NCR Voyix Corp (VYX) 2021 Q1 法說會逐字稿

Good day, everyone, and welcome to the NCR Corporation First Quarter Fiscal Year 2021 Earnings Conference Call. Today's call is being recorded.

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

Good afternoon, and thank you for joining our first quarter 2021 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 April 27, 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 first quarter 2021 earnings call. I will begin with some of my views on the business, including an update on our shift to NCR becoming a software and services focused company with a higher level of recurring revenue. Tim will then review our financial performance and an outlook into the second quarter. And then, Owen, Tim and I will take your questions.

Let's begin on Slide 4 with some highlights from the first quarter. NCR delivered solid performance that included accelerated recurring revenue growth, significant margin expansion and strong cash flow production. Although there remains uncertainty regarding when businesses return to prepandemic levels in certain geographies, we are starting to experience green shoots across parts of our business. A year ago, we were facing unprecedented uncertainty over the depth and length of the pandemic. We were focused on taking care of our employees. We asked our team to stay focused on taking care of our customers. I believe that, that relentless focus is starting to pay dividends in improved customer satisfaction and brand loyalty.

Although we still haven't fully recovered from the crisis, we are in a much stronger position today than we were a year ago. We are building momentum in our NCR as a Service strategy and improving execution. First, we expanded adjusted EBITDA margin to 16.7% in the first quarter, which represents an increase of 420 basis points from the first quarter of 2020. Second, we delivered 9% recurring revenue growth in the quarter. That brings recurring revenue to 57% of total revenue. We continue to make steady progress, increasing our recurring revenue which is consistent with our 80/60/20 goals. Third, we delivered strong free cash flow. We generated $98 million of free cash flow in the quarter, which represents the first time in many years that NCR has generated positive free cash flow in the first quarter of the year.

And finally, we are very excited about the opportunity combined with Cardtronics The proposed transaction will accelerate the NCR-as-a-Service strategy and further shift NCR's revenue mix to software, services and recurring revenue. We have successfully completed the financing for the transaction and remain on track to close midyear 2021, subject, of course, to regulatory and shareholder approval.

Now moving to Slide 5. We have continued to progress executing our strategy and remain focused on our transition to drive NCR-as-a-Service and achieve our 80/60/20 strategic goals. We have made significant progress against these goals, particularly as we accelerate margin expansion towards our 20% adjusted EBITDA margin target.

In banking, we continue to have positive momentum in our digital banking platform, with 11 new deals signed in the first quarter. We also had cross-sell success with existing clients with new products, including 3 business banking deals done in the quarter. Banking software continues with strong growth as we continue to shift the business to a recurring model. The first quarter saw strong growth in our end-to-end multi-vendor ATM solutions as well as continued momentum with our Digital First strategy, integrating our physical assets into our digital banking solutions.

In addition, we are beginning to shift to multiyear professional service engagements that are aligned with our software projects. We are receiving increased interest in our ATM as-a-Service solution and in the first quarter, signed [Arkea], one of the leading retail banks in France to a 10-year ATM-as-a-Service agreement.

In retail, we are gaining traction with our NCR Emerald offering, which is our next-gen cloud-based retail point-of-sale solution. The acceleration in digital transformation is being driven by consumer demand, and retailers will need to respond. We believe this is starting to drive an upgrade cycle for retail POS software. We recently signed a new NCR Emerald deal with Berkshire's Grocer, a Texas-based super regional grocer with more than 180 stores across 3 states. We are also seeing increased adoption of our self-checkout solutions. We experienced demand across customers and geographies as consumer preferences accelerate.

In Hospitality, momentum of Aloha Essentials, which bundle software, services hardware and payments continued in the first quarter. This model is proving itself in our ability to attract new customers and better service existing customers. During the first quarter, over 90% of all Aloha sites sold through our direct offices were sold as subscription bundles. Payment attach rate is also strong at roughly 85% of sales into new sites.

NCR and Stake & Shake recently entered into an agreement for NCR to support Stake & Shake for over 500 restaurants globally with subscription-based point-of-sale software, hardware and end-to-end IT services in support of their restaurants. As we focus on executing our NCR-as-a-Service strategy and drive the transformation of our businesses, we will strive to become an even more efficient steward of our resources. We continue to focus on taking care of our customers, advancing our product capability with investments in our strategic growth platforms and improving our productivity.

With that, let me pass over to Tim.

Thank you, Mike, and thanks to all of you on the phone for tuning in today. As Mike just described, the execution of a strategy that was launched a little over 2 years ago is starting to be evident in both our competitive and financial results.

Turning to Slide 6, which presents the top of our overview of our first quarter financial performance. Starting on the top left, consolidated revenue was $1.54 billion, up $41 million or 3% versus the 2020 first quarter, driven by solid growth in our retail and hospitality segments. Revenue was down $87 million or 5% sequentially. Although there is still some seasonality in our business and the lumpiness that can result from major hardware orders, we are driving significantly improved linearity.

This year's Q1 sequential decline in revenue compares to an average step-down of over $300 million from Q4 to Q1 over the last 4 years. Importantly, our strategy to shift to recurring revenue streams again accelerated. Recurring revenue was up 9% and comprised 57% of our revenue in the quarter. In the top right, adjusted EBITDA increased $70 million or 37% year-over-year to $258 million. Adjusted EBITDA margin rate expanded 420 basis points to 16.7%. This improvement is almost ratably attributable to 3 things: direct cost productivity in our operations, significant cost reduction in our indirect and overhead layers and revenue growth in the right, more profitable places.

On our last call, we detailed the more permanent productivity improvements that accumulated to more than $150 million in recurring annual cost savings. While we will judiciously add cost back to businesses with particularly high growth rates, we intend to preserve the productivity we have already generated and to identify further efficiencies both in our current operations and those synergistic from acquisitions.

Similar to the discussion of revenue, we are driving improved linearity in adjusted EBITDA. The flat performance from fourth quarter of 2020 compares to an average Q1 sequential decline of roughly $90 million in the first quarters of each of the last 4 years.

In the bottom left, non-GAAP EPS was $0.51, up $0.20 or over 65% from the prior year first quarter. The tax rate of 28.2% was higher than the 2020 Q1 tax rate of 13.5%, and our full year guidance of 26%, up in both cases due to higher income and a decrease in discrete tax benefits.

And finally, and maybe most importantly, we generated $98 million of free cash flow in the quarter. This compares to a use of cash of $20 million in the first quarter of 2020 and represents the first time in many years that NCR has generated positive free cash flow in our first quarter. The $60 million decline from the fourth quarter of 2020 compares to an average Q1 sequential decline of roughly $425 million in the first quarters of the prior 4 years.

Moving to Slide 7, which describes our banking segment results. Banking revenue decreased $7 million or 1% year-over-year, with more than all of that decline attributable to lower ATM hardware sales. Software and services revenues both increased despite the lower hardware pull-through and the shift to recurring revenue. This business extended its trend of replacing revenue that was traditionally recognized with the sale of ATM hardware with revenue streams and software and services that are more durable, predictable and valuable.

Our banking sales funnel has improved to above pre-COVID levels, with close rates also starting to trend more positively. Our sales funnel mix now has a much larger and richer recurring and subscription component. Q1 2021 total contract value signed was more than twice the value from a year ago. Banking adjusted EBITDA increased $14 million or 10% year-over-year despite the lower revenue. As a result, adjusted EBITDA margin rate expanded by 210 basis points to 20.4%.

On a sequential basis, revenue was down 5%, while adjusted EBITDA increased 17%, and the adjusted EBITDA margin rate expanded 380 basis points. The improved profitability both year-over-year and sequentially was driven by a favorable mix of revenue and lower expenses. The bottom of the slide shows our key metrics for the Banking segment.

On the left, while the conversion of current quarter wins that Mike described will have a typical 9-month lag to conversion and eventual revenue generation, prior period wins at digital banking drove a 6% year-over-year growth rate in the first quarter. Digital banking registered users increased 13% compared to Q1 2020. And despite the decline in total banking revenue, we did grow in the right places. Recurring revenue in the Banking segment increased 8% year-over-year.

Moving to Slide 8, shows our Retail segment results, which were uniformly strong. Retail revenue increased $60 million or 13% year-over-year, driven by strong self-checkout and services revenue. Retail adjusted EBITDA increased $36 million or 97% year-over-year while adjusted EBITDA margin rate expanded by 590 basis points to 13.7%. This first quarter performance demonstrates the impact of double-digit revenue growth accompanied by cost discipline, with incremental EBITDA conversion of $0.60 on the dollar.

Lower on the page, we depicted the 3 key metrics for retail. Self-checkout revenue increased 31% year-over-year, driven by broad-based demand, both by customer and by geography. Platform lanes increased 51% compared to the prior year first quarter. We continue to see accelerating adoption and implementation rates of our next-generation retail POS software solutions. And importantly, recurring revenue in this business increased 14% versus the first quarter of 2020.

Slide 9 shows our Hospitality segment results, which returned to year-over-year growth. Hospitality revenue increased $10 million or 6% as we are beginning to see restaurants reopen, rework existing locations and expand. Our signed total contract value more than doubled from the year ago first quarter. Our sales pipeline is getting stronger, and we are adding resources to our selling effort to catalyze this improving trend. First quarter adjusted EBITDA increased $18 million or more than tripled from the first quarter of 2020 due to higher revenue and lower operating expenses.

Hospitality's key metrics include Aloha Essential sites and recurring revenue. Aloha Essentials sites, which bundle software, services, hardware and payments into a single offering, grew 61% when compared to the prior year first quarter and grew 21% sequentially. Recurring revenue in the graph at the bottom right has stabilized as the attrition rate caused by restaurant closure has abated. Recurring revenue in this business was down 1% from last year and was flat sequentially.

Turning to Slide 10. We provide our first quarter results for 80/60/20 strategic targets that are now very familiar to you. We strive to generate 80% of our revenue from software and services or, described as the inverse, less than 20% of our revenue from discrete hardware sales. In the first quarter, software and services represented 72% of our revenue, which is an increase from 71% in the fourth quarter. The decline from 74% in the first quarter of 2020 was driven by higher SCO revenue this year. We aim for 60% of our revenue to be recurring, to drive more resilient, more predictable and more valuable revenue.

Recurring revenue represented 57% of total revenue compared to 54% in the fourth quarter and 53% in the first quarter of 2020. And we aspire to a 20% adjusted EBITDA margin rate. As I've already emphasized, we made significant progress in this metric with an adjusted EBITDA margin rate of 16.7% compared to 12.5% in the first quarter of 2020 and 15.8% in the fourth quarter.

On Slide 11, we present free cash flow, net debt and adjusted EBITDA metrics to facilitate leverage calculations. As I described earlier, we extended the trend of strong, more linear free cash flow through the traditionally challenged first quarter of the year. Free cash flow of $98 million in this quarter compared to free cash outflow in last year's same quarter of $20 million. Versus Q1 of 2020, all categories of inventory were down an aggregate 17%, with days on hand down 7 days operationally. Receivables were down 11%, with a 9-point improvement in those longer than 90 days, and days sales outstanding improved by 9 full days.

This slide also shows our net-debt-to-adjusted-EBITDA metric, with a leverage ratio of 3.2x. We ended the first quarter with $319 million of cash and remain well within our debt covenants. We ended the first quarter with credit facility leverage of approximately 3.3x well under our debt covenant maximum of 4.6.

In anticipation of the Cardtronics transaction, we have augmented our financial position with 2 important debt transactions. We amended and extended our senior secured credit facility which provided an incremental $1.3 billion of new Term Loan A and issued new $1.2 billion in the 8-year senior notes. The weighted average interest of these transactions is about 3.7%, which is significantly lower than our original model. At the eventual close of the transaction, these funds will all become available, and our total leverage covenant will widen to 5.5x to allow us to execute our plan to delever rapidly from a forecasted post-close level of 4.5x.

These borrowings are structured so that in the absence of a close, NCR would not be left with excess borrowing. We greatly appreciate the partnership and strong support from our lending group.

And my last slide is Slide 12, which provides an outlook for Q2 of 2021 for NCR on a standalone basis. While the successful completion of our proposed Cardtronics transaction at midyear would complicate both your modeling efforts and our reported results, we intend to report the second quarter in our current format to facilitate that analysis. So for Q2, for NCR is currently comprised and relative to 2020's results, we expect revenue growth of 9% to 10%. Strengthening demand signals from our end markets and improving competitive position will both support that growth. We expect particularly strong growth in our Retail and Hospitality businesses and a growth rate in our recurring revenue streams that is similar to Q1.

On profitability, we expect adjusted EBITDA margin rate to expand by 250 to 300 basis points to more than 16%. And finally, we also expect free cash flow to be similar to Q1 of 2021 as we continue to drive improved cash generation linearity. I expect our second quarter performance to be another proof point that NCR is emerging from the pandemic in more productive, more competitive and more valuable company.

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

Thanks, Tim.

Now turning to Slide 13. I want to provide an update on the proposed transaction with Cardtronics. Cardtronics shareholders will vote on the transaction at their shareholder meeting scheduled for May 7. From a regulatory perspective, the Hart-Scott-Rodino waiting period expired on March 11, and the transaction is still under review in South Africa and the United Kingdom. We anticipate the transaction to close midyear, subject to shareholder and regulatory approval.

We remain very excited about the transaction as the addition of Cardtronics will accelerate our NCR-as-a-Service strategy and is expected to be accretive to non-GAAP EPS for the first year by 20% to 25%. It will enhance our scale and cash flow generation while advancing our 80/60/20 strategic targets by roughly 2 years. We believe the combination of NCR and Cardtronics will drive significant value for our customers and our shareholders. It's a unique opportunity that's both strategically consistent and financially accretive to NCR.

Now turning to Slide 14. Looking forward, 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 and strive to build on the positive momentum.

Second, we have momentum in the business and are well positioned to drive accelerated growth while improving revenue and cash flow linearity as we shift more of our revenue to a recurring revenue stream.

Third, we expect the combination of a lower cost structure, along with positive operating leverage, will continue to drive margin expansion.

Fourth, we will continue to allocate capital to the highest growth and return opportunities with the goal of driving free cash flow and increasing returns for our shareholders.

And finally, we are preparing to hit the ground running and executing on the opportunities that Cardtronics will bring us once the transaction closes.

That concludes our prepared remarks for today. With that, we'll open up the call for questions. Thank you for your time.

And operator, please open the line.

(Operator Instructions) And we'll take our first question from Katy Huberty of Morgan Stanley.

A couple of questions. First, 2Q guidance -- revenue guidance is strong. But if you look at it on a sequential basis, up 5% is below pre-COVID seasonality of about 8% in 2Q. Is that just a function of increasing recurring revenue mix? Or is there something having to do with the timing of when you see hardware deals coming through this year? Then I have a follow-up.

No, you're exactly -- Katy, this is Tim. You're exactly right. As we've gotten more linear in our revenue streams, we had a much better first quarter than would have typically happened in the -- historically happened to shift from Q4 to Q1. And so going into Q2, the sequential growth is there. But the modest -- the trend of modest sequential growth that we've talked about for the last several quarters continues into Q2. I would expect the growth in that quarter to be a little bit more hardware heavy in Q2, particularly when it comes to SCO and point-of-sale at the Hospitality business.

Okay. And Tim, I assume that's why EBITDA expansion is up year-on-year, but it's down sequentially in 2Q, is that because of the hardware mix?

Yes. So as we sit here now, I'm not certain it will be lower. I think we did demonstrate some pretty significant growth in Q1. I do see a little bit higher cost in the second quarter, and my revenue mix is a little less advantageous in Q2. So now look, if we're able to hit the high end of that growth range, there's some opportunity that will come in the right places. But yes, for now, I'd expect margin rate to be just modestly below where it was in this quarter.

Okay. And then lastly, you commented on TCV and pipeline for the Banking and Hospitality segments. Can you just comment on what you're seeing around the pipeline in retail in particular?

Yes -- go ahead, Owen.

Yes, Katy, this is Owen. The retail business is both on the software side of the house which is what's driving TCV. We're seeing some really good momentum there. We've talked about the refresh cycle that we were forecasting or talking about back in December. We're seeing that come to fruition. And the activity level is really strong, so the TCV number is a reflection of that. And coming along with that is the self-checkout as we convert the number of lanes that are available to us. So it's a little bit of hand in glove. But what we really like, and goes back to Tim's comment about the mix, we're getting the right mix out of the retail business, along with the others, but they're going to drive a big hardware number. They did in the first quarter. We probably will see that in the second quarter, but I think we're more energized about the software momentum there.

Congrats on the quarter.

Thank you.

Thanks.

Next, we'll hear from Tim Willi of Wells Fargo.

My first question and then a follow-up. Mike and Tim, I think you both referenced numerous times through your comments talking about your improved competitive position. And I know that product and people has been a focus of investment since you arrived, Mike. I'm wondering if you could just sort of -- is there a business line more so than others where you feel like there have been substantial improvements in your competitive position? Any way to sort of think about one standout versus the other, appreciating that probably all of them are better?

Yes. Tim, thanks for the question. I'd say a little bit across the board, again, we've been focused on all 3 lines of business and some very specific initiatives. I think you see a little bit in the numbers. I think if you start with Hospitality and what we've done in the SMB market with the Aloha Essentials. And we give you those metrics, we're starting to have good success there, we're starting to have really good success attaching payments to those bundled Aloha sales in the SMB market.

The enterprise side of Hospitality is starting to pick up. A little bit of that is the challenges at the large end of the market had last year. It's because they were so busy, this year, we're starting to get refreshes and upgrades, and they're opening up new stores, new restaurants.

Retail. Retail, we've had a number of years now reinvesting back in our Emerald cloud-based retail POS. We believe, and we're starting to see that again with the pandemic, in driving the need to really have a lot of multiple channels available that you need to upgrade your POS to get it on a more current architecture. So we're starting to see success in that. I want to mention that that's going quite well. You're seeing a little bit on SCO, I should say, a little bit SCO, obviously, coming out of pandemic, the drive to self-service. It started with pandemic, now it's driven by the ability to get labor and then the labor cost that all of our clients are seeing is driving a lot of conversation around the SCO.

We have improved across the board, not only on product -- in the product investment, but also on our service or NPS scores, our Net Promoter Scores, went up last year quite well. And as a result, as you know, in the business that we're in, when our customer sat improves because we do better service, we get more sales. So we're starting to see that.

And then lastly, digital banking came back last year, had a good '19 -- sorry, a good '20. And it's continuing to show very well into 2021. So literally across the board, Retail, Hospitality, Banking, digital banking have had a really good start to the year.

And then my follow-up was just on hospitality and restaurant. We hear a lot about labor shortages and people not being able to hire. And I'm curious if within your product suite there, are there definitive revenue opportunities that are really built for this environment where you can really walk into that restaurant and help them manage even if they're understaffed, whether it's checkout at the table or some kind of other products and services in that POS system that there's a real opportunity given this labor market to really get some cross-selling into the customer base around labor-type products?

Well, I mean, those are the 2. You can [sense] in the 2 the ability to pay a table and a quick thing, the ability to order a table, the ability to order the table and drive it straight through to the kitchen. Again, most times, when you pop a menu at a table, you can just wait for the wait staff. Our system, because it's integrated with Aloha, it went back to the back kitchen. If you're in a Aloha client, your customers can order a table, and then you can have runners taking them out, the drinks and the food.

Integrated with the front end, we put some money into our front-end online ordering system. Again, that goes through our BSP, our business service platform, right through the kitchen. So you don't have to reenter, which most platforms are becoming third-party aggregators like GrubHub or Uber Eats. If you see it in a restaurant, they're reordering it into the POS. Ours goes straight through into the kitchen. So we have some technology in the enterprise accounts, a lot of interest in just having that integration and having the capability to minimize staff interactions. So we think we're poised pretty well for that talent in self-service.

Joel Hoeffler of Stephens has our next question.

I might have missed this earlier, but I was hoping if you could talk more about payment attach rates for the existing Hospitality customer base and if you were starting to win some of the acquiring business as that's coming up for renewal. And then I have a follow-up.

Yes. So we're -- we talk about going on and putting up new Aloha Essentials sites. So Aloha Essentials could be to a new client, greenfield client or it could be upgrading existing Aloha client. So in those situations, you can see the attach rates are very strong. We actually have gone out and started to sell into larger accounts, whether it's a -- still SMB with 10 restaurants or whether it's a larger enterprise and are starting to build a nice pipeline with that. I think we'll start to see some of those convert into customers over time. We've actually had payments, so Hospitality is head of retail where retail is starting to get some momentum as well with Store Point and with Emerald. So across the board, payments are starting to get attraction.

I would just -- I say this every call, payments for us is a long game. We're going to attach payments to our point of sale. Where we start a transaction, we want to complete the transaction and collect the fee for that. And we'll just keep moving and keep integrating, keep adding functionality that we can differentiate with the integrated POS to the merchant payment.

And the only thing I'd add to that is Dirk and his team, as they have gone to market here, 2 things that they're very focused in on. They are on the path to double the number of feet on the street in the Hospitality space. So when we look at our product functionality and feature, we think we're very competitive. We feel good about that. This is about a feet on the street, a battle in the SMB market in particular. So we are on the path to double the number of salespeople.

The other thing is that they have really built a strategy to lead as a payment-first strategy with the SMB marketplace. And in fact, what we've done is we've bundled the pricing to do a net settlement on payments. So at the end of the day, we're bringing Aloha Essentials with payments to the table, and it's all on a net settlement basis against the payments volume. So the message is loud and clear, and I will tell you the receptivity, Mike talked about 61% growth on Aloha sites. We're more than happy that we're overachieving on the attach rate in that activity versus what we had planned.

That's super helpful. I appreciate that. My follow-up question is, to the extent that you guys can, any update on how customers or partners are thinking about the Cardtronics acquisition?

Yes. I mean we obviously can't go and market together. We can't go and talk about Cardtronics as an offering. We do get inbound messages, whether it's calls or as well talking to clients, an executive. So it's literally more anecdotal. I would say the vast majority of it has been very positive, where -- whether it's the banks or retail input around, boy -- and again, some of these are joint customers, right, so some of the retail clients are using our products are also using Cardtronics. Some of the banks have relationships with us, and they also use the offline network or they use some other services from Cardtronics. They come to us and say, well, together, here are some things that you guys could do that would really help us. So it's, again, very anecdotal, but so far, it has been very positive.

Next, we'll hear from Dan Kurnos of The Benchmark Company.

Owen, can we just go back for a second, just on the Hospitality doubling feet on the street. If there's any way to kind of maybe parse out what you guys are seeing between, let's call it, existing logos that were struggling and are reopening their doors versus maybe new logos that have cropped up because obviously, the pandemic impacted the hospitality space in a more meaningful way than almost any other vertical. Just kind of the conversations that you're having there just so we can get a sense of the trajectory there. And then, Mike, I guess, look, I know we haven't really touched on digital banking too much. It had a nice uptick in the quarter. Thanks for all the breakouts again kind of here. You've talked about seeing some green shoots, integration of physical assets. Just any other granularity you can give us on sort of how you see that trajectory kind of improving over the balance of this year would be helpful.

Sure. So on the hospitality, I would say that we certainly absorbed a lot with our customer base. I think Mike referenced there our Net Promoter Scores, probably the most material movement has been in the hospitality space. And I think that was because with our existing customers, we really collaborated with them in terms of helping them absorb the body punches, if you will, so suspending payments and stretching things out. So the loyalty there has been very, very strong. The attrition has been coming from those that just couldn't survive and stepped out, but the loyalty from that customer base is really good.

What we're seeing in the vast majority of the step up in Aloha sites are new footprints. Now some of those are existing customers that move down the street or reopen their shop for new stores, but we're seeing a really good pickup. And the receptivity to this approach that Dirk and his team have taken, which is the bundle of Aloha Essentials, minimal upfront capital, the net settlement on payments has really made this tolerable because even though we're starting to come out of it, we're not out yet. The volume is directionally right, but the volume isn't there. So the cost or the payment structure is volume sensitive, which is exactly what these new folks are looking for.

So we're seeing really good performance and new footprints opening up. And the loyalty of those customers that survived it has been really strong. So I don't know if that's what you were looking for, but that's kind of what we're seeing from the activity in the first quarter.

Yes. And then on digital banking, so we had talked on December 3 at our Investor Day that we've built up -- built back the digital banking product set, not only with the product and feature function and the investment, but also with our team, with our go-to-market and how we literally interact with the marketplace. So we aspire to get that growth rate into double digits. I think we said we believe we can get there. I don't think that's going to happen in '21, but we think like in '22. '23, we can approach double digits.

The acquisition of D3, which is paying dividends and the $25 billion above, we announced a couple of big deals. We announced the associated bank, we announced interest bank, both of those banks are in the $50 billion range, so some very large scale. Part of that was integrating with Terafina. We brought on Terafina as a part of our business. We have partnered with them in the past. They do omnichannel or multichannel account opening. They put it in front of the mobile, they put it in front of digital. We can put that in the brand, so we put that into ATM. So we really have different products, particularly in that segment of the marketplace where they are looking for the retail consumer, starting with a digital experience moving to a branch and moving to an ATM or ITM.

We're competing out there with the Q2s and the [alchemies]. We believe we're winning our share against them, and we're doing really well. The cores, particularly some of the core providers have some legacy platforms that have not been cut up to date on the mobile side. And as you guys all know, the whole play for a bank in the retail side of their business is all digital today, so it's so important to have a really strong digital partner, and we believe our product is as good as anybody else out there today.

Paul Chung of JPMorgan has our next question.

So just on free cash, very strong generation this quarter. Typical usage in 1Q. So anything on working cap you want to call out? Looks like payables is a bit lighter. So anything structural going on there? You're going to smooth that out across the year? Q2 looks pretty strong as well, so how do we think about 4Q as well? Are you going to see a bump there?

Yes, we had a great quarter on receivables again, and receivables have been most of the story over the last, let's say, 3 quarters. And I think those -- while those improvements to our processes aren't necessarily completely institutionalized yet, they become, let's call, more comment across the organization. We'll continue to work on that.

We still got too much in the way of our receivables. They're still 90 days -- longer than 90 days in duration, we're going to work on that. And I think the -- overall, our days right now are, in the quarter, 71, 72 days. It's been as low as 63 or 64 days at year-end, and then we'll work that down as we go through the year.

On the inventory side, really great performance. Typically, this company ramps up inventory buys in Q1 and then draw down that inventory tick on the raw side over the next several quarters. We're buying in a more linear fashion to be more just in time, or not just in time, but more just in time. And you're seeing that in our raws. And our -- we finished the quarter a little higher than I would have liked on finished goods that had to do with -- remember, there's some shipping issues as we closed out the quarter, so -- globally. So I think we'll clean up a little bit of that going into Q2.

But there's every reason to believe that as the year plays out, that our free cash flow should continue to be in the $450 million range for the full year, which, if you play that out linearly across the year to get a little bit better in each quarter as we go. We tend to have a little higher second half free cash flow than the first, but I still expect north of $200 million of free cash flow in the first half of the year.

Okay. Wow. That's great. And then just a follow-up on Terafina. What's kind of the respective contribution there? And what kind of attracted you to that asset? And then given the more kind of expansive capabilities and full solution, are you seeing more interest from fintechs and community banking? Any thoughts there?

Yes. So technically, on Terafina, so we -- starting with, we really like the project. We like the ability to account opening and do account opening on a digital or mobile platform. Second, we like the fact that they then can go to other channels. As I said, we can do the same opening then on an ATM or ITM, probably more an ITM, interactive teller machine. And then we can take that into a branch or a call center. So it's multichannel, we think that's really important.

And then it's multiproduct. So does a deposit account opening, it will do installment opening, it will go to mortgage if it was small bid. So it has that ability to really serve the whole breadth of products.

And then lastly, it's built for customer direct. It's built really to be as opposed to back offices built front office for the customer. So it fits really nicely with our strategy, which is self-service or self-directed banking for retail clients. It fit in nicely. It's integrated. It's up and running. And it really is helping to drive sales, not only for Terafina, but also for our digital banking products.

Next, we will hear from Matt Summerville of D.A. Davidson.

Just a couple of questions. First, has your business been impacted in any way by all of the supply chain and logistical challenges that you can basically read about sort of every day, whether it has to do with microprocessors or again, just challenges with freight, et cetera?

Yes. Matt, this is Owen. I would say to date, we have been really comfortable with our position. I think as you may recall, over the last year or so, we talked quite a bit about what we had done to reevaluate our supply chain as we reestablished our manufacturing footprint around the globe, moving more localized with the supply chains, but also creating redundancies. And quite candidly, over the last year, those redundancies were tested as COVID hit certain geographies that is in Brazil or Chennai. So we were able to put the supply chain infrastructure that we put in place to the test.

We're pretty comfortable going forward that we have what we need. We've certainly looked and are aware of the microprocessor issues, but we believe that we have the supply chain and redundancy and alternatives in place that we need. That's -- given current conditions, if things really moved in a materially bad way, and then we'd have to reassess where we're at. But right now, Adrian and his team have done a really good job getting us well positioned.

I mean you raised a constant battle when a ship is stuck in the Suez Canal, our team has to scramble and figure how to get materials around that. A year ago -- a little a year ago, we were very challenged with China. We have a plant in India right now. As you all know, the pandemic's hitting India as bad as any other country on the globe. So we've been battling this for over a year. The team does a great job literally every single day trying to figure this out, but it's still a risk for us going forward.

And then lastly, can you talk, Tim, what the impact was in the quarter on the top and bottom line with respect to the ongoing shift towards more of a recurring revenue model?

Yes. So about 1 point of growth. It costs us about 1 point of growth this quarter, predominantly still in Banking for 1 more quarter, but probably 2/3 in Banking and 1/3 in the Retail space.

(Operator Instructions) We'll now hear from Kartik Mehta of NCR.

Mike, just -- you talked a lot about ATM-as-a-Service. I'm wondering what type of FIs you're seeing interest in size-wise, asset size-wise? And is it just domestic? Or are you seeing that demand internationally as well?

Yes. We just announced it'd be over in Europe later, I think we announced it last week. So we're going to be more community credit union, particularly in the States, it's going to be a little bigger overseas. I will tell you the discussions over the last 18 months. And again, we're still fairly early stage in rolling out ATM-as-a-Service. But we thought it would be smaller banks, maybe a few midsized banks. We've had larger banks very interested in a dialogue. In some cases, it's off-prem only where they want to take their off-prem fleet. In other cases, it's exploring at maybe a little bit broader opportunity where we could bring value to them. Again, we're early stage, so our focus right now is to do it on a smaller scale.

That is an area that we've called out as we combine. If we get through the merger process with Cardtronics, we will have a very compelling offering in terms of this capability to operate and run. They probably run as large a fleet as anybody on the globe in terms of driving ATMs 24/7. So today, it's been smaller. We think that will upscale quickly.

And Mike, just last question. As you look at the Aloha offering, how do you think you're comparing in terms of competition? Are you maintaining, gaining, losing market share? How would you kind of characterize what's happening on that side of the business?

Yes. So Aloha's serving 2 markets, and then it's very small and we use a product called Silver, which is pure cloud-based. Aloha is a cloud of -- got cloud components to it. And as you know, it's not really about the cloud, it's really about the ability to install, about the ability to support, the ability to drive upgrades. And we -- our products have that capability. Aloha in the enterprise side, we still think is by far the best product out there. It's continuing to be validated. So on the enterprise side, we do very well.

On the SMB side, Owen talked about it, we've rebuilt our channel into some of the marketplaces. We've been adding a feet on the street and continuing to drive success. You can see that in our Aloha Essential numbers. We've got, I'd say, some stronger competitors and one in particular in the SMB space.

But I think the product, if you look at the product and you talk to people using the product, they love the product. There's more wait staff. There's more servers in the industry who know our product than any other product out there. If you look at labor challenges and you want a product, somebody can walk in and use its Aloha. So I think our biggest challenge is demand distribution, our channel, our ability to install, our ability to get it out there, and we're -- we've been addressing those over the last 18 months.

And we'll now hear from Ian Zaffino of Oppenheimer.

This is Mark on for Ian. Just actually a quick one. On Aloha, can you give us a sense of where the attrition rate is? And then it seems like attrition rate has been caused a lot by restaurant closures, is that, I guess, like majority of the region or the driver? And if so -- like if not, is there anything else that's driving attrition or where do you see it going forward?

Yes. I mean we track attrition closely. It's a little hard, particularly in 2020. Is at an SMB -- the enterprise ones, you see those. That's fairly straightforward. And again, we're very torn in the enterprise, and we pick up market share in clients and enterprise as opposed to losing. In the SMB, it was hard to tell last year why they went away. And they stopped paying or stopped connecting to our system. It's been -- it's dramatically better now as Dirk and Owen track that quarter-to-quarter. First quarter was dramatically lower on attrition, but he's been tracking that, following that.

Our view of that space, so you had -- take your pick, read an industry periodical of 25% to 30% of the restaurants closed up, not reopened. You can walk down your street, those places that closed up. And restaurants on a business, somebody is going to reopen in that space because the demand is going to be so high for going back out and eating when the pandemic ends. Our goal is to be there and to win back or win new -- those entities that opened back up in literally the same location. So we think going forward, we're -- our numbers will continue to get better throughout '21 on net add versus losses.

And if there are no further questions at this time, I'll turn the call over to Mike Hayford for any additional or closing comments.

Thanks. Thanks to all of you for joining us again today. What I'd say is we don't think we're fully out of the global pandemic yet. Obviously, we're seeing it. It moves. So depending on where you are, you feel better about where it's at. Obviously, our compatriots in India, we have a large staff in India, Brazil are still feeling the brunt of it. But we do feel really good about the progress in the first quarter.

In 2020 throughout the whole year, during a difficult year in the pandemic, we asked our team to stay very focused on the customer. And our goal is that we take care of the customers in a difficult year. Coming in the back end of that, they'll look at NCR as a partner, and they'll buy more from us. It was a pretty simple formula. We believe we're starting to see that. That's starting to pay dividends. As customers are buying, and they're buying our strategic investments, they're buying our initiatives. And the work that we've been doing in the last 2.5 years is starting to pay dividends.

These green shoots, as we call them, I called them in my script, these green shoots of success that we started to see in the first quarter give us some optimism and you may have seen -- a little more optimistic in our call today based on our numbers and our performance. But the optimism is that our strategy is working, our execution is starting to come through. And that makes us feel a little bit better about 2021 going forward.

Thanks for joining us today. We'll see you in 3 months.

That does conclude today's conference. Thank you all for your participation. You may now disconnect.