Description

Summary

NCR Voyix (“VYX” or “the Company”) is the RemainCo of the old NCR after spinning off the ATM business. We believe the dislocation post 4Q has created an asymmetric opportunity as VYX should initiate a strategic review of the Digital Banking segment to resolve the SOTP discount. Urgency is palpable with an aligned Board & C-suite, and we have a pot-committed activist to keep everyone honest. Should that fail, we enjoy a clean 10%+ FCF yield for a resilient, growing set of businesses, with 2024 numbers already de-risked with the guidance revision. We see little to no downside from current prices and up to a 100% return with a DB sale, which we view as far better than a coin toss. This is an exceptional r/r skew for a liquid security ($30mm+ ADV).

Business Overview

VYX in its predecessor form is no stranger to VIC so we will be brief. Business is comprised of the following segments:

·         Digital Banking or “DB” (26% of pre-corp EBITDA): front-end banking software

·         Retail (50% of pre-corp EBITDA): PoS software & hardware, self-checkout kiosks

·         Restaurants (24% of pre-corp EBITDA): PoS software & hardware

Digital Banking is the crown jewel of VYX with 40%+ EBITDA margins and HSD organic growth. DB serves banks and credit unions in the US, providing cloud-based software solutions to digitize the bank branch, with applications such as account opening, account management, transaction processing and imaging. DB currently has ~21mm active users, ~$28 ARPU and 800+ customers, while boasting 95%+ customer retention and 90%+ recurring revenue. Active user count (top of the funnel) is guided to increase at a 12.5% CAGR through 2027.

Digital banking was originally acquired for 15.7x EV/EBITDA in 2014 from Thoma Bravo. VYX has significantly grown the business since, but DB was never integrated with the other segments. This creates the SOTP dynamic, as the consolidated EV massively discounts the value that DB would trade for on a standalone basis.  

Why Would DB be Sold?

Historical context is important. The predecessor entity, NCR, went through a lengthy strategic review process beginning in Feb 2022, which attracted numerous bidders. The PE firm Veritas was reportedly in exclusive talks to acquire NCR in July 2022, but failed to ultimately consummate the deal as financing was not available at commercial terms during the market rout.

For the next 12 months, before NCR finally decided to spin the ATM business, management was publicly open that they would consider any alternate transaction to create shareholder value. Through media reports, it became obvious that numerous options were indeed contemplated, including monetizing DB (May ’23 Reuters) and selling the ATM business to Brinks (Oct ’23 Reuters).

Even the spin of the ATM business was structured such that VYX would enjoy full flexibility if superior alternatives presented themselves down the road, a point that management openly talks about. We believe that many behind-the-scenes initiatives were spearheaded by Engaged Capital – including board reshuffle, management transition, and ensuring alignment to maximize shareholder value. Engaged was a former 13D filer in NCR, had direct board representation, and still retains a significant stake – 5.0mm shares of VYX (3.5% of FSDO) as per their 13F. We believe that the sale of DB was always in the cards, with the only pertinent question being timing.

To answer that question, VYX pulled forward the timeline by announcing a disappointing 4Q’23 which caused the stock to plummet 25%. VYX revealed a guide-down of ’24 numbers due to hardware weakness, a result of demand pull-forward in the past couple of years during the supply chain uncertainty. One-timers further frustrated the market, including a cyber hack on a bank account and a delayed 10-K. However those issues were subsequently rectified (10-K filed during the extension period, and cyber losses likely recoverable through insurance).

In our view the 4Q debacle has forced the Board & management to act with urgency. There is intense pressure on the team, and the most logical lever to pull is divesting DB. We believe that this is well understood and supported at all levels. We would not be surprised at all if bankers were already hired and a process underway behind the scenes. The backdrop could not be better, with credit markets wide open and buyers hungry for assets (PE sitting on dry powder, and strategics all trading near 52w highs with clean balance sheets).

What is DB worth?

We first note that DB (fka Digital Insight) was purchased from Thoma Bravo at $1.65bn or 15.7x EV/EBITDA. However, DB was a more nascent business then ($105mm EBITDA vs. ~$250mm for ’24) so the mid-teens multiple may be a tad ambitious today. For the other bookend, consider the Reuters leak in May ’23 which cited that DB “could be worth more than $2.0bn”.

However, we believe that $2.0bn number is far too low, for several reasons:

·         DB has grown since then, with an estimated ~$250mm of ’24 pre-corp EBITDA

·         Financing markets are wide open now and corporate credit is trading at tighter yields

·         Peer multiples have expanded and every public comp is trading near 52w highs

Management believes that DB could be worth up to $3.0bn – and has communicated to investors in public settings that $2.5 - 3.0bn would be an attractive valuation range. In our opinion the lower end is a more realistic target for a transaction, but higher numbers are certainly possible in a robust process with multiple strategic and financial bidders. 

From a fundamental perspective, $2.5bn only represents ~12x ’24 EBITDA with corporate burdened and the multiple doesn’t strike us as expensive for a highly profitable, sticky software business with HSD topline growth and DD bottom line growth. An operationally focused PE firm may see a materially lower valuation based on how much fat they can trim – a bloated cost structure has been a consistent criticism of VYX (and the predecessor NCR).  

Who would buy DB?

Private Equity comes to mind first, but we certainly can’t rule out strategics – and upside case values likely come from a strategic buyer who can underwrite cost synergies. Lay of the land is provided in the below table:

Creating value through SOTP unlock

If DB could be sold, the rest is a simple math exercise. We create the remaining businesses at an unconscionably cheap valuation, which should lead to an immediate rerate. We demonstrate this with the FCF profile – the Retail & Restaurant segments can generate ~$156mm of PF FCF.

DB proceeds will largely be used for debt paydown, allowing VYX to hit the lower end of the long-term leverage target at 2.0x. This removes a key overhang for the stock as many potential investors dislike the elevated leverage profile today. The remaining proceeds can be used for capital return (long anticipated buybacks) or accretive M&A to bolster the remaining businesses. We believe that RemainCo can comfortably rerate to 6.5 – 7.5x EV/EBITDA by achieving these milestones – to recap: 1) SOTP simplification, 2) deleveraging, and 3) initiation of capital returns.

But there’s more! We also believe that the retail & restaurant businesses are severely underappreciated by the market due to a myopic bear thesis predicated on 1) retail terminal value questions and 2) competition in the restaurants segment. First, we note VYX’s enviable position in retail, as the industry’s #1 PoS software provider and the #1 self-checkout software provider. We find it unfair that VYX’s retail business is assigned such a low multiple while many of the large customers don’t suffer the same problem (see Walmart and Woolworth’s multiples). Furthermore, we see self-checkout as a long-term growth engine as adoption is still in the early innings.

On the restaurant side, we often hear about competitive pressures but VYX is the #2 restaurant PoS software provider globally with 8 of the top 10 global restaurant chains as customers – such as Starbucks, McDonalds, and Chipotle. When you look at faster growing peers, PAR and TOST trade at 40x and 20x ’26 EBITDA, respectively. The market dings VYX’s multiple based on lower topline growth, but with superior EBITDA margins and an incumbent base of sticky top-tier customers, VYX has plenty of room to rerate.

We believe this mispricing exists for both retail and restaurants because of the cyclical nature of hardware (which gets smaller as a piece of the pie every year) and the market’s laziness of slapping a hardware multiple on the entire business – while the segments are primarily software with an attached hardware offering. This dynamic should be rectified as VYX executes against the longer-term targets announced during the Investor Day.

That said, we do NOT need to believe in a monster rerating in the RemainCo to win here – as the market merely repricing retail & restaurants as “fair” businesses (from “terrible”) will get us paid handsomely. If the market eventually comes around to valuing them as “good” businesses, then VYX will be one of the best performing public equities in the market for the next few years… yet we would only characterize that as gravy.

Modeling and Case Analysis

We provide our full model below, with the following cases:

·         Bear Case – DB sold for 10.0x, RemainCo trades at 6.0x

·         Base Case – DB sold for 11.0x, RemainCo trades at 6.5x

·         Bull Case – DB sold for 12.0x, RemainCo trades at 7.0x

·         “Dream” Case – DB sold for 15.0x, RemainCo trades at 7.5x

What If We’re Wrong?

We could certainly be wrong. DB may not be sold, and all the SOTP unlock math goes out the window. The predecessor entity has disappointed investors multiple times and we are not blind to that fact pattern either. But the truth is, we find none of the historical roadblocks applicable today. Financing is readily available. Supply chain issues are resolved. There was not as much urgency before. And finally, with the board & management turnover, we don’t believe anyone is entrenched or anchoring on unrealistic value expectations. The market is assigning no chance of anything good happening, while we believe a DB sale is far better than a coin toss. This is our “variant perception”.

If we still get it wrong, we get comfort from the 10%+ ’24 FCF yield with the guidance already de-risked, and shares languishing near multi-month lows since the ATM spin. We see little to no downside in this scenario, which presents an excellent overall risk/reward given our conviction in a DB sale.

Bonus for Credit Investors

We also present a bonus for investors with a credit mandate. The existing bond indentures allow for debt paydown at par with asset sale proceeds – which imply a windfall gain as the bonds are currently trading in the low 90s. We believe that the Unsecured Notes due 2030s are the most attractive given the lowest dollar price. Upon a DB sale, the Company will likely conduct an open market tender at par, and bondholders can realize 15-25% IRRs depending on timing of close on the DB sale. You can generate distressed credit returns with a “sleep at night” BB paper. Not bad!

Model Output

Credit Returns Output

Catalyst

1) sale of DB

2) deleveraging 

3) capital returns