Description

NCR Atleos (“Atleos” or “NATL”) was recently spun off from NCR Corporation on October 16, 2023. The rationale for the spin was a belief by the board that the consolidated entity was not receiving full valuation in the public markets. For context, prior to the spin, it was widely reported that NCR Corporation had been in exclusive negotiations with Veritas Capital to be taken private (see WSJ article from July 2022) and there was also a Reuters article that Brinks was in advanced discussions to merge with what is now Atleos.

Atleos is one of the largest global providers of ATM hardware, services and software. The company manufactures (or contract manufactures) ATM hardware, has a field services organization to service ATMs, provides ATM software, and owns a network of ATMs that are placed at various retailers across the US. This vertical integration / breadth of offering is important in this industry as it allows Atleos to cross sell its solutions. NATL monetizes its solutions in four ways: 1) a one-time sale of the hardware itself, 2) subscription revenue from ATM software, 3) recurring servicing revenue from ATM maintenance, and 4) network transaction revenue from ATM usage. Approximately 40% of revenue is derived from services, 29% from network transactions, 22% from hardware sales, and 9% from software. In 2022, then NCR acquired Cardtronics, the owner of Allpoint, the largest retail surcharge-free independent network of ATMs in the U.S. Allpoint is an important differentiator for Atleos (versus its main competitors Diebold and Hyosung) because some banks will choose Atleos as it allows those banks’ customers to access the Allpoint network for free. The company still predominantly offers its products and services separately, but it is moving towards offering an ATMaaS solution which bundles the products together in order to expand the company’s TAM and gain additional wallet share from the customer.

NATL reports its business in three distinct segments:

1. Self-service banking ($630M of Adj. EBITDA in 2023): SSB consists of hardware, software, services and ATMaaS revenue. By virtue of its large installed base, Atleos has advantages in terms of the size of its sales force, the scope of its hardware solutions, and its manufacturing footprint.
2. Network ($379M of Adj. EBITDA in 2023): This segment provides credit unions, banks, digital banks, fintechs, stored-value debit card issuers, and other consumer financial services providers access to Atleos’ ATM network, including its proprietary Allpoint network. Atleos’ network has >80k locations inside large retailers. Retailers benefit from increased traffic into the store and outsourcing the ATM operations and Atleos benefits from expanding its network. Customers also pay Atleos to brand ATMs inside the network with their own branding.
3. Technology & Telecommunication (T&T) ($33M of Adj. EBITDA in 2023): Offers a managed network and infrastructure where clients can outsource the procurement, implementation and monitoring of their branch network security to Atleos.

Corporate overhead was $310M in 2022 leading to a total Adj. EBITDA of $732M in 2023. The company has guided to an Adj. EBITDA between $770M and $800M in 2024 and has provided a target of $1,400M Adj. EBITDA in 2027.

The investment thesis in Atleos is predicated on the following components:

1. Changing the business model into an ATMaaS provider: Historically, Atleos has sold its solutions (hardware, software, field services) on an individual basis. Management is now embarking on an initiative to sell the solutions on an aggregated basis which it calls ATMaaS. The ATMaaS solution brings the prospect of expanding Atleos’s TAM which is a material change for an industry that does not have much growth from an installed base perspective. Below is a management slide depicting the additional services that increases Atleos’s wallet share and thus TAM. Based on our diligence, the cost reductions at banks from the switch to ATMaaS is real and a big driver of adoption.  

2. Atleos’ strong installed base and competitive position derisk the transformation: Atleos has an installed base of hundreds of thousands of ATMs and is in a top two position in most of the markets in which it competes (Diebold and Hyosung are the primary competitors based on installed base). Diebold Nixdorf and Hyosung provide hardware and software but do not have their own network, making them less competitive with banks that wish to outsource their ATM footprint. The high installed base and breadth of service offerings put Atleos in a strong position to benefit from the trend of its customers (primarily banks) outsourcing their ATM operations to reduce expenses and transform their branches to self-service operations. When a bank outsources, it is highly likely it will choose one of the existing, large providers of its ATM installed base because it is hard for one competitor to service another’s ATMs.
3. Allpoint network is a strategic asset: Through the ownership of the Allpoint network, Atleos has a strategic asset to help sell its ATMaaS solutions and to provide incremental organic growth. Allpoint essentially functions as an outsourced ATM network for banks and allows their cardholders to transact on Allpoint ATMs without fees. An outsourced ATM network is particularly attractive for small-and-medium sized banks with limited capital to build out their own network. When a banking customer is engaging in an RFP to transition its ATM network, Atleos will often include the ability for the banks’ customers to access the Allpoint network as a carrot to incentivize its winning on an ATMaaS basis. This is unique in the industry and from our research is a strong value proposition to customers. The Allpoint network is also growing. In 2023 revenue grew ~6% and EBITDA grew ~8% based on incremental transactions (partially due to a larger number of customers on the network).
4. Current valuation provides a good entry price: At current levels, the company trades for less than 6x 2024 EBITDA and around a 9x 2024 P/E. At this level of EBITDA, the company will generate around $200M of FCF in 2024. However, approximately $45M of these costs are 1x in nature (much of it related to the separation). If one assumes some EBITDA growth in 2025 and lower interest payments (the company is paying down debt), it’s not hard to see FCF at around $280 million which means we are buying the company at a 14% Free Cash Flow yield based on 2025 numbers. For a business with a stable and large installed base and potential for material TAM expansion, we find this to be too cheap.
5. Acquisition candidate: Given its considerable free cash flow generation and low valuation, we believe Atleos is a likely acquisition candidate. We note that the current Chairman of the company is Joe Reece who has a track record of selling companies. As mentioned, prior to the separation, there was a rumor that Brinks was in advanced negotiations to merge with Atleos via a reverse morris trust that would have valued Atleos at $5.5 billion. This would mean a share price of $42 per share for Atleos at the current net debt level. We note that since then, Brinks’ shares have gone up making a merger less dilutive for the company and therefore more likely.

If Atleos is able to execute on the ATMaaS strategy we highlight above, we believe it would create material value for shareholders. While management’s plan to achieve $1.4B of Adj. EBITDA in 2027 seems ambitious to us, we believe the stock is not encapsulating this in the current price. If the company can achieve an installed base of approximately 75k ATMaaS units and grow its network revenue by 7%pa, we believe it can achieve approximately $1.1B of EBITDA in 2026. At a multiple of 5x EBITDA this would equate to an enterprise value of approximately $5.5B. After accounting for $675M of debt paydown, net debt would be ~$1.9B leading to a market capitalization of around $3.6B and a share price of about $45 for a return of around 70% over 2.5 years.

Even if our EBITDA assumptions are too aggressive, we believe there is a significant margin of safety and multiple ways to win.

Key Risks:

One of the key risks to this thesis is if cash usage in the economy declines and thus the need for ATM services declines. We think there is an interesting counterbalancing force to this argument in the Atleos story. Namely, if cash usage declines, it would cause banks to outsource their ATM networks at a faster pace which would lead to more business for Atleos.

Atleos currently has a net leverage ratio of approximately 3.5x which is high for this business.

While the end markets / refresh cycle for ATMs are currently normalized, a drop in demand for the hardware sales division is a risk.

Catalyst

FCF generation, Debt paydown, Progress towards ATMaaS strategy

Sale of the company