NCR Voyix Corp (VYX) 2020 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the NCR Corporation Fourth Quarter Fiscal Year 2020 Earnings Conference Call. Today's call is being recorded.

And at this time, I would like to turn things over to Mr. Michael Nelson, Vice President of Investor Relations. Please go ahead.

Good afternoon, and thank you for joining our fourth quarter and full year 2020 earnings call. Joining me on the call today are Mike Hayford, President and CEO; Owen Sullivan, COO; and Tim Oliver, CFO.

Before we get started, let me remind you that our presentation and discussions will include forward-looking statements. These statements reflect our current expectations and beliefs, but they're subject to risks and uncertainties that could cause actual results to differ materially from those expectations. These risks and uncertainties are described in our earnings release and our periodic filings with the SEC, including our annual report.

On today's call, we 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 February 9, 2021, and on the Investor Relations page of our website. A replay of this call will be available later today on our website, ncr.com.

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

Thanks, Michael, and thank you, everyone, for joining us today for our fourth quarter and full year 2020 earnings call. I will begin with a review of the fourth quarter and full year as well as provide an update on our shift to NCR becoming a software- and services-focused company with a high level of recurring revenue. Tim will then review our financial performance and an outlook into 2021. And then Owen, Tim and I will take your questions.

I'll begin on Slide 4 with some highlights from the fourth quarter and full year. NCR delivered solid performance despite the current environment that continues to be impacted by COVID-19. We continue to experience incremental improvements across our business. However, there remains uncertainty regarding when vaccines will be available to the general population and when businesses will return to normal levels.

First, we delivered strong free cash flow. We generated $149 million of free cash flow in the quarter and $448 million of free cash flow for the year. Tim will discuss in more detail the drivers of our strong free cash flow production.

Second, we expanded adjusted EBITDA margin sequentially for the third consecutive quarter to 15.8% in the fourth quarter, which represents an increase of 10 basis points from the third quarter. As we discussed last quarter, we have taken actions to replace the temporary cash cost savings when the pandemic began with permanent expense savings. We entered 2021 with $150 million in cost savings that are expected to drive margin expansion. Our performance in the fourth quarter is the result of some of these actions we have taken, and those actions continue to drive margin improvement in 2021 and beyond.

Third, we delivered 6% recurring revenue growth in the fourth quarter, bringing recurring revenue to 54% of total revenue. Throughout 2020, we have made steady progress generating increased recurring revenue, which is consistent with our 80/60/20 goals.

And finally, we are very excited about the opportunity to combine with Cardtronics. The proposed transaction accelerates the NCR as-a-Service strategy we laid out at Investor Day in December and further shifts NCR's revenue mix to software, services and recurring revenues. We continue to expect the proposed transaction to close midyear 2021 and to be 20% to 25% accretive to EPS in its first full year.

Now moving to Slide 5. We have continued to progress executing our strategy despite a challenging business environment. We remain focused on our transition to drive NCR as-a-Service and achieve our 80/60/20 strategic goals. For the full year 2020, software and services represented 72% of our total revenues, up from 65% in 2019; and 54% of our revenues were recurring, up from 46% in 2019. EBITDA margin was 14.4%.

In banking, we continue to have positive momentum in our digital banking platform with 5 new customers signed in the fourth quarter. One of those new customers was Wintrust, a $43 billion bank with 15 branded community bank subsidiaries that selected NCR's D3 Digital Banking solution. We have already started off 2021 strong with the signing of another new D3 customer-associated bank, which is a $35 billion regional bank based in Wisconsin. In the fourth quarter, we also had cross-selling success with existing clients and new products, including 7 business banking deals.

In retail, we are gaining traction with our NCR Emerald offering, which is our next-gen cloud-based retail point-of-sale solution. As we discussed at our Investor Day, the acceleration in digital transformation is being driven by consumer demand and retailers needing to respond. We believe this is driving an upgrade cycle for retail POS software, and NCR has the largest global install base.

We continue to be excited about the sales funnel for NCR Emerald and recently signed our biggest NCR Emerald deal to date with the largest cooperative in Canada with 1,500 stores. We are also seeing increased adoption of our self-checkout solutions. We're experiencing demand across customers, geographies as consumer preferences accelerate.

In Hospitality, momentum of Aloha Essentials, which bundles software, services, hardware and payments, continued in the fourth quarter. This model is proving itself in our ability to attract new customers as well as better service existing customers. During the fourth quarter, over 90% of all Aloha sites sold to our direct offices were sold as subscription bundles, with payments attach rate also strong at roughly 75% of sales into new sites.

As we focus on executing our NCR as-a-Service strategy, we continue to invest in our strategic growth platforms both organically and inorganically. We recently closed 2 relatively small but very strategic acquisitions. We acquired Terafina, a leading provider for customer account opening, which is a digital front-end solution for digital banking.

We also acquired Freshop, a digital online ordering platform which provides retailers the ability to quickly deploy, buy online, pick up in store capabilities. With Freshop, NCR can now have grocers capitalize on the growth in e-commerce going forward. These 2 recent acquisitions are consistent with NCR's strategy to acquire early-stage software companies and to enhance product capabilities and extend our leadership in the vertical industries we serve.

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

Thank you, Mike, and thanks to all of you on the phone for tuning in today. Turning to Slide 6, which presents the top level overview of our fourth quarter financial performance. Starting on the top left, consolidated revenue was $1.63 billion, down $255 million or 14% versus the 2019 fourth quarter. But as we anticipated, we extended our trend of modest sequential improvement, beginning back with the onset of the pandemic. Revenue was up $42 million or 3% sequentially from 2020's third quarter, with all 3 business segments showing increases.

As expected, our fourth quarter revenue was negatively impacted by the broader economic pause. And while I'll dig into the more specific drivers of the year-over-year decline later, in aggregate, $203 million or 80% of that decline was attributable to lower hardware revenue, which was down 30%.

Importantly, our strategy to shift to recurring revenue streams again accelerated sequentially. Recurring revenue was up 6% year-over-year and 3% sequentially. We shifted $32 million or over 2 points of revenue that previously would have been booked upfront as a perpetual sale to a recurring revenue stream. This compares to just $9 million in last year's fourth quarter or $27 million in this year's Q3.

In the top right, adjusted EBITDA decreased $41 million or 14% year-over-year to $258 million, in line with the revenue decline, with EBITDA margin rate down only slightly from the prior year, ending at 15.8%. On a sequential basis, adjusted EBITDA was up 4%, and EBITDA margin rate expanded 10 basis points. The similar margin rate results obfuscate the impact of a tremendous amount of hard work on our cost structure.

The temporary cost reductions that were enacted at the outset of the pandemic were suspended in late Q3 and were replaced with cost action savings finalized in Q4. Because they were taken during the quarter, they had only a prorated impact on Q4 results. The productivity improvements implemented in the fourth quarter were both more permanent and of greater magnitude than those that they replaced. These actions were upsized from $100 million to $150 million to allow us to sustain our profitability at pandemic levels of demand and to drive further margin expansion as demand improves and our revenues follow.

Similar to the discussion of revenue, the shift to recurring revenue was also an important descriptor of our relative EBITDA results. $27 million of adjusted EBITDA did shift out of the quarter, accompanying the respective revenue shift. This compares to $8 million in the year ago Q4 and $21 million sequentially from Q3.

And in the bottom left, non-GAAP EPS was $0.59, down $0.26 from the prior year fourth quarter and up $0.04 from Q3. The tax rate of 20% for Q4 decreased as a result of the lower-than-planned income, which causes planned discrete tax items to have an outside effect on the overall rate.

And finally and maybe most importantly, we generated $149 million of free cash flow in the quarter and $448 million for the full year. This compares to $302 million in the year ago quarter by just $281 million for that full year. To say it differently, more than all of 2019's free cash flow was generated in the last quarter of the year. While in 2020, we generated a much more linear free cash flow result, with approximately $150 million in each of the last 3 successive quarters.

Our year-over-year improvement was due to a 9-day improvement in days sales outstanding, a reduction in both raw and finished goods inventories and a more efficient capital spending plan that more than offset the impact of profitability from the pandemic.

Moving to Slide 7, which describes our banking segment results. Banking revenue decreased $149 million or 16% mainly driven by a 36% decline in ATM hardware. Bank customer capital spending constraints continued into the fourth quarter, resulting in lower year-over-year hardware revenue but consistent with Q3 and our expectations expressed then for Q4. The remaining decline in revenue was driven by lower attached software related to the lower ATM sales. Excluding the decline in new ATM hardware and the directly related revenues, our service revenue has shown modest growth year-over-year.

Operating income decreased $57 million or 40%, and operating margin rate declined by 440 basis points to 10.9%. About 60% of that decline was hardware-related and included lower volumes, a disadvantageous geography mix, resulting unabsorbed costs and a lower attached software sales. The remainder was from the shift to -- of $17 million of software to future period recurring revenue. Operating expenses were only down 3% and will need to go lower in '21.

On a sequential basis, revenue was up 2%, and operating margin decreased by 180 basis points. Sequential profitability declined due to the timing of 2 vendor payments and a lag in new cost actions replacing the old ones.

At our Investor Day in December, we introduced some key metrics for the banking segment as digital banking revenue, digital banking registered users and recurring revenue. For digital banking revenue, 2020 marked an inflection point as the full year increased 4% over 2019. Digital banking registered users increased 12% compared to the fourth quarter of 2019 and showed nice sequential growth over the last 5 quarters. Despite the overall declines in revenue, we did grow in the right places. Recurring revenue in this business increased 8% year-over-year and 3% sequentially.

Moving to Slide 8, which shows our retail segment results. Retail revenue decreased $40 million or 7% against a very tough hardware comparison. That was partially mitigated by a year-over-year increase in services revenue. That said, operating income was up $7 million or 17% versus Q4 2019. That increase was driven by a favorable mix of revenue, both by product and by geography. Sequentially, revenue was up 2%, and operating margin expanded 50 basis points. This is our third consecutive quarter of modest sequential growth driving significant margin recovery on a lowered cost structure.

Down at the bottom, you will see the 3 key metrics we introduced for retail. Self-checkout revenue decreased compared to a hardware-rich fourth quarter in 2019 and was down slightly versus Q3. While this metric is somewhat dependent upon the timing of customer rollouts, we continued to see broad-based demand for both by customer and by geography for scope. We are actively managing both manufacturing and installation capacity in this business to facilitate more linear revenue.

And platform lanes increased 40% compared to prior year fourth quarter. We continued to see positive traction in the implementation of our next-generation retail solutions. Recurring revenue in this business increased 11% versus the fourth quarter in 2019 and increased 3% sequentially.

Slide 9 shows our Hospitality segment results. Hospitality revenue decreased $50 million or 22% driven primarily by lower hardware sales. As expected, our Hospitality segment and its customers have been most impacted by the pandemic, with capacity of service limitations in the Americas and Europe and changes in consumer behavior. Fourth quarter operating income declined $8 million mainly due to the flow-through impact from lower revenue. As was the case in Q3, we were able to partially preserve profitability by reducing operating expenses by 15%.

On a sequential basis, we continued to experience incremental improvement in both revenue and operating margin. While we wait for a more normal operating environment for our customers, we will continue to add functionality to help them acclimate, manage our costs carefully and accelerate our transition to recurring revenue streams.

The key metrics added for Hospitality are Aloha Essentials sites and recurring revenue. Aloha Essentials sites, which bundled software, services, hardware and payments into a single offering, grew 42% when compared to prior year fourth quarter and grew 9% from this year's third quarter. We continued to see the adoption of our Aloha Essentials bundle as we convert our current installed base. We're pleased to see a turn in recurring revenue graph at the bottom right. While down 5% last year, it was up 6% in the third quarter.

Turning to Slide 10. We provide our fourth quarter revenue results under our previous operating model for both continuity and added color. Software revenue decreased 9% due primarily to the shift from onetime recurring revenue, which represented approximately 2/3 of the decline. Lower sales attached to new hardware and challenging conditions for our Hospitality business account for the remaining decline. Services revenue remained flat. And finally, as I mentioned previously, hardware revenue was the most impacted in the quarter by the pandemic, declining 30%.

ATM revenue declined 36%, while the combination of self-checkout and point-of-sales declined 23%. Software and services as a percentage of total company revenue increased to 71% from 64% in the prior quarter, with lower hardware sales exaggerating our improvement.

Recurring revenues increased 6%, driven by our programmatic effort to shift our sales away from single sales events with perpetual licensing to predictable multiyear commitments with relatively high certainty of revenue generation. Recurring revenue as a percentage of total company revenue increased to 54% from 44% in Q4 of 2019, also benefiting from lower hardware sales. We continued to experience sequential improvement with all areas increasing compared to the third quarter.

On Slide 11, you'll see the same revenue snapshot but for the full year 2020 versus full year 2019. The shift in recurring revenue had a $100 million impact to the full year or roughly 80% of the software decline. Adjusting for that shift, software and services revenue would have shown a modest increase compared to 2019. Service revenue continued to show resiliency with 2% year-over-year growth.

Recurring revenue increased 5% year-over-year, living up to its title and validating our emphasis on it. We ended the year with 54% of our revenue as recurring. While admittedly, the increase is aided by the air pocket in hardware sales, we continue to see growth in all 3 of our segments with a positive mix shift.

On Slide 12, we present free cash flow, net debt and adjusted EBITDA metrics. As I mentioned earlier, we continue to have impressive performance on the cash side. Free cash flow was $149 million in the quarter. Although a decline from the prior year period, we ended the year with free cash flow of $448 million, up nearly 60% from the $281 million in the prior year.

Our efforts to improve working capital and drive improved linearity in our annual cash generation are working well. Also, during the fourth quarter, we made a $70 million discretionary contribution to the U.S. pension plan, which is expected to push our mandatory contributions out until 2023.

This slide also shows our net debt to adjusted EBITDA metric with a net debt leverage ratio of 3.3x. We ended the year with $338 million of cash, having paid down both our outstanding revolver and our trade receivable securitization facility and having retired 132,000 shares of preferred stock. We remain well within our debt covenants and ended the fourth quarter with a credit facility leverage of approximately 3.3x, well under our debt covenant maximum of 4.6.

Turning to Slide 13. Late in the third quarter, we released several of our temporary cost actions in anticipation of replacing them in the fourth quarter with more permanent and sustainable cost reductions. Those cost actions and the related operational changes or product decisions resulted in approximately $200 million of restructuring charges in our fourth quarter.

Approximately $150 million of those were noncash charges, mainly related to excess inventory and software impairment charges related to strategic changes. The remaining $50 million were cash charges for severance and the resolution of several legacy items. We entered 2021 with an estimated $150 million of run rate cost savings. Approximately 40% of those savings are from operating costs, another 40% from SG&A and the remaining 20% from the corporate functions.

And my last slide is Slide 14, which provides an outlook for Q1 2021. Because our end markets are still being impacted by the economic drag of the pandemic and because the successful completion of the proposed Cardtronics transaction at midyear will complicate reported results, we are not going to provide full year 2021 guidance for stand-alone NCR at this point.

But for Q1, relative to the year ago Q1, so on a year-over-year basis, we expect revenue growth of 2% to 3%. We expect particularly strong growth in recurring revenue streams, and we anticipate persistently difficult banking hardware environment. On profitability, we expect adjusted EBITDA margins to expand by 250 basis points to 15%.

And finally, we expect free cash flow to be positive, which might seem to buck our recent trends. But remember that we have had about $150 million of unavoidable payments in the first quarter related to benefits and compensation that occur in every Q1. We know that you have a complicated modeling effort on your hands and hope to be more prescriptive as we get closer to midyear and to the closing of the transaction.

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

Thanks, Tim. In closing, I want to first commend the entire NCR team on strong execution in 2020. Despite unprecedented challenges, our employees have continued to take care of our customers and have shown resiliency in these very difficult times.

Looking ahead, our key priorities are clear. First, we will continue to accelerate our NCR as-a-Service and 80/60/20 strategy. We have made notable progress this year despite some of the challenging conditions.

Second, we will return to growth in 2021. We expect to grow both top line revenue and expand margins. We took recurring costs out of the business in 2020 and expect the combination of a lower cost structure, along with positive operating leverage, to drive margin expansion in 2021. We entered 2021 with positive momentum and are laser-focused on execution.

Third, as Tim discussed, we are focused on improving the linearity of both revenue and cash flow. We made significant progress in 2020 and seek to improve our linearity as we shift to more of our revenue to recurring. And finally, we are preparing to hit the ground running and executing on opportunities that Cardtronics will bring us once the transaction closes.

Turning to Slide 16. I want to close with the strategic rationale for our proposed transaction with Cardtronics. The combination accelerates our NCR as-a-Service strategy and expands opportunities in payments. It will enhance our scale and cash flow generation while advancing our 80/60/20 targets by roughly 2 years. Additionally, the proposed transaction is expected to be accretive to EPS by 20% to 25% in the first full year.

We believe the combination of NCR and Cardtronics will drive significant value for our customers and shareholders. It's a unique opportunity that's both strategically consistent and financially accretive to NCR.

And with that, we will open the call for your questions. Thank you for your time today. Operator?

(Operator Instructions) And we'll go first to Tim Willi of Wells Fargo.

A couple of questions, if I could. First, in control on Hospitality overall. Is there a way to just sort of think about the average, I guess, transaction size, whether that be product attachment or sort of annualized revenue from the new sales versus sort of prior experience? Just sort of help us think through that revenue lift as that continues to gain progress.

Yes. Tim, you were breaking up a little bit. But I think you're asking about Hospitality and Aloha Essentials versus the way we used to sell? Was that the question?

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

Well, I mean, I'll tell you, the key to it -- so first of all, if you just look at it, we're going to bundle everything in an essential package. You're going to get all the components in there. So instead of piecemealing it, you're going to get a bigger sale and say this update percentage is bigger than a total sale. I don't know if 1x, then you go 1.5, 2x if you're selling a bundle, so you get a bigger sale.

The most important thing is attaching payments. So lease side attaching payments, the revenue per account goes up considerably if we don't have payments. And obviously, as we get more scale and leverage and payments, that's going to drive margin on those accounts. So it really is that 75% attach rate on payments which is important to us. Getting those accounts, getting them up and running, they're turnkey. They don't start to parse out each component as a separate RFP to a separate pricing competition. So over time, we think the margins will hold up better, and it's just a better revenue stream for us.

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

Well, look, Tim, we would input -- and obviously, we know Cardtronics well. It's a very large client of NCR. They go on the marketplace and sell today, and part of what they sell is bundled up components that we deliver to them. We saw the hardware today, Tim. We sell them services. We sell them software. And they bundle that up and they deliver a more value-added product in the marketplace, which obviously is one of the reasons that we were interested in this combination.

We did not expect any negative feedback from the marketplace, banks, the industry. And we just haven't seen any. We haven't heard any. I don't really know what Cardtronics has seen on their side. But I think we did not expect it, and we haven't really heard negative. What feedback we're getting from the marketplace, we don't really get engaged with what does Cardtronics look like combined with us, but I think the general perception feedback has been positive.

and we will now move over to Katy Huberty of Morgan Stanley.

Tim, just a clarification first. Is the 2% to 3% revenue growth in the first quarter, is that reported or constant currency? And what do you expect the currency impact to be in the March quarter?

And just to follow up on that, guidance implies about half the sequential decline that you typically would see in the first quarter. Does that speak to a more robust recovery in demand in the March quarter? Or is that just changing shape of seasonality because of higher revenue mix than in the past? Then I have a follow-up.

Yes. So firstly, on the growth rate. On a reported basis, I'd expect it to be at the higher end of that range. And then the currency effect, we've left ourselves some room to the downside there the currency happens to be. I think, right now, it looks like currency will be okay in the quarter.

On the linearity from Q4 to Q1, you're exactly right. We did not do in the fourth quarter some of the things we've done in the past to, let's say, unnaturally move revenue into the full year and into last year. We have traditionally had very aggressive selling in the fourth quarter, particularly around hardware. And we didn't -- that didn't happen in the last -- fourth quarter of last year.

And so that leaves us in much better stead coming into Q1 with a better revenue expectation, a better pipeline and a much more linear revenue pattern really for the full year. So we're very pleased to be able to show year-over-year growth in Q1 because you'll recall that was not really a pandemic-affected quarter, only mildly at the back end. We had a little effect, as you'll recall, from a tornado. But still even adjusted for that impact, we would be showing year-over-year growth.

That's great. And Mike, speaking of capital and hardware spending, if you think about the 3 segments, which are wholly dependent on a full vaccine rollout versus where could you see a more robust recovery just as we get visibility into a vaccine, but not necessarily a full reopening?

Wow. Well, I'm not going to share our data. We've acquired an end date to the pandemic here at NCR, but I can't share it with you. So that's a great question, Katy.

I would say it like this, so the parts of the business where consumers have to regain confidence and get out and feel comfortable going to restaurants, to going to retailers, brick-and-mortar retailers again, that's obviously going to drive our Hospitality business and our retail business.

I'd say Hospitality is probably impacted a little bit more on the high end of our marketplace. The ability to drive through and takeaway, obviously survived, and in some cases, thrived. But I would say Hospitality should have a better impact when people can get out and about. Retail is going to have a good impact.

I think other one is, if you look at what's happening to us in the bank environment, the banks are still operating, but they've been a little bit concerned a little bit because of the financial performance with the margin -- net interest margin spread trapping on them this year with the fiscal policies and then also just not knowing for them when this economic impact ends. We've seen them slow down a little bit in their capital spend.

So I think the banks, and the banks might be a little bit of a trailer when they see the market picking up. But I think Hospitality, when restaurants start opening up to start getting business again and then retail. Retail is a little bit more of a strategic push. We think that they will have to retool their POS technology going forward.

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

This is Joel on for Brett. I appreciate you taking our questions. So a couple of questions here. Can you talk about Aloha and maybe the competitive dynamics? Any color on win rates at your pipeline in a quarter? And then can you provide any color on the JetPay volumes and maybe some of the trends that you've seen of late? That would be great.

Yes. Let me start on JetPay. So JetPay, we've gone through the process of integrating into Aloha, in Aloha Essentials. We've started to integrate it into Emerald. We've got it integrated into some of our other retail products. And then we've had the most activity in Hospitality with Aloha bundling that, and as we've talked about, a very strong attach rate.

So that's new clients going up to new clients and attaching payment. We started in 2020 -- in the back half of 2020 going up to existing clients and upselling JetPay and have started to get some momentum and traction along those lines.

So we feel really good about not only when we go and attach, but also going back into the marketplace. And again, our strategy is fairly simple. If you're using our POS, at the point of the transaction and we tightly integrate our payments, we can have a smoother interface and smoother integration, better information, better data flow than if you separate those 2. So that strategy seems to be working. And that team continues to make solid progress.

Maybe I'll put it over to Owen on Aloha and the success. I mean I think we're tracking to where we wanted to be in a difficult year. And the competition, I don't think it's really changed. It's just...

Yes. I would say the competitive landscape has not changed significantly in terms of the major players. And from our performance, second quarter was clearly the low point. We are seeing sequential growth in Aloha Essentials activity in both the third and the fourth quarter. So I would say the team on the Hospitality side is feeling modestly positive.

But to Mike's earlier comment, until we see the vaccine and the pandemic a bit more under control, I think we're in a holding pattern, if you will, albeit minimal positive momentum going into the year. So I think there's cautious optimism based on the momentum we've seen in the last 2 quarters. But I think we're still waiting, probably, until late second or third quarter before we see significant momentum.

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

Just 2, if I could. First, just maybe, Mike, on SCO. It was probably maybe the only real surprise in the quarter and actually an incremental breakout or at least color there. Just kind of some color on what's driving that success and sort of what you're seeing going forward. And you talked about as part of your increased linearity, that might be one area to focus on.

And then secondarily, the Q1 guide is on the top line, I think, ahead of expectations and pretty in line, if you think on the EBITDA. But it's kind of impressive. It sounds like you're getting some momentum. So maybe you guys could just talk through what the drivers are for both Q1 into the balance of this year as you see them.

Yes. Sure. So let me take the 2021 stuff first. So it's tough, right, because we were only going to be NCR alone, we hoped, for a couple of quarters. And so I know you're all trying to build models. But yes, I feel very good about the Q1 momentum to be able to post growth year-over-year in what's called a pandemic unaffected quarter is terrific.

When we talked back in December 3, we talked about a growth rate that approximated 5% over the 4-year period that we described then. I think we'll be on that number. I think we've said that it's going to be a linear walk, that this is not a hockey stick or it's a rough upset curve in most years. I would expect that to be the case this year, and I expect it to be, as Owen just described, modest sequential improvement quarter-over-quarter every quarter. That's what we're headed for.

Now as somebody just described, we could get a pandemic bump here at some point. We've not planned for it. That's not part of our forecast. And then we've not planned for a significant recovery in hardware, particularly the ATMs. So up modestly year-over-year, but not anything, no big bump.

On EBITDA. Similarly, we talked about moving from 14.5% this year to 20% EBITDA margins out to 2024. I think we'll make at least 1 year's worth of progress against that delta. It's a little bit lower at 14.5% than the starting point might have been. So we'll have nice margin expansion this year, and I think we'll be 16%-ish for the full year and exit the year at a rate that's -- in the fourth quarter that's higher than that.

On free cash flow, I think it will be very similar to what we generated this year. I think the pattern of the generation will be very similar as well. The -- we'll have higher profitability, which would suggest we should get a little bit more free cash flow. But I do think that we're going to have to reinvest back into some working capital as we start to grow up out of the bottom of the pandemic.

The balance sheet shrunk across 2020. And then when that happens, quickly, you harvest a little bit of working capital goodness in free cash flow. So I think those 2 phenomenon will offset one another. And for the year, free cash flow will look a lot like the $450 million we generated in 2020. And there's the first part of that question. Michael, you remember the first one?

Oh, SCO. So the SCO -- SCO is very -- was very lumpy in the year ago period, and it's particularly dependent upon some major orders from very, very large retailers. Our effort is to get that to look more linear as well. And it's tough. So you saw a very, very hard comparison in Q4. You saw a year-over-year number that you probably didn't like.

That said, in the first half of 2021, you're likely to see a 50% growth rate in SCO hardware because the comparisons were super easy. And so you'll see linear revenue from us this year with, I'd say, 15 percentage growth across the year in SCO with a heavily weighted to the front half in terms of growth rate but a more linear performance across the year.

And I would just add that geographically, we're -- from a segment standpoint, where Tim commented about a lot of enterprise driving lumpiness, we're seeing really good traction in the SMB markets as we continue to work with customers as they address their point-of-sale software and look at their entire technology footprint, and that includes the self-checkout.

So if you look in Europe, if you look in the United States and across the SMB, we're getting very good traction and seeing good backlog and pipeline development.

Michael Nelson just waved at me and said, I need to give a little more guidance for 2021 modeling. So here's a couple of other facts, let me throw them out there.

Interest expense. I think interest expense will be just north of $180 million on an NCR stand-alone modeling basis. CapEx, $275 million to $300 million, which if you think about a depreciation and amortization number of $302 million or $305 million. For the first time in a long time, we hope to underspend depreciation. A tax rate of 26%, which is up year-over-year, which should be profitable, which accounts us to pay a little more tax. We're hoping to find some discrete items to help us bring that number down. But as we sit here today, I think 26% is, let's call it, a fair and conservative number. And shares outstanding for the year, about 143.5 million.

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

I wanted to talk about expenses a little bit here. It looked like SG&A, up sequentially, up year-over-year, the highest percent of sales you've had in quite a few quarters there. Can you talk about the level of spend entertaining unusual in there? I guess I was surprised to see it so high.

Yes. There was some unusual spend in there. We had -- first of all, we had cost actions coming off and new ones going back on. So we had -- remember, we had some salary reductions across the organization in Qs 2 and 3 that came back online. We started paying people their regular salary, except Mike, in Q3. And so obviously, there's a lift of all those temporary cost actions that we saw before.

We replaced them with permanent actions, but those are out of sync with one another. So you'll see the impact of the reduction in costs in Q1. But admittedly, those didn't sync up perfectly in Q4. So you saw it as a bump in cost.

The other is we had some onetime items of settling up of some, let's call them, legacy contracts that caused us to have higher -- a little bit higher in the quarter. They will not recur. So there's some nonrecurring expenditures in there, maybe to the tune of $15 million and $20 million.

Okay. That's very helpful. And then what would you say should be a realistic growth rate for the digital banking business as you see it for 2021 organically?

Yes. I know. So we stated on December 3, our Investor Day, that we had felt good that in digital banking, we bottomed out in 2019. We had a little bit of growth in 2020, and we expect in 2020 to get additional growth. I think we're going to keep putting points on the board. We've got some solid organic growth. We talked about 2 nice-sized deals that we signed in the last quarter and then into early this year.

And then we've continued to add products. So we added a product like Terafina, which is online account opening. It gives us another component that we can go cross-sell to our existing digital banking client. So that will help our organic growth. And then we'll continue to look for tuck-in. So we're going to get that business back on track in terms of driving growth. We took a step forward in '20. And then '21, we think it's going to take that next step.

Our next question will be from Paul Chung of JPMorgan.

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

Yes. So $200 million, $150 million of it, noncash; $50 million, cash. The cash side was really severance for the cost actions we took in Q4. So where we'll be about 1,800 people lighter next year than we were -- this year than we were last.

On the noncash side, we made some changes to the way we're going to operate our services business. Adrian and his team think that we can take cost out across the system and bring our inventory levels down by having fewer -- the right parts on the truck when we make our runs. That's going to cost us to treat our inventories of those parts differently. And so we wrote down some parts associated with that business in the quarter. Some that were excess and obsolete and some that were yet to be repaired, and therefore, we may not bother to repair. So think of them as kind of course waiting to be repaired.

There also were some other software product and hardware product on the balance sheet that we don't intend to sell any longer as we look forward. Those products were not as profitable as we'd like them to be and our new product offering gets better. And so we took those down off the balance sheet as well. And then we had a couple of other what that's called contract -- legacy contract situations that we wanted to address. They weren't driving value for us. We thought that we'd accelerate this forward, get them off the books.

So yes, with those charges, you'll see the savings, particularly in the services business over time as we make better decisions on whether to use a repaired part or a new part. You also see, obviously, less inventory in the balance sheet to start the year. And therefore, we hope we can keep that lower. And the -- obviously, from a severance perspective, we talked about the $150 million of cost up. Of that $150 million, I'd say $110 million of it is going to be people-related. So you'll absolutely see that in 2021 as well.

Got you. And then as we think about your free cash flow for '21, you had a nice finish for '20. You mentioned some working cap headwinds probably in '21. You had a nice benefit this year. But if you see growth in the top line for the year, why can't we exceed kind of $450 million pretty handily? Just any puts and takes there.

Yes. So I don't know -- if we get the top line growth, of course, our receivables balance is going to grow. And so it'll have some pressure on working capital. My assumption right now is that we will not improve our days by another 9 days next year, and we won't be able to take our past dues down by a full 6 points -- or 6 percentage points next year.

I do think there's still some room on inventory, not in the services business where we just took that right down, but maybe in its finished goods as we go through the year. So I'm hopeful that we'll have some pickup in working capital to be able to offset some of the necessary investment in working capital to support that growth.

So I wouldn't tell you you're wrong. But I think the -- you should start thinking about our conversion rate of net income to be in that 95% to 105% range going forward. I think we were probably about 110% or 112% last year, and that's just not sustainable over time. It has to equal 100%.

We will now move to Ian Zaffino of Oppenheimer.

This is Mark on for Ian. So I guess just a quick one for Tim. Just a lot of moving parts on free cash flow and further volume just going to 2021. Can you just give us a sense of what capital allocation priorities are? And for the -- what the, I guess, like appetite for M&A and where the sort of M&A categories you guys are interested in going forward?

So you can answer that after I say, first of all, we are going to delever after the transaction is completed.

Yes. So again, it's a little bit before and after Cardtronics. We shared on, I think, the announcement, when we announced the transaction back in a couple of weeks ago, that our typical capital allocation moved to buyback those shares to [take out a little]. We'd not expect to do that in '21.

We will continue to invest organically, obtain the capital dollars to build out our products to differentiate them in the marketplace. We will continue to do that. Tim talked about the CapEx. So we're going to continue to spend internally. We will do that in '21.

We would like to continue the tuck-ins. We've done a couple, but you can expect that, that may slow down a little bit as we go forward just so we can preserve cash. As Tim said our priority going forward then will be to reduce our debt level, particularly as it relates to putting on the debt to complete the Cardtronics acquisition.

So that's how you think about in '21 and really for the next, as Tim shared when we made the announcement, 18 months to really focus on delevering the balance sheet.

And I think because of that commitment, Mike, that we're going to be able to borrow at a rate that makes good sense. We've got tremendous interest in supporting our banks and been terrific in supporting this transaction. That is because of our commitment to get back to 3.5x leverage from the 4.5x we're going to be on, that we've had that great response. And so we intend to make good on that.

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

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

Yes. Let me just speak, Kartik, at a maybe more of a macro level, or kind of lead us as we started working on a strategy the last couple of years. And again, as we've laid this out over the last 1.5 years, we've talked about really moving upstream to full stack. We call it ATM as-a-Service. Others call it, maybe, more managed services. But the ability to deliver a transaction or a full-function ATM, including driving and operating and switching and embodying it along with the hardware, software and the service.

So we've looked at that. We've seen around the globe and in different countries this actually move faster than we've seen in the U.S. It generally specs as off-prem ATMs and the desire and the move of the banks to move that to a stand-alone footprint that somebody else operates, in some cases, somebody else owns.

We've also seen banks, particularly midsize and smaller, and then I would include the U.S. in this category, including credit unions, where they've looked at the cost to operate and run and set somebody at a scale -- as a scale provider be in a better position to do that for them. With the described service levels really simplify their life in terms of really delivering that ATM transaction to their clients.

So the off-prem is really global. We expect that's going to actually take place in the U.S. as well. It hasn't really moved that much yet. But then we do think midsized to smaller financial institutions will literally look at outsourcing the ATM operating model and trying to -- a partner that can do it cheaper.

And then just one question on JetPay, Mike. What kind of volume growth have you seen, if any, in -- just in 2020 versus 2019?

Well, it's kind of a difficult year to measure. As you are aware, when the pandemic hit early in mid-March into April, JetPay, along with all the other like on-prem acquirers, had a fairly challenging second quarter. So we had a difficult second quarter with transaction volumes in the third quarter. They started to recover as people get out and about, but 2020 is a little bit a rough year.

On an equalized basis, I think we look at the sales that we've done, particularly as it relates to going out and adding Aloha Essentials sites. And then we've looked at, as I mentioned, in the second half of the year going out and upselling existing clients to add a payment. So if we look at clients and on apples-to-apples, we feel good about the 2020 numbers. If you look at the numbers, it's tough because of the pandemic effect.

Yes. We currently are down in the high single digits for the full year. But of course, that was very isolated to the second quarter as we covered. So therefore -- so we'd be leaving the year at a rate very similar to where we entered the year.

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

Mike, just going back to the win with associated. So that's 2 sizable banks. Obviously, those are competitive takeaways. I mean is there any way you could just characterize what you think the differentiators are in those wins, functionality, price, something else, maybe NCR, just right timing? I'm just sort of curious, that's a nice string you've got going after turning that business around. Is there something there that you think you can build upon and continue to add the large enterprises like you have?

Yes. And that's a really good question. And I said the 2 distinct aspects. The first is just feature function capability of digital banking or your mobile banking. And again, you have to remember that's what retail banking means for banks of all sizes now. So these are nice-sized banks, 30 -- mid-30s to mid-$40 billion, a lot of branches, a lot of retail clients. They have to have the capabilities to compete with the top 5 money center banks that go out and spend a lot of money.

So it's a great win for us because it demonstrates that our capabilities allow those banks to compete with the Wells, with the BofAs, with the JPMs that are out there, the Citis investing a lot of money in that digital front end. I think the other aspect as we compete with other providers who are like us very focused on delivering differentiated product, is that we horizontally go in with a platform solution, we call it CSP, client services platform. That will then connect what you do on mobile, what you do in digital, what's -- to what you can do on an ATM or an ITM. And then we've done that with some very large institutions into their branch footprint.

So now you start to follow a retail client literally across the different channels that they might use. And we think that product is differentiated. We think it makes it simple for those banks to roll that out. And we have found that a lot of our competitors in that space aren't really looking horizontal like we are. So we think that's what allows us to win.

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

All right. I just want to thank everybody for joining us today. Just kind of closing comments on the year. 2020 was a very challenging year for NCR. When the global pandemic hit us, sitting here in March 2020, and we actually started to feel it around the globe even a little earlier. But by March, it was really starting to be called a global pandemic.

The management team at NCR, we put in 3 simple priorities. Number one, we said, take care of our employees. And so we focused on taking care of our employees. Number two, when we said protect our company from the uncertainties ahead. And while sitting here today, you look back and say, "Wow, those things all come to fruition." Sitting here in March of 2020, there were a lot of uncertainties that we did not know what was going to hit our business. So we took a number of steps to protect our company. And number three, we said, take care of our customers.

Then we said to our team, we said, "Let's take care of our customers better than anyone else. Let's take care of our customers better than anyone else in the industry. And let's exit the pandemic as a better company than when it started." And I'd say thanks to the unbelievable hard work, the efforts of 35,000 NCR associates around the world, who through a difficult environment, executed each and every day. I can truly say today that we will be, we will be a better company after the pandemic.

Thanks for joining us today, and we'll talk to you next quarter.

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