NCR Corp On Track To Spin-Off NCR Atleos In 4Q23; Maintain Buy

Deal Overview

On August 16, 2023, NCR Corporation (NYSE: NCR, $29.84, Market Capitalisation: $4.2 billion), a leading enterprise technology provider for retail stores, restaurants, and self-directed banking, announced that the U.S. Securities and Exchange Commission (SEC) has declared effective the registration statement on form 10 filed by NCR Atleos (Spin-Off). Post-spin-off, NCR RemainCo will be named NCR Voyix, focused on digital commerce business, and NCR Atleos (Spin-Off) will focus on ATM business. As per the amended Form 10, each NCR shareholder would receive one share of NCR Atleos common stock for every two shares of NCR common stock held at the close of business on the record date, and NCR Atleos is expected to list its common stock on NYSE under the symbol “NATL”. The Company continues to expect the spin-off to be completed by the end of 4Q23, while information regarding the record date and distribution date will be provided in due course. After completing the proposed spin-off, NCR Voyix (RemainCo) will focus on the digital commerce business, continuing to operate its Retail, Hospitality, and Digital Banking businesses. NCR Atleos (Spin-Off) will include ATMfocused businesses, including Self-Service Banking, Payments & Network, and Telecommunications & Technology businesses. Moreover, NCR has announced to host Investor Days for NCR Atleos (Spin-Off) and NCR Voyix (RemainCo) on September 5, 2023.

Valuation

We value NCR Corporation (NCR) using the 2024e EV/EBITDA methodology by valuing NCR Voyix (Stub) and NCR Atleos (Spin-Off) separately. Our intrinsic value of $24.00 for NCR (Stub) is based on a 2024e EV/EBITDA multiple of 9.2x (Previously: 9.5x) for the digital commerce business (~4% discount to its peer multiple of 9.6x). Our fair value estimate for NCR Atleos (Spin-Off) stands at $22.00 per share based on the 2024e EV/EBITDA multiple of 5.1x (Previously: 5.3x) to ATM business (~13% discount to multiple of Euronet). We arrive at a consolidated target price of $35.00 per share (Previously: $37.00) for NCR Corporation, which implies a potential upside of 17.3% from the current market price of $29.84 as of 8/18. We, thereby, retain our ‘Buy’ rating on the stock. Risks to our valuation include a slowdown in sales growth due to rising competition, weakness in the economy, slower momentum in key markets, and failure to achieve the cost saving targets.

2Q23 and 1H23 Results Review

2Q23

In 2Q23, NCR recorded revenues of $2.0 billion, down 0.3% YoY (flat on a constant currency basis), as the decline in ATM, SCO and POS revenues was partially offset by an increase in software license and BitcoinBTC-related revenues. Service revenue for the 2Q23 increased by 2% due to growth in recurring banking services revenue, software maintenance, and other software-related services, partially offset by a decline in hardware maintenance revenue. Foreign currency fluctuations had an unfavorable impact of 1% on the revenue comparison, primarily in hardware maintenance, hardware product sales and payments processing. In 2Q23, adjusted operating income increased to $297 million, up 27.5% YoY, from $233 million in 2Q22. Notably, the Company reported Adjusted EBITDA of $389 million in 2Q23, up 14.7% YoY (+17% YoY on a constant currency basis), despite the unfavorable impact of foreign currency fluctuations. Adjusted EBITDA margin improved to 19.6% in 2Q23, compared to 17.0% in the prior-year period, driven by cost mitigation actions and a higher margin revenue mix. In 2Q23, NCR reported adjusted EPS of $0.94, up 3.3% YoY (+9% YoY on a constant currency basis), compared to $0.91 in 2Q22.

1H23

In 1H23, the Company’s revenues grew 0.4% YoY to $3.9 billion, as the service revenue increased 2% due to growth in recurring banking services revenue, payments processing, software maintenance and software-related services, partially offset by a decline in hardware maintenance revenue. Foreign currency fluctuations had an unfavorable impact of 2% on the revenue comparison, primarily in hardware maintenance, hardware product sales and payments processing. In 1H23, adjusted operating income increased to $503 million, up 39.3% YoY, from $361 million in 1H22. Notably, the Company reported Adjusted EBITDA of $691 million in 1H23, up 13.3% YoY (+18% YoY on a constant currency basis), despite the unfavorable impact of foreign currency fluctuations. Adjusted EBITDA margin improved to 17.8% in 1H23, compared to 15.8% in the prior-year period, driven by cost mitigation actions and a higher margin revenue mix. In 1H23, NCR reported a net income of $151 million, up 46.6% YoY, compared to $103 million in 1H22.

Segmental Information

NCR currently operates in 5 operating segments. Post-spin-off, NCR Voyix (RemainCo) will include Retail, Hospitality, and Digital Banking segments. NCR Atleos (Spin-Off) will include Self-Service Banking, Payments & Network segments.

Retail Segment

2Q23

For 2Q23, the Retail segment recorded a revenue of $576 million, up 2.5% YoY, compared to the prior year period. This was primarily due to higher revenue from services and point-of-sale solutions partially offset by decreased self-checkout related revenue. Adjusted EBITDA for the period was $123 million, up 18.3% YoY, with a margin of 21.4%, up by 290 bps. This was primarily due to improvements in component, labor and freight costs and other cost mitigation and pricing actions partially offset by increased employee benefit-related costs.

1H23

In 1H23, the Retail segment recorded a revenue of $1.1 billion, up 1.8% YoY, primarily due to higher revenue from services and point-of-sale solutions partially offset by decreased self-checkout related revenue. Adjusted EBITDA for the period was increased to $220 million, up 28.7% YoY, with a margin of 19.5%, up by 410 bps. This was primarily driven by favorable software and services revenue mix and due to improvements in component, labor and freight costs and other cost mitigation and pricing actions partially offset by increased employee benefit-related costs.

Hospitality Segment 2Q23

The Hospitality segment recorded a revenue of $235 million in 2Q23, down 1.3% compared to the prior year period. This was primarily due to a decrease in POS hardware partially offset by an increase in point-of-sale solutions revenue and increases in services and payments processing revenues. However, Adjusted EBITDA for the period was $60 million, up 30.4% YoY, with a margin of 25.5%, up by 620 bps primarily due to improvements in component, labor and freight costs and other cost mitigation and pricing actions partially offset by increased employee benefit-related costs.

1H23

In 1H23, the Hospitality segment recorded a revenue of $458 million, up 2.0% YoY, compared to the prior-year period. This was primarily due to increased services and software revenues, including growth in cloud services and payment processing, partially offset by a decrease in POS hardware. Adjusted EBITDA for the period was $113 million, up 29.9% YoY, with a margin of 24.7%, up by 530 bps primarily due to improvements in component, labor and freight costs and other cost mitigation and pricing actions partially offset by increased employee benefit-related costs.

Digital Banking Segment

2Q23

For 2Q23, the Digital Banking segment recorded a revenue of $140 million, up 6.9% YoY, compared to the prior-year period. This was due to increased recurring cloud services and software maintenance revenues. Adjusted EBITDA for the period was $53 million, down 5.4% YoY, with a margin of 37.9%, down by 480 bps driven by investment in selling expenses and research and development expenses, and an increase in employee benefit-related costs.

1H23

The Digital Banking segment recorded a revenue of $276 million in 1H23, up 3.4% YoY, due to increased recurring cloud services and software maintenance revenues. Adjusted EBITDA for the period was $102 million, down 8.9% YoY, with a margin of 37.0%, down by 490 bps driven by investment in selling expenses and research and development expenses, and an increase in employee benefit-related costs.

Self-Service Banking 2Q23

For 2Q23, Self-Service Banking Segment recorded a revenue of $661 million, down 2.7% YoY, compared to the prior-year period. This was due to the shift from one-time ATM hardware and hardware maintenance revenues to recurring ATM as-a-Service arrangements and a decline in one-time software license revenues. The declines in ATM hardware, hardware maintenance and software license revenues were partially offset by increased recurring software and services revenue. Software and services revenue as a percent of total Self-Service Banking segment revenue was 69% for 2Q23. Adjusted EBITDA for the period was $169 million, up 19.0% YoY, with a margin of 25.6%, up by 470 bps. This is due to the reduction in direct costs, particularly in expenses related to fuel and components, particularly in ATM hardware, and increases in higher margin recurring revenue streams. These improvements were partially offset by an increase in employee benefit-related costs.

1H23

For 1H23, Self-Service Banking Segment recorded a revenue of $1.3 billion, down 1.2% YoY, due to the shift from one-time ATM hardware and hardware maintenance revenues to recurring ATM as-a- Service arrangements in addition to a decline in one-time software license revenues partially offset by an increase in recurring software and services revenue. Software and services revenue as a percent of total Self-Service Banking segment revenue was 67% for 1H23….