NCR Voyix Stock: Hopefully The End Of 8 Years Restructuring (OTCMKTS:NCRRP)

NCR Voyix: Investment Thesis

My previous article in relation to NCR Voyix Corporation (NYSE:VYX) was back on 17 October 2023, “NCR: Spinoff Of ATM Business Completed – Expect ‘Spin’ To Continue – Downgrade To Sell”. At that time, NCR Voyix had just divested itself of its wholly owned subsidiary NCR Atleos Corporation (NATL), by a spin-off to NCR Voyix shareholders in a publicly listed corporation, with NCR Voyix having zero shareholding in NCR Atleos following the split. I have to question whether the spin-off drove an associated costly loan restructuring, or the necessity for a loan restructuring drove the decision on the spin-off. Either way, the spin-off was a costly exercise further eroding shareholder value, and consequently increasing shareholder risk. At the same time, I see a glimmer of hope this brings an end to 8 years of costly restructuring, and NCR Voyix might see smooth sailing ahead. I briefly discuss the reasons for these contentions followed by more detailed supporting material with appropriate links to source material.

Objective of NCR Split into Two Separate and Independent Companies

A 15 September 2022 press release, “NCR to Separate Into Two Independent, Industry-leading Companies” provided the rationale, the objective, for splitting NCR into two separate and independent companies.

“This announcement is the right next step in NCR’s transformation. The separation would create two strong companies at scale, each with distinctive business goals and capital structures and allocation, as well as increased flexibility to innovate,” said Michael D. Hayford, CEO of NCR. “Each company can simplify its operations and focus on what it does best, and because they will have different growth profiles and economic models, separating them will also provide investors with greater transparency and a better ability to value each of the businesses. And, importantly, we believe this approach will put us in the best position to drive the most competitive products and solutions for our customers.”

For shareholders, it meant they would have the same interest in the combined businesses, but held through two separate stocks with separate tickers, rather than a single stock. There would be no benefit to shareholders unless the combined worth of the separated businesses proved to be greater than continuing as one entity.

NCR Atleos Spin-off an Expensive Exercise with Shareholder Ownership Not Changing

From an NCR shareholder point of view, the two separate companies certainly need to perform better, considering the magnitude of the costs of separation.

NCR Separation Costs

The NCR Voyix consolidated results for 9 months ended September 2023 show $147 million in separation costs, with NCR Voyix share $61 million and NCR Atleos share $86 million. NCR Voyix are yet to report Q4 2023 results but NCR Atleos have reported a further $84 million in separation costs for Q4 2023 taking its cost to $170 million. Assuming NCR Voyix have a similar proportional share of separation costs in Q4 2023, total separation costs through end of 2023 will be ~$300 million. Remember, Blackstone was brought in by NCR in December 2015, as an experienced technology investor to add value to and accelerate NCR’s strategic transformation to an integrated software & services company. This estimated $300 million comes on top of $630 million expended on transformation and restructuring over the last 7 years 2016 to 2022.

NCR Separation Related Borrowings and Interest Expense Changes

In accordance with the separation agreement, on 16 October 2023, NCR Atleos made a $3 billion cash distribution to NCR Voyix. NCR Voyix used these funds to retire debt. NCR Atleos sourced the funds for this payment through new credit facilities and as a result, its total short and long-term borrowings were $3,014 million at Dec. 31, 2023. NCR Atleos new debt has interest rates over 2 percentage points higher than the debt retired by NCR Voyix. Discounts and premiums related to borrowing facility terminations and premiums paid for new borrowings added $64 million to costs related to the spin-off. While the higher interest rates will likely add in the order of $90 million per year to the combined interest expense of the two companies from 2024 onwards, NCR Voyix will likely enjoy lower total interest expense going forward.

NCR Voyix Borrowing Covenants – Leverage Ratios

NCR Voyix Senior Secured Credit Facility agreement, as amended at Feb. 4, 2021, placed limits on the company’s total consolidated debt to adjusted EBITDA ratio. This “Leverage Ratio” progressively reduced over time, from 5.50 up to December 31, 2021, then 5.25 up to Sep. 30, 2022, and 4.75 thereafter. While Consolidated Debt and EBITDA are defined in the agreement, there are matters of interpretation, making it difficult to be certain if any ratio that might be calculated would be in accordance with actual company calculations. It does appear the ratio was likely over 4.0 and could have been approaching the maximum 4.75 at end of 2022. The repayment and termination of the existing Senior Secured Credit Facility on Oct. 16, 2023, using funds borrowed by NCR Atleos at higher interest rates, eliminates the risk of NCR Voyix breaching its loan covenants in respect of maximum permitted Leverage Ratio.

NCR Voyix Investment Thesis – Summary and Conclusions:

For certain, it is no accident NCR Voyix is a leading global provider of digital commerce solutions for Retail, Restaurant, and Digital Banking industries with a large installed base. I don’t question the competence of management in this regard. What I do question is why the need for the continuous and costly restructuring and transformation of the organization over the last eight years, and is the spin-off the end of this? My conclusion is hopefully, yes, and the spin-off will see NCR Voyix become a narrowly focused business, able to grow EBITDA with less of the “unusual items” of expense causing positive adjusted EBITDA (non-GAAP) to convert to GAAP losses. There is also potential lower interest expense for NCR Voyix due to expected lower debt level of $2.5 billion at Dec.31, 2023 as per p. 63 of NCR Voyix Sep. 5, 2023 presentation. I am not sure NCR Voyix is capable of getting debt down to $2.5 billion by Dec.31, 2023 and that is something to watch for when Q4 earnings report is released (although NCR Atleos have already reported for Q4 on Feb. 14, 2024, NCR Voyix are yet to advise a release date). The share price has fallen by about 5% since the date of the spin-off and it is likely prudent to hold at present and to assess progress by management in growing real earnings and reducing debt over the next twelve months. Additional information on matters discussed above appears below.

NCR Separation Related Borrowings and Interest Expense Changes

In accordance with the separation agreement, on 16 October 2023, NCR Atleos made a $3 billion cash distribution to NCR Voyix from proceeds of new credit facilities agreements entered into by NCR Atleos. This enabled the following loan restructuring to occur on or before 16 October 2023 –

• NCR Voyix on 16 October 2023, used a portion of the $3 billion cash to repay existing secured credit facilities loan balances totaling $2.137 billion and with weighted average interest rates ranging from 7.47% to 7.65%.
• In order to fund the $3 billion payment, NCR Atleos, on or before 16 October, 2023 entered into new senior secured credit facilities for borrowings of $2,935 million, with original issue discounts totaling $41 million. These loans have weighted average interest rates of 9.50% to 10.17% in comparison to the 7.47% to 7.65% for the borrowings retired by NCR Voyix.
• NCR Voyix entered into new secured credit facilities for $700 million and drew down $563 million on October 16, 2023.
• On 16 October 2023, NCR Voyix repaid $500 million of 5.75% Senior Notes due 2027 and $500 million of 6.125% Senior Notes due 2029. NCR Voyix was required to pay redemption premiums of ~$23 million.

As for the separation, this loan restructuring was a costly exercise. Discounts and premiums cost a total of $64 million. The total debt for the two companies combined remains around the same level of $5.7 billion before the split. However, the higher interest rates will likely add in the order of $100 million per year to the combined interest expense of the two companies. The great majority of that additional interest burden will fall on NCR Atleos (see my recent article, “NCR Atleos: Burdened With Debt And Shares Expensive – Sell“). Table 1 below shows the detail of the actual and projected changes to borrowing arrangements that took place in conjunction with the spin-off.

Table 1

Table 1 shows NCR Voyix total debt immediately following the spin-off was ~$2.9 billion. To achieve total debt of $2.5 billion by Dec. 31, 2023 would require further reduction of ~$424 million.

NCR Voyix Earnings Projections FY 2023

Table 2 below shows NCR Voyix projected earnings for FY 2023.

Table 2

Table 1 shows NCR Voyix estimated FY 2023 Adjusted EBITDA (non-GAAP) of $671 million derived from Sep. 5, 2023 presentation linked above. NCR Atleos have already reported earnings through Dec. 31, 2023, so it is possible to project full year results on a proforma consolidated basis.

Comments on projected consolidated results –

• Adjusted Segment EBITDA (non-GAAP) is projected to increase from $1.803 million to $1,910 million, an increase of ~6%.
• But higher Corporate unallocated and eliminations results in Adjusted EBITDA increasing by a much lower ~2% from $1,370 million to $1,403 million.
• Higher “unusual costs” associated with the spin-off result in projected EBITDA GAAP reducing from $1,079 million in FY 2022 to $945 million in FY 2023.
• An increase in Interest, Tax, and Depreciation & Amortization from $1,015 million in FY 2022 to $1,309 million in FY 2023 results in GAAP net income reducing from $64 million in FY 2022 to a projected loss of $364 million in FY 2023.

Comments on projected NCR Voyix results –

• Adjusted Segment EBITDA (non-GAAP) is projected to increase from $855 million to $868 million, an increase of ~1.5%.
• But higher Corporate unallocated and eliminations results in Adjusted EBITDA decreasing by ~2% from $685 million to $671 million.
• Higher “unusual costs” associated with the spin-off result in projected EBITDA GAAP reducing from $631 million in FY 2022 to $506 million in FY 2023.
• An increase in Interest, Tax, and Depreciation & Amortization from $675 million in FY 2022 to $740 million in FY 2023 results in GAAP net loss increasing from $44 million loss in FY 2022 to a projected loss of $234 million in FY 2023.

Additional detail for “Unusual Costs” and Interest, Tax and Depreciation & Amortization is shown in Table 3 below.

Table 3

Table 3 shows projections for FY 2023 based on actual reported results for NCR Atleos for the full 12 months and for NCR Voyix for the first nine months. The only estimates included are for NCR Voyix for Q4 2023.

NCR Voyix: Summary and Conclusions

NCR Voyix are already over a week behind NCR Atleos with their fourth quarter earnings release, and that is of some concern. When released, it will be useful to compare actual results with the projections in NCR Voyix Sep. 5, 2023 presentation. I am impressed by NCR Voyix products and services. On a Segment adjusted EBITDA basis earnings appear solid and management has mapped out a path to further grow revenues and Segment adjusted EBITDA through 2027 in their Sep. 5, 2023 presentation linked above. Provided that map can be followed, the major concern will be any disproportionate increases in cash expenses not allocated to segments and any continuation of the incurrence of “unusual costs” that have plagued the businesses for the last 8 years, eroding profitability. The relative share price of NCR Voyix has fallen by ~5% since I rated NCR pre-split a SELL. I believe it is reasonable at this point in time to adopt a wait and see approach, and on that basis I upgrade NCR Voyix from Sell to Hold.

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