NCR Voyix (VYX): Fundamentals

Overall Context

NCR Voyix (VYX) is a leading provider of digital commerce solutions focused on the retail and restaurant industries. It emerged after the separation from NCR Corporation’s ATM-focused business (NATL) and the divestiture of the digital banking unit. VYX’s historical model relied significantly on hardware and associated services. Now, it’s aggressively shifting towards subscription-based (SaaS) and recurring revenue models, aiming to generate sustainable free cash flows, higher margins, and better valuation multiples.

---

Fundamental Question #1: Objective – Free Cash Flow (FCF) Generation

Core Idea:
The intrinsic value of VYX depends on its ability to produce robust, sustainable FCF. Investors look for rising free cash flow driven by stable recurring revenue, high margins, and efficient capital deployment.

Past vs. Future:

• Historically, NCR’s consolidated adjusted EBITDA margin hovered around 17–20%. On a pro forma basis, VYX’s current adjusted EBITDA margin is ~17%.
• Future target: Expand EBITDA margins to 21–22% by 2027.
• Key drivers include increasing the share of recurring revenue from ~54% currently to ~65% by 2027, and reducing interest expense after a major deleveraging (cutting ~$95M/year from an original ~$290M+ annual interest cost).

Revenue & Margin Data Impacting FCF:

• Revenue baseline (pro forma, post-separation) is around $3.8–3.9B in FY23.
• Recurring revenue (subscriptions, payments) expected to grow at 9–11% CAGR, outpacing total revenue growth of 4–6% by 2027.
• Shifting from hardware (low-margin) to SaaS and services (high-margin) reduces capital intensity and raises ROIC, thereby increasing FCF conversion.

TAM & Penetration:

• Total Addressable Market (TAM) of ~$117B (Retail $62B, Restaurant $25B, and legacy digital banking $30B).
• VYX’s post-spin revenue scale (~$3.8–3.9B) represents low single-digit penetration, signaling significant long-term growth runway and potential for substantial FCF expansion as it captures more market share.

As SaaS grows, margins improve, interest costs decline, and capital needs shrink. This paves the way for stronger FCF generation, which underpins long-term value creation.

---

Fundamental Question #2: How the Business Makes Money

Core Products & Solutions:

1. Retail Solutions (about 59% of revenue):
   • Offerings: POS software, self-checkout, loyalty/engagement platforms, inventory/supply chain solutions, analytics, and e-commerce connectors.
   • Monetization: Monthly/annual SaaS fees per store/terminal + fees for add-on modules (e.g., advanced analytics, loyalty programs). Large retail clients (e.g., Walmart) sign multi-year contracts, ensuring stable recurring revenue streams.
2. Restaurant Solutions (about 24% of revenue):
   • Offerings: Aloha cloud-based POS, kitchen management systems, mobile ordering/payment, loyalty/marketing, analytics.
   • Monetization: Subscription fees per location/device, transaction-based fees on integrated payments, recurring charges for back-office workforce management. A restaurant chain might pay a base fee for Aloha plus additional per-transaction fees.

Current Revenue Mix:

• Historically, hardware plus associated services accounted for a substantial portion of revenue. Hardware and hardware-related services can represent ~25–30% of revenue currently.
• Shift: Growing the share of SaaS subscriptions and payment transaction fees.
• For example, if a retailer previously paid a one-time fee for a POS system, now they pay ongoing subscriptions (recurring revenue ~54% currently).

Revenue Growth & ARPU Expansion:

• When customers migrate from legacy on-premise solutions to the cloud platform, ARPU can increase by 1.5x initially, then up to 3–4x over five years as they adopt more modules.
• This ARPU growth from existing clients is a key revenue driver and supports higher recurring revenue percentages.

---

Fundamental Question #3: Nature of the Cost Structure

Cost Structure Evolution:

• Past (Hardware-Focused): Required managing inventories, supply chain complexities, and produced relatively low gross margins (~20–30% on hardware). Capital tied up in equipment reduced FCF and margin stability.
• Future (SaaS & Outsourcing Hardware):
  • Software typically enjoys 70–80% gross margins. As SaaS subscription revenue grows, overall blended margins rise.
  • Outsourcing hardware design and manufacturing reduces working capital and Capex needs, lowering capital intensity and improving ROIC.
  • Operating leverage: With R&D and hosting costs mostly fixed, each incremental SaaS sale adds disproportionately to EBITDA, pushing margins from ~17% currently toward the 21–22% target.

Incremental Margin Benefits:

• High retention and upselling mean incremental sales often require minimal additional cost.
• Deleveraging saves ~$95M in interest expense annually, translating more EBITDA to net income and FCF.

---

Fundamental Question #4: Key Drivers of the Business

1. Organic Growth:

• With a ~$117B TAM and low single-digit penetration, growth potential is significant.
• Total revenue: targeting 4–6% CAGR by 2027, aided by recurring revenue growing at 9–11%.
• Growth from converting legacy customers: Only ~10% of retail clients and a modest portion of restaurant clients are on the new SaaS platforms. Increasing this penetration is a big lever.

2. Margin Expansion:

• Current EBITDA margin ~17%; target 21–22% by 2027.
• Margin uplift from higher SaaS mix (recurring revenue from 54% to 65%), improved cost structure, and hardware outsourcing.

3. Capital Intensity & ROIC:

• Reduced hardware exposure, more SaaS = less Capex and inventory.
• Higher ROIC as more revenue comes from software subscriptions and payments rather than low-margin hardware.

4. Capital Deployment:

• After reducing leverage (net leverage ~1.6x vs. ~4.1x previously), VYX can allocate FCF to R&D, selective M&A, or share repurchases.
• The company aims to reinvest in product innovation, potentially adding specialized analytics or AI-driven solutions to increase ARPU and stickiness.

5. Terminal Value & Competitive Moat:

• Mission-critical solutions: Retailers and restaurants rely on VYX’s platforms to run daily operations, making them “sticky” and reducing churn (<10% churn implies >90% retention).
• Long-term, high retention and stable ARR streams increase perceived terminal value. Markets assign premium multiples to resilient, high-margin, recurring revenue businesses.

---

Fundamental Question #5: Business Momentum

Current State & Trajectory:

• Revenue Momentum:
  • Near-term total revenue growth is modest (~1–2%), as hardware softness offsets SaaS gains.
  • By 2025–2027, as more customers move to SaaS, top-line growth of 4–6% becomes achievable, supported by 9–11% recurring revenue growth.
• Segmental Insights:
  • Retail (~59% of revenue): Historically ~1–2% growth, targeted at 2–5% longer-term as platform conversions accelerate. ARPU increases drive incremental revenue without needing as many new logos.
  • Restaurant (~24% of revenue): After ~9% Y/Y growth in 2022, growth slowed due to macro conditions, but margin improvements are evident (EBITDA margin recently jumped to ~31.3% from ~22–23%). As more restaurants adopt Aloha POS cloud, loyalty solutions, and integrated payments, both revenue and margins should climb.
• Margin Momentum:
  • Restaurant’s recent EBITDA margin expansion exemplifies the future of VYX’s entire business as SaaS penetration deepens. This is an early indicator of how margin trajectory could look once more of the retail customers convert.
• Investor Debate & Market Positioning:
  • Initially, the stock may trade at a discount (EV/Revenue ~1.2x FY25 vs. peers like Toast or Olo at 1.6–4.8x) due to slower immediate growth and hardware legacy.
  • As recurring revenue share increases and margin targets become more visible, valuation could re-rate upward, reflecting improved momentum and SaaS dynamics.

Normalization Over Multiple Years:

• Using 2–3 year stacks helps see past short-term headwinds. Over a multi-year period, recurring revenue ramp, ARPU growth, and cost efficiencies compound, driving steady improvements in both top-line and bottom-line momentum.

---

Conclusion

Integrating Data & Explanation:

1. FCF Generation:
   • Moving from a ~17% EBITDA margin to 21–22% by 2027, cutting interest by ~$95M/year, and raising recurring revenue share from 54% to ~65% supports robust FCF growth.
2. Monetization Model:
   • SaaS subscriptions and transaction-based fees are replacing hardware sales, improving stability, predictability, and margins. Customers pay monthly/annual fees and per-transaction charges, driving up ARPU and recurring revenue growth.
3. Cost Structure:
   • Capital-light SaaS model, outsourced hardware, and scale economies in software push incremental margins higher. Lower Capex and working capital needs enhance ROIC and FCF conversion.
4. Key Drivers:
   • Significant TAM ($117B) and low current penetration support long-term organic growth. Recurring revenue expansion (9–11% CAGR) and margin enhancement fuel sustainable value creation.
5. Momentum:
   • While near-term revenue growth is subdued, medium-term targets signal acceleration. Cohort-based ARPU gains, high retention, and margin expansion in the restaurant segment foreshadow improvements across the portfolio. Expect growing investor confidence as results align with targets, potentially narrowing the valuation gap with higher-multiple SaaS peers.

Overall, VYX’s strategy of increasing recurring revenue, improving margins, and investing in mission-critical solutions sets a path for stronger free cash flows, stable long-term earnings power, and a more favorable market valuation over time.