NCR VOYIX CORPORATION Third Quarter Overview The following were the significant events for the third quarter of 2020, each of which is discussed more fully in later sections of this MD&A: •Revenue decreased approximately 11% from the prior year period; •Segment results continue to be negatively impacted by the COVID-19 pandemic; •Cash and cash equivalents as ofSeptember 30, 2020 of$1.61 billion , improved liquidity and capital structure to help manage through the COVID-19 pandemic; and •Task force continues to pro-actively manage the global impact of the COVID-19 pandemic on our employees, customers and business.
Strategic Overview
Today's consumers expect, including as the world navigates in a COVID-19 pandemic environment, businesses to provide a rich, integrated and personalized experience across all commerce channels, including online, mobile and, as consumers are able to return to a more normal operating environment, in-store. NCR is at the forefront of this shift, assisting businesses of every size in their digital transformation journeys including a shift to contactless commerce. Our mission is to be the leading software- and services-led enterprise provider in the financial, retail and hospitality industries. We have developed a long-term growth strategy built on taking care of our customers, improving execution of new product introductions, accelerating software and services revenue growth and executing spend optimization programs. This long-term mission and our strategy to execute it are designed to position NCR to continue to drive -- in the long-term -- growth, sustainable revenue, profit and cash flow, and to improve value for all of our stakeholders. As we manage our business through the COVID-19 pandemic with a focus on prioritizing the health and safety of our employees and customers, and being positioned to capitalize on market opportunities when we return to a more normal operating environment, we have also remained focused on our long-term mission and executed at a high level to advance our strategy.
To deliver on our short-term and long-term mission and strategy, we are focused on the following main initiatives in 2020:
•Customer Care - Support our customers to continue operations in a safe manner
and enable them to transform their operations rapidly to meet consumer needs and
emerging industry or government programs in the COVID-19 environment; improve
the customer experience and execution of new product introductions;
•Business Continuity Plans - Manage our business through the COVID-19 pandemic
by focusing on business continuity plans, reducing our planned capital
expenditures, improving our liquidity and increasing our financial flexibility
to position our business, in the long-term, to accelerate profitable top-line
revenue growth by investing in and shifting our revenue mix to recurring
software and services revenue streams we identify as strategic growth platforms,
while improving the Company's cost structure;
•Strategic Growth Platforms and Targeted Acquisitions - Increase capital
expenditures in strategic growth platforms and targeted acquisitions to gain
solutions that drive the highest growth and return on investment and accelerate
our NCR-as-a-Service vision;
•Talent and Employee Care - Implement actions to protect the health and safety
of our employees and protect as many jobs as possible to enable us to retain
talent, and, in the long term, to continue to develop, reward and retain talent
with competitive recruiting, training and effective incentive-based compensation
programs; and
•Sales Enablement - Provide our sales force with flexibility in services and
operations to meet customer needs through the COVID-19 pandemic; and provide
top-performing and secure products packaged to target our desired revenue mix
and drive customer delight, as well as invest in appropriate training programs
to enable success.
Potentially significant risks to the execution of our initiatives and
achievement of our strategy include the impact of the COVID-19 pandemic on our
workforce, operations and financial results, including the impact on our
customer's businesses and their ability to pay; manufacturing disruptions,
including those caused by or related to outsourced manufacturing or disruptions
in our supply chain due to the COVID-19 pandemic; strength of demand for the
products we offer or will offer in the future consistent with our strategy and
its effect on our businesses; domestic and global economic and credit conditions
including, in particular, those resulting from the imposition or threat of
protectionist trade policies or import or export tariffs, global and
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regional market conditions and spending trends in the financial services and
retail industries, new tax legislation across multiple jurisdictions, modified
or new global or regional trade agreements, execution of the United Kingdom's
exit from the European Union , uncertainty over further potential changes in
Eurozone participation and fluctuations in oil and commodity prices; the
transformation of our business and shift to increased software and services
revenue, as well as recurring revenue; our ability to improve execution in our
sales and services organizations; our ability to successfully introduce new
solutions and compete in the technology industry; cybersecurity risks and
compliance with data privacy and protection requirements; the possibility of
disruptions in or problems with our data center hosting facilities; the impact
of the March 2020 tornadoes in the greater Nashville area on an NCR Global
Fulfillment Center in Mt. Juliet, Tennessee operated by a third party, including
the sufficiency and effectiveness of our or our third-party logistics partner's
business continuity plans, the adequacy of our property damage and business
interruption insurance coverage and our ability to recover under the applicable
policies; defects or errors in our products; the impact of our indebtedness and
its terms on our financial and operating activities; the historical seasonality
of our sales; tax rates and tax legislation; foreign currency fluctuations; the
success of our restructuring plans and cost reduction savings initiatives; the
availability and success of acquisitions, divestitures and alliances; our
pension strategy and underfunded pension obligations; reliance on third party
suppliers; the impact of the terms of our Series A Convertible Preferred Stock;
our multinational operations, including in new and emerging markets;
collectability difficulties in subcontracting relationships in certain
geographical markets; development and protection of intellectual property; the
impact of intellectual property litigation and claims; workforce turnover and
the ability to attract and retain skilled employees; uncertainties or delays
associated with the transition of key business leaders; environmental exposures
from our historical and ongoing manufacturing activities; and uncertainties with
regard to regulations, lawsuits, claims, and other matters across various
jurisdictions.
Impacts from the COVID-19 pandemic
The impact of COVID-19 has grown throughout the world, including inthe United States . Governmental authorities have implemented numerous measures attempting to contain and mitigate the effects of COVID-19, including travel bans and restrictions, quarantines, shelter in place orders and shutdowns. We continue to actively monitor the global outbreak and spread of COVID-19 and take steps to mitigate the potential risks to us posed by its spread and related circumstances and impacts. We continue to assess and update our business continuity plan in the context of this pandemic. We have taken precautions to help keep our workforce healthy and safe, including establishing a coronavirus task force inJanuary 2020 , thermal screening procedures at our manufacturing plants and call centers and remote working arrangements for the vast majority of our back-office employees. We expect the pandemic to create headwinds to our customers and our business until COVID-19 is contained, consumer confidence improves and the economic conditions rebound. Although it is difficult to project how deep and how long the COVID-19 pandemic will last, we do expect it will negatively impact our business for the remainder of 2020 and into 2021. With respect to our Banking segment, we are working with local governments to make sure that these businesses are designated as essential critical infrastructure businesses. Although we experienced installation delays, we have not experienced any significant impact to our recurring services revenue stream. We believe our ATM break-fix services, which represented the largest percentage of Banking segment revenue, has remained strong, although there can be no assurance that such operations will not be impacted in the future with higher costs or labor availability. With respect to our Retail segment, the food, drug and mass merchandising market, which includes grocery stores, drug stores and big box retailers, and which represented the majority of our Retail segment revenue, is currently designated as an essential critical infrastructure business in many jurisdictions. We have realigned our resources to support our customers as they respond to changing consumer demand, particularly with regard to self-checkout and contactless checkout. However, customers in our department and specialty retail market and in our small and medium business market, which is approximately 20% of our Retail segment revenue, have encountered significant adverse impacts in connection with COVID-19 as a result of temporary closures of physical stores and reduced consumer spending. With respect to our Hospitality segment, the quick service restaurants, which are large chains and represent the majority of the Hospitality segment revenue, have remained busy with respect to drive-through and pick up services being in demand as many in-restaurant dining options are limited by social distancing and governmental orders. However, we do expect this market to be negatively impacted from lower new stores and less remodeling activity. For table service restaurants, which are sit-down restaurants with more than 50 locations, we expect negative impacts as a result of governmental and public actions. Although many of these businesses have experienced an increase in online and takeout ordering, we expect this market to be negatively impacted until consumer confidence improves once COVID-19 is contained. Customers in our small and medium business market have experienced significant working capital and adverse cash flow impacts as a result of the COVID-19 pandemic, which, similar to table service restaurants, is expected to continue until COVID-19 is contained and the economy begins to rebound. 44
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In order to build a stronger liquidity position, we took steps to improve working capital and addressed certain business impacts with spending cuts. We took several steps to build our cash reserve to improve our financial liquidity and flexibility and provide a cushion to help weather the impacts of the pandemic. These steps included suspending our share repurchase programs, limiting our mergers and acquisition activity, reducing salary for members of our leadership team and certain salaried employees, reducing our planned capital expenditures, eliminating most contractors, curtailing travel, freezing merit increases and hiring. Additionally, earlier this year, we drew the remaining available funds of$630 million on our five-year,$1.1 billion revolving credit facility and issued$400 million senior unsecured notes. During the third quarter of 2020, we redeployed a portion of our excess cash and reduced our leverage by$200 million through the issuance of$1.1 billion of senior unsecured notes and the redemption of$1.3 billion of senior unsecured notes. Early in the fourth quarter of 2020, we evaluated our near-term liquidity needs and based on year to date cash flow generation, we completed several transactions to further reduce excess cash. We repurchased approximately 132,000 of Series A convertible preferred shares for$144 million , which represented approximately 32% of the outstanding preferred shares, as well as repaid$470 million of our outstanding revolver balance. However, the degree to which COVID-19 affects our financial results and operations will depend on future developments, which are highly uncertain and cannot be predicted with certainty, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume.
Results from Operations
For the three and nine months ended
The following table shows our results for the three and nine months endedSeptember 30 : Three months ended September 30 Nine months ended September 30 In millions 2020 2019 2020 2019 Revenue$ 1,589 $ 1,783 $ 4,576 $ 5,029 Gross margin 427 507 1,196 1,389 Gross margin as a percentage of revenue 26.9 % 28.4 % 26.1 % 27.6 %
Operating expenses
Selling, general and administrative expenses $ 254
$ 271 $ 743$ 775 Research and development expenses 55 64 169 185 Income from operations $ 118$ 172 $ 284$ 429 The following table shows our revenue by geography for the three months endedSeptember 30 : % Increase (Decrease) Constant In millions 2020 % of Total 2019 % of Total % Increase (Decrease) Currency (1) Americas$ 962 60%$ 1,104 62% (13)% (12)%Europe ,Middle East andAfrica (EMEA) 424 27% 458 26% (7)% (10)% Asia Pacific (APJ) 203 13% 221 12% (8)% (9)% Consolidated revenue$ 1,589 100%$ 1,783 100% (11)% (11)%
The following table shows our revenue by geography for the nine months ended
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% Increase
(Decrease)
Constant
In millions 2020 % of Total 2019 % of Total % Increase (Decrease) Currency (1)
Americas $ 2,740 60% $ 3,053 61% (10)% (9)%
Europe , Middle East and Africa
(EMEA) 1,234 27% 1,329 26% (7)% (7)%
Asia Pacific (APJ) 602 13% 647 13% (7)% (6)%
Consolidated revenue $ 4,576 100% $ 5,029 100% (9)% (8)%
The following table shows our revenue by segment for the three months ended
September 30 :
% Increase
(Decrease)
Constant
In millions 2020 % of Total 2019 % of Total % Increase (Decrease) Currency (1)
Banking $ 777 49% $ 942 53% (18)% (17)%
Retail 556 35% 539 30% 3% 2%
Hospitality 173 11% 216 12% (20)% (20)%
Other 83 5% 86 5% (3)% (5)%
Consolidated revenue $ 1,589 100% $ 1,783 100% (11)% (11)%
The following table shows our revenue by segment for the nine months ended
September 30 :
% Increase
(Decrease)
Constant
In millions 2020 % of Total 2019 % of Total % Increase (Decrease) Currency (1)
Banking $ 2,303 50% $ 2,568 51% (10)% (9)%
Retail 1,511 33% 1,608 32% (6)% (6)%
Hospitality 502 11% 611 12% (18)% (17)%
Other 260 6% 242 5% 7% 8%
Consolidated revenue $ 4,576 100% $ 5,029 100% (9)% (8)%
(1) The tables above for the three and nine months ended September 30 are
presented with period-over-period revenue growth or declines on a constant
currency basis. Constant currency is a non-GAAP measure that excludes the
effects of foreign currency fluctuations. We calculate this information by
translating prior period revenue growth at current period monthly average
exchange rates. We believe that examining period-over-period revenue growth or
decline excluding foreign currency fluctuations is useful for assessing the
underlying performance of our business, and our management uses revenue growth
adjusted for constant currency to evaluate period-over-period operating
performance. This non-GAAP measure should not be considered a substitute for, or
superior to, period-over-period revenue growth under GAAP.
The following table provides a reconciliation of geographic revenue percentage
growth (GAAP) to revenue percentage growth constant currency (non-GAAP) for the
three months ended September 30, 2020 :
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