NCR Atleos Corporation

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

NCR Atleos is a financial technology company, providing solutions for banks and retailers including ATMs, self-service banking, and other financial services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

NCR Atleos, formerly known as NCR Corporation’s ATM business, became an independent public company on October 16, 2023. It aims to be a leading provider of technology solutions to the financial services industry, focusing on the evolution of self-service banking.

Business Explanation

  • Revenue Distribution: The company’s revenue is derived from several sources:
    • Self-Service Banking: This segment provides services around ATMs, including ATM software, installation, and managed services. This is the largest segment, generating most of the total revenue.
    • Network: This segment includes providing solutions that allow financial institutions to connect and manage their network, for example, through digital solutions, cloud offerings and other digital banking solutions.
    • Technology and Innovation (T&T): This segment is primarily focused on product development, which includes software, hardware, and integrated service solutions to financial institutions.
  • Industry Trends: The financial technology industry is undergoing significant changes:
    • Digital Transformation: There’s an ongoing shift toward digital and self-service banking solutions due to increasing customer preference for convenient and technologically advanced options. This transformation is leading many financial institutions to invest more on technologies which can help provide better digital customer experiences.
    • ATM as a Service (ATMaaS): The increased implementation of outsourcing of ATM management and operations in favor of ATMaaS is becoming a norm.
    • Increased need for security: As a larger and larger number of transactions are being handled through digital and self service banking means, the need for increased cybersecurity has become a top priority in the industry.
  • Margins: The company has seen an improvement in gross margin due to its focus on recurring revenue through its services business.
  • Competitive Landscape:
    • The company faces a highly competitive landscape, especially in the ATM sector. There is intense rivalry among companies and low barriers to entry.
    • The competitive nature has also affected pricing, which puts a lot of pressure on margins.
    • The industry itself is driven by innovation and constant changes in the market and therefore it’s important to for companies to adapt themselves to stay afloat.
  • What Makes NATL Different:
    • Focus on Self-Service Banking: Unlike traditional hardware manufacturers, NATL is focusing on a combination of software, hardware and services to offer its solutions.
    • Recurring Revenue: Unlike most hardware companies, a significant portion of the company’s revenue comes from services and software, which are recurring revenue streams. This makes for high and stable income.
    • Global Presence: NATL’s global presence in a multitude of different countries makes for wider market share and higher demand for its products.
  • Financials Deep Dive:
    • Revenue: The company’s revenue for the three months ended September 30, 2023, was $1.1 billion. For the nine months, the revenue totaled $3.09 billion, which represents a 5% increase YoY.
    • Gross Margin: Gross margin increased to 27.5% in the third quarter of 2023, compared to 24.1% in the same period a year ago. For the nine months ended September, the gross profit margin totaled 25.6%, compared to 22.9% YoY. This increase was due to increased service revenue as well as better product mix.

    • EBITDA: The adjusted EBITDA for the third quarter of 2023 was $281 million (24.7% margin) compared to $205 million (18.8% margin) YoY. The adjusted EBITDA for the nine months ended September 30, 2023, came out to be $786 million (25.1% margin) compared to $583 million(19.1% margin) a year ago. This increase was because of strong gross margin and decreased operating expenses.

    • Cash flow: For the nine months ending 2023, they generated a net cash flow from operations of $388 million. They had $245 million from the spin-off of NCR’s business unit in October of 2023 that was categorized as a non-cash gain and did not affect the operation cash flow, this non-cash gain also helped the company generate cash of $274 million from financing activities.
    • Debt: The company has a debt of $2 billion with a maturity of three to five years and an average interest rate of 7%. They also have a revolving credit facility of $1.5 billion with a variable rate.
  • Recent Concerns/Controversies:
    • The company is focused on addressing operational and financial complexities stemming from the separation, including managing costs and ensuring a smooth transition.
    • They are also investing in the future of self-service banking, including exploring new growth avenues and opportunities and developing new technology.
    • The company is also managing its supply chain and inflation risk as best it can, and these factors are playing a significant role in the business.
    • The company has recently reported that it had $64 million in restructuring expenses and additional impairment charges to assets that were not mentioned previously.

Moat Rating: 3 / 5

  • Justification: NATL possesses some elements of a competitive moat, although not as strongly as more dominant industry players.
    • Network effects: While there are not any direct network effects, the widespread adoption of their technology creates a form of indirect network effect.
    • Switching Costs: Due to the deep integration of its software into banks and other financial institutions, its clients may find switching from NATL to a competing company difficult, leading to substantial switching costs. This also leads to strong customer relationships and long term contracts, providing consistent income.
    • Brand recognition: The company has been a trusted brand, as it’s been a leading provider in the financial solutions industry, having a long reputation for quality and dependability. This acts as a moat as it means that companies will more readily trust NATL as their service provider.
    • Scale: The business’s global presence allows it to operate at a larger scale, making it more difficult to compete with.
  • Risks to the Moat:
    • Competition: As stated earlier, there are several players in the market, that increases competition and reduces margin.
    • Technology Changes: The industry faces many advancements in technology, the company could be outpaced by competitors in development if it doesn’t adapt. This can reduce switching costs and remove the need for the company’s services or products.
    • High debt burden: Having a high debt burden might make it more difficult for the company to compete or invest in development. In addition, the interest costs could be extremely high, reducing profits.
  • Business Resilience:
    • Recurring revenue: The services and software revenue provides a source of recurring revenue, however the company is also exposed to fluctuations in the industry.
    • Global Presence: The diverse market across the globe helps the company to stay profitable even if regional crisis arises.

Understandability Rating: 3 / 5

  • Justification: The business model is somewhat complex due to its combination of software, hardware, and services. Understanding the intricacies of each segment and their interplay requires a higher degree of understanding. In addition, the financial statements are complicated by the accounting used to separate the old parent company from the new entity. However, it is not too complicated to completely make understanding difficult. Therefore, it gets a moderate score.

Balance Sheet Health Rating: 4 / 5

  • Justification: The company’s balance sheet demonstrates decent financial strength:
    • Cash: It has a good cash balance that allows the company to withstand short term issues.
    • Debt: While the company is highly leveraged, the loans are locked at a steady interest rate with a maturity ranging from three to five years, giving some flexibility to manage and pay down debt obligations.
    • Debt-to-equity ratio: Given the level of debt the company has, there could be some risk as interest rates rise, potentially reducing profitibility.
    • Revolving Credit: They have a large revolving credit facility which allows them to tap in on additional funds if need be.

These traits place the business in a relatively good health.

Conclusion

NATL is a financial technology company with both opportunities and challenges. It has a somewhat sustainable moat that is built on sticky customers and some brand value. The company has a global presence. The biggest risks come from competitive landscape, fluctuations in technology and their large debt. All things considered, it may be a worthy investment after a proper evaluation.