Business Context and Reporting Period
NCR Atleos, LLC reported unaudited condensed combined results for the three and six months ended June 30, 2023, compared with the same periods in 2022. The company provides self-service banking, ATM-as-a-Service, payments and network solutions, and telecommunications and technology services through its Self-Service Banking, Payments & Network, and T&T segments.
The financial statements are derived from NCR Corporation’s historical records and include allocations of shared corporate costs. NCR Atleos was preparing for its planned spin-off from NCR; completion remained subject to conditions and was not guaranteed. The entity was expected to convert from an LLC into a corporation before the spin-off.
Key Financial Metrics
| In millions, except percentages | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $1,040 | $1,067 | $2,026 | $2,036 |
| Recurring revenue | $730 | $707 | $1,440 | $1,362 |
| Gross margin | $247; 23.8% | $236; 22.1% | $467; 23.1% | $436; 21.4% |
| Income from operations | $79; 7.6% | $42; 3.9% | $145; 7.2% | $76; 3.7% |
| Net income attributable to NCR Atleos | $53; 5.1% | $20; 1.9% | $89; 4.4% | $37; 1.8% |
| Adjusted EBITDA | $198; 19.0% | $146; 13.7% | $344; 17.0% | $301; 14.8% |
| Cash flow from operations | Not separately provided | Not separately provided | $200 | $15 |
| Adjusted free cash flow-unrestricted | Not separately provided | Not separately provided | $141 | $23 |
- Q2 product revenue declined 13% to $262 million, while service revenue increased 1% to $778 million. For the six months, product revenue declined 7% and service revenue increased 2%.
- Recurring revenue represented 70.2% of Q2 revenue and 71.1% of six-month revenue, compared with 66.3% and 66.9%, respectively, in the prior-year periods.
- At June 30, 2023, cash and cash equivalents were $337 million, restricted cash was $228 million, and total cash, cash equivalents and restricted cash were $565 million.
- Related-party borrowings totaled $785 million, consisting of $571 million short-term and $214 million long-term borrowings. These balances were part of NCR’s centralized treasury arrangements and are not equivalent to post-spin-off external debt.
- Capital expenditures were $22 million and capitalized software additions were $15 million in the first six months.
Material Changes Versus the Prior Comparable Period
- Q2 revenue decreased 3%, while six-month revenue was essentially flat. Management attributed the shift to lower hardware and perpetual software-license sales as customers moved toward ATM-as-a-Service and software subscriptions.
- ATM-as-a-Service revenue increased $20 million in Q2 and $36 million for the six months. ATM-as-a-Service units increased to 18,007 from 4,454 in the prior-year period.
- Recurring revenue growth and lower component, fuel, shipping and parts costs improved profitability. Q2 gross margin increased 170 basis points, and six-month gross margin increased 170 basis points.
- Higher interest rates increased vault cash rental costs by approximately $12 million in Q2 and $34 million for the six months, partially offsetting operating improvements.
- Q2 operating income increased 88% and six-month operating income increased 91%. Adjusted EBITDA increased 36% in Q2 and 14% for the six months.
- Self-Service Banking Adjusted EBITDA increased 24% in Q2 and 25% for the six months. Payments & Network Adjusted EBITDA increased 6% in Q2 but declined 3% for the six months. T&T Adjusted EBITDA declined 54% in Q2 and 33% for the six months.
- Operating cash flow improved by $185 million year over year, driven by higher net income and favorable working-capital movements. Six-month financing cash flow was an outflow of $130 million, compared with a $271 million inflow in 2022, reflecting changes in related-party borrowings and parent transfers.
Outlook, Risks, Contingencies and Unusual Items
- Management expects to continue shifting toward recurring revenue, ATM-as-a-Service, software-led offerings, payments processing, and digital currency solutions. No clear quantitative standalone earnings or revenue guidance is provided in the filing.
- The planned spin-off was expected to require up to $2.935 billion of new debt, with approximately $2.782 billion of proceeds paid to NCR and approximately $300 million retained in cash and cash equivalents after specified transactions. Management estimated a weighted-average interest rate of approximately 9.33%; the amount and terms remained subject to change.
- Separation-related costs were $33 million in Q2 and $40 million for the six months. Management expected such costs to continue through at least fiscal 2024.
- The company expected to contribute approximately $150 million to the U.S. pension plan immediately following the spin-off. It also expected 2023 contributions of $4 million to international pension plans and $5 million to postemployment plans.
- Interest-rate exposure remains significant: a hypothetical 100-basis-point increase in variable rates would increase quarterly vault cash rental expense by approximately $9 million before the effect of swaps.
- On June 14, 2023, the company terminated existing interest-rate swaps for $71 million of cash proceeds and entered into new swaps with $2.4 billion aggregate notional value, fixed rates ranging from 4.240% to 5.274%, and maturities through December 31, 2025.
- Risks include the ability to complete the spin-off, post-separation financing and debt-service capacity, higher interest rates, foreign exchange volatility, macroeconomic and geopolitical conditions, supply-chain and labor costs, cybersecurity, customer credit exposure, pension obligations, tax matters, cryptocurrency regulation, and potential loss of favorable terms previously obtained through NCR.
- The filing states that there were no material changes to previously disclosed risk factors. It also describes customer and transaction-related indemnifications, purchase commitments, tax audits, and potential tax benefit changes; no material liability was recorded for the disclosed indemnifications.
Important Facts for Investors to Verify
- Whether the spin-off was completed as planned and the final amount, maturity, covenants and interest rates of the post-spin-off debt.
- The sustainability of recurring-revenue growth and the pace, economics and capital requirements of ATM-as-a-Service adoption.
- Whether improved gross margins can offset higher vault cash rental costs, pension obligations, separation expenses and standalone public-company costs.
- The company’s post-spin-off liquidity, access to capital markets, external debt service requirements, and treatment of related-party balances.
- The effect of NCR’s historical cost allocations on standalone operating expenses and comparability of future results.
- The funding status and ultimate obligations associated with pension and postemployment plans transferred from NCR.
- Exposure to foreign exchange movements, customer defaults, cybersecurity incidents, supply-chain disruption, geopolitical events and regulatory developments affecting payments and digital currency activities.