Hardware Drag And Payments Delays Will Eventually Give Way To Healthier Software Margins

Catalysts

About NCR Voyix

NCR Voyix provides commerce software, payments and services for large retail, restaurant and fuel customers across multiple countries.

What are the underlying business or industry changes driving this perspective?

• Although the shift to a software led model with higher recurring revenue is progressing, the drag from lower hardware sales and onetime software and services revenue could limit how quickly this mix change shows up in total revenue and segment earnings.
• Although outsourcing hardware to an ODM partner is intended to lower capital needs and simplify operations, execution risk around the multi month transition and potential disruption across three major facilities could pressure gross margins and near term adjusted EBITDA.
• While customer demand for cloud based microservices in retail and restaurants is building and NCR Voyix is rolling out its Voyix Commerce platform and edge native applications, migration from legacy architectures and the timing of large enterprise rollouts may remain lumpy. This could create volatility in software ARR and total revenue growth.
• Although integrated payments across fuel, grocery and restaurant volumes, including the roughly $1.4t in U.S. payment volume opportunity cited on the call, offer room to expand wallet share, dependence on partner migrations and slow replacement of incumbent processors could delay the impact on payments revenue and net margins.
• While long duration agreements such as the new 6 year Chipotle contract and multiyear deals with major grocers support visibility, the need to absorb customer adjustments tied to prior delayed implementations and ongoing restructuring cash outflows near $100 million for 2025 may constrain how quickly adjusted free cash flow and overall earnings quality improve.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on NCR Voyix compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming NCR Voyix's revenue will decrease by 9.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 1.6% today to 0.2% in 3 years time.
• The bearish analysts expect earnings to reach $5.0 million (and earnings per share of $0.02) by about July 2029, down from $42.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $12.1 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 369.9x on those 2029 earnings, up from 26.5x today. This future PE is greater than the current PE for the US Software industry at 28.1x.
• The bearish analysts expect the number of shares outstanding to decline by 0.31% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.76%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The long term shift away from hardware and toward a software and payments model depends on a smooth transition to the outsourced hardware partner. Any extended disruption across the three major facilities or issues with customer deliveries could weigh on segment revenue and limit progress in gross margins and adjusted EBITDA.
• Many large customers are still running prior generation architectures. If migrations to the Voyix Commerce platform and microservices remain slow, staggered or more complex than expected, the build up of software ARR and total recurring revenue could fall short of expectations and hold back earnings.
• The company cites roughly $1.3t to $1.4t of U.S. payment volume running through or visible to its platforms. However, actual monetisation depends on customers choosing Voyix as a payments provider instead of incumbents, so slower than expected wallet share gains in fuel, grocery and restaurants would limit payments revenue and net margins.
• Price escalators on multiyear contracts and the move to transaction based pricing in payments rely on customer acceptance. Any pushback, renegotiations or competitive pricing pressure could reduce the benefit to recurring revenue growth and constrain margin expansion in both segments.
• Restructuring actions, including headcount reductions and transformation programs with expected cash outflows of about $100 million in 2025, may take longer or cost more than planned. This would pressure adjusted free cash flow, keep leverage from improving as quickly as hoped and reduce flexibility for ongoing product investment.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for NCR Voyix is $9.75, which represents up to two standard deviations below the consensus price target of $12.96. This valuation is based on what can be assumed as the expectations of NCR Voyix's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $18.0, and the most bearish reporting a price target of just $9.75.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $2.0 billion, earnings will come to $5.0 million, and it would be trading on a PE ratio of 369.9x, assuming you use a discount rate of 11.8%.
• Given the current share price of $8.09, the analyst price target of $9.75 is 17.0% higher. Despite analysts expecting the underlying business to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.