In our view NCR has been busy financially engineering the company. In their Hospitality division this has manifested itself as NCR Essentials, which are the same old Aloha products but wrapped in a SaaS pricing model to fool merchants into believing that it’s somehow modern. And you know what? It’s working. Per NCR’s Q3 2019 earnings call,
In Digital First Restaurants, we have achieved early success with Aloha Essentials, which bundles software, services, hardware and payment. During the third quarter, 65% of all SMB Aloha sites sold through our direct sales channel were sold as an Aloha Essentials subscription bundle.
Mike Hayford, NCR CEO
We shouldn’t be surprised: these are the same people that think POS is free and who have no idea how to actually run a business. It’s why third party delivery can bend them over a barrel on economics and why ghost kitchens will eventually spell death for most of them.
In the meantime NCR is having a field day at their own customers’ expense. If you want a more visual example for what we think is going on, here’s a literal piece of shit.
Now NCR put a cherry on top and called in “essential”, so pay them monthly.
Sound crazy? Apparently not to 65% of restaurants.
It’s totally unsustainable (you can’t outrun product and culture deficiencies forever) but we don’t think NCR’s management cares: artificially inflate the stock price, get your bonus, then leave the problem for someone else to clean up. Having watched the company for a better part of a decade this feels like the NCR modus operandi at this point, and the entire culture is geared to run like this.
Totally insane.
Now we get to the better question. Why did NCR’s CEO mention that 65% conversion was happening through NCR’s direct sales channel and not through its reseller channel? If NCR Essentials was so essential wouldn’t the channel be selling it as well?
Apparently not. Here are some plausible explanations, and the last one is a real doozie.
First, many dealers think Essentials is anything but. In a world where you’re the brand to the customer you try to do right by them. Call us crazy, but sometimes that isn’t repackaging 1990’s technology in a SaaS license and praying the the merchant doesn’t read the contract nor look at what product is available elsewhere. It’s the same reason Heartland reps were struggling with Global’s payments warrantless rate increases: it reflects poorly on the account holder. This isn’t the case when you’re working sales for faceless BigCo and don’t care what happens to the merchant after the ink dries.
Second, a lot of resellers are not that financially savvy, and they don’t understand how recurring revenue works. In their business models they could only ever justify a perpetual license sale and never made the move to recurring. The two issues are sometimes related – i.e. some dealers had large enough businesses to transition to recurring revenue and they were just too dumb to do so, but others legitimately couldn’t get the math to work because they were simply too small. NCR direct offices don’t have to worry about P&Ls nearly as much and can go full-bore on recurring revenue to get that premium (yet totally undeserved) revenue multiple in the public markets.
Third, not all NCR dealers are so dumb that they don’t know how finance works. NCR is allegedly asking their resellers to sign payments on NCR paper, meaning that NCR controls the invoicing and contracts and can shut the dealer out of the lucrative payments stream at any time. There goes the option to sell the processing portfolio at 30x monthly revenues. The few that do understand finance are turning their noses up at the proposition.
Lastly, NCR was offering Essentials to direct customers at prices lower than the buy rate for their resellers. What?! Yea, talk about channel conflict. If you’re not clear what this means, a reseller buys a product from a manufacturer then marks up the price and sells it to the end customer. This is how a reseller makes money: they resell a good for a higher price. Well, if the manufacturer sells the product to the end customer for less than the reseller can buy the product, it doesn’t make much sense to be a reseller, does it? Several NCR resellers confirmed this is exactly what NCR has been doing with Essentials, and who’s to think NCR won’t continue the model for all of their products going forward?
Side bar: this is THE debate in POS right now: can the POS industry use the internet to disintermediate the channel? It’s obviously been amazingly successful in certain markets, like how consumers can buy consumer goods directly from manufacturers, but will it translate to POS? If the POS needs local support, then maybe not. At least not in a cost-efficient manner under status quo support models, so those might need to be redefined.
Analysts started poking around this issue on the last earnings call, asking why NCR was buying their resellers. Here’s what NCR’s management had to say.
Rob Wildhack (Analyst)
Hi guys. I wanted to ask about the most recent acquisition which was Midwest POS. That follows on from Texas P.O.S. earlier in the year. Can you remind us of the strategy around these smaller regional-type deals? And do you think there’s a long list of potentially attractive targets here such that you keep pursuing these types of acquisitions?
Mike Hayford (NCR CEO)
Yes. So, effectively we’re teaming up with distributors or partners that have been serving in a region. Our point of sale is playing itself for hospitality for the restaurant space. And we look at it from a couple of different aspects. One is quite frankly, these deals generally are accretive very quickly. So certainly in year and sometimes quickly the same quarter.
So financially, it’s a good transaction for us. But more importantly, as we look at how we go-to-market with our hospitality product specifically with Aloha, whereas in the past, we are selling hardware and then a software stack, we’re now going on and selling a bundle, where we’re selling hardware software services all together. We’re selling it as a subscription and we’re selling it with payment. So the Aloha product that we’re going out to market.
And we talked about where we have local channels where we actually own the local market — and we’re going out marketing a bundle, we’re seeing a 65% success rate selling Aloha Essentials versus the traditional way of selling point solutions. When we don’t control that channel, the numbers are much lower. It’s just more difficult to get the channel partners who are doing a good job of just getting them scaled and getting it and go out in market, not only bundle but subscription and also payments attached to that. So from business strategy, we’d like to do that.
The short of it is this: NCR says they can sell merchants junk products (in our opinion) better than the channel. Given that perspective they’ve rationalized the financials to own distribution themselves (here’s our math on what that might look like).
NCR is stomping on both their merchants and their resellers, even if neither of them aren’t smart enough to see it yet. This is precisely what happens when management is most concerned about share price and not what’s best for the customer. We have a HBS case study in the making, folks.
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