NCR Corporation (NCR) Q4 2022 Earnings Call Transcript

NCR Corporation (NYSE:NCR) Q4 2022 Earnings Conference Call February 7, 2023 4:30 PM ET

Company Participants

Michael Nelson – Treasurer and Investor Relations

Mike Hayford – Chief Executive Officer

Owen Sullivan – President and Chief Operating Officer

Tim Oliver – Chief Financial Officer

Conference Call Participants

Paul Chung – JPMorgan

Matt Summerville – D.A. Davidson

Charles Nabhan – Stephens

Erik Woodring – Morgan Stanley

Operator

Good day and welcome to the NCR Corporation Fourth Quarter Fiscal Year 2022 Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Mr. Michael Nelson, Treasurer and Investor Relations. Please go ahead, sir.

Michael Nelson

Good afternoon and thank you for joining our fourth quarter and full year 2022 earnings call. Joining me on the call today are Mike Hayford, CEO; Owen Sullivan, President and 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 are 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 February 7, 2023, 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

Thanks, Michael. I will begin with some of my views on the business, and I will also provide an update on our previously announced intention to separate NCR into two public companies. Tim will then review our financial performance and provide an outlook for 2023. And then Owen, Tim and I will take your questions.

Let’s begin on Slide 4 with some highlights from this past year. We closed out 2022 with strong demand and positive momentum in the business. Maybe a different way to say this is across all five of our business segments, our products are winning in the marketplace. We continue to make significant progress against our strategic initiatives to advance our strategy of becoming a software-led as-a-service company with higher recurring revenue streams. A key part of our strategy is to run the store, run the restaurant and run self-directed banking. It is contingent on our ability to cross-sell and upsell additional services to our clients. To do so, we have a maniacal focus on customer satisfaction, which we measure as net promoter score, or NPS.

When we initiated the strategy in 2018, our NPS was 14, which is not very good. Each year, we continue to improve. We went the following year to an 18 on our NPS score, then to a 36, then to a 48. And in 2022, I am proud to say we improved to 52. So in 4 years, we improved our net promoter score from 14 to 52. That’s quite a significant improvement. We now have happy customers, which is a key to executing our strategy and transforming NCR into a software-led as-a-service company. In 2022, NCR delivered 13% total revenue growth, recurring revenue growth of 20% and adjusted EBITDA growth of 16%, all on a constant currency basis. These are strong results, particularly given the extraordinary macroeconomic and geopolitical challenges that we navigated throughout the year.

Now moving to Slide 5, I thought it would be helpful to put our strong execution in perspective relative to the external macro headwinds we endured. Keep in mind, the headwinds in 2022 were almost all external uncontrollable impacts. Our revenues on a constant currency basis held up very well and our teams did a great job addressing the cost impacts over the last 3 quarters of 2022.

First, we began the year with continued pandemic, this time the Omicron strain. For example, our NCR office is shut down in January and February of last year. Unfortunately, we were not alone. In countries we operate, most businesses were shut down as well, which impacted our transaction volumes. Second, a war in the Ukraine impacted our business in the region, and we suspended sales in Russia and exited that country.

Third, supply chain disruptions resulted in significantly higher component and transportation costs, which adversely impacted our margins, particularly in the first quarter of 2022. While the supply chain impacts are easing, costs remain elevated. Nonetheless, our engineering and procurement teams have adjusted by designing alternative components and certifying more sources to reduce the impact. Fourth, inflation reached the highest levels in over 40 years. In addition to higher component and transportation costs, fuel costs increased and wage inflation escalated. And fifth, interest rates accelerated one of the fastest rates in history.

Finally, in the second half of 2022, foreign exchange rates represented an incremental headwind. For the full year, the stronger U.S. dollar reduced revenue growth by 300 basis points and adjusted EBITDA by 600 basis points. Despite all these external headwinds, NCR executed very well against our strategic initiatives with strong growth across our KPIs. Although some of the headwinds we faced in 2022 are beginning to abate other headwinds like interest and inflation still persist. Looking into 2023, market expectations suggest at least a moderate recession in the U.S. and abroad. In anticipation of potential global slowdown, NCR has taken additional cost actions in the fourth quarter that we are expected to drive incremental savings in 2023.

Throughout 2022, we had to take many actions to offset these headwinds. Some of those were temporal in nature. Others are permanent cost savings as we head into 2023. During 2022, we were able to reduce our headcount with attrition. Heading into 2023, we needed to reduce our cost even further. The total impact was to reduce our staffing levels by approximately 7%. Tim will provide some more details in his section later.

Now moving to the business update on Slide 6. We have strong momentum across all 5 of our business segments. In retail, we continue to deliver on our strategy to be the retail platform company of choice. The consulting from RBR named NCR the number one global point-of-sale software vendor for the fifth year in a row. We were also recognized by RBR as the global leader for self-checkout for the 19th consecutive year. During the fourth quarter, Love’s Travel Stop and Country stores extended its partnership with NCR and is connecting over 3,000 lanes to the NCR Commerce platform to enhance the omni-channel experience to their customers. We continue to have positive momentum in winning upgrade imperative for retail point-of-sale software.

Quick Trip, a regional convenience store chain with over 800 stores across the Midwest, turn to NCR support their mobile ordering strategy and enhance the customer experience. In self-checkout, we continue to see strong demand across our grocery and big-box retailers as well as the expansion into new verticals such as convenience and fuel in department and specialty retail. Our customers are embracing self-checkout usage to help them mitigate increased labor costs.

In hospitality, we continue to experience strong demand across our enterprise and SMB customers. Chuck E. Cheese, a 20-year customer of NCR, committed to a new 5-year agreement to partner with NCR to deepen integrations through NCR’s platform, which enabled Chuck E. Cheese to enhance its ability to serve their customers through digital channels. Hot Valley, a 7-year customer of NCR is revamping their kitchen deploying Aloha integrated tablets alongside Aloha Kitchen to improve operational efficiencies in handling online orders. We also continue to gain traction with our integrated payments offering for our hospitality customers. In the fourth quarter, Chicken Salad Chick, a 226 site operator shows NCR as its merchant payment processor for all existing and future locations.

In digital banking, we continue to have positive momentum. In the fourth quarter, digital banking activity was strong with 40 renewals, which represented one of the largest renewal quarters in the company’s history. During the fourth quarter, we also had 10 new logo deals, which are all competitive wins. For the full year 2022, it was a strong year for digital banking as we converted two large regional banks, Wintrust Bank and Associated Bank, to our digital banking platform. These two conversions added almost 1 million new digital banking accounts.

We also had success with NCR’s DFB by our digital-first banking solution for retail banking, where we integrate a financial institution retail channels using our CSP or channel services platform. NCR signed two of the top five banks in the U.S. on our DFB CSP teller platform during 2022. In Payments and Network, we are making progress against both merchant acquiring and the Allpoint network. We are continuing to have success with our integrated payment offering for our hospitality customers, including roughly 90% of our new SMB clients selecting NCR’s payment solution.

The Allpoint network continued its strong growth by delivering transactions to more financial institutions and cardholders than ever before. In the fourth quarter, NCR expanded a long-term agreement with Walgreens, making NCR the exclusive provider of ATM services across the majority of Walgreens stores. In 2022, P&C Bank partnered with the Allpoint network extending surcharge free ATM access to more than 10 million of their customers. We now have over 70 million cards on the Allpoint network. We also extended our Allpoint network with key merchant partners, most notably Circle K, 1 of the largest convenience store brands in the U.S., which activated NCR’s Allpoint network on more than 4,400 Circle K stores across 30 states.

In self-service banking, we continue the momentum in our ATM as a Service solution. Interest in our offering is accelerating from both community banks and large FIs globally. In the fourth quarter, we signed 10 ATM as a Service deals, including Santander U.K. Santander extended its longstanding partnership with NCR, selecting NCR ATM as a service to transform, connect and run its self-service banking network of more than 1,700 ATMs across the U.K.

The bank is shifting the operational management of a self-service channel, including software, transaction processing, cash management, ATM monitoring, help desk and hardware maintenance to NCR. During 2022, we signed 46 ATM as a service deals, including Bank of New Zealand and Bank of Baroda, which is 1 of the India’s largest retail banks. NCR’s ability to provide the scale and capabilities of a full stack integrated ATM as a Service offering when bundled with the Allpoint network has given us a unique solution in the marketplace. And lastly, we are on track to separate NCR into two public companies by the end of 2023. Following Tim’s comments on our financial results, I will provide an update on the separation activities.

With that, let me pass it over to Tim.

Tim Oliver

Thanks, Mike and thanks to all of you for joining us today. As Mike described, our solid fourth quarter completes a year described by a determined effort to drive sequential quarterly improvement after a very difficult start to the year while confronting a litany of external challenges.

Last April, during our first quarter 2022 earnings call, we described unexpected impacts from the Omicron COVID wave to the then new war in Russia, extraordinary supply chain costs due to scarcity and modestly higher interest rates that totaled about $75 million of negative impact on Q1 EBITDA.

At the time, we forecasted that these issues would have an additional $75 million of impact over the remainder of the year for a total of $150 million. That forecast accurately predicted the eventual full year impact of our exit from Russia and the COVID wave, but could not then anticipate worsening supply chain challenges and component availability, historically rapid interest rate increases, a 40-year high inflation and dramatic strengthening of the U.S. dollar.

In aggregate, those extrinsic factors eventually impacted EBITDA by almost $500 million. In response, cost productivity and pricing actions that were launched in March were expanded and enhanced to insulate the P&L against further deterioration in macroeconomic factors and allowed EBITDA margin rates to expand to 19% in the second half of the year, up 450 basis points from the difficult start in Q1. Even more impressive than the success of the tactical grind that preserves the P&L through cost control and incremental productivity with our team’s ability to simultaneously drive strategic KPIs above our stretch targets. We exited 2022 with significant momentum across our platform and as-a-service offerings.

I’ll start on Slide 7 with a top level overview of our fourth quarter financial performance. As we guided back in October, the fourth quarter reported results were very similar to those in Q3. Starting on the top left, revenue was $2 billion, down 1% year-over-year as reported and up 2% on a constant currency basis. Recurring revenue was up 3% year-over-year and up 7% when adjusted for FX. We continue to have success transitioning from onetime perpetual sales into multiyear subscription-based revenue streams. The nature of these contracts shifted roughly $83 million of high profit revenue that would previously have been recognized upfront to recurring revenue. The very strong U.S. dollar had an unfavorable impact of $72 million primarily within our retail and self-service banking segments.

On the top right, adjusted EBITDA increased $27 million year-over-year to $380 million, up 8% year-over-year as reported and up 14% on a constant currency basis. Foreign currency exchange rates had an unfavorable impact of $20 million. Adjusted EBITDA margin expanded 150 basis points from the fourth quarter of 2021 to 18.9%.

In the bottom left, reported non-GAAP EPS was $0.79, up $0.03 or 4% year-over-year as reported and up 8% on a constant currency basis. The strength of the U.S. dollar reduced EPS by about $0.03. The non-GAAP tax rate was 29.9% versus 26% in the prior year, and that impacted EPS by about $0.05. And finally, free cash flow was $202 million due to the predicted improvements in working capital, which had up until then been a persistent use of cash for the first 3 quarters of the year. I’ll have more on cash flow and leverage later.

Slide 8 shows our financial highlights for the full year. Revenue was $7.8 billion, up 10% year-over-year and up 13% on a constant currency basis, driven by strong progress across our strategic growth platforms. Remember that 2022 benefited from the full year of legacy Cardtronics results, which was acquired in June of 2021. Normalizing for the inclusion of Cardtronics, revenue was up 6% on a constant currency basis. The very strong U.S. dollar had an unfavorable impact of $231 million on reported revenue, primarily within our self-service banking and retail segments. Adjusted for the impact of FX, all five of our reported segments contributed to our growth. Recurring revenue again outpaced total revenue growth, up 16% year-over-year and up 20% when adjusted for FX and now makes up 62% of revenue. For the full year, impact of shift to recurring revenue reduced revenue by $210 million, also primarily in our self-service banking and Retail segments.

In the top right, adjusted EBITDA was $1.4 billion, up 10% year-over-year as reported and up 16% on a constant currency basis. FX had an unfavorable impact of $60 million. Adjusted EBITDA margin rate was 17.5%, remarkably, up slightly year-over-year. On the bottom left, non-GAAP EPS for the full year was $2.62, up 2% year-over-year and up 12% on a constant currency basis from the year ago 2021. Higher interest costs, higher tax rate and a higher share count together caused EPS to grow less quickly than EBITDA. And we generated $164 million of free cash flow for the year. More than all of that was generated in the fourth quarter. Supply chain challenges though now abating caused both nonlinear revenue generation and a purposeful investment in working capital to assure availability of parts for both OEM and repairs. And the impact of our labor cost reductions and changes in employee benefit programs impacted the P&L before they were evident in cash flow. Both of these effects are timing issues that we’ve benefited from in Q4 and will continue to harvest in Q1. I’ll provide more detail on cash flow on Slide 14.

Moving to Slide 9, which shows our Retail segment results. Starting in the top left, retail full year revenue was up 5% on a constant currency basis. Fourth quarter revenue was down 5% year-over-year and down slightly adjusted for FX on lower hardware sales.

Retail full year adjusted EBITDA was down 6% year-over-year and was flat on a constant currency basis. Full year adjusted EBITDA margin rate contracted 140 basis points, 18.4%. The full year EBITDA rate was particularly impacted by component cost inflation on POS devices during the first half of the year. Fourth quarter adjusted EBITDA declined 3% year-over-year and was up 2% adjusted for currency.

While the comparisons are difficult because of the slow start in Q1, retail exited the year with margin rates north of 20%, a recovery of almost 800 basis points from Q1 levels. And fourth quarter adjusted EBITDA margin rate expanded 60 basis points over the prior year. We continue to have success transitioning our retail business from onetime perpetual sales into multiyear subscription-based revenue streams.

The strategic deals that Mike mentioned were key wins in 2022. The nature of these contracts shifted roughly $45 million of very high profit revenue that would previously have occurred upfront to recurring revenue that will be recognized over the next 4 to 7 years. Most of this shift occurred in the second half of the year, including $25 million in Q4 alone. The bottom of the slide shows retail segment key strategic performance indicators. On the left, our platform lanes, a KPI that illustrates the success of our strategy to convert our retail customers to our platform-based subscription model. We increased our number of platform lanes by more than 200%. The platform lane increase was driven by rollouts at major convenience of fuel customers. While platform lanes currently only represent less than 4% of our total lanes, we are seeing accelerating momentum for conversion of our traditional lanes have a substantial lane conversion backlog.

In the center bottom is our self-checkout revenue. Self-checkout revenue for the full year increased 3% year-over-year. And ARR increased 1% year-over-year on higher ARPU generated by those new platform lanes. Similar to the impact on revenue, currency rates did reduce all of our ARR calculations. And in this business by about 5 full points of growth.

Slide 10 shows our Hospitality segment results and illustrates momentum across this business. For the full year, hospitality revenue increased $77 million or 10% adjusting for currency. Our enterprise business was up 8%, driven by new store openings, technology refreshes and services growth. Our SMB business was driven up by 13% by the success of our platform products and payments. Fourth quarter revenue increased $8 million or 3% year-over-year as reported and 5% adjusting for currency. Full year adjusted EBITDA was up 22%. Adjusted EBITDA margin rate for the full year expanded 210 basis points to 21%. A richer revenue mix with more payments and platform sales and improving indirect cost absorption drove profitability improvements.

Fourth quarter adjusted EBITDA was up 38% year-over-year. Adjusted EBITDA margin rate expanded 570 basis points to 23%. Better mix of software and services combined with strong cost productivity drove better margin rates. Hospitality’s key strategic metrics are on the bottom of this slide and include platform sites, payment sites and ARR. For the full year, platform sites increased 20%. Payment sites increased 64% and ARR was up 6% year-over-year on the higher ARPU at both new platform and new payment sites. We continue to see strategic momentum in this business as enterprise clients shift to the platform and add services and SMB clients attach payments.

Turning to Slide 11, which shows our Digital Banking segment. Full year digital banking revenue increased $30 million or 6% year-over-year, driven by client wins, strong renewal momentum and cross-sell success at Terafina and channel service platform. Fourth quarter revenue increased $6 million or 5% year-over-year. Full year adjusted EBITDA was up 6% year-over-year with an adjusted EBITDA margin rate increasing to 42%. A richer revenue mix and improving indirect cost absorption drove profitability improvements. Fourth quarter adjusted EBITDA was up 4% year-over-year with an adjusted EBITDA margin rate of 39%.

Digital Banking’s key strategic metrics in the bottom of this slide include registered users, active users and annual recurring revenue. Both registered and active users, which drive about two-thirds of the revenue in this business increased 5% year-over-year, having outgrown two consolidation-driven de-conversions that impacted results in midyear 2022, and ARR was up 3% year-over-year.

Let’s move to Slide 12. This is our Payments and Network segment. Starting at the top left, Payments and Network revenue for the full year increased $611 million or 91%, and 96% when adjusted for FX rates. Most of the effect of the addition of the full year of legacy Cardtronics results occurred in this segment. Normalizing for the inclusion of Cardtronics, revenue was up 12% on a constant currency basis. Fourth quarter revenue increased $24 million or 8% year-over-year and 11% adjusted for FX. Full year payments and network adjusted EBITDA increased 70% year-over-year and 76% when adjusted for FX.

While the inclusion of full year Cardtronics results, strong revenue mix and cost productivity all benefited comparative profitability, short-term interest rates that are a primary driver of our cash rental costs significantly impacted 2022 results and will further impact 2023 results. The cost of renting cash in our ATM fleet goes through EBITDA’s cost of goods, and would have reduced EBITDA by approximately $50 million in 2022 and an incremental $95 million in 2023. That said, the combination of our hedging program, operational optimization and price protections will result in a net effective interest rates of $40 million in 2022 and another $45 million in 2023.

Adjusted EBITDA margin rate was 32% for the full year. Fourth quarter adjusted EBITDA declined 9% year-over-year and 5% when adjusted for FX. Adjusted EBITDA margin rate contracted 550 basis points in the fourth quarter to 30%, down from the prior year, primarily due to those higher cash rental costs. The bottom of this slide shows payments and network key strategic metrics. On the bottom left, endpoints increased 24% year-over-year. These access points to the Allpoint Network and merchant acquiring terminals are expanding as we migrate them to our NCR installed base. In the center bottom, our transactions, the KPI that illustrates the payments processed across our Allpoint Network, and our merchant acquiring networks. Transactions were up 27% for the full year. Annual recurring revenue in this business increased 8% year-over-year.

Slide 13 shows our self-service banking segment results. Self-service banking full year revenue was flat year-over-year as reported and up 4% on a constant currency basis. Fourth quarter revenue was down 2% as reported and up 2% on a constant currency basis. We continue to have success transitioning our self-service banking business from onetime perpetual sales into multiyear subscription-based revenue streams.

In the fourth quarter, we shifted roughly $37 million of high profit revenue that would previously have occurred upfront as software licenses to recurring revenue. For the full year, the impact of the shift to recurring revenue for self-service banking was $100 million. We expect this effect to be closer to $150 million in 2023 as our ATM as a Service business accelerates. This future impact will defer less profit per dollar of revenue as the ATM hardware has lower margins than the accompanying software.

Full year adjusted EBITDA declined 3% year-over-year and was up 1% on a constant currency basis. Adjusted EBITDA in the fourth quarter increased 9% year-over-year and was up 13% on an FX consistent basis. Full year adjusted EBITDA margin rate was 22% and the fourth quarter rate was 23%. Very strong cost productivity was able to overcome significant cost pressures, particularly in the first half of the year.

The bottom of the slide shows self-service banking segment key strategic metrics. On the left, our software and services revenue mix was similar to last year at 68%. ATM as a Service units increased 226% year-over-year to over 14,000 units. We experienced significant growth in India and incremental growth in the United States. The shift to recurring revenue continues to gain traction with ARR up 4% year-over-year.

Slide 14 describes free cash flow, net debt and adjusted EBITDA metrics to facilitate leverage calculations. As I said earlier, we generated $202 million of free cash flow in the quarter which represented more than all of the cash we generated in 2022. While the quarter results were solid, the full year results were insufficient. Looking forward, the combination of higher profitability further working capital improvements, particularly at inventory and the lapse of the timing issues and compensation and benefits, we expect $400 million to $500 million of free cash flow generation in 2023, with a significant proportion of that cash coming in the first half of the year.

We have been clear about our intention to reduce total company leverage by at least $500 million, before we complete our contemplated spin transaction later this year. Beyond the operating activities described in the segment discussions, we’re looking at other ways to generate cash that can aid in reducing leverage. In Q4, a concentrated effort to repatriate overseas cash was actioned and delivered some early results. We also importantly completed our first non-recourse financing arrangement for ATM as a Service, which is crucial to funding this growth strategy.

And finally, we made a $50 million voluntary contribution to the U.S. pension program to address underfunding and push out any mandatory contributions. This slide also shows our net debt to adjusted EBITDA metric with a leverage ratio of 3.8x, down from 4.1x in Q4 2021 due to higher profitability. We remain well within our debt covenants and have significant liquidity with over $750 million available under our revolving credit facility. We have a strong balance sheet, ample liquidity and the financial strength to support our growth strategy.

On Slide 15, we present our first quarter and full year 2023 guidance. After 3 straight years of multi-varied uncertainty, we have proven that our forecast or guidance are only as good as the macro assumptions that underlie them and that they can become dated very soon after they are issued. That said, for this guidance, we have assumed the following: that interest rates are correctly described by the forward curve on January 1; that the currency exchange rates are also accurately described by the forward rates as January 1; that the global economy will experience a modest consumer-led recession that may constrain growth in our nonrecurring revenue streams; and that our ATM as a Service business defers $150 million of ATM revenue at the accompanying hardware margin rates from 2023 into future years. These assumptions mean that the pernicious effect of interest rates and currency exchange rates will drive tougher reported comparisons in the first half of the year but should ease in the second half.

They also mean that our efforts to reduce cost and drive productivity needed to be extended. While price and cost actions taken in the first half of 2022 allowed a significant recovery in profitability in that second half, further actions are necessary to offset the wrap effect of 2022’s challenges and to preemptively address the dis-synergies that we anticipate from the spin transaction. In the fourth quarter, we initiated additional cost takeout actions that are expected to drive sufficient incremental savings in 2023 to more than offset any dis-synergies resulting from the contemplated spin.

Before I walk you through the guidance page, I want to highlight that we intend to change our calculation of non-GAAP EPS to exclude the impact of stock-based compensation expense. This change will result in better alignment of our calculation with both our post-spin pure-play peers and with our own calculation of adjusted EBITDA that already excludes stock-based compensation.

After reviewing the intended change with our Board, it was determined that the change should be made at the start of the new fiscal year concurrent with annual guidance rather than waiting until the spin transaction occurs. Because many of you have existing models based on our prior convention, I provided guidance both with and without this change. The impact of stock-based compensation was about $0.70 in 2022 and is expected to be about $0.75 in 2023.

So for the full year 2023, we expect revenue of $7.8 billion to $8 billion after the impact of the ATM as a service shift of $150 million, and on a constant currency basis. While forward rates would suggest only a very modest full year impact from FX, it will be a notable drag in the first half of the year and will impact calendarization. We expect adjusted EBITDA to be $1.45 billion to $1.55 billion. Adjusted EBITDA margins are expected to expand to roughly 19%. I’ll provide more detail on EBITDA on the next slide.

Non-GAAP EPS is expected to be $3.30 to $3.50 under our new convention. That range is comparable to $2.55 to $2.75 under our prior methodology. In calculating EPS guidance for 2023, we assumed interest expense of $330 million, an increase of $45 million or $0.29 a share. We also assumed a tax rate of 29% versus 28% in 2022 and a share count of 155 million shares versus the 150.4 million shares in 2022. The combination of these two impacts reported EPS by another $0.11. Obviously, these assumptions have a range of potential outcomes, and we will provide update quarterly as necessary.

As I discussed earlier, we expect to generate $400 million to $500 million of free cash flow on a more linear basis than 2022. To assure alignment with your quarterly models, I also want to provide some thoughts on Q1 and the calendarization of the full year 2023. For Q1 2023, we expect reported revenue of $1.8 billion to $1.9 billion, up $50 million on a currency-neutral basis from the last Q1. We expect adjusted EBITDA of approximately $300 million. We expect non-GAAP EPS of $0.55 to $0.60 and expect to generate free cash flow between $100 million and $200 million. For the quarter, we have assumed a tax rate of 29%, a share count of 152 million shares and interest expense of $85 million. For the remainder of 2023, we expect relatively linear sequential quarterly improvement across most financial metrics, ultimately aggregating to the results described in our annual guidance.

Slide 16 – finally, Slide 16 provides a high-level illustration of our EBITDA drivers, juxtaposing 2022 realized impacts against our 2023 expectations for the same bucket. I will walk you through the relative impacts for 2022 and our outlook for 2023. In the first red bar, we have aggregated the discrete items that we had talked about prior under external impacts, including in order of magnitude, component costs and expedited freight, exchange rate translation, interest expense, war in the Ukraine and finally, the last wave of the pandemic. Taken together, these effects totaled about $200 million in 2022.

The next red bar labeled inflation includes both material and labor cost increases across our global cost structure that was nearly 6%. This bucket includes NCR labor, contractor labor, fuel and commodities, planned freight, parts, raws, etcetera. To address these two bars together, there were close to $500 million of impact, we launched similarly sized actions in Qs 2 and 3 that reduced our overall spend on improved pricing. In aggregate, our actions totaled about $400 million. Most of these actions targeted indirect costs to offset our uncontrollable effects in our direct costs. About 40% of these actions were permanent the remaining 60% were fast but temporal and have since been replaced with more permanent actions that will benefit 2023.

Bringing down the page. In 2023, those same external impacts will be far less impactful. We will have residual wrap effect from interest costs. The other items are either built into the 2022 base like our exit from Russia or have swung to a net positive like premium freight and ship costs. And we expect excess inflation to ease to a more manageable level. In Q4, we launched another round of cost actions that are more sustainable and anticipate the dis-synergies from the planned spin transaction. These actions were more than sufficient to both replace the 2022 temporal actions and to cover the follow-on impact of last year’s shocks. We entered 2023 with almost 7% fewer headcount than we started with in 2022. About half of those reductions were from attrition and the remainder were reductions in force.

And finally, as you read across the remaining columns, you can see that in both years, the volume growth is muted by an acceleration in our shift to recurring revenue and increased pricing is around $150 million.

With that, I’ll turn it back to you, Mike.

Mike Hayford

Thanks, Tim. Moving to Slide 17. Let me provide an update on our thoughts on separating NCR into two public companies. We intend to separate NCR’s existing payments and network and self-service banking businesses to form a new entity via tax-free spin-off and distribution of shares to existing shareholders. NCR’s ATMCo includes NCR’s self-service banking. In other words, our traditional ATM hardware, software and services business, and all of our payments and network business, except for the merchant services payment, which is integrated tightly into the retail and hospitality segments of NCR.

NCR will include our retail, hospitality, Digital First Banking and our Merchant Services payment business. NCR will continue its transformation to a software-led as a service growth company. These businesses operate in markets where we expect to see continued spending on technology to run the store, run the restaurant and deliver digital-first banking solutions. We believe NCR continue to be positioned to win the business for those upgrade imperatives.

Moving to Slide 18. NCR has made significant strides over the past 5 years to transform our company into a customer-first software-led as a services company. The actions we have taken to align our organization around customers and markets will help us move into two organizations. We believe we are number one in the markets we serve. They represent enormous opportunity for us, and our goal is to make sure we continue to take advantage of our market-leading position.

Our NCR RemainCo on the left side of Page 18, will be the number one provider of point-of-sale software in the world and the number one provider of self-checkout, and NCR will be the leading provider of DFB or digital-first banking solutions. NCR RemainCo is anticipated to be a higher-growth company serving markets that have growing demand for integrated platforms to serve retailers, restaurants and banks and enable them to serve their clients with a differentiated experience.

NCR ATMCo, which is labeled SpinCo on the right-hand side of Page 18, will continue to be the number one provider of multi-vendor ATM hardware ATM software applications and ATM middleware in the world and will have the largest surcharge-free network. We will continue our shift as-a-service with our ATM as-a-service offering. We believe that we will have a differentiated offering that will continue to drive growth and expanding margins as we capture more share of wallet for delivering ATM solutions. NCR ATMCo is expected to be a stable recurring revenue business with solid cash flow generation that can allow us to deliver cash back to shareholders through a dividend payment. We believe that spinning off NCR’s ATMCo in a tax-free transaction is the best path to unlock shareholder value. But should alternative options become available in the future that could deliver superior value such as a whole or partial company sale of NCR, the Board remains open to considering alternative scenarios.

Slide 19 provides an overview of our separation roadmap. We have put together a separation management office and have defined our business separation plan. Operationally, the majority of our teams are organized by industry under a general manager business unit. These teams are ready for the spin. Additionally, there are areas of shared services functions such as legal, tax, HR, treasury, IT and real estate that we are in the process of preparing for separation. We are working on submitting our Form 10 registration statement, and then the timing of separation will be largely dependent on SEC approval and the state of the capital markets. We intend to de-lever through the generation of free cash flow between now and separation is expected to occur by the end of 2023. However, we are working to be in a position to execute the spin as early as late third quarter. This of course, is dependent on receiving approvals from the SEC and a favorable capital markets environment.

In closing, on Slide 20, we are looking forward, the key priorities are clear. First, we have made significant progress executing our strategic growth initiatives. Our strategic KPIs are trending in the right direction, and we will continue to build on the positive momentum in the business. NCR is winning, and we expect to continue to win in the marketplace. Second, we will continue to execute our strategy of transforming NCR to a software-led as-a-service company with higher recurring revenue streams, we continue to have momentum in the business. Third, we are focused on improving our cost structure. We have identified efficiencies for cost action to streamline our costs in 2023. Fourth, these cost take out actions, along with positive operating leverage should drive margin expansion. Fifth, we expect to generate strong cash flow, as Tim had referenced in his section. And finally, we are focused on separating NCR into two public companies. We are working through the legal and organizational structures and expect to execute the separation by the end of 2023 and be in a position to execute the spin earlier if the opportunity arises.

This concludes our prepared remarks for the day. With that, we will open the call for questions. Operator, please open the line.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from Paul Chung with JPMorgan.

Paul Chung

Hi. Thanks for taking my question. So, just on the free cash flow guide, can you talk about some of the puts and takes there? Where do you expect CapEx levels, expectations for working cap? And I would have thought there would be somewhat a more outsized benefit on working cap after a heavy investment year. And then you guys did a good job of more uniform cash flow over the course of the year back in ‘20 and ‘21, 2022 saw a reversion back due to kind of back-end loaded free cash flow. How do we think about cash flow kind of throughout the year this year?

Tim Oliver

Yes. A lot of questions in there. CapEx, I would expect it – we have about $400 million this year. I think it’s going to be on $400 million is slightly higher. I do expect the cash flow to be much more linear this year. As we have said in the script, there were some – as we took cost out of the organization, the P&L benefit outstripped the cash flow benefit, and we will see that benefit come back in the first half of this year from a timing perspective. We harvested some of the investment in working capital in Q4. You can see that in our cash flow performance. And I think that we are going to make more progress on inventory in the first quarter. So, I think our cash flow guidance is very consistent with what we described a quarter ago, right, that we are going to have a very good fourth quarter. We are going to have a strong first quarter, and then we will get back on a more linear path after that. So, that’s the – it’s not perfectly easy to predict to the dollar, but I guess that we are closer to the high end of the range I described on the guidance page for Q1, which will give us a nice head start in the full year.

Paul Chung

Got it. And then just a follow-up on self-checkout, so, you had a very strong performance in ‘21, and then some monitoring pace here in ‘22. Talk about the expectations for ‘23 and longer term? And where you are seeing momentum across regions, verticals? And then can you talk about the Halo product, too, where you showcasing NRF? How impactful can that solution be kind of near-term, long-term? Thank you.

Tim Oliver

Yes. I will let Mike take the product questions. The 3% growth in SCO this year was on an as-reported basis. There is actually three full points of growth that went to currency. So, on a constant currency basis, that 6% growth is very much in line with what we would have expected that mid to high-single digit growth at SCO. And next year, I would expect about the same.

Mike Hayford

Yes. Paul, on the Halo product, which you saw at NRF, we are pretty excited about it. It kind of does the best of both worlds. It has the vision-based ability to scan items and identify what they are. But it also has a capability for those that can’t scan appropriately, which is one of the challenges that, that technology has. You can still scan the UBC code. So, it’s easy to use. A lot of the growth we have seen in self-checkout is in convenience stores and fast food restaurants, and it’s a perfect fit for that environment.

Operator

And our next question comes from Matt Summerville with D.A. Davidson.

Matt Summerville

Thanks. A couple of questions. Obviously, you are baking in, it sounds like some level of moderate recession into your outlook for ‘23. Can you talk maybe about incoming order rates and what you may be seeing there relative to your guidance framework? Are you seeing things indicative of a slowdown? Are your go forward look at the funnel suggesting some whom perhaps becoming more pronounced in that regard? And then I have a follow-up.

Tim Oliver

No. I think the order book is strong. It’s about as strong as we would hope it would be at the beginning of the year. The uptake on our as-a-service efforts have been very strong. So, we have not yet seen any rollback of the order book. Let me give you some color on the total growth for the year because I think if you think about a 2% growth rate across the total company as reported. Self-service banking is likely to be down 4% reported. Now, that’s up 2% if you add back the shift to recurring revenue, but we are accelerating the shift in recurring revenue in that business. And so it’s going to be a 4% decline, we think, with really nice margin expansion. I think there is probably 3 points to 4 points of margin expansion in that business. We have got two businesses, Payments & Network and Digital Banking that are both going to grow nearly 10%. Both those businesses are going to invest back into growth. And so their margin rates are likely to come down a little bit, maybe a couple of points there as they invest in growth, which then leaves the retail and hospitality businesses that will grow low-single digits each hospitality coming off a rip roaring year. And retail, really, when we think about building in a consumer-led recession into our model, we took a little bit of – if you think about where the non-recurring revenue streams occur, it’s in hardware. It’s in POS and self-checkout and it’s in ATMs. And so we moderate our expectations for our hardware revenue in the year. If we are wrong and there isn’t a recession and our customers aren’t affected by it or don’t adjust for it, there could be upside to this plan.

Mike Hayford

Yes. Matt, just to add to Tim’s comments, so specifically, have we seen a moderation in demand to-date, the simple answer is no. And as you look at Tim walking through the numbers, so some of the growth impact is literally the ability for us to execute our strategic plan and to shift our revenue streams to subscription. And so we are – it’s taken off the fastest a little faster than maybe we anticipated. It was ATM as-a-service in that backlog. The sales success in 2022 was very strong. The backlog continues to be very strong into 2023. And so that will portend for the future to have a very, very strong business there, but we have got to get through 2023 since have Payments & Network, strong business outlook. Digital Banking had an extremely strong fourth quarter, a lot of renewals, a lot of new logos, continues to have a very strong backlog in terms of potential I would say, backlog sales pipeline and then recon hospitality, the migration to platform lanes and platform sites. So, we haven’t seen that yet. We look at the outlook for the marketplace probably a little more concerned about banking, just as banks taking advantage of some margin spread, interest margin spread in ‘22. I think they are all looking at the same risk. And so later on in the year, will they start to slowdown in capital spending. But again, to-date, we haven’t seen that. And I think our outlook for the year is just trying to be cautious based on the economic outlooks that we are reading.

Matt Summerville

Got it. And then just as a follow-up, and I only had a quick second to look at this, just given the timing of the call, but in Payments & Network, it looked like on a quarter-over-quarter basis. So, it’s not in your current slide deck, I had to go back and look at Q3, but it looked like endpoints were down a little bit quarter-on-quarter. Transactions appeared to be down a little bit quarter-on-quarter as was ARR. I realize there is an FX dynamic perhaps driving ARR. But if you can just kind of speak to that, that would be helpful. Thank you.

Tim Oliver

Yes. That’s a typical seasonality in what we do. You are going to see a nice pickup in Q1 as tax season comes around. So, the end points are moving in the right direction annually. I don’t know if there is a modest downdraft in Q4, I can’t remember. The transaction numbers are higher. They will go higher. There is a seasonality to them. That’s why we moved the key – the transaction numbers to full year because it takes the seasonality out. But good transaction growth and the fact that we are going to be able to deliver that 9% top line growth in that business is heavily dependent on more endpoints and more transactions.

Matt Summerville

Thank you, guys.

Operator

And our next question will come from Charles Nabhan with Stephens.

Charles Nabhan

Hi. Good afternoon and thank you for taking my questions. Just wanted to drill into the segments a little more. First of all, within Payments, if you were to take out LibertyX what would the organic growth rate look like for the fourth quarter? And then secondly, as far as Digital Banking goes, I know in the past, you referred to it as a double-digit grower. Is it fair to still think of that as a trajectory for that business on the top line?

Mike Hayford

Yes. Let me start with Digital Banking. Absolutely, it was a little light in the fourth quarter. We – again, we had an extremely high renewal quarter, which drove extending our terms with our customers, which may be impacted revenue a little bit in the fourth quarter. But I don’t think that there is anything in the trends to cause us concern. I do think, as Tim referenced, high-single digit, low-double digit in 2023 based on what we are seeing for Digital Banking. I think the overall – without LibertyX, what do you get in mind.

Tim Oliver

LibertyX is about $15 million to $20 million a quarter.

Charles Nabhan

Got it. And then just as a quick follow-up, if I could refer back to some of your guidance from the prior quarter when you talked about $200 million in cost take-outs for ‘23 and $80 million to $100 million in dissynergies. Is that still a ballpark range of thinking about ‘23?

Tim Oliver

Yes. I think if you get your ruler out and that EBITDA, it’s supposed to say causal walk, it says casual walk. The casual walk in the deck on Page 16, I tried to kind of roll all of these different efforts at cost take-out as they played out across this year and next because they don’t necessarily calendarize to any one fiscal year. We did see $500 million or so of pressure from both the discrete items we called out, external forces and then inflation in aggregate. And we have got about $400 million of cost actions or permanent actions – total actions done in 2022. About 60% of those were more temporal in nature. So, the raining and discretionary spending hard not backfilling positions that have been opened, and we need to add back some costs there and about 40% of that cost-out was permanent. Moving into ‘23 then, since we expect the external impacts and the inflation to moderate really considerably and in fact, a couple of the items turned around in our net benefits to us this year. We simply need to then cover the $100 million or so of wrap effect from the negative impacts last year and cover those temporal actions. So, if you add those together, it looks like in aggregate, about $350 million of permanent actions in 2023, which will then allow us to hit the numbers on this page. If there is – we have talked about $80 million to $100 million of let’s call it, negative synergies, dissynergies associated with the spin transaction. We have presumed across this model that it will be when we split, it will be $80 million, about $40 million on each side of the NewCo. We think as we – as the year plays out, we will be able to keep that cost down and offset it across the year. So, we found several opportunities for efficiency beyond the actions that we have described here to help keep that from being a negative at the time of the launch of the two companies.

Operator

And we will take a question from Erik Woodring with Morgan Stanley.

Erik Woodring

Hey guys. Thanks for taking the question. You look at 2023, and it looks like you plan to do more with less, I guess. Meaning your revenue guide is flat to up 2%, and we talked through some of the factors there. EBITDA is up much nicer kind of around 9% at the midpoint. Can you maybe just talk us through, Tim, I know you have talked about kind of like high level, but maybe walk us through how you are thinking about gross margins and the puts and takes there in 2023 versus OpEx just to help us maybe where the leverage in the model comes from next year? And then I have a follow-up next.

Tim Oliver

Yes. That’s a good question because you will remember that this year, most of the savings came at OpEx, right. It came from indirect costs because that was we have more quickly act there. It’s going to be nearly entirely gross margin savings this year. The actions that we took to re-qualify parts and to diversify our supply chain, the efforts we have made to reduce our transportation costs and other direct cost efficiencies are going to help pay back nicely in 2023. So, I would expect most of the recovery to be in gross margin rather than at OpEx.

Erik Woodring

Okay. Super. That’s really helpful. And then as a follow-up, I just want to make sure I get some of these items, right? So, I am obviously guiding to some nice year-over-year improvements in EBITDA and free cash flow. EPS has held back a bit more regardless of the kind of change in disclosures. Is that mostly tax rate, interest rate – sorry, tax rate, interest expense and share count. Was there anything else that I am missing? I just want to make sure I kind of understand why that measure maybe as much as the others.

Tim Oliver

You are exactly right. There is $0.29 associated with interest expense and there is a little more than $0.10 associated with both share count and tax rate.

Erik Woodring

Okay. Perfect. Thank you, guys.

Tim Oliver

That’s what that $0.40 in aggregate.

Operator

Thank you. And that does conclude the question-and-answer session. I will now turn the call back over to Mr. Mike Hayford for any additional or closing remarks.

Mike Hayford

Thank you. Thanks everybody for joining us today. I think our team is pretty excited about a strong finish to 2022. Obviously, we had some challenges at the start of the year and just a great big thank you to our whole team for working through the last three quarters and delivering a very solid 2022. We look forward to 2023. We expect it to be, again, a modestly challenging environment. This what’s going on out there, but we feel very good about our products. We feel very good about our strategic initiatives, and we are looking forward to executing the spin-off later in 2023. Again, thank you for joining us today.

Operator

Well, thank you. And that does conclude today’s conference. We do thank you for your participation. Have an excellent day.