NCR had, in our opinion, some major announcements in their third quarter 2018 results. We’re going to break out what we feel are the relevant points our readers should be aware of, along with our rating of perceived strategic value.
JetPay Acquisition
NCR acquired JetPay as both a way to fix their glaring hole with Connected Payments and also bolster quick, commoditized revenue. According to NCR’s CEO Mike Hayford,
We announced a definitive agreement to acquire JetPay, which will expand NCR’s offering into the high value payment space and allow us to monetize transactions via payment. JetPay is a provider of end-to-end payment processing. This acquisition will give NCR powerful new products to sell as the provider of the end-to-end, integrated point of sale and payments platform. NCR will be able to use JetPay’s innovative payments platform to deliver turnkey, highly integrated point of sale and payment bundles to our customers.
When asked where JetPay could be quickly accretive to earnings, Hayford mentioned the hospitality and retail verticals.
And again, our strategy will be to really make that tightly coupled with the uniqueness of the front-end POS that we have on the enterprise software. So, we’ll do it with Aloha, we’ll do it with Silver, we’ll do it with products like iPads in the convenience store. We’ll do it in the retail space. I think our plan will be wherever we have very strong penetration with the front-end enterprise software in a retailer or in hospitality, we’ll connect the payments and then settle through the backend on the merchant side.
We don’t believe payments is high value at all: it’s commoditized. But because there’s guaranteed demand it’s free, and highly profitable, revenue. Square has been bundling POS and payments for nearly a decade so it would make sense for a laggard like NCR to finally decide to make a play. NCR’s customers (at least the ones we spoke with) had little positive to say on their perspectives.
Verdict: 5 out of 10. This will likely fix NCR’s Connected Payments debacle but is a huge black eye to NCR as their customers feel NCR is more interested in making money on their backs than they are in fixing years-long problems plaguing their POS. We think this is bad strategy.
Zipscene Acquisition
Zipscene is probably an unknown entity to most of our readers but it’s been a silent marketing player in full service restaurant chains for nearly a decade. Zipscene acted as a CRM for restaurants, helping them collate customer information and deliver marketing to customers that was specific around the types of items they were ordering through integration to the POS. Zipscene’s real impetus was to provide suppliers (Budweiser, et. al.) insights on customer patterns in the restaurant space since the data has been so fragmented and the restaurant chains themselves too inept to figure out how to use category management (not kidding).
Zipscene is a great tool, but we have some reservations about NCR’s ability to execute anything meaningful. Zipscene was venture funded and after 7 years investors were looking for a return – any return – so NCR likely got a great deal. There was probably even decent account overlap. But that’s where the good news likely ends.
- Zipscene is not a SMB product. Half of NCR’s restaurant customer base is SMB (fewer than 50-location groups). We don’t think there will be much carry over, particularly because SMB is served by the channel who’s not particularly high on NCR at the moment (more on that below)
- Over half of the large Aloha merchants we’ve talked with (a number of large restaurant chains comprising over 10,000 locations) are “unbundling” from the NCR solution stack. That is, these merchants are stripping down to a bare-bones Aloha POS and letting third parties fill their gaps for inventory, labor, reporting, etc. They’re doing this because they’re intending to leave Aloha over the next 24 months for a multitude of reasons
- NCR has a history of turning good software solutions into underperformers. Aloha is one such painful example, Cimplebox another. Orderman doesn’t have EMV compatibility and is predominantly relegated to Europe while NCR Back Office (what was Menulink) isn’t even web-based. Should we go on?
Zipscene is a great tool that should have been offered in a partnership model; that would have prevented NCR’s hardware culture from strangling innovation. And remember Zipscene, like JetPay, is only picked up if the core POS is relevant.
Verdict: 5 out of 10. We’re not convinced buying more solutions to layer on top of a broken POS is going to fool anyone: the 15% drop in Aloha’s market share this year has much less to do with “not having ____ bolt-on” and much more to do with fundamental business model and cultural problems.
Acquiring Even More Bolt-Ons
NCR’s new CEO has made it clear that he believes NCR has great distribution but lacks products to upsell. Accordingly NCR will be looking to buy more bolt-ons to add to their existing product stack, spending upwards of half a billion a year procuring these solutions.
On our last call, we shared our capital allocation strategy. We remain focused on adding products to our sales and distribution network to increase our sales to existing markets. To achieve this, we referenced the need to use a targeted M&A program to execute that strategy… we’ll try to do four, five, six deals a year averaging about $100 million a transaction a deal, and spend $400 million, $500 million on deals each fiscal year.
Verdict: 3 out of 10. People building spreadsheets love how this math looks, but they fail to understand how innovation works. NCR’s culture will make it very difficult for any software acquisition to prosper in the long run. NCR has had some success with their hosted solutions in the past but only because they built walled gardens, not because the solutions were independently worthy of adoption. NCR Pulse is a perfect example. We’re skeptical that NCR’s absence of software understanding and execution can be changed so quickly as a public company.
Selling Merchant Data
NCR has finally come out and admitted to their EULA changes that allow them to sell merchant transaction data. For the record, we believe POS companies should have data rights if they’re to serve as stewards of innovation on behalf of their merchants. Our concern is that, like NCR’s purchase of JetPay has revealed, NCR prioritizes themselves over their merchants. When asked about data monetization Hayford responded with,
During the third quarter, we also completed the acquisition of Zipscene, a data analytics company. Zipscene aggregates data from restaurant customers’ buying pattern and provides targeted marketing data back to the restaurants. This enables NCR to begin monetizing the wealth of data we collect through our enterprise point-of-sale platform… the data we can gather from our POS – point-of-sale systems, and also our restaurant systems… So, we just need to start and we need to look at where we have opportunities to monetize the data that we have today, situation we have.
Verdict: 3 out of 10. Selling aggregate POS transaction data (called syndicated data) outright is low value. Building solutions with POS data that help merchants is more lucrative and noteworthy, but NCR hasn’t proven it has the culture or capabilities to do this yet. They’ll also run into market share issues in selling data but let them figure that out on their own dime. In the mean time their customers – who are seeing little innovation or value in exchange for giving up their data – will start to push back. Once again, we are chalking this up to bad strategy.
POS Marketshare Erosion
NCR’s POS was down 28% quarter over quarter. They tried repositioning this with the comment that the same quarter last year (2017) saw an 18% boost versus 2016 due to “large implementations”. Okay, but looking over a two-year period NCR’s POS is down 10%. Guess what direction Brink, Revel, Square, Toast, Touchbistro and other cloud providers have gone over the same period of time?
Now to slide 13, which shows our Hardware segment results, revenue was down 20% constant currency in the quarter with ATMs down 10%, point-of-sale down 28% and self-checkout down 24%… The decline is largely due to the timing of customer rollouts. Point-of-sale revenues were lower in the quarter compared to growth of 18% last year, which also benefited from several large customer rollouts.
Here’s a crazy idea: maybe your drop in marketshare was due to the POS product having so many fundamental problems. In that case it doesn’t matter how many bolt-ons you layer on to mask the issues: fix the core problems first.
Verdict: 0 out of 10. It’s hard to get excited when a company keeps shooting itself in the foot with hubris and bad decisions. NCR can spin this however they want to analysts but we’re too close to the market to be duped. Then again, this is positive news if you’re a competitor.
Layoffs
NCR didn’t come out and say they would be firing people (they quietly started their force reductions last week) but they announced a proposed $100M+ in annual savings stemming from a reduction in SG&A. At $100,000 per head, that’s a reduction of 1,000 people.
Today, we announced $100 million-plus takeout of cost, Andre talked about it being in overhead, SG&A, discretionary spending, just to bring those areas back in line with where we think they should be. They’ve seemed seem to creep over the last two to three years.
We’ve heard that NCR employees in the Atlanta area will now need to work from NCR’s new headquarters in downtown Atlanta. Previously NCR’s headquarters were in the suburbs of Duluth and many mid-level managers (and their families) live by the company’s old digs. When NCR moved headquarters many employees worked from home four or more days per week. The now-mandated downtown commute will add at least two hours of daily time for most employees, driving employees to show themselves the door without NCR’s direct involvement.
Verdict: 0 out of 10. The HR policy change will let NCR avoid the negative PR associated with a round of layoffs as people attrit themselves. Keep in mind the country is experience record-low levels of unemployment; this move definitely signifies NCR is having issues.
Admitting Fault
Emerald POS, NCR’s newer retail POS, is way overdue. We’re not endorsing it as a modern solution, but it is an upgrade from most of the POS solutions NCR has in the market. On the earnings call NCR’s CEO admitted they were behind on a number of products:
We obviously have a little bit of self-inflicting we talked about in the past, kind of mentioned some product cycles. We talked about the ACATs going all the way back to, we put those in place early second quarter. And those were areas like SCO, there’s OPTIC device which is a convenience gas station; Emerald, which is focused on retailers. We didn’t get the products to the market fast enough. That clearly hurt us in 2018. Those products are up in pilot. We’re having success getting referenceable clients. So, we’ll get those out to our salespeople here in the fourth quarter, start building some momentum into next year. So, that clearly hurt us.
Verdict: 9 out of 10. This is the first time NCR has publicly admitted they’ve done anything wrong in our years of interacting with them. We would have given this a 10 out of 10 had we learned that NCR sent emails to their customers explaining their screw ups. NCR would win more support from their customers, partners, and employees if they were open and honest about their issues.
Belief In The Channel
In the event you thought this would end on a high note we must talk about NCR’s lip service to its channel, at least with respect to Aloha. NCR believes that they have great distribution and they include their channel in that ethos:
We have a unbelievably strong distribution channel… So to the extent that we can go out, get products that we can distribute through our sales channel, to the extent that we can get products that we can cross-sell and upsell to our customers, we think we can create that mix and shift to software, to services.
To be clear, this is the same channel that’s filed a class action suit against NCR and is picking up other, competitive POS systems to sell, right? But don’t shoot the messenger: NCR’s channel problems are a direct reflection of policies and culture at the top, NOT the managers running the channel for NCR.
Verdict: 0 out of 10. NCR’s leadership is either out of touch with reality or plain lying.
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Think about this as an analogy.
Imagine the POS is a car. NCR’s car is very old. It has flat tires, there’s no AC, and traveling above 30 miles per hour is pretty much impossible. Despite all that NCR still prices their car higher than new cars with much better features. Customers who have been driving NCR’s car are tired of the growing list of problems, especially in comparison to the newer models on the road.
NCR, in an effort to fix sliding sales, mails letters to their customers. Surely these letters will explain that NCR has listened to their customers and is working hard to remain competitive by airing up the tires, installing AC units, and upgrading the engine, all at no cost to the driver.
Nope.
Instead, these letters inform customers that they have the privilege of using NCR coolant (JetPay), even though NCR has never even produced a functioning AC unit. And in the coming months NCR will be offering new options (like Zipscene) that customers have the privilege of buying from NCR. And by the way, this comes 8 years after other legacy car companies (like Micros) launched newer car models (Simphony) in the market.
When customers are treated like this it’s a real surprise NCR’s market share has only dropped by 15%.
Now don’t get us wrong, NCR does have a roadmap for its POS systems. But the customers we’ve talked to aren’t convinced much will change. If you were to ask the ones we’ve had discussions with they’d say:
- They have little conviction NCR will meet any of their product timelines. Never have, and don’t expect things to change now
- The latest “replacement” version of Aloha is written on a new code base and it’s at least 3 years from relevance upmarket. Customers are afraid to be the first ones to try it given NCR’s history with new software releases
- NCR’s kiosk product is still not open to different payment processors nor is it compatible with multiple hardware devices
- No faith in Connected Payments even though NCR says they’re keeping it around
- Stability issues have plagued NCR software forever. Experiences here make people leery with any piece of software NCR announces
Ultimately these are some easy fixes… for a software company. Does NCR know what is has to do to stem its Blockbuster moment?
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