NCR Corp

LSE:0K45

Earnings Call Transcript 2020-Q4

[Operator]

Please stand by. Good day, ladies and gentlemen and welcome to the NCR Corporation Fourth Quarter Fiscal Year 2020 Earnings Conference Call. Today's call is being recorded.

And at this time, I would like to turn things over to Mr. Michael Nelson, Vice President of Investor Relations. Please go ahead.

[Michael Nelson, Vice President, Investor Relations]

Good afternoon and thank you for joining our fourth quarter and full year 2020 earnings call. Joining me on the call today are; Mike Hayford, President and CEO; Owen Sullivan, COO; and Tim Oliver, 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'll 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 February 9th, 2021 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.

[Mike Hayford, President and CEO]

Thanks, Michael and thank you everyone for joining us today for our fourth quarter and full year 2020 earnings call. I will begin with a review of the fourth quarter and full year, as well as provide an update on our shift to NCR becoming a software and services-focused company with a high level of recurring revenue. Tim will then review our financial performance and an outlook into 2021, and then Owen, Tim and I will take your questions.

I'll begin on Slide 4, with some highlights from the fourth quarter and full year. NCR delivered solid performance despite the current environment that continues to be impacted by COVID-19. We continue to experience incremental improvements across our business. However, there remains uncertainty regarding when vaccines will be available to the general population and when businesses will return to normal levels.

First, we delivered strong free cash flow, we generated $149 million of free cash flow in the quarter and $448 million of free cash flow for the year. Tim will discuss in more details the drivers of our strong free cash flow production. Second, we expanded adjusted EBITDA margin sequentially for the third consecutive quarter to 15.8% in the fourth quarter, which represents an increase of 10 basis points from the third quarter.

As we discussed last quarter, we have taken actions to replace the temporary cost savings when the pandemic began with permanent expense savings. We entered 2021 with $150 million in cost savings that are expected to drive margin expansion. Our performance in the fourth quarter is the result of some of these actions we have taken, and those actions continue to drive margin improvement in 2021 and beyond.

Third, we delivered 6% recurring revenue growth in the fourth quarter, bringing recurring revenue 54% of total revenue. Throughout 2020, we have made steady progress generating increased recurring revenue, which is consistent with our 80/60/20 goals.

And finally, we are very excited about the opportunity to combine with Cardtronics. The proposed transaction accelerates the NCR-as-a-Service strategy we laid out at Investor Day in December, and further shifts NCR's revenue mix to software, services and recurring revenues. We continue to expect the proposed transaction to close midyear 2021 and to be 20% to 25% accretive to EPS in its first full year.

Now moving to Slide 5, we have continued to progress executing our strategy despite a challenging business environment. We remain focused on a transition to drive NCAR-as-a-Service and achieve our 80/60/20 strategic goals. For the full year 2020, software and services represented 72% of our total revenues, up from 65% in 2019 and 54% of our revenues were recurring, up from 46% in 2019. EBITDA margin was 14.4%.

In banking, we continue to have positive momentum in our digital banking platform with five new customers signed in the fourth quarter. One of those new customers was Wintrust, a $43 billion bank with 15 branded community bank subsidiaries that selected NCR D3 Digital Banking Solution. We have already started off 2021 strong with the signing of another new D3 customer, associated bank which is a $35 billion regional bank based in Wisconsin. In the fourth quarter we also had cross-selling success with existing clients and new products including seven business banking deals.

In retail, we are gaining traction with our NCR Emerald offering, which is our next-gen cloud-based retail point-of-sale solution. As we discussed at our Investor Day, the acceleration in digital transformation is being driven by consumer demand and retail is needing to respond, we believe this is driving an upgrade cycle for retail POS software and NCR has the largest global install base.

We continue to be excited about the sales funnel for NCR Emerald and recently signed our biggest NCR Emerald deal today with the largest collaborative in Canada with 1,500 stores. We are also seeing increased adoption of our self-checkout solutions, we're experiencing demand across customers, geographies as consumer preferences accelerate.

And hospitality's momentum of Aloha Essentials, which bundles software, services, hardware and payments continued in the fourth quarter. This model is proving itself in our ability to attract new customers as well as better service existing customers. During the fourth quarter, over 90% of all Aloha sites sold to our direct offices were sold as subscription bundles, with payments attach rate also strong at roughly 75% of sales into new sites.

As we focus on executing our NCR as-a-Service strategy, we continue to invest in our strategic growth platforms, both organically and inorganically. We recently closed two relatively small but very strategic acquisitions. We acquired Terafina, a leading provider for customer account opening, which is a digital front-end solution for digital banking.

We also acquired Freshop, a digital online ordering platform, which provides retailers the ability to quickly deploy, buy online, pick up and store capabilities. With Freshop, NCR can now help grocers capitalize on the growth in e-commerce going forward. These two recent acquisitions are consistent with NCR strategy to acquire early-stage software companies, to enhance product capabilities and extend our leadership in the vertical industries we serve.

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

[Tim Oliver, CFO]

Thank you, Mike and thanks to all of you on the call for tuning in today. Turning to Slide 6, which presents the top-level overview of our fourth quarter financial performance. Starting in the top left, consolidated revenue was $1.63 billion, down $255 million or 14% versus the 2019 fourth quarter. But as we anticipated, we extended our trend of modest sequential improvement beginning back with the onset of the pandemic, revenue was up $42 million or 3% sequentially from 2020's third quarter with all three business segments showing increases.

As expected, our fourth quarter revenue was negatively impacted by the broader economic pause, and while I dig into the more specific drivers of the year-over-year decline later, an aggregate $203 million or 80% of that decline was attributable to lower hardware revenue, which was down 30%. Importantly, our strategy to shift to recurring revenue streams again accelerated sequentially. Recurring revenue was up 6% year-over-year and 3% sequentially.

We shifted $32 million over 2 points of revenue that previously would have been booked upfront as a perpetual sale through a recurring revenue stream. This compared to just $9 million in last year's fourth quarter or $27 million in this year's Q3.

In the top right, adjusted EBITDA decreased $41 million or 14% year-over-year to $258 million, in line with a revenue decline, with EBITDA margin rate down only slightly from the prior year, ending at 15.8%. On a sequential basis, adjusted EBITDA was up 4% and EBITDA margin rate expanded 10 basis points. The similar margin rate results obfuscate the impact of a tremendous amount of hard work on our cost structure.

The temporary cost reductions that were enacted at the outset of the pandemic were suspended in late Q3 and were replaced with cost action savings finalized in Q4, because they were taken during the quarter, that only a prorated impact on Q4 results. The productivity improvements implemented in the fourth quarter were both more permanent and of greater magnitude than those that they replaced. These actions were upsides from $100 million to $150 million to allow us to sustain our profitability at pandemic levels of demand and to drive further margin expansion as demand improves and our revenues follow.

Similar to discussion of revenue, the shift to recurring revenue was also an important descriptor of our relative EBITDA results. $27 million of adjusted EBITDA did shift out of the quarter accompanying the respective revenue shift. This compares to $8 million in a year ago Q4, and $21 million sequentially from Q3.

And in the bottom left, non-GAAP EPS was $0.59, down $0.26 from the prior year fourth quarter, and up $0.04 from Q3. The tax rate of 20% for Q4 decreased as a result of being lower than planned income, which causes planned discrete tax items to have an outsized effect on the overall rate. And finally, and maybe most importantly, we generated $149 million of free cash flow in the quarter and $448 million for the full year. This compares the $302 million in the year ago quarter, but just $281 million for that full year.

To say it differently, more than all of 2019's free cash flow was generated in the last quarter of the year. While in 2020, we generated a much more linear free cash flow result, with approximately $150 million in each of the last three successive quarters. Our year-over-year improvement was due to a nine-day improvement in days sales outstanding, a reduction in both raw and finished goods inventories and a more efficient capital spending plan, that more than offset the impact of profitability from the pandemic.

Moving to Slide 7, which describes our banking segment results, banking revenue decreased $149 million or 16%, mainly driven by a 36% decline in ATM hardware. Bank customer capital spending constraints continued into the fourth quarter, resulting in lower year-over-year hardware revenue, but consistent with Q3 and our expectations expressed then for Q4. The remaining decline in revenue was driven by lower attached software related to the lower ATM sales, excluding the decline in new ATM hardware and the directly related revenues, our service revenue has shown modest growth year-over-year.

Operating income decreased $57 million or 40% and operating margin rate declined by 440 basis points to 10.9%. About 60% of that decline was hardware related and included lower volumes, disadvantageous geography mix, resulting unabsorbed costs and a lower attached software sales. The remainder was from the shift of $17 million of software, to future period recurring revenue.

Operating expenses were only down 3% and will need to go lower in 2021. On a sequential basis, revenue was up 2% and operating margin decreased by 180 basis points. Sequential profitability declined due to the timing of two vendor payments, and a lag in new cost actions replacing the old one.

At our Investor Day in December, we introduced some key metrics for the banking segment as digital banking revenue, digital banking registered users and recurring revenue. For digital banking revenue, 2020 marked an inflection point as the full year increased 4% over 2019. Digital banking registered users increased 12% compared to the fourth quarter of 2019 and showed nice sequential growth over the last five quarters. Despite the overall declines in revenue, we did grow in the right places. Recurring revenue in this business increased 8% year-over-year, and 3% sequentially.

Moving to Slide 8, which shows our retail segment results. Retail revenue decreased $40 million or 7% against a very tough hardware comparison. That was partially mitigated by a year-over-year increase in services revenue. That said, operating income was up $7 million or 17% versus Q4 2019. That increase was driven by a favorable mix of revenue, both by product and by geography. Sequentially, revenue was up 2% and operating margin expanded 50 basis points. This was our third consecutive quarter of modest sequential growth, driving significant margin recovery on a lowered cost structure.

Down at the bottom, you will see the three key metrics we introduced for retail. Self-checkout revenue decreased compared to hardware-rich fourth quarter in 2019. It was down slightly versus Q3. Well, this metric is somewhat dependent upon the timing of customer rollouts, we continue to see broad-based demand for both by customer and by geography for scope. We're actively managing both manufacturing and installation capacity in this business to facilitate more linear revenue. And platform lanes increased 40% compared to prior year fourth quarter, we continue to see positive traction in the implementation of our next generation retail solutions. Recurring revenue in this business increased 11% versus the fourth quarter in 2019 and increased 3% sequentially.

Slide 9 shows their hospitality segment results. Hospitality revenue decreased $50 million or 22%, driven primarily by lower hardware sales. As expected, our hospitality segment and its customers have been most impacted by the pandemic, with capacity of service limitations in the Americas and Europe and changes in consumer behavior.

Fourth quarter operating income declined $8 million, mainly due to the flow through impact from lower revenue. As was the case in Q3, we were able to partially preserve profitability by reducing operating expenses by 15%. On a sequential basis, we continue to experience incremental improvement in both revenue and operating margin. While we wait for a more normal operating environment for our customers, we will continue to add functionality to help them acclimate, manage our costs carefully and accelerate our transition to recurring revenue streams.

The key metric added for Hospitality are Aloha Essentials sites and recurring revenue. Aloha Essential sites which bundles software, services, hardware and payments into a single offering through 42% when compared to prior year fourth quarter, and grew 9% from this year's third quarter. We continue to see the adoption of our Aloha Essentials' bundle as we convert our current installed base. We're pleased to see return in recurring revenue graph at the bottom right, while down 5% last year, it was up 6% in third quarter.

Turning to Slide 10, we provide our fourth quarter revenue results under a previous operating model for both continuity and added color. Software revenue decreased 9% due primarily to the shift from one-time recurring revenue, which represented approximately two-thirds of the decline. Lower sales attached to new hardware and challenging conditions for our hospitality business account for the remaining decline.

Services revenue remained flat. And finally, as I mentioned previously, hardware revenue was the most impacted in the quarter by the pandemic, declining 30%. ATM revenue declined 36%, while the combination of self-check on a point-of-sales declined 23%.

Software and Services as a percentage of total company revenue increased to 71% from 64% in the prior quarter with lower hardware sales exaggerating our improvement. Recurring revenues increased 6% driven by our programmatic effort to shift our sales away from single sales event with perpetual licensing to predictable multi-year commitments with relatively high certainty of revenue generation.

Recurring revenue as a percentage of total company revenue increased to 54% from 44% in Q4 of 2019, also benefiting from lower hardware sales. We continue to experience sequential improvement with all areas increasing compared to the third quarter.

On Slide 11, you'll see the same revenue snapshot but for the full year 2020 versus full year2019. The shift to recurring revenue had $100 million impact to the full year or roughly 80% of the software declined. Adjusting for that shift, software and services revenue would have shown a modest increase compared to 2019. Service revenue continues to show resiliency with 2% year-over-year growth.

Recurring revenue increased 5% year-over-year, living up to its title and validating our emphasis on it. We ended the year with 54% of our revenue as recurring. While admittedly, the increase is aided by the air pocket in hardware sales, we continue to see growth in all three of our segments with a positive mix shift.

On Slide 12, we present free cash flow, net debt and adjusted EBITDA metrics. As I mentioned earlier, we continue to have impressive performance on the cash side. Free cash flow was $149 million in the quarter. Although it declined from the prior year period, we ended the year with free cash flow of $448 million, up nearly 60% from the $281 million in the prior year.

Our efforts to improve working capital and drive improved linearity in our annual cash generation are working well. Also, during the fourth quarter, we made $70 million discretionary contribution to the US pension plan is expected to push our mandatory contributions out until 2023. The slide also shows our net debt to adjusted EBITDA metric, with a net debt leverage ratio of 3.3 times.

We ended the year with $338 million of cash, having paid down both our outstanding revolver and our trade receivable securitization facility and having retired 132,000 shares of preferred stock. We remain well within our debt covenant and ended the fourth quarter with a credit facility leverage of approximately 3.3 times well under a debt covenant maximum of 4.6 times.

Turning to Slide 13, late in the third quarter, we released several of our temporary cost actions in anticipation of replacing them in the fourth quarter with more permanent and sustainable cost reductions. Those cost actions and related operational changes or product decisions resulted in approximately $200 million of restructuring charges in our fourth quarter. Approximately $150 million of those were non-cash charges, mainly related to excess inventory and software impairment charges related to strategic changes. The remaining $50 million were cash charges for severance and the resolution of several legacy items.

We entered 2021 with an estimated $150 million of run rate cost savings. Approximately 40% of those savings are from operating costs, another 40% from SG&A and the remaining 20% from the corporate functions.

In my last slide of Slide 14, which provides an outlook for Q1 2021, because our end markets are still being impacted by the economic drag of the pandemic, and because of the successful completion of the proposed Cardtronics transaction at midyear will complicate reported results. We are not going to provide full year 2021 guidance for standalone NCR at this point.

But for Q1 relative to the year ago Q1, so on a year-over-year basis, we expect revenue growth of 2% to 3%. We expect particularly strong growth in recurring revenue streams. And we anticipate persistently difficult banking hardware environment.

On profitability, we expect adjusted EBITDA margins to expand by 250 basis points to 15%.

And finally, we expect free cash flow to be positive, which might seem to buck our recent trend, but remember that we have had about $150 million of unavoidable payments in the first quarter related to benefits and compensation that occur in every Q1. We know that you have a complicated modeling effort on your hands and hope to be more prescriptive as we get closer to midyear and to the closing of the transaction.

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

[Mike Hayford, President and CEO]

Thanks, Tim. In closing, I want to first commend the entire NCR team on strong execution in 2020. Despite unprecedented challenges, our employees have continued to take care of our customers and have shown resiliency in these very difficult times. Looking ahead, our key priorities are clear. First, we will continue to accelerate our NCR as-a-Service, an 80/60/20 strategy. We have made notable progress this year despite some of the challenging conditions.

Second, we will return to growth in 2021. We expect to grow both top line revenue and expand margins. We took recurring costs out of the business in 2020 and expect the combination of a lower cost structure along with positive operating leverage to drive margin expansion in 2021. We enter 2021 with positive momentum and are laser-focused on execution.

Third, as Tim discussed, we are focused on improving the linearity of both revenue and cash flow. We made significant progress in 2020 and seek to improve our linearity as we shift to more of our revenue to recurring. And finally, we are preparing to hit the ground running and executing on the opportunities that Cardtronics will bring us once the transaction closes.

Turning to Slide 16, I want to close with a strategic rationale for a proposed transaction with Cardtronics. The combination accelerates our NCR as-a-Service strategy and expands opportunities in payments. It will enhance our scale and cash flow generation, while advancing our 80/60/20 targets by roughly two years. Additionally, the proposed transaction is expected to be accretive to EPS by 20% to 25% in the first full year. We believe the combination of NCR and Cardtronics will drive significant value for our customers and shareholders. It's a unique opportunity to both strategically consistent and financial accretive to NCR.

And with that, we will open the call for your questions. Thank you for your time today. Operator?

[Operator]

Thank you. [Operator Instructions] And we'll go first to Tim Willi of Wells Fargo.

[Tim Willi, Wells Fargo]

Hi, thanks and good afternoon, everybody. Quickly a couple of questions If I could, first in controls and fatality overall, is there a way to just sort of think about the average, I guess transaction size, whether that'd be product attachment or sort of annualized revenue from the new sales versus sort of prior experience, just sort of help us think through that that revenue as that continues to gain progress?

[Mike Hayford, President and CEO]

Yeah, Tim as you're breaking up a little bit, but I think you're asking about Hospitality and Aloha Essentials versus the way we used to sell, is that the question?

[Tim Willi, Wells Fargo]

Yeah, just sort of like a way to think about the average attach rates, number of products people may be buying or and I know that's a bundled product. So revenue just, again, a way to think about like the delta of these new customers versus the existing base.

[Mike Hayford, President and CEO]

Well I mean - the key to us so first of all, if you're just looking, we're going to bundle everything in an essential package, you're going to get all the components in there. So instead of piece meaning, it, you're going to get a bigger sale and say that that, you know, a percentage bigger than its type of sale, I don't know, you know, if 1x, and you go 1.5x, 2x to sign a bundle, so you get a bigger share, most important thing is attaching payments, so we've had to add some payments, the revenue per account goes up considerably if we don't have payments, and honesty, as we get more scale and leverage in payments, that's going to drive margin on those accounts. So it really is that 75% attach rate on payments, which is important to us, getting those accounts, getting them up and running. They're carrying key. They don't stack the parts of each component as a separate RFP to separate pricing competition. So over time, we think the margins will hold up better and it's just a better revenue stream for us.

[Tim Willi, Wells Fargo]

Okay, great. And then just a follow-up, I know you can't say a lot, I guess about sort of the Cardtronics, given the merger hasn't closed. But I guess it's been now I guess, a couple of weeks since that formal announcement, I guess I'm sure a curious any feedback you've gotten from your existing customer base within the banking industry, whether it's, you know, conversations you've initiated or just, you know, unsolicited feedback from existing customers that you have about how they think about it and your confidence about the deal?

[Mike Hayford, President and CEO]

Well, so Tim we were absolute and obviously we know Cardtronics well they're like client of NCR, you know, they go on the marketplace sell today. And part of what they sell is just bundled up components that we deliver to them, we sell them hardware today camps, we sell them services, we sell them software, and they bundle that up and they deliver more value-added product in the marketplace, which obviously is one of the reasons that we were interested in this combination.

We did not expect any, you know, negative feedback from the marketplace, banks, the industry. And, you know, we just haven't seen any, we haven't heard any, I don't really know what Cardtronics has seen on their side. But I think we did not expect it and we haven't really heard negative. You know what feedback we're getting from the marketplace; we don't really get engaged with what is Cardtronics look like combined with us. But I think the general perception feedback has been positive.

[Operator]

And we will move over to Katy Huberty of Morgan Stanley.

[Katy Huberty, Morgan Stanley]

Yes, thank you. Good afternoon. Tim, just like clarification first, is the 2% to 3% revenue growth in the first quarter, is that reported or constant currency? And what do you expect the currency impact to be in the March quarter? And just to follow-up on that, guidance implies about half the sequential decline that you typically would see in a first quarter, did that speak to a more robust recovery in demand in the March quarter? Or is that just changing shape of seasonality because of higher revenue mix than in the past? Kind of a follow-up to Mike -

[Tim Oliver, CFO]

Yeah, so firstly on the growth rate. On a reported basis, I'd expect to be at the higher end of that range and then currency effect, we left ourselves some room to the downside that if the currency happens to be negative. Right now it looks like currency will be okay in the quarter.

On the linearity from Q4 to Q1, you're exactly right. We did not do in the fourth quarter some of the things we've done in the past to put, let's say unnaturally move revenue into the full year and into the last year, we have traditionally had very aggressive selling in the fourth quarter particular on hardware. And we didn't - that didn't happen in the last - in the fourth quarter of last year. So that leaves us a much better stead coming into Q1 with a better revenue expectation and better pipeline, and a much more linear revenue pattern really for the full year.

So you know, we're very pleased to be able to show year-over-year growth in Q1, because you'll recall it was not really a pandemic affected quarter, only mildly at the backend. We had a little effect as you recall from a tornado, but still even adjusted for that impact, we would be showing year-over-year growth.

[Katy Huberty, Morgan Stanley]

That's great. And Mike, speaking of capital and hardware spending, if you think about the three segments, which are wholly dependent on a full vaccine rollout versus where could you see a more robust recovery just as we get visibility into a vaccine, but not necessarily a full reopening?

[Mike Hayford, President and CEO]

Wow. Well, I'm not going to share our data. We've declared an end date the pandemic here at NCR, but I can't share it with you. So that's a great question, Kate, I would say like this. So the parts of the business where consumers have to regain confidence and get out and feel comfortable going to restaurants and going to retailers, brick-and-mortar retailers, again, that's obviously going to drive our hospitality business and our retail business, as the hospitality probably impacted a little bit more then on a high end of our marketplace, the ability to buy food and takeaway obviously sort of survived, in some cases, thrived.

But I would say hospitality should have a better impact and people can get out and about retails going to have a good impact. I think the other one is, if you look at what's happening to us in the bank environment, you know the banks are still operating, but they've been a little bit concerned, a little bit because of the financial performance with the margin, net interest margin spread, tracking out in this year with fiscal policies, and then also just not knowing for them when the economic impact, and we've seen them slow down a little bit of their capital spend. So I think the bank, and the bank might be a little bit of a trailer when they see the market picking up that I think, you know, hospitality, when restaurants start opening up, start getting business again. And then retail, retail is a little bit more of a strategic push, we think that they will have to retool their POS technology going forward.

[Operator]

And now we'll move to our next question and that will be with Brett Huff of Stephens.

[Joel Hoeffler, Stephens]

Great, thanks guys. This is Joel on for Brett. Appreciate you taking the questions. So a couple of questions here. Can you talk about Aloha and maybe the competitive dynamics, any color on win rates or pipeline in a quarter? And then can you provide any color on the JetPay volumes and maybe some of the trends that you've seen of late? That'd be great. Thank you.

[Mike Hayford, President and CEO]

Yeah, let me start on JetPay. So JetPay, you know, we've gone through the process of integrating into Aloha and Aloha Essentials. We've started integrating into Emerald, we've got it integrated into some of our other retail products. And then we've had the most activity in hospitality with Aloha bundling that as we talked about the returning attach rates so that new clients going out to new clients and attaching payments, we started in 2017, in the back half of 2020 going out to existing clients and upselling JetPay and have started to get some momentum and traction along those lines.

So we feel really good about not only when we go to test, but also going back into the marketplace. And again, our strategy is fairly simple. If you're using our POS at the point of the transaction, and we tightly integrate our payments we can have a smoother interface, smoother integration, better information and better data flow and if you separate those two. So that strategy seems to be working. And I think continues to make solid progress. Maybe I'll turn it over to Owen on Aloha, the success and then I think we're tracking to where we wanted to be in a difficult year. And the competition, I don't think it's really changed. It's just a -

[Owen Sullivan, Chief Operating Officer]

Yeah, I would say the competitive landscape has not changed significantly in terms of the major players and from our performance, second ordering was clearly the low point. We have seen sequential growth in Aloha Essentials activity in both the third and the fourth quarter. So, I would say the team on the hospitality side is feeling modestly positive.

But to Mike's earlier comment, you know until we see the vaccine and the pandemic have been more under control, we're in a hold on pattern, if you will, albeit minimal positive momentum going into the year. So I think there's cautious optimism based on the momentum we've seen in the last two quarters. But I think we're still waiting probably until late second or third quarter before we see significant momentum.

[Joel Hoeffler, Stephens]

Thank you.

[Operator]

We will now go next to Dan Kurnos of The Benchmark Company.

[Dan Kurnos, The Benchmark Company]

Thanks, good afternoon. Just two if I could and then first, just maybe my thoughts on SCO probably the only real surprise in the quarter intentionally incremental breakout or any color there? Just you know, kind of a color on what's driving that success and sort of what you're seeing going forward and you talked about as part of your increased linearity, that might be one area to focus on.

And then secondarily, the Q1 guide which is on the top line, I think ahead of expectations. And you know, pretty to minus, you think, you know, but you know, it's kind of impressive and sounds like you're getting some momentum. So maybe you guys could just talk through what the drivers that are for both Q1 and into the balance of this year as you see them? Thanks.

[Tim Oliver, CFO]

Yeah, sure. So let me take the 2021 SCO first. So it's tough, right, because we were only going to be NCR alone, we hope for a couple of quarters. And so I know, y'all trying to build models, see I feel very good about the Q1 momentum to be able to post growth year-over-year. And then let's call the pandemic unaffected quarter is terrific.

When we talked back in December the 3rd, we talked about our growth rate that approximately at 5% over the four-year period that we will describe then. I think we'll be on that number, I think we said that it's going to be a linear walk, that's just not a hockey stick, we're going to walk up that curve in most years. And I would expect that to be the case this year. And I expect it to be as Owen just described, modest sequential improvement quarter-over-quarter, every quarter that's where we're headed for.

Now, as somebody just described, we could get a pandemic bump here at some point, we've not planned for it. That's not part of our forecast. And then we've not planned for a significant recovery, and hardware, particularly the ATM. So up modestly year-over-year, but not that anything, no big bump. On EBITDA, similarly, we talked about moving for 14.5% this year to 20% EBITDA margins of 2024, I think we'll make at least one year's worth of progress against that delta, it's a little bit lower at 14.5%, than the starting point might have been. So we'll have nice margin expansion this year, and I think will be 16 percentage for the full year and exit the year at a rate that's in the fourth quarter, that's higher than that.

On free cash flow, I think it'll be very similar to what we generated this year. I think the pattern of the generation will be very similar as well. The - we'll have higher profitability, which would suggest we should get a little bit more free cash flow. But I do think that we're going to have to reinvest back into some working capital as we start to grow up out of bottom of the pandemic. We, the balance sheet shrunk across 2020, and when that happens. Quickly you harvest a little bit of working capital goodness in free cash flow. So I think those two phenomenons to offset one another and for the year free cash flow a lot like the $450 million we generated in 2020.

And for the first part of that question, Mike do you remember the first one?

[Mike Hayford, President and CEO]

On SCO. Just on SCO, SCO is very - was very lumpy in the year ago period. And it is particularly dependent upon some major orders of some very, very large retailers. Our efforts to get that to look more linear as well and it's called. So you saw a very, very hard comparison in Q4, you saw year-over-year number that you probably didn't like. That said, in the first half of 2021, you're likely to see a 50% growth rate in SCO hardware, because the comparisons were super easy. And so you'll see linear revenue from us this year when I'd say 15 percentage growth across the year in SCO, with a heavily weighted to the front half in terms of growth rate, but a more linear performance across the year.

[Owen Sullivan, Chief Operating Officer]

And I would just add that geographically versus and from a segment standpoint, where Tim comments about a lot of enterprise striving lumpiness, we're seeing really good traction in the SMB markets, as we continue to work with customers, as they address their point-of-sale software and look at their entire technology footprint. And that includes the self-checkout. So if you look in Europe, if you look in the United States and across the SMB, we're getting very good traction and seeing good backlog and pipeline development.

[Tim Oliver, CFO]

Michael, Mike just waving me to give a little more guidance for 2021 modeling. So here's a couple of other facts let me throw out there. Interest expense, interest expense will be just north of $180 million, on an NCR standalone modeling basis. CapEx $275 million to $300 million, which if you think about depreciation and amortization number of $302 million or $305 million. For the first time in a long time, we hoped to underspend depreciation, but tax rate of 26%, which is up year-over-year, we should be profitable, which will cause us to pivot more tax. We're hoping to find some discrete items to help us bring that number down. And as we sit here today, I think 26% is, let's call it a fair and conservative number and shares outstanding for the year about 143.5.

[Dan Kurnos, The Benchmark Company]

Got it, that's super helpful, guys what it's worth and I just thought it was a little better than I thought. So anyway, thanks for all the color. Really appreciate it.

[Tim Oliver, CFO]

Sure. Our pleasure.

[Operator]

Our next question will come from Matt Summerville of D.A. Davidson.

[Matt Summerville, D.A. Davidson]

Thanks. I want to talk about rig fencing a little bit here, it looks like SG&A up sequentially up year-over-year, the highest percentage sales you've had in quite a few quarters there. Can you talk about the level of spend that you're having unusual in there? I guess I was surprised to see it so high.

[Tim Oliver, CFO]

Yeah, there was some unusual spending there. We had, first of all, we had cost actions coming off and new ones going back on. So we had some salary reductions across the organization in Qs 2 and 3, that came back online, we started paying people the regular salary, except like, in Q3. And so obviously, there was a lift of all those temporary cost actions that we saw before. We replaced them with permanent actions, but those are out of sync with one another. So you'll see the impact of the reduction in cost in Q1. But admittedly, those didn't sync up perfectly in Q4 these other with the bump in cost. The others, we had some one-time items of settling up of some let's call it legacy contracts that caused us to have higher - a little bit higher in the quarter, it will not recur. So there are some non-recurring expenditures in there maybe to the tune of $15 million to $20 million.

[Matt Summerville, D.A. Davidson]

Okay, that's very helpful. And then what would you say should be a realistic growth rate for the digital banking business as you see it for 2021 organically?

[Mike Hayford, President and CEO]

Yeah, I know. Yeah so, we shared on December 3rd at our Investor Day that we had felt good that in digital banking, we bottomed out in 2019, we got a little bit of growth in 2020 and we expect in 2020 to get additional growth. You know, I think we're going to keep putting points on the board, we get some solid organic growth, we talked about two nice sized deals that we signed in the last quarter, and then into early this year. And then we continue to add products. So we added product like Terafina puts it online account opening, it gives us another component that we can go cross-sell to our existing digital banking clients, so that'll help our organic growth, and then we'll continue to look for tuck-ins. So we're going to get that business back on track in terms of driving growth, we took a step forward in '20 and in '21, we think it's going to take that next step.

[Operator]

Our next question will be from Paul Chung of JP Morgan. And, Paul, your line is open. If you can check your mute function, we're not hearing your question.

[Paul Chung, JP Morgan]

Hi, can you hear me?

[Operator]

Yes, we can -

[Paul Chung, JP Morgan]

Question. Great. So just on the restructuring charge, and that was quite material this quarter, can you just expand on you know, where the majority of that charge came from? What kind of drove the decision that can clean up some of the legacy costs and you know how this ultimately benefits your cost base next year? And I have a follow-up.

[Tim Oliver, CFO]

Yeah, so $200 million, the $150 million of it non-cash, $50 million cash, the cash side was really severance for the cost actions we took in Q4. So we'll be about 1,800 people later next year that would work than this year than we were last.

On the non-cash side, we made some changes to the way we're going to operate our services business, Adrian and his team think that we can take cost out across the system and bring our inventory levels down or by having fewer the right parts in the truck we make we make our runs, that's going to cost to treat our inventory of those parts differently. And so we wrote down some parts associated with that business in the quarter some that were accessed and obsolete and some that are yet to be repaired. And therefore we may not bother to repair. So they almost kind of course, wait to be repaired.

There also were some other software product and hardware product on the balance sheet that we don't intend to sell any longer. As we look forward those products were not as profitable as we'd like them to be. And our new product offering is better. And so we took those down off the balance sheet as well. And then we had a couple of other let's call, contract, legacy contract situation that we wanted to address the work driving value for us. We thought that we'd accelerate thus far to get them off the books.

So yes, with those charges, you'll see that savings particularly in the services business over time as we make better decisions on whether to use a repaired part or a new part. You also see obviously less inventory on the balance sheet to start the year, and therefore, we hope we can keep that lower. And the - obviously from a service perspective, we've talked about $150 million of cost, of that, $150 million I'd say $110 million of it is going to be people related. So you'll absolutely see that in 2021 as well.

[Paul Chung, JP Morgan]

Got it, thanks for that. And then as you think about your free cash flow for '21, you know, you had a nice finish. For '20 you mentioned some working cap headwinds probably in '21, you had a nice benefit this year. But if you see growth in the top line for the year, why can't we exceed kind of $450 million pretty handily? Just any puts and takes there? Thank you.

[Tim Oliver, CFO]

Yes, so I don't know as we head - if we get the top line growth, of course, my receivables balance is going to grow. And so I'll have some pressure on working capital. My assumption right now is that, we will not improve our days by another nine days next year, and it won't be able to take our past dues down by a full 6 points or 6 percentage points next year.

I do think there's still some room on inventory, not in the services business, we just took that right down. But maybe and it is finished goods as we go through the year. So I'm hopeful that we'll have some pickup in working capital that we'll be able to offset some of the necessary investment in working capital to support that growth. So I wouldn't tell you, you're wrong. But I think the - you know, you should be started thinking about our conversion rate of net income to the be in that 95% to 105% range going forward, I think we're probably at 110% or 112% last year, and that's just not sustainable over time, it has to be below 100%.

[Operator]

We will now move to Ian Zaffino of Oppenheimer.

[Ian Zaffino, Oppenheimer]

Hey, good afternoon, guys. This is Mark on for Ian, thanks for taking our questions. So I guess I should start from [indiscernible] just put all the moving parts on free cash flow and as for the volume just go into 2021 can you just give a sense of what capital allocation priorities are? And you know, first of all, you know, what the, I guess like, you know, appetite for M&A? And you know, where the sort of M&A categories, you know, you guys are interested in going forward? Thanks.

[Tim Oliver, CFO]

So you can answer that after I'd say, first of all, we are going to do de-lever after the transaction is complete.

[Mike Hayford, President and CEO]

Yeah. So again it's a little bit before and after Cardtronics. So we said I think the announcement when we announced the transaction back in a couple weeks ago that, our typical capital allocation moved to the buyback of those shares, they got dilution, and we'd not expect to do that in '21, we will continue to invest organically plenty of capital balance to build on our products to differentiate in the marketplace, we will continue to do that. Tim talked about the CapEx so we're going to continue to spend internally, we will do that in '21.

We would plan to continue to tuck-ins we've done a couple, but you can expect that that may slow down a little bit as we go forward, as we preserve cash. As Tim said, our priority going forward then will be to reduce our debt level, particularly as it relates to putting on the debt to complete the Cardtronics acquisition. So that's how we think about in '21 really for the next like Tim shared, when we made the announcement 18 months to really focus on de-levering the balance sheet.

[Tim Oliver, CFO]

And I think because of that commitment, Mike that we're going to be able to borrow at a rate that makes good sense. We have a tremendous interest in supporting our banks been terrific and supporting this transaction as because of our commitment to get back to 3.5 times leverage from the 4.5 leverage that going to be - that we've had a great response. And so we intend to make good of that.

[Operator]

And now we'll take a question from Kartik Mehta of Northcoast Research.

[Kartik Mehta, Northcoast Research]

Mike, you've talked a lot about ATM as-a-service, so especially now with the combination with Cardtronics coming up. I'm wondering what you have, if, any in your backlog for financial institutions that are looking for that service and kind of or what the characteristics? Are they credit unions? Are they community banks, regional banks just some color around the types of customers you see in that demand from?

[Mike Hayford, President and CEO]

Yeah, let me let me just be hard to get any more of a macro level, what kind of ladder that we took looking on a strategy in the last couple of years, and again, as we've laid the top in the last year and a half, we've talked about really moving upstream to full stack. We got ATM as-a-Service, others call it, maybe one managed services, but the ability to deliver a transaction by a full function, ATM, including driving and operating and switching and routing it, along with the hardware, software and service.

So we've looked at that. We've seen around the globe and in different countries that that can move faster than we've seen it the US, in general steps as off-prem ATMs and the desire and that can be move with the banks to move that to a standalone footprint that somebody else operates. In that case, if somebody else owns. We've also seen banks, particularly midsized and smaller, and then I would include the US in this category, including credit unions, where they've looked at the cost to operate and run and set somebody to scale as the scale provider would be in a better position to do that for them where that's got service levels really simplify their life in terms of really delivering that ATM transactions to their clients. So the off-prem is really global, we expect that's going to actually take place in the US as well, it hasn't really moved that much yet. But then we do think midsized and smaller financial institutions would literally look at outsourcing the ATM operating model and find a partner that can go cheaper.

[Kartik Mehta, Northcoast Research]

And then just the one question on JetPay, Mike what kind of volume growth have you seen, if any, in JetPay in 2020 versus 2019?

[Mike Hayford, President and CEO]

Well it's kind of a difficult year to measure, as you are aware, when pandemic hit early in mid-March into April. [Jeff Hale] [ph] along with all the other like on-prem acquirers had a fairly challenging second quarter. So we had a fiscal second quarter with transaction volumes in the third quarter, they started to recover as people get out and but 2020's a little bit of rough here.

On an equalized basis, I think we look at sales that we've done, particularly as it relates to going out and adding a lot of sense of tight. And then we've looked at, as I mentioned in the second half of the year going out and upselling existing clients to add a payment. So if we look at clients and do an apples-to-apples, we feel good about the 2020 numbers. If you look at the numbers, it's tough because of the pandemic effect.

[Tim Oliver, CFO]

Yeah, we're currently are down in the high single-digits for the full year. But of course that was very isolated to the second quarter that has recovered. First of all, we leave the year at a rate very similar to where we entered the year.

[Operator]

We will now go back to Tim Willi of Wells Fargo Securities for a follow-up.

[Tim Willi, Wells Fargo]

Hey, thanks for the follow-up opportunity. Mike, just went back to the win that's associated so that's two sizable banks. Obviously, those are competitive takeaways. I mean, is there any way to just characterize what you think the differentiators are in those wins, functionality, price, something else maybe NCR just right timing? I was just sort of curious, that's a nice string you've got going after turning that business to randomness. Is there something there that you think you can build upon and continue to add the large enterprises that you have?

[Mike Hayford, President and CEO]

Yeah, and that's a really good question. And I said two distinct aspects. The first is just feature function capability of digital banking or your mobile banking. And, again, you have to remember that's what retail banking means for banks of all sizes now. So these are nice-sized banks, you know, 30 - 30s to mid $40 billion, a lot of branches, a lot of retail clients, they have to have capabilities to compete with, you know, the top five money centered banks spends a lot and they can spend a lot of money. So it's a great win for us, because it demonstrates that capability, allow those banks to compete with, you know, with the Wells, with the BofA, with JPMs that are out there, got the Citis investing a lot of money in the digital front end.

I think the other aspect as we compete with other providers who are, like us, very focused on delivering differentiated products that we horizontally go in with a platform solution, a we call, CSP, Client Services Platform that will then connect what you do on mobile, what you do in digital, what you can do on an ATM or a non-ATM. And then we've done that with some very large institutions into their branch footprint. So now you start to follow that retail client literally across the different channels that they might use. And we think that product is you know, differentiated, we think it makes it simple for those banks to roll that out. And we have found that a lot of our competitors in that space aren't really looking horizontal like we are. So, I think that's what allows us to win.

[Operator]

And with that, ladies and gentlemen, that does conclude today's question-and-answer session. I would like to turn the call back to Mr. Mike Hayford for closing remarks.

[Mike Hayford, President and CEO]

All right. I just want to thank everybody for joining us today. Just kind of closing comments on the year, 2020 was a very challenging year for NCR. When the global pandemic hit us, sitting here in March 2020 and we actually started to feel that around the globe, even a little early, but by March, it was really starting to call a global pandemic. The management team at NCR, we put in three simple priorities, number one, number one, we said take care of our employees and so we focused on taking care of our employees. Number two, we said protect their company from the uncertainty that had. And while sitting here today, you look back and say, Wow, those things did all come to fruition, sitting here in March 2020, there were a lot of uncertainty that we did not know what was going to fit our business. We took a number of steps to protect your company. And number three, we said, take care of our customers. Then we said to our team, we said, let's take care of our customers better than anyone else. Let's take care of our customers better than anyone else in the industry. And let's exit the pandemic as a better company than when it started. And I'd say thanks to the unbelievable hard work you know the efforts of 35,000 NCR associates around the world who through a difficult environment executed each and every day, I can truly say today that we will be a better company after the pandemic. Thanks for joining us today and we'll talk to you next quarter.

[Operator]

And with that, ladies and gentlemen, that does conclude today's call, we'd like to thank you again for your participation. You may now disconnect.