NCR Atleos Corporation — Form 10-Q Summary
Business context and reporting period
NCR Atleos provides self-directed banking solutions, including ATM and interactive teller machine hardware, software, services, ATM-as-a-Service, payment processing and the Allpoint network. Reportable segments are Self-Service Banking, Network and Telecommunications & Technology.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2023, with comparisons to the same periods in 2022. The financial statements are condensed combined statements derived from NCR Voyix historical records because Atleos operated as part of NCR before the October 16, 2023 spin-off. Allocated corporate and shared costs may not reflect costs as an independent company.
Atleos was distributed to Voyix shareholders on October 16, 2023 and began trading independently on the NYSE under “NATL” on October 17, 2023.
Financial performance and key metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Total revenue | $1,067 million | $1,030 million | $3,093 million | $3,066 million |
| Product revenue | $252 million | $260 million | $748 million | $794 million |
| Service revenue | $815 million | $770 million | $2,345 million | $2,272 million |
| Gross margin | $268 million; 25.1% | $241 million; 23.4% | $735 million; 23.8% | $677 million; 22.1% |
| Income from operations | $91 million | $103 million | $236 million | $179 million |
| Net income attributable to Atleos | $(58) million | $64 million | $31 million | $101 million |
| EPS, basic and diluted | $(0.82) | $0.91 | $0.44 | $1.43 |
| Adjusted EBITDA | $210 million; 19.7% margin | $197 million; 19.1% margin | $554 million; 17.9% margin | $498 million; 16.2% margin |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $347 million | $241 million |
| Adjusted free cash flow-unrestricted | Not provided for quarter | Not provided for quarter | $252 million | $165 million |
Recurring revenue was $765 million in Q3, up 6%, and $2.205 billion for the nine months, up 6%. Recurring revenue represented 71.7% of Q3 revenue and 71.3% of nine-month revenue, compared with 70.3% and 68.0%, respectively, in the prior-year periods.
Q3 segment revenue was $656 million for Self-Service Banking, $335 million for Network and $49 million for T&T. Nine-month segment revenue was $1.916 billion, $944 million and $148 million, respectively. Nine-month segment Adjusted EBITDA was $484 million for Self-Service Banking, $279 million for Network and $26 million for T&T.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $423 million at September 30, 2023, compared with $293 million at December 31, 2022.
- Total cash, cash equivalents and restricted cash were $2.730 billion, including $2.083 billion of restricted cash primarily holding spin-off financing proceeds in escrow.
- Total assets were $8.309 billion and total liabilities were $4.719 billion at September 30, 2023.
- Debt consisted of $1.350 billion of 9.500% senior secured notes due 2029, $742 million of term debt outstanding, $11 million of short-term borrowings and $445 million of related-party borrowings. The reported carrying value of long-term borrowings was $2.020 billion after discounts and deferred financing fees.
- Atleos entered into senior secured credit facilities totaling $2.085 billion, including an $835 million Term Loan A, a $750 million Term Loan B and a $500 million revolving facility. The revolver was undrawn at September 30, 2023, providing $500 million of stated borrowing capacity.
- On October 16, 2023, Atleos used financing proceeds, cash and additional borrowings to distribute $3.003 billion to Voyix as consideration for net assets transferred in the separation.
- Management stated that cash, operating cash flow, revolving capacity and capital-market access are expected to provide adequate liquidity for current and long-term material requirements, capital expenditures and investment opportunities.
Material changes versus the prior comparable period
- Revenue increased 4% in Q3 and 1% for the nine months. Service revenue growth more than offset declines in product revenue as customers shifted from hardware and perpetual licenses to ATM-as-a-Service and software subscriptions.
- Gross margin improved to 25.1% in Q3 from 23.4% and to 23.8% for the nine months from 22.1%. Management cited lower fuel, shipping and component costs, partly offset by higher vault-cash rental costs from increased interest rates.
- Operating income declined 12% in Q3 despite higher gross profit because SG&A increased 22%, R&D increased 143% and separation costs were $46 million. For the nine months, operating income increased 32%.
- Net income declined sharply because Q3 included $147 million of income tax expense, including a $121 million discrete tax expense related to internal restructuring for the spin-off. Approximately $109 million was non-cash deferred tax expense.
- Adjusted EBITDA increased 7% in Q3 and 11% for the nine months. The metric excludes separation costs, stock compensation, amortization and other specified items and is not a GAAP measure.
- Operating cash flow increased $106 million for the nine months, primarily from higher pre-tax income and favorable working-capital movements. Capital expenditures for property, plant and equipment increased to $70 million from $40 million.
- Self-Service Banking and Network grew, while T&T revenue declined 8% in Q3 and 11% for the nine months; T&T Adjusted EBITDA declined 9% and 26%, respectively.
Outlook, management commentary, risks and unusual items
Management expects to continue shifting toward recurring revenue, expanding ATM-as-a-Service, leveraging the Allpoint network and developing digital-currency and other digital-to-physical transaction capabilities. Separation-related costs are expected to continue through at least fiscal 2024.
- Key risks include the substantially higher post-spin-off debt burden, variable interest rates, debt covenant compliance, refinancing and access to capital markets.
- The credit agreement includes a consolidated leverage-ratio covenant beginning with the quarter ended December 31, 2023: 4.75x through September 30, 2024, 4.50x through September 30, 2025, and 4.25x thereafter, subject to specified acquisition adjustments and a 5.00x maximum cap.
- A hypothetical 100-basis-point increase in variable interest rates would have increased Q3 vault-cash rental expense by approximately $9 million, excluding interest-rate swaps.
- Macroeconomic, geopolitical, supply-chain, foreign-exchange, commodity, labor and energy pressures are expected to continue affecting the business in the short term. Bank failures and broader banking-industry uncertainty could reduce customer spending.
- The business is seasonal, with generally lower first-quarter revenue and transaction volumes and stronger activity during warmer months and travel periods.
- Atleos assumed significant pension and postemployment obligations in connection with the separation. It expects to contribute approximately $136 million to the U.S. pension plan after the distribution, in addition to other 2023 benefit-plan contributions.
- Atleos assumed specified liabilities under the separation agreements, including 50% of certain shared environmental liabilities above specified thresholds and certain liabilities related to the Atleos business and separation disclosures.
- Atleos established a trade receivables facility with up to $166 million of funding based on eligible receivables and other conditions.
- Atleos ceased operations in Russia and is dissolving its remaining Russian subsidiary. Prior-year comparisons exclude specified Russia-related operating impacts and charges.
Facts an investor should verify
- Post-spin-off debt outstanding, interest expense, mandatory amortization and compliance with the leverage covenant.
- Actual cash remaining after the $3.003 billion distribution to Voyix and the availability and utilization of the revolving and trade receivables facilities.
- The recurring-revenue transition, including ATM-as-a-Service growth, customer economics, required capital expenditures and cash conversion.
- The magnitude and duration of separation and stand-alone public-company costs through and after 2024.
- Progress toward the expected $136 million U.S. pension contribution and the potential effect of pension, postemployment and postretirement obligations on liquidity.
- Whether higher interest rates, vault-cash rental costs, banking-industry conditions and macroeconomic pressures affect Network profitability and transaction volumes.
- Reported GAAP results versus Adjusted EBITDA, including the continuing impact of tax charges, amortization, stock compensation, separation costs and other exclusions.
- The extent to which historical combined results and allocated NCR costs differ from Atleos’s actual results as an independent company.