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NCR (VYX 0.50%)
Q4 2022 Earnings Call
Feb 07, 2023, 4:30 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


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 -- Vice President, Investor Relations

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're 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'll 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.

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With that, I would now like to turn the call over to Mike.

Mike Hayford -- President and Chief Executive Officer

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 continued 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'm proud to say we improved to 52.

So, in four years, we improved our net promoter score from 14 to 52. That's quite a significant improvement. We now have happy customers, which is the 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 three quarters of 2022. First, we began the year with a continued pandemic. This time, the omicron strain. For example, our NCR offices 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 remained 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 at 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 a potential global slowdown, NCR has taken additional cost actions in the fourth quarter that we 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 costs 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 five of our business segments. In retail, we continue to deliver on our strategy to be the retail platform company of choice. The consulting firm RBR named NCR the No.

1 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 Stops & Country Stores extended its partnership with NCR, and it's connecting over 3,000 lanes to the NCR commerce platform to enhance the omnichannel experience for their customers. We continue to have positive momentum in winning the upgrade imperative for retail point-of-sale software.

QuikTrip, a regional convenience store chain with over 800 stores across the Midwest, turned to NCR to 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 and department of 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 five-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. Potbelly, a 17-year customer of NCR, is revamping their kitchens, 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, chose 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 were 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, or our digital-first banking solution for retail banking, where we integrate a financial institution's retail channels using our CSP or channel services platform.

NCR signed two of the top five banks in the U.S. on our DFP 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, PNC 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, one 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 UK.

Santander extended its long-standing 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 one of 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 those separation activities. With that, let me pass it over to Tim.

Tim Oliver -- Chief Financial Officer

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, 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 rate -- 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 EBIDTA by almost $500 million. In response, past productivity and pricing actions that were launched in March were expanded and enhanced to insulate the P&L against further deterioration and macroeconomic factors and allowed EBITDA margin rates to extend 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 preserved the P&L through cost control and incremental productivity was 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 offering. 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 in 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 one-time perpetual sales into multiyear subscription-based revenue streams. The nature of these contracts shifted roughly $83 million of high-profit revenue that were 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 segment. 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 three 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 shifts to recurring revenue reduced revenue by $210 million, also primarily in our self-service banking and retail segment.

On 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 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 at 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 one-time 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 four to seven 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's 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 and 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 to have a substantial lane conversion backlog. On 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 five 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 services 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 at 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 deconversions 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 the 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 as 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 effect of 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's 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 are 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 one-time 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 in software licenses to recurring revenue. For the full year, the impact of this 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's 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 nonrecourse 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 contribution. This slide also shows our net debt to adjusted EBITDA metric, with a leverage ratio of 3.8 times, down from 4.1 times in Q4 of 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 three straight years of multivariate uncertainty, we have proven that our forecasts or guidance are only as good as the macro assumptions that underlie them and that they can become dated very soon after they're issued.

That said, for this guidance, we have assumed the following: that interest rates are correctly described by the forward curve on January the 1st, that currency exchange rates are also accurately described by the forward rates as of January the 1st, 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 to the first half of the year, which 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 challenges and to pre-emptively 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 till 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, which 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 in 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 buckets. I will walk you through the relative impacts for 2022 and our outlook for 2023. On 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 cost 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, land, freight, parts, raws, etc. To address these two bars together that were close to $500 million of impact, we launched similarly sized actions in Qs 2 and 3 that reduced our overall spend and improve 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, and 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 a 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, 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 -- President and Chief Executive Officer

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 a tax-free spinoff and distribution of shares to existing shareholders. NCR's ATM Co 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 will continue to be positioned to win the business for those upgrade imperatives.

Moving to Slide 18, NCR has made significant strides over the past five years to transform our company into a customer-first software-led-as-a-service company. The actions we have taken to align our organization on customers and markets will help us move into two organizations. We believe we are No. 1 in the markets we serve.

They represent an enormous opportunity for us, and our goal is to make sure we continue to take advantage of our market-leading position. NCR -- or NCR RemainCo on the left side of Page 18 will be the No. 1 provider of point-of-sale software in the world and the No. 1 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 ATM Co, which is labeled SpinCo on the right-hand side of Page 18, will continue to be the No. 1 provider of multivendor 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 expand margins as we capture more share of wallet for delivering ATM solutions. NCR ATM Co is expected to be a stable recurring revenue business with solid cash flow generation that can allow it to deliver cash back to shareholders through a dividend payment. We believe that spinning off NCR's ATM Co 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 road map. 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 delever through the generation of free cash flow between now and separation, which 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 to our key priorities that 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-takeout 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.

Questions & Answers:


Thank you. [Operator instructions] And our first question will come from Paul Chung with J.P. Morgan.

Paul Chung -- JPMorgan Chase and Company -- Analyst

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? You know, where do you expect capex levels, expectations for working cap? And I would have thought there would be somewhat a more outsized benefit on, you know, working cap after a heavy investment year. And then, you know, you guys did a good job of more uniform cash flow over the course of the year back in 2021 -- 2022, sorry, version back to the kind of back-end-loaded free cash flow.

How do we think about cash flow kind of, you know, throughout the year, this year?

Tim Oliver -- Chief Financial Officer

Yeah, a lot of questions in there. Capex, I'd expected -- we're about $400 million this year. I think it's going to be on $400 million or slightly higher. I do expect the cash flow to be much more linear this year.

As we said in the script, there are some -- as we took cost out of the organization, the P&L benefit outstripped the cash flow benefit, and we'll 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're 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're going to have a very good fourth quarter, we're going to have a strong first quarter, and then we'll get back on the more linear path after that. So, I -- that's the -- it's not perfectly easy to predict to the dollar, but I'd guess that we're closer to the high end of the range I described in the guidance page for Q1, which will give us a nice head start in the full year.

Paul Chung -- JPMorgan Chase and Company -- Analyst

Gotcha. And then just to follow up on self-checkout. So, you had a very strong performance in '21 and then some moderating pace here in '22. Talk about the expectations for '23 and longer term and where you're seeing momentum across regions, verticals.

And then can you talk about the HALO product, too, where you were showcasing in our -- you know, how impactful can that solution be kind of near term, long term. Thank you.

Tim Oliver -- Chief Financial Officer

Yeah, I'll let Mike take the product questions. The 3% growth in SCO this year was on an as-reported basis. There was 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'd expect about the same.

Mike Hayford -- President and Chief Executive Officer

Yeah, Paul, on the HALO product, which you saw at NRF, we're pretty excited about it. You know, it kind of has the best of both worlds. It has the vision-based ability to scan items and identify what they are, but it also has the capability for those that they can't scan appropriately, which is one of the challenges that that technology has. You can still scan the EBC code.

So, it's easy to use. A lot of the growth we've seen in self-checkout is in convenience stores and fast-food restaurants, and it's a perfect fit for that environment.


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

Matt Summerville -- D.A. Davidson -- Analyst

Thanks. Excuse me. A couple of questions. Obviously, you're baking in, it sounds, like some level of moderate recession into your outlook for '23.

Can you talk maybe about incoming order rate and what you may be seeing there relative to your guidance framework? Are you seeing things indicative of a slowdown? Are your go-forward, you know, look at the funnel suggesting something perhaps becoming more pronounced in that regard? And then I have a follow-up.

Tim Oliver -- Chief Financial Officer

No, I think the order book is strong. It's about as strong as we would hope we'd be at the beginning of the year. The uptake on our as-a-service efforts have been very strong. So, we've 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're accelerating the shift to 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's probably, you know, three to four points of margin expansion in that business.

We've got two businesses, payments and 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 come off -- 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 -- you think about where the nonrecurring 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 hardware revenue in the year. If we're wrong and there isn't a recession and our customers aren't affected by it or don't adjust for it, there could be an upside to this plan.

Mike Hayford -- President and Chief Executive Officer

Yeah, Matt, just to add to Tim's comments, so specifically, have we seen a moderation in demand today? The simple answer is no. And as you look at Tim walking through the numbers, so some of the -- you know, 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, where it's taken off the fastest, a little faster than maybe we anticipate, was ATM-as-a-service and 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've got to get through 2023. As Tim said, payments and 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'm going to say, backlog of sales pipeline. And then retail and hospitality, the migration to platform lanes and platform sites. So, we haven't seen that yet.

You know, 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're all looking at the same risk. And so, later on in the year, will they start to slow down 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 -- D.A. Davidson -- Analyst

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 and 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 it was an uptight dynamic perhaps driving the ARR. But if you can just kind of speak to that, that would be helpful. Thank you.

Tim Oliver -- Chief Financial Officer

Yeah, that's a typical seasonality in what we do. You're going to see a nice pickup in Q1 as tax season comes around. So, I -- the endpoints are moving in the right direction [Inaudible] I don't know if there's a modest downdraft in Q4, I can't remember. The transaction numbers are higher.

They will go higher. There's a seasonality to them. That's why we moved the key -- the transaction numbers to full year because it takes that seasonality out. But good transaction growth and the fact that we're 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 -- D.A. Davidson -- Analyst

Thank you, guys.


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

Charles Nabhan -- Stephens, Inc. -- Analyst

Hi, good afternoon, and thank you for taking my question. 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've 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 -- President and Chief Executive Officer

Yeah. Let me start with digital banking. Absolutely. It was a little late in the fourth quarter.

We -- again, we had an extremely high renewal quarter, which drove, you know, extending our terms with our customers, which may be impacted rev a little bit in the fourth quarter. But I don't think that there's 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're seeing for digital banking. I think the overall -- without LibertyX, what did you get modeled?

Tim Oliver -- Chief Financial Officer

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

Charles Nabhan -- Stephens, Inc. -- Analyst

Got it. Got it. And 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 takeouts for '23 and 82 million to 100 million in dis-synergies, is that still a ballpark range of thinking about the -- thinking about '23?

Tim Oliver -- Chief Financial Officer

Yeah. I think if you get your ruler out in that EBITDA, it's supposed to say causal walk, it's says casual walk. It -- causal walk in the deck on Page 16. I tried to kind of rule all of these different efforts at cost takeout 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 got about $400 million of cost actions or permanent total actions done in 2022. About 60% of those were more temporal in nature, so draining in discretionary spending hard, not backfilling positions that have been opened. And we need to add back some cost 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's -- we have talked about $80 million to $100 million of, let's call it, negative synergies, dis-synergies associated with the spin transaction, we've presumed across this model that it will be -- when we split, it will be $80 million, about $40 million on each side of your -- of the new co. We think as we -- as the year plays out, we'll be able to keep that cost down and offset it across the years.

We found several opportunities for efficiency beyond the actions that we've described here to help keep that from being a negative at the time of the launch of the two companies.


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

Erik Woodring -- Morgan Stanley -- Analyst

Hey, guys. Thanks for taking the question. You know, you looked at 2023, and, you know, it looks like you plan to do more with less, I guess. Meaning, you know, your revenue guide is flat, 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've talked about kind of like high level, but maybe walk us through how you're 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 come from next year. And then I have a follow-up.


Tim Oliver -- Chief Financial Officer

Yeah, that's a good question because, you know, you'll remember that this year, most of the savings came at opex, right? It came from indirect cost because that was where we quickly act there. It's going to be nearly entirely gross margin savings this year. The actions that we took to requalify parts and to diversify our supply chain, the efforts we've 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 in opex.

Erik Woodring -- Morgan Stanley -- Analyst

OK, 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, obviously guiding to some nice year-over-year improvements in EBITDA and free cash flow.

You know, EPS is 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'm missing? I just want to make sure I kind of understand --

Tim Oliver -- Chief Financial Officer


Erik Woodring -- Morgan Stanley -- Analyst

Why that [Inaudible]

Tim Oliver -- Chief Financial Officer

No, you're exactly right.

Erik Woodring -- Morgan Stanley -- Analyst

Maybe as much as the others.

Tim Oliver -- Chief Financial Officer

You're exactly right. There's $0.29 associated with interest expense and there's a little more than a dime associated with both share count and tax rate.

Erik Woodring -- Morgan Stanley -- Analyst

OK. Perfect. Thank you, guys.

Tim Oliver -- Chief Financial Officer

So, that puts us at $0.40 in aggregate.


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

Mike Hayford -- President and Chief Executive Officer

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 just with what's going on out there. But we feel very good about our products. We feel very good about our strategic initiatives, and we're looking forward to executing the spinoff later in 2023.

Again, thank you for joining us today.


[Operator signoff]

Duration: 0 minutes

Call participants:

Michael Nelson -- Vice President, Investor Relations

Mike Hayford -- President and Chief Executive Officer

Tim Oliver -- Chief Financial Officer

Paul Chung -- JPMorgan Chase and Company -- Analyst

Matt Summerville -- D.A. Davidson -- Analyst

Charles Nabhan -- Stephens, Inc. -- Analyst

Erik Woodring -- Morgan Stanley -- Analyst

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