NCR’s 2018 Investor Day Shows Major Contradictions, Red Flags for “Partners”

Investor Days, sometimes called analyst days, are events when the company’s leadership presents to a live audience of investors. With today’s technology there’s also a simulcast where people who can’t make the live meeting can listen in and, in some cases, ask questions.

NCR held their 2018 investor day on November 7 at the New York Stock Exchange. You can listen to the recorded presentation here and go to NCR’s Investor Relations site to gain access to the Investor Day presentation.

What follows are soundbites that we found interesting. Some of these are revisits of NCR’s Q3 earnings but others are deeper explanation on initiatives. We’re quoting the time the topic was discussed on the call, along with our analysis.

[12:40] From NCR’s CEO Mike Hayford, “NCR should own every piece of technology at the restaurant.” NCR estimates that today they capture 20-30% of a merchant’s share of wallet for existing NCR restaurant installations. “We want to go from 30% share of wallet… we want to add the rest of products, payments, enrichment of the data, so spend on software and services and hardware goes to us.”

How does NCR believe they’ll achieve this? The POS is undoubtedly the hub of the merchant’s infrastructure. But there are solutions that don’t touch the POS. Even if a solution touches the POS, does NCR believe they will build all of those possible combinations?

NCR has struggled to produce relevant software in years. One might claim this is debatable, yet their market share and revenue erosion are behaving as if this position is more fact than opinion. Over the past few quarters NCR’s new management has been diplomatically explaining that NCR wants to monopolize the entire solution stack on top of its existing systems by owning “every piece of technology”. If you’re a third party who integrates to NCR systems in any fashion, this is your warning call. Yet we don’t see NCR monopolizing the whole stack as they believe they will for a few reasons.

1. Many of NCR’s major market accounts are unbundling the NCR solution stack from their POS systems so they can jump ship. In the SMB market upstart POS companies with open platforms and lower priced options are growing market share at NCR’s expense. After years of abuse it looks like the market has had enough
2. NCR finds itself in its current position specifically because they tried building/buying much more than the POS. Had they focused on the POS and built partnerships to tackle the non-core areas of value they wouldn’t be losing the market share they are
3. NCR doesn’t own all rights and titles to innovation. Silicon Valley is very much experiencing (and investing in) the unbundling effect and NCR won’t be immune to creative, nimble innovators in the foreseeable future… unless they strengthen their existing walled gardens, which only makes it worse for their customers, not better

[18:40] How will NCR achieve revenue growth? According to NCR’s CEO, “We have to do some M&A, we have to extend our products, and we have to do more partnerships.” NCR has a long history of overpaying on assets and not investing in what they acquire, but the partnerships option throws us for a loop. Literally 6 minutes earlier NCR’s CEO said, and we quote,

NCR should own EVERY piece of technology at the restaurant.

No doubt NCR feels the same way about their retail and banking verticals. So if NCR is going to own every piece of technology, what value can a partner expect to receive? Are they supposed to sit idly while NCR figures out how to reverse-engineer the “partner’s” solution so NCR might offer a cloned version themselves? We have some additional thoughts and questions:

1. NCR’s current partnership process is a nightmare. It takes years to get approval, and even if you’re lucky enough to secure their blessing it comes with an integration tax of such magnitude that we literally can think of no other hospitality POS system that treats “partners” this way
2. If NCR makes their “partner’s” solution much more expensive via integration taxes, doesn’t that make whatever competitive solution NCR offers more appealing?
3. Why would any prospective “partner” then work with NCR? NCR has a history of erecting walled gardens and pushing out innovators in favor of their homegrown solutions

Are we to expect that this new management team changes NCR’s culture? It would be great if so, but their stated financial goals appear to be in direct conflict with any type of partnership approaches.

[45:00] NCR wants to own the entire payments stack through JetPay.

Going forward, we’ll be plugging JetPlay behind all the transactions so when we start a payment transaction in the future we want to finish the payment transaction.

How NCR achieves this remains to be see. No doubt this ends the Worldpay relationship, though it will take 24 months to wind down as NCR integrates JetPay and scales up the sales effort to elbow out competitive processors. How fairly NCR does this is a different story. If we were to make a bet, given NCR’s need to show growth and their history of walled gardens, NCR will mandate payments as much as they can with SMB customers and invent additional gateway fees for larger merchants who choose other processors.

We could be wrong but we’re leaning on NCR’s past behaviors and a new management team that achieves their personal financial upsides by increasing the share price of the company.

[45:40] This myth will not die. According to NCR’s CEO, “25% of the market today uses Aloha.” Where does this statistic even come from? NCR said they have 75,000 sites using Aloha on slide 6 of their Investor Day presentation. We would question even this number given the abysmal year that was 2018 for NCR POS. Either way, this slide references IHL and Euromonitor as data sources. Someone needs to tell these guys that there are more than 300,000 restaurants in the US (implied from 25% of the market = 75,000 locations).

NPD’s latest count puts the US market at 647,228 locations and the National Restaurant Association likes to quote 1,000,000 food-serving establishments. That people still quote Micros and NCR as having 25% of the US restaurant market each is complete bupkis.

[54:00] NCR has analyzed their customer acquisition costs and life time value and the economics are “very compelling”. On top of this NCR is going to add a payment revenue stream,

…plug in JetPay behind every drop-n-ship Silver device that we do.

NCR’s CEO believes that NCR didn’t put the proper marketing behind NR Silver POS and SMB products.

We haven’t put the money behind the proper channel and proper marketing path and that’s probably the biggest difference you’re going to see.

Competing downmarket, especially with bundled payments, will be very hard. Square does incredibly well here with nothing more than a direct marketing budget though they’ve been building SEO and a technology brand since 2009. The acquiring universe has also had their own POS systems for years: FirstData has now shipped over 1 million Clover devices and other processors, banks and their respective channels have POS solutions from talech to white labeled systems. Silver was primarily distributed by Worldpay but NCR just shot that horse in the head.

So how does NCR plan to move Silver in meaningful numbers? JetPay doesn’t exactly bring meaningful brick and mortar distribution…

[55:45] In discussing their M&A strategy, NCR’s CEO is looking at targeted acquisitions, mostly because their balance sheet is limited from debt repayments.

By the time a target gets customers and EBITDA I probably can’t afford them.

NCR won’t be buying companies to cut costs but instead to invest money and scale the solutions – something NCR has not done well with previous acquisitions. NCR’s CEO goes on to say that they have an integration team that allows them to onboard acquired solutions into their existing platforms. They also have a sales team that will sell these acquired solutions. Whether buying or building NCR will aim for an ROIC of 13-15%.

Our comments here are limited to the integration and sale of acquired solutions.

1. NCR’s integration programs, as they stand today, have proven unworkable for a number of parties, both from a technical stability standpoint and also from an economics standpoint. Large NCR customers and the third party partners they rely upon use local data available on the POS to “hack” integrations instead of subjecting themselves to NCR’s integration process
2.  NCR needs to be confident they can teach their sales people how to sell whatever new solutions they acquire. They also need to be sure they can properly support it. These two necessities have found difficult alignment at NCR for a number of years

[58:00] NCR talks about using JetPay to increase recurring revenue and margins but we’re missing the slide that shows NCR investing in their current problems. Even members of NCR’s own Customer Advisory Board are skeptical of NCR’s behavior.

[1:02:10] NCR’s CEO talks about his definition of monetizing data.

Take the data that we gather, use some analytics, take a look at it, and get someone to buy it from us.

[1:14:00] NCR’s COO discusses the five projects that weren’t meeting customer expectations and were offtrack. NCR dove in deep to those problems and built teams to execute the products with the ultimate goal of customer referenceability. All 5 have since met their timelines. It was good to see NCR publicly acknowledge execution faults and work to fix these problems. But one has to wonder where this mea culpa is for their other product lines.

[1:34:30] Previous NCR restructuring has not worked and the company’s financial health has declined. Operating expense has gone from 15% to > 18% over three years, which has led NCR to make personnel cuts.

[1:39:45] Part of NCR’s $100M in annual savings generated from the reduction of workforce will go to fund new expenses, like two new office towers in Atlanta and an employee incentive plan. The latter makes sense but the former is outrageous. In fairness the previous management deserves the blame for the expensive digs but it’s very hard to quantify the expense of glitzy executive offices when you’re canning what equates to 1,000 people.

[1:56:50] In a telling comment NCR (most likely incorrectly) recognizes that NCR sees lower margin when they have partners and prefers to sell their own solutions instead.

To the extent that we can sell bundles that include NCR-developed product and software that will increase our margin

We would love to get the data that NCR’s using to arrive at this conclusion; considering we partner with many of NCR’s competitors we are very close to this math and often see POS companies delude themselves with false analogies. Either way, NCR’s commentary once again contradicts their line that partnerships are something they’re considering. When you look at how technically-difficult and uneconomic NCR has made their partnership programs thus far it raises the question: does NCR really even want any partners? Again, if you’re an existing NCR “partner” this could be the writing on the wall.

[2:10:10]  A humorous comment – if you know where to look – was made by NCR’s CEO.

NCR on the box, if something breaks, somebody’s gateway fails, we get the call today. Why don’t we get paid for it?

This is the reality for all POS companies since payments companies generally have horrible support. TouchBistro’s CEO discussed this exact same behavior in their deal with Chase Payments.

[2:15:00] Following other payment providers, NCR will look at the idea of giving away hardware to own the software stack. Imagine a “Free POS” scheme backed by not only SMOPP, but the walled garden approach arguably invented and executed by NCR over the past decade.

How enticing.

[2:17:50] A number of WorldPay folks have asked us how long it will be before NCR kicks them to the curb. NCR’s CEO said they run 5-7 year windows on ROIC. In the case of JetPay, NCR will pump in some money to get it to “breakeven” ROIC but it will take 3, 4, or 5 years before NCR will earn their ROIC in full.

Our estimate is that NCR integrates JetPay in 2019 and decides whether they fire the Connected Payments team. From there they start sales in earnest late in 2019. Material customer volumes start moving to their processing in 2020 depending how aggressive NCR gets. And as they’ve already proven for years, there’s no walled garden tall enough.

Will this new leadership team change that? Given their responses, we don’t think so.