NCR Corp

LSE:0K45

Earnings Call Transcript 2019-Q2

[Operator]

Good day, ladies and gentlemen, and welcome to today’s NCR Corporation Second Quarter Fiscal Year 2019 Earnings Call. As a reminder, today’s conference is being recorded.

And at this time, I’d like to turn the floor over to Mr. Michael Nelson, Vice President of Investor Relations. Please go ahead, sir.

[Michael Nelson, Vice President of Investor Relations]

Good afternoon, and thank you for joining our second quarter earnings call. Joining me on the call today are Mike Hayford, President and CEO; Owen Sullivan, COO; and Andre Fernandez, CFO.

Before we get started, let me remind you that our presentation and discussions will include forward-looking statements. These statements reflect our current expectations and beliefs, but they’re subject to risks and uncertainties that could cause actual results to differ materially from those expectations. These risks and uncertainties are described in our earnings release and our periodic filings with the SEC, including our annual report.

On today’s call, we will also be discussing certain non-GAAP financial measures. These non-GAAP measures are described and reconciled to their GAAP counterparts in the presentation materials, the press release dated July 30, 2019, and on the Investor Relations page of our website. A replay of this call will be available later today on our website, ncr.com.

With that, I would now like to turn the call over to Mike.

[Michael Hayford, President and Chief Executive Officer]

Thanks, Michael, and thank you everyone for joining us today for our second quarter earnings call. I will begin with some of my views on the business before turning it over to Andre, who will review our financial performance, as well as discuss our updated outlook for 2019. Then Owen, Andre and I will take your questions.

I’ll begin on Slide 4 and an overview of our second quarter performance. We continue to drive improved execution and our second quarter results exceeded our expectations. We generated consolidated revenue growth of 14% on a constant currency basis, with higher revenues in each of our segments. A key driver of our second quarter performance was strong results in our Banking segment, where total revenues were up 23% constant currency and ATM revenues were up 78% constant currency.

The strong ATM revenue growth was driven by strength in the Americas and Europe. This was supported by increased ATM-related software and services revenue growth. This quarter, we also made progress advancing our strategic growth platforms, as well as staying on track for a broader integrated payments processing platform launch later this year. We also successfully targeted inorganic M&A opportunities that are consistent with our Digital First and recurring revenue focus.

Finally, we are raising our full-year 2019 revenue outlook and reaffirming earnings and cash flow guidance. Andre will discuss this in greater detail during his remarks.

Moving to Slide 5 and an overview of our financial performance in the second quarter. Consolidated revenue was $1.71 billion, up 11% as reported and up 14% on a constant currency basis. Again, the strong top line performance was driven primarily by our Banking segment.

Adjusted EBITDA increased 12% compared to the second quarter of last year. Non-GAAP EPS was $0.76 per share, which was up 17% as reported and 27% constant currency. FX headwinds lowered EPS by $0.05 year-over-year.

Lastly, free cash flow was $9 million, which was down from $27 million during the second quarter of 2018, due to higher working capital. As a reminder, our historical free cash flow linearity includes higher working capital requirements earlier in the first-half of the year. We remain confident in our full-year free cash flow guidance.

Now turning to Slide 6 and an update on our strategic growth platforms. These are the six areas where we are accelerating investment with a goal of advancing our shift to higher-margin, recurring software and services revenue and driving accelerated revenue growth in the future. We’re making steady progress on the journey to bundle solutions that drive a shift to subscription pricing.

Our goal is to provide a better purchasing experience for our customers and simplify quoting and configuration process for our sales team, which should lead to profitable growth for NCR.

We’ll begin with Digital First Banking, where we continue to see improved organic growth. We recently shifted eight products from perpetual licensing to recurring, continuing our journey to become a recurring software and services-led company. We also acquired D3 Technology earlier this month, which extends the reach of our Digital Banking Solutions.

In Digital First Restaurants, we recently launched Aloha Essentials, which bundle software, services, hardware and payments and have received positive customer feedback. We’ve been making steady progress on the Aloha’s migration to the cloud with general availability targeted for early next year.

In Digital First Retail, Emerald, our next-generation cloud-based retail point-of-sale solution is currently in pilot and on track for general availability later this year. We’ve created an offering that includes all the essentials required to run a grocery retail environment, including point-of-sale, loyalty, payments and frictionless shopping components.

In Digital Connected Services, we continue to expand our customer base. A top U.S. bank recently selected NCR’s Digital Connected Services capability for multi-vendor service for the bank’s fleet of more than 12,000 ATMs. Our Digital Connected Services include a portfolio of managed and support services that will help the bank reduce total cost of ownership, drive higher ATM availability and enhance the customer experience.

In Digital Convenience and Fuel, we have created a package that bundles the software, services and hardware required to run a convenience and fuel retail chain.

And finally, in Digital Small Business Essentials, we launched NCR Silver One, our all in one point-of-sale solution that integrates payment processing with NCR Silver in a monthly subscription package.

Overall, the six strategic growth platforms will remain investment priorities for NCR, as we look to strengthen our software and services products for sustainable long-term growth and increase in recurring revenue.

Now to Slide 7. We made great progress in our payments business during quarter two and continue to execute the plan. We have completed payments integration for NCR Silver and are in control deployment with a broad array of customers. Our integrated NCR Silver One offering is scheduled for general availability in August.

In parallel, we are executing on our plan to integrate payments with Aloha and will be moving to a controlled deployment in the fourth quarter. We have begun planning payments integration with other NCR POS systems that serve other market segments.

We anticipate further profitable growth in our payments business as we penetrate additional market segments with those systems. We look forward to sharing more about these plans in future earnings calls.

Now turning to Slide 8 and an update on our recent M&A activity. Our recent acquisitions are consistent with our strategy to add to our software products portfolio, further expand our global distribution and increase our services revenue. Earlier this month, we announced the acquisition of D3 Technology, a provider of online and mobile banking solutions for the Large FI institution market. The addition of D3 immediately unlocks new market segments for NCR’s Digital Banking, including large U.S. banks and eventually expansion into international markets.

Several months ago, we acquired Texas POS, which increases our sales and services presence to a local office in the Texas region, allowing us to reach more customers with our expanded product offerings. We will expand the reach of our services offerings in Brazil through the acquisition of OKI Brazil IT services. Upon closing, this transaction will allow us to deliver expanded service offerings, including additional support options for banks, retailers and restaurants.

And finally, we recently announced our intention to purchase minority interest in NCR Manaus that is indirectly owned by Banco Bradesco. Once approved under local requirements, this deal will enable NCR to more broadly service our customers in Brazil by leveraging our manufacturing and engineering operations.

With that, let me pass the call over to Andre.

[Andre Fernandez]

Thank you, Mike. Slide #9, shows our Banking segment results. Banking revenue increased 23% constant currency, led by a 78% constant currency increase in ATM revenue, driven by both higher backlog conversion and still healthy order rates.

Software and services related to ATMs also contributed to the year-over-year increase in segment revenue, and we grew our hardware maintenance backlog, a future annuity stream, both from the ATM revenue and several meaningful large customer wins in the quarter.

We are seeing a stronger than expected ATM replacement cycle in addition to Win 10 upgrades, with particular strength in the quarter in the Americas and in Europe. Operating income increased 47% constant currency, driven by higher volume and a favorable mix for our ATMs, as well as higher software margin pulled through from the ATMs and lower third-party content on non-ATM software sales.

As I just mentioned, we continue to see strength in both orders and backlog in our Banking segment. Additionally, our Digital Banking unit is poised for its next phase of growth with the addition of Omaha-based D3 Technology to our Digital Banking business.

Now moving onto slide #10, which shows our Retail segment results. Retail revenue increased 6% constant currency, helped by our JetPay acquisition, which represented about two points of this growth. In addition, our self-checkout solution recorded solid revenue gains in the quarter, while the services side also grew due to higher hardware maintenance activity, both driven by customers in North America.

Operating income increased 14% constant currency, primarily driven by services productivity improvement initiatives, partially offset by JetPay-related expenses.

Slide #11 shows our Hospitality segment results. Hospitality revenue increased 3% constant currency, driven by an increase in cloud revenue from our NCR Silver and Aloha products, as well as payments revenue from our JetPay acquisition.

Operating income decreased 36% constant currency, driven by an unfavorable revenue mix and continued investment in customer satisfaction initiatives, including our channel programs. We are also investing in programs to enhance our technology and shift revenue to a recurring model, which includes Aloha’s migration to the cloud.

During the quarter, we launched bundled subscription packages via our Aloha Essentials offering. Although there was minimal financial impact during the second quarter from the shift to subscription pricing, the change is a strategic focus for us, as we will look to accelerate the investment in these programs.

Now to Slide #12, where we provide our second quarter revenue results under our previous operating segments. Software revenue increased 7% constant currency, driven primarily from our JetPay acquisition, as well as ATM-related software revenue.

Services revenue increased 5% constant currency, driven primarily by an increase in recurring maintenance revenue, while both our installation and hardware maintenance backlogs grew in the quarter.

And finally, hardware revenue increased 33% constant currency, driven primarily by ATM revenue growth of 78% constant currency, while the combination of self-checkout and point-of-sale added additional growth.

On Slide #13, you can see free cash flow, net debt and adjusted EBITDA for the quarter. Free cash flow was $9 million in the quarter, down from $27 million in the prior year, due to higher accounts receivable as a result of increased billings. We exceeded our internal plan this quarter and remain on track to hit our free cash flow target for the full-year.

Slide 13 also shows our net debt to adjusted EBITDA metric, with a leverage ratio of 2.8 times for the second quarter of 2019, which is down slightly from 2.9 times at the end of the first quarter. With no share repurchase this quarter, good cash repatriation and limited M&A activity as our acquisition of D3 Technology closed early in the third quarter, we were able to reduce our leverage sequentially from the first quarter.

We are comfortable with our current debt, leverage and maturity profile. While the next maturities in our debt stack are not until early 2021, both the bank pro rata and high-yield bond markets are strong at the moment for a company with our credit profile, and we believe represents a unique opportunity to refinance a portion of our debt.

As a result, we have initiated conversations with several members of our bank group and are proactively evaluating alternatives to optimize our debt capital structure in light of these favorable market conditions. While the exact instruments, pricing and tenders are being evaluated, it is possible that we will complete a portion of this debt refinancing by the end of the third quarter.

On Slide #14, you will find our full-year guidance for 2019. We are raising our revenue growth guidance to a range of 3% to 4%, up from the previous range of 1% to 2%. The increase in guidance is primarily attributable to our solid revenue performance through Q2, driven primarily by higher ATM sales.

Recall the margin on these sales is lower than the company average, which will limit the flow-through to EPS. Also included in this revenue guidance are expected FX headwinds of approximately 1.5%. Although it could trend slightly higher if the dollar strengthens against other major currencies due to the global nature of our business.

Also, as our business model changes and we begin to bring new products to market that will generate higher recurring revenue streams, we will begin to shift from perpetual license revenue that is recognized upfront to either term or subscription-based revenue that is recorded over time.

This shift may have a dampening effect on our overall revenue, as we grow our recurring revenue base. While this shift was immaterial in the second quarter, as we move through the remainder of 2019 and beyond and roll out our new offerings, we’ll update you as to our progress, as well as the impact of this shift on our financials.

We are reaffirming our full-year earnings and cash flow guidance. We are also seeing the benefits of cost actions taken the last several quarters, including the $100 million action taken at the end of last year. In the second quarter, operating expenses as a percentage of revenue was down 130 basis points constant currency year-over-year. Although we expect further benefits, we will continue to invest in solutions that enhance the competitiveness of our products and in efforts that improve customer satisfaction.

As we stated on our last call, our 2019 adjusted EBITDA is expected to be $1.04 billion to $1.08 billion. Our 2019 GAAP EPS is expected to be $1.91 to $2.01 and includes restructuring and transformation charges of approximately $60 million.

Our non-GAAP EPS is expected to be $2.75 to $2.85 for the year. We have assumed a tax rate of 23% to 24% and a share count of 153 million shares. We enjoyed a lower tax rate in both the second quarter and the first-half of this year due to several discrete tax items that are not expected to repeat in the second-half of the year.

Our guidance includes roughly $0.05 of dilution in the second-half of the year related to our acquisitions year-to-date, while excluding any costs that may result from a potential refinancing of our debt. Again, we expect free cash flow for the year to be in a $300 million to $350 million range. We expect the linearity of our cash flows to follow a similar pattern to previous years, with the majority of free cash flow generated in the fourth quarter.

The fourth quarter will represent a tougher revenue comp for us due to the revenue strength we recorded in the fourth quarter of last year. We expect approximately 23% to 24% of the full-year EPS to be generated in the third quarter. Our Banking segment should have another strong revenue quarter in Q3, driven by our increased ATM backlog position.

With that, I’ll turn it back to Mike for closing comments.

[Michael Hayford, President and Chief Executive Officer]

Thanks, Andre. In closing, we delivered a solid first-half to 2019 through improved execution and a relentless focus on our customers. We will continue to invest in the strategic growth platforms that will help power the future of our industries and customers. The targeted investments in our key growth initiatives will be supported by the broader roll out of our integrated payments platform later this year and an ongoing commitment to driving productivity enhancements across our operations.

In addition, we are unlocking new markets for our solutions through strategic tuck-in acquisitions and further advancing our mix shift to software, services and recurring revenues. However, this is consistent with our goal of building a stronger NCR. We have made notable progress, strengthening our foundation for sustainable long-term value creation.

The entire NCR team enters the second-half of the year with a clear commitment to delivering competitive differentiation and success to our customers.

Thank you for your time. And now, Andre, Owen and I will take your questions.

[Operator]

[Operator Instructions] Okay. And first from RBC Capital Markets, we have Dan Perlin.

[Dan Perlin, RBC Capital Markets]

Thanks. Good afternoon, guys, and congratulations on a nice print.

[Michael Hayford, President and Chief Executive Officer]

Thanks, Dan.

[Dan Perlin, RBC Capital Markets]

Obviously, there’ll be a lot of spend on the ATM. But I wanted to start on the area that looked a little weaker to us, which is really in hospitality. And specifically, I’m just trying to make sure I understand how the cadence of that business segment transitions here from legacy license on Aloha to more these recurring revenues. And the margin in the quarter was definitely below our expectation and you called out mix. But I’m just wondering if you could put a little finer point on that and then how that might shift in the back-half of the year as you make that transition?

[Michael Hayford, President and Chief Executive Officer]

Yes. Dan, thanks. I’d say two things on hospitality. The first one I’d say is maybe impacting margins is that, we continue to focus on and that’s predominantly the – our restaurant business, focus on customer sat execution and we put a little money into that this year, which is bringing down the margins a little bit, and that was something we did by design.

And then secondly, on the transition. Andre talked about his comments that we’re continuing and I spoke to some of the specific products that we’ve rolled out. We’re continuing in second quarter. We did a number of different areas, including the Aloha Essentials, where we started bundling and selling it on a monthly basis.

Those numbers that we saw roll through where in the bandwidth that we expected for the second quarter and we expect to see that for the full-year in the guidance that we’ve given just to see that kind of numbers and the impact. But it does have an impact when you look at year-over-year. We are taking some, but would have been sold as a license or hardware upfront, and we’re rolling that into monthly subscription fees in hospitality.

So I don’t think there’s anything for us is of concern. We know we’ve got to focus on customers, customer sat and we know we have to focus on getting our next-gen product out. And at the same time, we’re shifting the whole model for how we sell and book revenues.

[Dan Perlin, RBC Capital Markets]

Okay. And if I could just…

[Owen Sullivan, Chief Operating Officer]

I was just going to say, the third leg of that stool is the channel strategy. So we’ve spent a fair amount of time along with the customer sat challenges and issues and responding to that money beyond that is addressing the channel strategy. And I think there were some our viewers. There were some steps – missteps in that area. We’re trying to resolve those, invest back in those. And so there’s some effort going into that group as well and we feel good about the progress we’re making there.

[Dan Perlin, RBC Capital Markets]

Can I shift gears for a second on the Digital First Banking. You talked about eight clients, I guess, converting over to recurring revenues. I’m wondering, you have D3 now and then your Digital Insight. I’m trying to understand kind of the interplay between those two, I think, they go after different sizes of the market. And I’m just wondering what kind of success you’re kind of having with the Digital Banking strategy in the quarter around DI? And then how that, again, kind of dovetails into D3, given they’re different sized banks? Thanks.

[Michael Hayford, President and Chief Executive Officer]

Well, two – kind of two different questions you have there. One – the one, on the eight that converted, those were software license deals that we’ve typically done perpetual. They’re not really in Digital Banking, they’re not in DI. But they’re in our other suite of products that we got market around the globe. And we have, again, made a conscious decision not to sell perpetual license.

So as we go out to market during the quarter, we would sell – and recurring to us, we’d like to do monthly subscription, or we’ll do term, if we have to, based on kind of how that market, how the customer wants to purchase. So that’s those eight. So those were not related to DI.

DI, we had a really good sales quarter in the first quarter. We had really good sales in that in the second quarter, I don’t think we announced a lot of new deals. But I think we feel pretty good about where that product is today, particularly versus a year ago in terms of product feature function.

We’ve addressed a couple of areas that we felt competitively we needed to address. We’ve put money into that. We’ve rebuilt the team. We’ve rebuilt the sales channel. And as we go out and compete with some of the newer companies out there, we actually think our product has a deeper, more rich feature function and we’ve got a really strong platform to go and deliver and support and install our customers.

So DI will continue to get investments and the focus on a segment of the market that wants a shared platform, that gets them a really cost-effective, very strong feature function product that we feel is one of the best out there. D3 is going to focus on larger FIs in the U.S. So, think $20 billion, $30 billion UIs, who want a customized platform, where we take our code that is also a cloud product.

So it’s going to run as a subscription product. And then we eventually plan to take that into the international markets, where today we do not have a Digital Banking offering. So that’s going to be a new market for us.

[Dan Perlin, RBC Capital Markets]

Great. And if I could just one – quick one to Andre. On the…

[Andre Fernandez]

Yes.

[Dan Perlin, RBC Capital Markets]

…on the potential debt refinancing, is there any thought to taking advantage of a bridge now to also kind of plugged in funded pension liability with that? And with that, I’ll jump off. Thank you.

[Andre Fernandez]

Yes. I mean, listen, I think when we project out the cash flows, we’ve got to – we know what our pension – required pension contributions are going to be, because the pension has been derisked and it’s largely fixed income. So they’re fairly set in stone. So they’re not really sensitive to interest rates or what have you.

So and those are pretty manageable, I think, until I think 2020 – 2021 is when the first starts. It’s something around maybe $30 million and then it goes up to around $100 million after that, and then it stays at $100 million for a few years. So I guess, just when we think about the capital structure, we know, listen, we’ve got some required contributions that are going to be a use of cash flow in those years.

So we just need to make sure that we’ve got the appropriate liquidity or – and to build – to build that payment into the covenants. I don’t think we’re looking into anything specific in any new credit package around the pension other than just to make sure that we’ve got sufficient liquidity to address it.

[Dan Perlin, RBC Capital Markets]

Thank you.

[Andre Fernandez]

Sure.

[Operator]

Moving on from D.A. Davidson, we have Matt Summerville.

[Matt Summerville, D.A. Davidson & Co.]

A couple of questions. Can you maybe talk about – put some numbers to what you kind of saw from an incoming order rate and where your backlog stands in the ATM business? And just for context, kind of where you think we are at in the overall cycle here in the Americas and Europe?

[Owen Sullivan, Chief Operating Officer]

Yes. This is Owen. I would say, as we look at the backlog and the order rates leaving the first-half, both are up year-over-year and we feel good about that momentum. From our perspective, North America and Europe has continued to be very strong. And they were strong in delivering on the quarterly revenue. They’re also strong in terms of the order rate and the backlog, conversion activity.

So, our view is, we’re getting participation from all of the key regions. We’re not seeing the same kind of growth and haven’t been, quite honestly, over the last several quarters out of the Asia Pacific market. But Europe and North America, even South America have been strong for us.

Where we are in the cycle, we clearly are seeing some Win 10 tailwind. We have a lot of internal discussions as to where we are in the cycle. I would say we’re still early [Technical Difficulty] 10 activity. We’re seeing an awful lot of refresh decisions being made by those clients that are dealing with the Win 10 upgrade, as opposed to just replacing the core, which has been good news for us. But yes, I would say, we feel good with orders and with backlog going into the third and fourth quarter.

[Matt Summerville, D.A. Davidson & Co.]

And then as it pertains to the hardware business, year-to-date, what’s the scorecard look like in terms of how that business is tracking from an operating loss standpoint versus the prior year?

[Owen Sullivan, Chief Operating Officer]

Yes. So we said that coming into the year, we were looking to cut our losses in half. And our assessment right now at mid-point, the team is doing a good job. And we feel like we’re on track to to beat and hopefully improve on that.

[Matt Summerville, D.A. Davidson & Co.]

Thank you.

[Michael Hayford, President and Chief Executive Officer]

Yep.

[Operator]

And next from Northcoast Research, we have Kartik Mehta.

[Kartik Mehta, Northcoast Research]

Hey, good afternoon. Michael, I wanted to just make sure on the outlook for 2019, obviously, raised revenue guidance, but then raised EPS. And is that strictly a function of the hardware and the margins that you’re, or do you feel like now you’ll be at the upper-end of the guidance from an EPS standpoint?

[Michael Hayford, President and Chief Executive Officer]

Yes, Kartik, I think you hit it right on the head. So, as Owen said, our plan for the year is to reduce the losses that we had in hardware last year, and quite frankly, to cut them in half, which is a big step. But it’s still a loss. Our long-term goal is to get that back to worst neutral. We’d like to make some profit in hardware.

But as we have strong numbers that we saw in the second quarter, we have strong numbers through the first-half of the year, a lot of that hardware-driven revenue. And so that hardware revenues coming on at a negative margin, so it’s coming on at loss pennies of loss. It drags in attached software, which obviously has a positive margin. So you can almost think of those as netting each other off part a little bit.

And then I’ll turn it over to Andre, we have a few other things that are just hitting us a few pennies here and there. But we fee good about the revenue and the growth, actually feel very good about that through the first-half of the year. And as we said, we think for the full-year, we raised our outlook based on that. But from an earnings perspective, it’s not really driving additional earnings that aren’t being offset by a few headwinds.

[Andre Fernandez]

Yes, just adding, we said in our prepared remarks that the – our in-year acquisitions are dilutive, I think we said to the tune of about $0.05. So that’s pulling us back a little. Also recall on my prepared remarks, we took up the share count a little bit from $151 million to $153 million, that’s just timing of share purchase. But over the year, that’s slightly dilutive, that’s about at $153, there’s about $0.03 headwind. And then a little bit more FX. It seems like in particular, the euro has been a little bit weaker. We’re very international. Euro is probably our largest exposure.

So, what was about a 1% headwind on revenue that we built into our plan is probably more like 1.5% on revenue and maybe a few more sense headwind on EPS. So I think the combination of those three makes us a little bit more cautious about taking up earnings at this point.

[Kartik Mehta, Northcoast Research]

Okay. Thank you. What about the payments business? As you look at JetPay and the integration, when do you think that business can start having a positive impact on margins?

[Michael Hayford, President and Chief Executive Officer]

Well, we – I mean, we talked about just kind of the timing and the sequence in our statements there. So we’ll continue to make progress. Second quarter, we attached and rolled out Silver One, which is our Silver products. When we ship Silver out the door, we’ll attach our payments. We’re well down the path of attaching our payments to Aloha and getting ready to roll that out in the second-half of the year in GA.

So, we knew we had some work to go on a number of fronts, obviously, integrating the products, adding some capabilities to differentiate our products. So when we go on the market, we can do some things with restaurants and with retailers. And then, obviously, we have to build out the operational back into the newer underwriting all these customers.

So, we’re tracking right to plan, second-half of the year, we get to GA. So you’re going to see it start to tick up. But it’s one customer at a time. It’s a recurring revenue stream. We’re going to get clicks as they come through. The new customers will get payments, when they buy our products, when they buy our POS products, whether it’s restaurants or retailers.

And then we will also go after existing customers and try to convert and up-sell them to our payments offering. But that’s obviously going to be a little bit more of a challenge and it’ll come in quarter-by-quarter. So you’re going to look into 2020, and we’ll give you an outlook as we look – start looking at 2020 and what those numbers would mean, but it’s still out in the future a bit.

[Kartik Mehta, Northcoast Research]

Thank you. I appreciate it.

[Operator]

[Operator Instructions] Next, we have Dan Kurnos, Benchmark Company.

[Daniel Kurnos, Benchmark Company]

Great. Thanks. Mike. If I just follow-up a little bit on that. Just in terms of the customer reception and the switch, it sounds like from your last response that you’re maybe waiting for licenses to come up. But just want to make sure there’s no like incremental churn as you go from perpetual, the monthly and just how that’s being received?

And then as you talked earlier about some of the customer sat stuff, obviously, you inherited a lot of issues. I’m just curious how much more runway you think you have before that starts to trail off?

[Michael Hayford, President and Chief Executive Officer]

Yes. Let me just kind of go backwards to the question. So I think the team’s done a really nice job. We put a high, high focus on customer and customer sat and taking care of our clients, one client at a time. And you have to fix each product. We have to go out to the market. In some cases, we had to go out where we maybe hadn’t done the best job of implementing and go out and correct those things.

So I think every – literally, every month, we get better at that. The product quality, we’re shipping is much better today than it was a year ago. Our customer sat, we shifted our our measurements to NPS this year. So we’re asking them, will they recommend NCR as a partner and that’s – saw an improvement year-over-year. And so we feel good about that. There is, I would say, some more work to continue and some areas are ahead of others.

Obviously, manufacturing side did a really nice job year-over-year and some of the work challenges we had last year. And you can see by just the volumes that we’re shipping that we’ve addressed that. We’ve got pockets, like Digital Banking has done a really, really good job of restoring the confidence of our customers and restoring confidence of the marketplace in our Digital Banking products.

We’re still working, as we talked about in hospitality and restaurants. And then we’ve got some of our retail products like Emerald, which is a cloud-based point-of-sale product that we’re going on controlled deployment. So we still have some work to go. I would say that we’re done. But we feel pretty good and, obviously, our clients aren’t going to buy from us if they’re dissatisfied with our product quality or service.

So, our service team, global services, professional services have done a really nice job, as well. In terms of a – so the recurring shift, I think, you’re probably referencing Aloha Essentials is going out there. So as we sell new ones, that package is actually very well received. Some of our competitors, as you might be aware, on the lower-end of the marketplace, have already gone to market with a bundled offering. I think our bundle offering is more complete, because we can bundle literally every piece of hardware in the restaurant, all the software and then a service component to install, operate and support that.

So we feel pretty good about that offering and the reception has been strong. When we bring – when we go for upgrades or renewals, we will try to convert people from a perpetual product to a subscription-based product. You just have to remember, though, in the Aloha product base, a big piece of that revenue today is Aloha cloud. So a lot of the products already delivered in a cloud format. And then again, all the payments – when the payments come on Board, they’re all be subscription by their nature.

[Daniel Kurnos, Benchmark Company]

Got it. That’s helpful. And then just on sort of the new offering as you go to market, I – I’ve asked this question a few times in the past, but now it seems maybe a little bit more timely. Just in terms of the analytics offering that you can provide to the table here to your restaurants, whether it’s 3P, blind data, whatever it is. It seems like you could kind of layer that in, in terms of incremental up-sell. So is that something that you’re thinking about as you go through layering in the payments integration bundle, especially on the restaurant and hospitality side?

[Michael Hayford, President and Chief Executive Officer]

Yes, absolutely. I mean, we’ve got some really nice tools. We’ve got a really nice mobile app that we give to our clients. So again, our clients in the restaurant space are the – a lot of them are the higher-end, full-table service customers, where they might have a grouping of five or 10 restaurants and we’ve got some great tools that we’re rolling out where on your mobile phone, whether it’s a Mac – sorry, Apple or Android, you can actually get an update on status and it’ll actually do some trending for what’s actually selling or competing.

We’re looking at how to add external data to that. So you can actually do trends in the neighborhood or on your location. But that – those kind of things where we have a lot of data or data rich in that regard and adding analytics are a big focus of that team.

[Daniel Kurnos, Benchmark Company]

Great. And then just last one, if I could squeeze one in for Andre. Did you mention how much the new acquisitions are expected to contribute in the back-half of the year, both either diluted EPS and/or from a revenue perspective?

[Andre Fernandez]

Yes. We said in-year acquisitions, the most material of which is D3, which closed early in July, not in second quarter. So we said that’ll be about $0.05 is the sum of all the in-year acquisitions, D3 being the most significant of them.

[Michael Hayford, President and Chief Executive Officer]

As a headwind.

[Andre Fernandez]

As a headwind.

[Daniel Kurnos, Benchmark Company]

Yes, as a headwind, I got it. All right. Thanks, guys. I appreciate it.

[Michael Hayford, President and Chief Executive Officer]

All right. Thanks.

[Operator]

And next, we have Paul Coster with JPMorgan.

[Paul Coster, JP Morgan]

Yes, thanks for taking my question. So it sounds like the ATM business was stronger than expected. What was the nature of the upside surprise? Was it a – was there a specific reason for – or a specific market segment, mid-market, Tier 1s? Was it all Windows 10-driven?

[Michael Hayford, President and Chief Executive Officer]

Well, I don’t know that we have a specific reason. Owen talked about the markets. Obviously, Europe is very strong for us and North America is very strong for us. We’ve had good success in Latin America, good success in EMEA, in the Middle East. So we always go to this debate. We talk to our sales team, how much is Win 10 versus how much is renewal cycle.

You still have some branch transformation taking place, I’d say, more than some, where banks and credit unions are rolling out ATMs or ITMs interactive teller devices are replacing drive thru lanes, they are putting in the front of their branches.

So I think it’s a little bit of all those things. And obviously, then, Win 10, as they look at needing to upgrade and making a decision is an ATM as an ATM, is there an ATM at end of life, or is it a core upgrade and we’ve seen more replacement with new ATMs than we’ve seen core upgrades. So yes, it’s stronger than probably we anticipated going into the year. But we’re pretty pleased with the results.

[Owen Sullivan, Chief Operating Officer]

Yes. The other thing I’d say, Paul, is that the confidence within our sales team and within the marketplace that we’ve addressed the production issues, both ability to deliver and the quality, you can feel that resonating throughout the organization.

So there’s a step that the organization is now feeling, especially with 80 series model being out in the market, and the marketplace is giving strong validation and they had to the product now that we’re delivering the on-time and with the quality. I think everyone’s feeling good about it and you can see that coming through in the numbers.

[Paul Coster, JP Morgan]

So kind of – so the feedback loop will be very positive as well. The software that attaches to these ATMs, does the revenue recognition take place in the same quarter, or is it really sort of on a lag basis? In other words, we sort of setting up for high-margin revenues associated with the software that flows through in 2020?

[Michael Hayford, President and Chief Executive Officer]

Well, the software – on the attached software that goes to ATM is booked at the license upfront. Over time, we may look at whether we can move that to subscription, but it’s both upfront. Services, which will become part of recurring revenue stream going forward in-year and it varies by customer and by region, there’s anywhere from a three or six or 12-month warranty period, where we provide services, but we don’t get paid an additional fee outside of what we got to pay for the ATM. So it does build a backlog of service revenue growth that will start to hit us next year.

[Owen Sullivan, Chief Operating Officer]

Yes, so just adding. I think – you might see, I think it was on Page 12. You’ve got services revenue only up 5% constant currency. But remember that, in some of these, the installation is not happening until month later. And then the maintenance stream won’t happen until the warranty period. And so you could have a maintenance stream it’s not even starting until after a year out. So the good thing now is, because all these hardware sales where we’re building the backlog pretty nicely. That’ll set us up well for the future.

[Paul Coster, JP Morgan]

All right. Got it. And then my last question is, it sounds like pretty confident that these three has got some traction. Does this confidence originate you from business that was already in the pipeline at the time of acquiring these three, or is it developed since? And yes, I mean, how are you able to expand backlog so quickly if it’s the latter?

[Michael Hayford, President and Chief Executive Officer]

Not – yes, so I think we’re excited about D3, but I think those comments are related to digital insight and the product that we’ve had out there in front of the improvements we’ve made. So yes, D3, we’re very excited about where this can be positioned and where we can take it both in Large FIs and international, but it’ll become part of our Digital Banking offering. And again, right now, what we’ve done with Digital Insight and restore the confidence of our customers and really restore the confidence of the marketplace is what the comments were regarding.

[Paul Coster, JP Morgan]

Okay, got it. Thank you very much.

[Michael Hayford, President and Chief Executive Officer]

Thanks.

[Operator]

Next from Morgan Stanley, we have Katy Huberty.

[Kieran Kenny, Morgan Stanley]

Hi, this is Kieran Kenny on for Katy. Thanks for taking my questions. I have two quick ones. First, free cash flow is down year-over-year in the first-half. So how do you bridge the free cash flow, or how do you bridge the free cash flow growth for the full-year?

And my second question has to do with revenue in the second-half. So your full-year revenue guidance of 3% to 4% assumes a deceleration from the 6% in the first-half. So how do you see the deceleration spread across 3Q and 4Q? And is the deceleration all ATM-driven, or do you see slower growth in other segments as well? Thank you.

[Andre Fernandez]

Well, I’ll start with free cash flow. So it was down year-over-year, but remember, we had a significant revenue and billing quarter. So temporarily, remember that impacts working capital. So we build a lot. The receivables are high and that’s why that’s a use of cash on the receivables.

But that – I think I mentioned in my prepared remarks, even making $9 million free cash flow in the quarter was better than our internal plan, because we typically don’t generate cash for really most of the third, three – first three quarters of the year and then we generate all of our cash in the fourth quarter. So that was very much on track. And I think the full-year cash flow was still – we said we’re still reaffirming the $00 million to $350 million of free cash flow and that’s in line with reaffirming the EPS.

[Michael Hayford, President and Chief Executive Officer]

And so on the revenue question, I mean, the – I’d say kind of nets out to it with a very strong start to the year. We’ve obviously bumped up our outlook. We have a pretty difficult comp in the fourth quarter, difficult, because we had a very, very strong fourth quarter with hardware, specifically ATM sales in the fourth quarter of 2018.

So while we still expect the second-half to be, as we expected to be real solid finish to the year, the first-half was a little bit faster growth than we had anticipated. And for the full-year, we’re going to have a obviously stronger year than we had originally started with.

[Kieran Kenny, Morgan Stanley]

Great. Thank you.

[Operator]

Okay. And it looks like that does conclude our question-and-answer session. I’d like to turn the floor back to Mr. Mike Hayford for any additional or closing remarks.

[Michael Hayford, President and Chief Executive Officer]

Thank you. In closing, I’m proud of the progress we’ve made in the first-half of the year. We are clearly in the early innings of a multi-year strategy, but we’ve been confident that our strategy will create long-term shareholder value. We continue to improve execution with a goal to drive a mix shift to recurring software and services revenue and enhance our free cash flow generation.

I’m very proud of the work that our entire NCR team did and for their focus on taking care of our customers and continuing to improve our products and services. Thank you, everyone, for joining us today, and we look forward to speaking with you on our third quarter call.

[Operator]

Once again, ladies and gentlemen, that concludes our call for today. Thanks for joining us. You may now disconnect.