to take that into the international markets where today, we do not have a digital banking offering.

So that's going to be a new market for us.

Great.

If I can just have one quick one to Andre, on the potential debt refinancing, is there any thought to taking advantage of reaching out -- to also kind of plug the unfunded pension liability with that?

And with that, I'll jump off.

Yes, I mean, it's a -- listen, I think when we project out the cash flows, we got to -- we know what our pension -- required pension contributions are going to be because the pension has been derisked and it's largely fixed income, so they are fairly set in stone.

So they're not really sensitive to interest rates or what have you.

So another pretty manageable -- I think until 2020, 2021 is when first starts, it's something around maybe $30 million and then it goes up to around $100 million after that and then it stays at $100 million for a few years.

So I guess, just when we think about the capital structure, we know -- listen, we've got some required contributions that are going to be a use of cash flow in those years.

So we just need to make sure that we've got the appropriate liquidity or -- and to build that payment into the covenants.

I don't think we are looking into anything specific in any new credit package around the pension other than just to make sure that we've got sufficient liquidity to address it.

Moving on from D.A. Davidson, we have Matt Summerville.

A couple of questions.

Can you maybe talk about -- put some numbers to what you kind of saw from an incoming order rate and where your backlog stands in the ATM business?

And just for context, kind of where you think we are at in the overall cycle here in the Americas and Europe?

Yes, this is Owen.

I would say as we look at the backlog and the order rates leaving the first half, both are up year-over-year.

And we feel good about that momentum.

From our perspective, North America and Europe have continued to be very strong.

And they were strong in delivering on the quarterly revenue.

They're also strong in terms of the order rate and the backlog conversion activity.

So our view is we are getting participation from all of the key regions.

We're not seeing the same kind of growth and haven't been quite honestly over the last several quarters, out of the Asia Pacific market, but Europe and North America, even South America, have been strong for us.

Where we are in the cycle.

We clearly are seeing some Win 10 tailwind.

We have a lot of internal discussions as to where we are in the cycle.

I would say we're still early

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activity.

We're seeing an awful lot of refresh decisions being made by those clients that are dealing with the Win 10 upgrade as opposed to just replacing the core, which has been good news for us.

But yes, I would say we feel good with orders and with backlog going into the third and fourth quarter.

And then as it pertains to the hardware business, year-to-date, what's the score card look like in terms of how that business is tracking from an operating loss standpoint versus the prior year?

Yes, so we said that coming into the year we were looking to cut our losses in half.

And our assessment right now at midpoint, the team's doing a good job and we feel like we are on track to beat and hopefully, improve on that.

And next from Northcoast Research, we have Kartik Mehta.

Mike, I wanted to just make sure on the outlook for 2019, obviously raised revenue guidance but then raised EPS.

And is that strictly a function of the hardware and the margins that you are?

Or do you feel like now you will be at the upper end of the guidance from an EPS standpoint?

Yes, Kartik, I think you hit it right on the head.

So as Owen said, our plan for the year is to reduce the losses that we had in hardware last year and quite frankly, to cut them in half, which is a big step but it's still a loss.

Our long-term goal is to get that back to, at worst, neutral.

We'd like to make some profit in hardware.

But as we have strong numbers that we saw in the second quarter, we have strong numbers through the first half of the year, a lot of that is hardware-driven revenue and so that hardware revenue is coming on at a negative margin.

So it's coming on at loss -- pennies of loss.

It drags in attached software, which obviously has a positive margin.

So you can almost think of those as netting each other off -- apart a little bit.

And then I'll turn it over to Andre, we have a few other things that are just hitting us, a few pennies here and there.

But we -- feel pretty good about the revenue and the growth, actually feel very good about that through the first half of the year.

And as we said, we think for the full year, we raised our outlook based on that.

But from an earnings perspective, it's not really driving additional earnings that aren't being offset by a few headwinds.

Yes, just adding, we said in our prepared remarks that the -- our in-year acquisitions are dilutive.

I think we said to the tune of about $0.05, so that's pulling us back a little.

Also recall on my prepared remarks, we took up the share count a little bit from 151 million to 153 million.

That's just timing of share repurchase.

But over the year, that's slightly dilutive.

That's about at 153 million, there's about $0.03 headwind.

And then a little bit more FX, it seems like in particular the euro has been a little bit weaker.

We're very international.

Euro is probably our largest exposure.

So what was about a 1% headwind on revenue that we built into our plan is probably more like a 1.5% on revenue and maybe a few more cents headwind on EPS.

So I think the combination of those 3 makes us a little bit more cautious about taking up earnings at this point.

Okay.

What about the payments business?

As you look at JetPay and the integration, when do you think that business can start having a positive impact on margins?

Well, we -- I mean we talked about kind of the timing and the sequence in our statements there.

So we'll continue to make progress, second quarter, we attached and rolled out Silver One, which is our Silver product.

So we shipped Silver out the door, we'll attach our payments.

We're well down the path of attaching our payments to Aloha and getting ready to roll that out in the second half of the year in GA.

So we knew we had some work to go on a number of fronts, obviously, integrating the products, adding some capabilities to differentiate our products so when we go in the market, we can do some things with restaurants and with retailers.

And then, obviously, we had to build out the operational back in because now we're underwriting all these customers.

So we are tracking right to plan, second half of the year, we get to GA.

So you're going to see it start to tick up.

It's one customer at a time.

It's a recurring revenue stream.

We're going to clicks as they come through.

The new customers will get payments when they buy our products, when they buy our POS products, whether it's restaurants or retailers.

And then we will also go after existing customers and try to convert and upsell them to our payments offering.

But that's obviously going to be a little bit more of a challenge, and it will come in quarter by quarter.

So you're going to look into 2020, and we'll give you an outlook as we look -- start looking at 2020, into what those numbers would mean, but it's still out in the future a bit.

(Operator Instructions) Next, we have Dan Kurnos, Benchmark Company.

Mike, if I could just follow up a little bit on that, just in terms of the customer reception and a switch, it sounds like from your last response that you're maybe waiting for licenses to come up, but just wanted to make sure there's no like incremental churn as you go from perpetual to monthly, and just that's how being received.

And then as you talked earlier about some of the customer sat stuff, obviously, you inherited a lot of issues.

I'm just curious how much more runway you think you have before that starts to trail off?

Yes, let me just kind of go backwards to the question.

So I think the team's done a really nice job.

We put a high, high focus on customer and customer sat and taking care of our clients one client at a time.

And you have to fix each product, we have to go out to the market.

In some cases, we had to go out where we maybe hadn't done the best job of implementing and go out and correct those things.

So I think every -- literally every month, we get better at that.

The product quality we're shipping is much better today than it was a year ago.

Our customer sat, we shifted our measurements to NPS this year so we are asking them, will they recommend NCR as a partner and that's -- saw an improvement year-over-year.

And so we feel good about that.

There is, I would say some more work to continue, and some areas are ahead of others, obviously, the manufacturing side did a really nice job year-over-year and some of the work challenges we had last year, you can see by just the volumes that we're shipping, that we've addressed that.

We've got pockets like digital banking has done a really, really good job of restoring the confidence of our customers and restoring confidence of the marketplace in our digital banking products.

We're still working as we talked about in Hospitality and restaurants, and then we've got some of our Retail products like Emerald, which is a cloud-based point-of-sale product that we're rolling out on controlled deployment.

So we still have some work to go.

I wouldn't say we're done.

But we feel pretty good and obviously, our clients are not going to buy from us if they are dissatisfied with our product quality or our service.

So our service team, global services, special services, have done a really nice job as well.

In terms of a -- so the recurring shift, I think you're probably referencing Aloha Essentials and going out there.

So as we sell new ones, that package is actually very well received.

Some of our competitors, as you might be aware on the lower end of the marketplace, have already gone to market with a bundled offering.

I think our bundled offering is more complete because we can bundle literally every piece of hardware in a restaurant, all the software and then a service component to install, operate and support that.

So we feel pretty good about that offering and the reception has been strong.

When we bring -- when we go for upgrades or renewals, we will try to convert people from a perpetual product to a subscription-based product.

You have to remember though, in the Aloha product base, a big piece of that revenue today is Aloha cloud, so a lot of the product's already delivered in the cloud format.

And then again, all the payments, when the payments come on board, they're all be subscription by their nature.

Got it.

That's helpful.

And then just on sort of the new offering as you go to market, I've asked this question a few times in the past, but now it seems maybe a little bit more timely, just in terms of the analytics offering that you can provide to the table here to your restaurants, whether it's 3P, blind data, whatever it is, it seems like you could kind of layer that in, in terms of incremental upsell.

So is that something that you are thinking about as you go through layering in the payments integration bundle, especially on the restaurant and hospitality side?

Yes, absolutely.

We've got some really nice tools.

We've got a really nice mobile app that we give to clients.

So again, our clients in the restaurant space are -- a lot of them are the higher end, full-table service customers, where they might have a grouping of 5 or 10 restaurants, and we've got some great tools that we are rolling out where on your mobile phone, whether it's a Mac -- sorry, Apple or Android, you can actually get an update on status and it will actually do some trending for what's actually selling or competing.

We're looking at how do you add external data to that so you can actually do trends in the neighborhood or in your location.

But that -- those kind of things where we have a lot of data, we're data rich in that regard and adding analytics are a big focus of that team.

Great.

And then just last one, if I could just squeeze one in for Andre, did you mention how much the new acquisitions are expected to contribute in the back half of the year both either dilutive to EPS and/or from a revenue perspective?

Yes, we said in-year acquisitions, the most material of which is D3, which closed early in July, not in second quarter.

So we said that will be about $0.05 is the sum of all the in-year acquisitions, D3 being the most significant of them.

As a headwind.

As a headwind.

And next we have Paul Coster with JPMorgan.

So in terms of the ATM business, it was stronger than expected.

What was the nature of the upside surprise?

Was it a -- was there a specific reason for it or specific market segment, midmarket, tier 1s?

Was it all Windows 10 driven?

Well, I don't know that we have a specific reason.

Owen talked about the markets.

Obviously, Europe was very strong for us and North America was very strong for us.

We've had good success in Latin America, good success in EMEA, in the Middle East.

So we always go through this debate.

We talk to our sales team, how much is Win 10 versus how much is renewal cycle.

You still have some Branch Transformation taking place.

I'd say, more than some where banks and credit unions are rolling out ATMs or ITMs, Interactive Teller devices, are replacing drive-thru lanes.

They are putting in the front of their branches.

So I think it's a little bit of all those things.

And obviously, then, Win 10 as they look at needing to upgrade and making a decision as an ATM, is there an ATM at end of life?

Or do they just do core upgrade?

And we've seen more replacement with new ATMs than we've seen core upgrades.

So yes, stronger than probably we anticipated going into the year but we're pretty pleased with the results.

The other thing I'd say, Paul, is that the confidence within our sales team and within the marketplace, now that we've addressed the production issues, both ability to deliver and the quality, you can feel that resonating throughout the organization.

So there is a step that the organization is now feeling especially with the 80 series model being out in the market and the marketplace is giving strong validation and they [had] to the product.

Now that we're delivering on time and with a quality, I think everyone is feeling good about it and you can see that coming through in the numbers.

Sure can.

I'm sure the feedback loop will be very positive as well.

The software that attaches to these ATMs, does the revenue recognition take place in the same quarter?

Or is it really sort of on the lag basis?

In other words, are we sort of setting up for higher-margin revenues associated with the software that flows through in 2020?

Well, the software -- on the attached software that goes to ATM is booked as a license upfront.

Over time, we may look at whether we can move that to subscription, but right now it's booked upfront.

Services, which will become part of our recurring revenue stream going forward, in-year and it varies by customer and by region.

There's anywhere from a 3- or 6- or 12-month warranty period, where we provide services but we don't get paid an additional fee outside of what we got to pay for the ATM.

So it does build a backlog of service revenue growth that will start to hit us next year.

Yes, so just adding.

I think -- you might see, I think it was on Page 12, you've got services revenue only up 5% to constant currency.

But remember that in some of these, the installation is not happening until months later.

And then the maintenance stream won't happen until the warranty period ends.

So you could have a maintenance stream that's not even starting until after a year out.

So the good thing now is because all these hardware sales we've built in the backlog pretty nicely.

That will set us up well for the future.

All right.

Got it.

And then my last question, it sounds like pretty confident that D3 has got some traction.

Does this confidence originate from business that was already in the pipeline at the time of acquiring D3?

Or is it developed since?

I mean, how are you able to expand backlog so quickly if it's the latter?

Not -- so, I think we're excited about D3, but I think those comments are more related to Digital Insight and the product that we've had out there and some of the improvements we've made.

So yes, D3, we're very excited about where that's going to be positioned and where we can take it both in large FIs and international.

But it will become part of our digital banking offering and again, right now, what we've done with Digital Insight and restore the confidence of our customers and, really, restore the confidence of the marketplace, is what the comments were regarding.

And from Morgan Stanley, we have Katy Huberty.

This is Kieran Kenny on for Katy.

I have 2 quick ones.

First, free cash flow was down year-over-year in the first half, so how do you bridge the free cash flow growth to the full year?

And my second question has to do with revenue in the second half.

So your full year revenue guidance of 3% to 4% assumes a deceleration from the 6% in the first half.

So how do you see the deceleration spread across 3Q and 4Q?

And is it deceleration all ATM driven?

Or do you see slower growth in other segments as well?

I'll start with free cash flow.

So it was down year-over-year.

But remember, we have a significant revenue and billing quarter.

So temporarily, remember that impact is working capital.

So we've billed a lot, the receivables are high and that's why that's a use of cash on the receivables.

But I think I mentioned in my prepared remarks, even making $9 million free cash flow in the quarter was better than our internal plan because we typically don't generate cash for really most of the third -- first 3 quarters of the year and then we generate all of our cash in the fourth quarter.

So that was very much on track.

And I think the full year cash flow was still -- we've said we're still reaffirming the $300 million to $350 million of free cash flow and that is in line with reaffirming the EPS.

On the revenue question, I mean, I'd say kind of nets out to -- we had a very strong start to the year, we've obviously bumped up our outlook.

We have a pretty difficult comp in the fourth quarter, difficult because we had a very, very strong fourth quarter with hardware, specifically ATM sales in the fourth quarter of '18.

So while we still expect the second half to be as we expected, to be a real solid finish to the year, the first half was a little bit faster growth than we had anticipated and for the full year, we were going to have obviously stronger year than we had originally started with.

Okay.

And it looks like that does conclude our question-and-answer session.

I'd like to turn the floor back to Mr. Mike Hayford for any additional or closing remarks.

Thank you.

In closing, I'm proud of the progress we've made in the first half of the year.

We are clearly in the early innings of a multiyear strategy but remain confident that our strategy will create long-term shareholder value.

We continue to improve execution with a goal to drive a mix shift to recurring software and services revenue and enhance our free cash flow generation.

I am very proud of the work that our entire NCR team did and for their focus on taking care of our customers and continuing to improve our products and services.

Thank you, everyone, for joining us today and we look forward to speaking with you on our third quarter call.

Once again, ladies and gentlemen, that concludes our call for today.

Thanks for joining us.

You may now disconnect.