NCR (NCR) Q2 2023 Earnings Call Transcript

NCR (VYX -0.25%)
Q2 2023 Earnings Call
Aug 02, 2023, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the NCR Corporation second quarter fiscal year 2023 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 vice president of investor relations.

Michael Nelson -- Vice President, Investor Relations

Good afternoon, and thank you for joining our second quarter 2023 earnings call. Joining me on the call today are Mike Hayford, CEO; Owen Sullivan, president and COO; Tim Oliver, CFO and CEO designate of NCR Atleos; and David Wilkinson, president of our commerce business and CEO-designate of NCR Voyix. 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 August 2, 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 -- President and Chief Executive Officer

Thanks, Michael. I will begin with some of my views on the business, and I'll also provide an update on our previously announced intention to separate NCR into two publicly traded companies. Tim will then review our financial performance and then Owen, Tim and I will take your questions. Let's begin on Slide 5 with some of the highlights from the first quarter.

First, NCR delivered strong performance that included solid recurring revenue growth and significant margin expansion and delivered over $150 million of free cash flow, which has allowed us to delever prior to the spin. Second, we are on track to separate NCR into two public companies in the fourth quarter of 2023. Following Tim's comment on our financial results, I will provide an update on those separation activities. Third, in the second quarter, we had slight year-over-year revenue growth on a constant-currency basis and 5% recurring revenue growth, also on a constant-currency basis.

It's important to note that the revenue growth would have been 4% year over year without the impact of shifting to subscription. Fourth, adjusted EBITDA increased 17% on a constant-currency basis from the second quarter of 2022. Adjusted EBITDA margin expanded to 19.6% this quarter, which represents a 260-basis-point increase from the second quarter of 2022. And finally, NCR generated $154 million in free cash flow in the quarter.

Over the past three quarters, we have generated over $550 million in free cash flow, allowing us to reduce financial leverage ahead of the separation. Moving to the business update on Slide 6. We have strong momentum across all five of our business segments with progress against our strategic initiatives across all of our KPIs. In Retail, we continue to deliver on our strategy to be the retail platform company of choice.

During the second quarter, NCR achieved multiple platform lane wins as retailers choose the best path for them to the platform. The Save Mart companies, a California-based grocery store operating approximately 200 stores, selected Emerald as their next-gen point of sale. We also continue our market leadership position in self-checkout. RBR announced that NCR once again was the market share leader in self-checkout, with more than twice the share of the next largest supplier.

This marks the 20th consecutive year that NCR has been the market leader in self-checkout solutions. In Hospitality, we continue to experience strong demand across our enterprise and SMB customers. In SMB, our payments attach rate for customers remains approximately 90%, driving a 45% increase in payment sites. In Enterprise, Firebirds Wood-Fired Grill chose the NCR Aloha for point of sale.

Aloha, with the NCR Commerce platform, will provide a cloud-based solution to transform and connect all of Firebirds fine-dining restaurants across 21 states. In Digital Banking, we continue to have positive momentum. In the second quarter, Digital Banking sales activity was strong with nine new customer deals and 18 digital banking renewals. We also continue to experience strong cross-sell/upsell momentum.

In the second quarter, Synovus, which has over $60 billion in assets, renewed its digital banking relationship with NCR and added the small business deposits module. In Payments and Network, we are making progress in both merchant acquiring and the Allpoint network. North America ATM withdrawals and cash expense continued to increase and remain at a six-year high. Internet market expansion continues to accelerate.

During the second quarter, we signed an agreement to deploy NCR's Cashzone ATMs and provide access to cash for travelers in the Barcelona Airport, which is one of the busiest airports in Europe. In Self-Service Banking, we continued our momentum in our ATM-as-a-Service solution. Interest in our offering is accelerating from both community banks and large FIs globally. In the second quarter, we signed 10 new ATM service deals, including Kiwi Bank and Union Bank of the Philippines.

UIP is transferring operational maintenance and management of its ATM fleet, which includes over 400 ATMs, to NCR. The bank will increase operational efficiencies while strengthening compliance and security. And the Seacoast Bank, which streamlined operations with NCR's ATM-as-a-Service solution, also extended customers' access to cash by joining the Allpoint network. 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. I'll start on Slide 7 with a top-level overview of our second quarter, which for every guided metric, we are at the higher end or above the guidance we provided back in May. As Mike summarized, in the second quarter, we drove substantial growth in recurring revenue, expanded our profit margins, particularly at gross margin, and generated $154 million of free cash flow. We continue to execute cost productivity actions that are and will generate incremental savings to offset any dissynergies arising from the planned separation.

This quarter's results are demonstrative of the exceptional effort of our teams to simultaneously drive financial results, accelerate our strategic plans, and ready the company for the pending separation transaction. Starting at the top left. Revenue was roughly $2 billion, down 1% year over year as reported and flat on a constant-currency basis. The revenue composition consisted of a richer mix of software and services.

Hardware revenue had a particularly difficult year-over-year comparison. You will remember then that a year ago Q2, we recognized about $50 million of hardware revenue that was pushed out of the first quarter due to supply chain and transportation issues. Most importantly, recurring revenue was up 4% year over year and up 5% adjusted for FX. We continue to have success transitioning from one-time perpetual sales into multiyear subscription-based revenue streams.

In the second quarter, we shifted nearly $80 million of high-profit revenue from what would have been previously recognized upfront to recurring revenue that will convert over the next several years. This intentional deferral of upfront revenue to recurring revenue lowered total revenue growth by four full points. The strong U.S. dollar compared to the year-ago period had an unfavorable impact of $18 million, primarily within our Retail and Self-Service Banking segments.

If we were to adjust for FX and the shift to recurring revenue, total revenue growth would have been about 4%. In the top right, adjusted EBITDA increased $50 million year over year to $389 million, up 15% year over year as reported and up 17% on a constant-currency basis. Foreign currency exchange rates had an unfavorable impact of $6 million. Adjusted EBITDA margin expanded 260 basis points from the second quarter of 2022 to 19.6%.

The increase in margin was driven by lower direct costs such as reductions in fuel, shipping, and component costs, as well as the impact of indirect cost mitigation actions and a higher-margin revenue mix. The benefit of lower direct costs similarly added 310 basis points to adjusted gross margin rate. In the bottom left, reported non-GAAP EPS was $0.94, up $0.03 or 3% year over year as reported and up 9% on a constant-currency basis. The strength of the U.S.

dollar reduced EPS by about $0.05. The non-GAAP tax rate was 26.2% versus 19.2% in the prior year, and that impacted EPS by another $0.09. The prior-year tax rate benefited from a favorable provision and a tax reserve adjustment. And finally, we generated $154 million of free cash flow from both higher profitability and the anticipated improvements in working capital.

Back in October, we described our desire to generate at least $500 million of free cash flow before the separation transaction to reduce our financial leverage. In the first three quarters of those five, we have already exceeded that bogey under a strong financial position heading into the separation. Moving to Slide 8, which shows our Retail segment results. Starting at the top left, retail revenue increased 2% year over year as reported and increased 3% adjusted for FX, driven by growth in Software and Services.

We also shifted roughly $30 million of high-profit revenue that would previously have occurred upfront to recurring revenue that will be recognized over the next four to seven years. This intentional deferral of upfront revenue to recurring revenue lowered revenue growth in retail by six points. Adjusted for FX and the shift to recurring revenue, retail revenue would have grown at almost 9%. Second quarter adjusted EBITDA increased 18% year over year and 21% adjusted for constant currency, resulting from improvements in component, labor, and freight costs, as well as other cost mitigation and pricing actions taken in the latter part of 2022 and in 2023.

The adjusted EBITDA rate was 21.4%, up 290 basis points over the prior year. The bottom of the slide shows the Retail segment key performance indicators. On the left are 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 28,000 lanes or 81% year over year.

At the time of conversion, a platform lane drives an incremental $400 in ARR or an increase of $11 million versus last year. The platform lane increase was driven by rollouts at major convenience and fuel customers. While platform lanes currently represent less than 5% of our total lanes, we see accelerating momentum for the conversion of our traditional lanes and have a substantial lane conversion backlog. And once on the platform, the opportunity to cross-sell and upsell new features and functionality drives further ARPU expansion.

In the center bottom is our Self-Checkout revenue. Self-checkout revenue was down 2% year over year. Timing of major hardware rollouts in the second quarter of last year versus the third quarter of this year caused that comparative temporal dislocation. And ARR was up 3% year over year.

Similar to the impact on revenue, currency rates did modestly negatively affect the ARR calculations, including this one. Turning to Slide 9, showing our Hospitality results. Hospitality revenue declined $3 million or 1%. Lower POS hardware sales were largely offset by an increase in Services and Software revenue, including cloud services and payment processing.

Adjusted EBITDA was up 30% year over year. Adjusted EBITDA margin rate expanded 620 basis points to a multiyear high of 25.5%, a richer mix of Software and Services revenue, pricing, and cost reductions all helped push margin rates higher. Hospitality's key strategic metrics on the bottom of this slide include platform sites, payment sites, and ARR. Platform sites increased 9%, payment sites increased 45% and ARR was up 8% year over year on higher ARPU at both new platform and new payment sites.

The average conversion to platform sites currently drives incremental $7,000 a year in ARR, while the average conversion of payment sites currently drives an incremental $4,000. Combined, the additional platform sites and payment sites contributed an incremental $25 million in ARR year over year. We continue to see strategic momentum in this business as Enterprise clients transitioned to the platform and expanded their functionality, and SMB clients attach payments. Turning to Slide 10, which shows our Digital Banking segment.

Digital Banking revenue increased 7% year over year, driven by client wins, strong renewal momentum, and cross-sell success at Terrafina and the channel service platform. We expect second-half revenue growth in this business to accelerate to about 10%. Adjusted EBITDA was down 5% year over year due to an investment in sales, marketing, and R&D to grow this business faster. Adjusted EBITDA margin rate was 37.9%.

Digital Banking's key strategic metrics on the bottom of this slide include registered users, active users, and ARR. Registered users increased 8%, active users increased 6% and ARR was up a similar 6%. On Slide 11, we do some easy math to help you evaluate the combined segments of Retail, Hospitality, and Digital Banking. These segments will form NCR Voyix at the separation transaction.

This roll-up is for directional indications only. The eventual financials for this company will be impacted by currently unallocated corporate costs by revenue profit adjustments that reflect the planned perimeter of the transaction, and by synergies or dissynergies that result from the spin. The combined revenue for these segments increased $20 million or 2% year over year as reported and 3% adjusting for currency. Recurring revenue was up 5% year over year.

The combined adjusted EBITDA was up 16% year over year, adjusted for FX, and adjusted EBITDA margin rate expanded by 270 basis points to 24.8%. Let's move to Slide 12, turning back to our currently reported segments, in this case, the Payments and Network segment. Starting at the top left, Payments and Network revenue was flat year over year as reported and up 1% adjusted for FX. Adjusted EBITDA increased 2% year over year as reported and 3% adjusted for FX.

Adjusted EBITDA margin rate expanded 50 basis points to 29.7%, driven by a richer mix of high-value transactions which more than offset higher cash rental costs. Because our cash rental costs are calculated using short-term interest rates and are recognized as cost of goods, they have a significant drag on results. That said, a hedging program, algorithm and operational optimization, and pricing adjustments have mitigated much of the impact of interest rates. ATM cash rental costs increased $35 million year over year on a gross basis and $12 million on a net basis after these mitigation efforts.

The bottom of this slide shows Payments and Network key strategic metrics. On the bottom left, endpoints increased 1% year over year. In the center bottom are Transactions, a KPI that illustrates the payments processed across our Allpoint network and across our merchant acquiring networks. Transactions were up 2% year over year on a trailing 12-month basis, fueled by an ATM withdrawal growth rate of 7%.

The rise in both the frequency of cash withdrawals and the amount of cash withdrawn per transaction led to an increase in the total amount of cap expense globally to a level the highest we've seen in the better part of a decade. Annual recurring revenue in this business increased 1% year over year. Slide 13 shows our Self-Service Banking segment results. Self-Service Banking revenue was down 3% as reported and down 1% on a constant-currency basis, primarily due to the intentional shift of recurring revenue which resulted in lower ATM hardware revenue reported in this quarter.

Recurring revenue was up 10% on an FX-adjusted basis over the prior year. We continue to have success transitioning our Self-Service Banking business from one-time perpetual sales into multiyear subscription-based revenue streams. During the quarter, we shifted roughly $36 million in revenue, that would have been upfront previously, to recurring revenue. The intentional deferral of upfront revenue from recurring revenue lowered revenue growth by five points.

Adjusted for FX and the shift to recurring revenue, Self-Service Banking revenue growth would have been closer to 4%. Adjusted EBITDA increased 19% year over year and was up 22% on a FX consistent basis. Adjusted EBITDA margin expanded 470 basis points to 25.6%. The remarkable margin expansion from the previous year can be credited to the reduction in direct costs, particularly in expenses related to fuel and components, as well as the increase in higher-margin recurring revenue streams.

The bottom of the slide shows our Self-Service Banking key metrics. On the left, Software and Services revenue mix increased 200 basis points to 69%. ATM-as-a-Service units increased 304% year over year to 18,000 units, and the shift to recurring revenue continues to gain traction, driving ARR up 7% year over year. On Slide 14, similar to the review presented on Slide 11 with similar caveats, this slide showcases the combined segment results for Payments and Network and Self-Service Banking, which are the segments that will comprise NCR Atleos at the time of the separation.

As I said before, the unallocated revenue and corporate costs are not reflected here. The combined revenue for these two segments declined $18 million or 2% year over year as reported and 1% adjusted for currency. The reduction was primarily driven by the intentional shift to recurring revenue. Recurring revenue increased 4% year over year as reported and 6% adjusted for currency.

The combined adjusted EBITDA was up 14% year over year, adjusted for FX. Adjusted EBITDA margin expanded 330 basis points to 26.4%. Turning to Slide 15, which describes free cash flow, net debt, and adjusted EBITDA metrics to facilitate leverage calculations. As we said before, we generated $154 million of free cash flow in the quarter driven by higher profitability and an improvement in working capital.

Days sales outstanding improved by three days and days of inventory improved by two days sequentially. Our goal to generate $500 million in free cash flow before the separation transaction to reduce financial leverage has been well communicated. We have now generated over $550 million of free cash flow in the first three of those five quarters. The slide also displays our net debt to adjusted EBITDA metric, which has improved to a leverage ratio of 3.4 times, down from four times in Q2 of 2022, driven by higher profitability and higher cash generation.

We remain well within our debt covenants and have significant liquidity, with over $900 million available under our revolving credit facility. We have a robust balance sheet, ample liquidity, and strong financial stability to support our growth and the spin transaction. And finally, on Slide 16, we reiterate our full year 2023 guidance that we provided back at the beginning of the year. That said, after a solid first quarter and a very strong Q2, we now expect to be at the higher end of all of these guided ranges for all financial metrics.

And for those of you building models, we expect to further the trend of sequential quarterly improvement in revenue and profitability in each of the remaining two quarters of 2023. With that, Mike, I'll send it back to you.

Mike Hayford -- President and Chief Executive Officer

Thanks, Tim. And I'm going to continue on Slide 17, with the NCR separation road map. Our go-to-market teams are organized by industry under general manager unit. These teams are ready and have been ready for the spin.

Additionally, there are areas of shared services functions such as legal, tax, HR, treasury, IT, and others that are well underway in the process of preparing for the separation. We continue to make progress in our process with the SEC and recently submitted an amendment to our Form 10 registration statement. We have already submitted a letter with the Internal Revenue Service regarding the tax-free nature of the separation. At this time, we are expecting the timing of the separation to be in the fourth quarter.

As disclosed in the Form 10, the timing of the separation is subject to a number of conditions, in particular, being declared effective by the SEC and the state of the capital markets. At this time, we believe the capital markets are favorable to us completing a spin. Once we receive regulatory approval, we will raise new debt and then execute the spin. In closing, on Slide 18, looking forward, our key priorities are clear.

First, we are on track to separate NCR into two public companies in the fourth quarter. Upon separation, we believe each company will benefit from increased operating and financial flexibility in pursuit of its respective and distinct opportunity sets. Second, we believe that spinning off NCR Atleos in a tax-free distribution is the best path to unlock shareholder value. But should other alternative options become available in the future that could deliver superior value such as a whole or partial company sale of NCR, the board continues to remain open considering these alternative scenarios.

Third, we have made significant strategic progress transforming NCR to a software-led-as-a-service company. We have momentum and a clear strategic vision as we transition customers onto our software and payments platforms, with customers on the platform increasing their spend with NCR. Fourth, we expect to continue our quarterly operating and financial improvements. And finally, I'd like to extend an invitation to each of you to participate in our virtual Investor Day for both debt and equity investors, which is scheduled for September 5 of this year.

We are looking forward to the event and intend to take a deep dive into our strategy and strategic goals for both NCR Voyix and NCR Atleos. This concludes our prepared remarks for today. With that, we will open the call for questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] And our first question will come from Charles Nabhan with Stephens.

Charles Nabhan -- Stephens, Inc. -- Analyst

Hi, guys. Thank you for taking my question. I had a two-part question on free cash flows and leverage post spin. First, on the free cash flow, it's good to see things trending seemingly ahead of schedule.

I know you're guiding to the top end of that $400 million to $500 million range. My question there is, given the trajectory of free cash flows, is it presumable to potentially expect upside to that $500 million? Or are there any factors like -- that were -- positive factors that were pulled forward? And then my second part of that question is just how to think about leverage initially post spin. I know you haven't recapitalized the businesses yet, but any color around that would be helpful.

Tim Oliver -- Chief Financial Officer

Yeah, sure. So, on cash generation thus far this year, we knew that we had about $200 million of cash flow that we should have delivered last year that we used to support working capital as we went through some supply chain issues in 2022, and we committed to harvesting that across Q4, 1, and 2. And so, it's been a very strong cash conversion period. And we've, for instance, a year ago, we're down $149 million in inventory loan.

Our receivables past dues are down, so we've done a great job of managing working capital and get us back to a level that's, let's call it, sustainable. There's not a lot of cash to be harvested from excess working capital at this point for the remainder of the year, so our conversion at this point will be more closer to profitability. I expect profitability to be higher in each of the next two quarters, and I expect to generate around $100 million or so a quarter over the next two quarters. That would put us through the high end of our range.

But remember that there are going to be one-time cash costs associated with this spin that we need to absorb. I didn't take that range up only to say we will need to invest some cash back into the transaction and pay all of our advisors and all the rest to get this thing done. But even with that $100 million or so outflow associated with one-time cost during the spin period, we'll be at the high end of our guided range.

Charles Nabhan -- Stephens, Inc. -- Analyst

Got it. That's really helpful.

Tim Oliver -- Chief Financial Officer

And the other half is on the -- so it's leverage -- coming out on leverage. So, we'll be -- yeah, we'll be in market right after Labor Day weekend to start to try to place the debt that we need. We think that it's going to be about $2.5 billion of debt on a net basis, so more like $2.9 billion on a gross basis for SpinCo. Atleos then will have a leverage ratio north of 3.5, in the 3.7 range out of the gate, and we'll likely work hard to pay that down into the three range as quickly as possible.

RemainCo then, or Voyix, will be about to be north of three but south of three and a half. I'm thinking 3.2, 3.3 at that business as we exit. And that's -- remember they'll keep most of the existing debt that's already outstanding, which has a very favorable coupon, and so their interest expense will be somewhat lower. I think that business will also likely delever a little more post spin and can get safely down below three and then probably move toward two and a half over time.

Charles Nabhan -- Stephens, Inc. -- Analyst

Got it. OK. And as a follow-up, one of your peers and, I guess, customers as well in Euronet noted some slowdown in cash withdrawal activity in Europe. And I know you're not as exposed to DCC and cross-border as they are, but if you could just quickly comment on some of the trends you're seeing across Europe in terms of cash withdrawal activity.

Tim Oliver -- Chief Financial Officer

Yeah. So, globally, our cash withdrawal activity was up. And as I said in the discussion earlier, not only were the number of cash withdrawal transactions up, but the amount of cash being withdrawn is up. That's true in the U.S.

to a larger degree than it is in Europe, but in the U.K., we still got more cash dispensed and more transactions.

Mike Hayford -- President and Chief Executive Officer

And I would say our new market in Portugal, Greece, some of the Southern European markets where we opened up new endpoints, we're seeing actually pretty good growth activity in those markets. So, contrary to what you raised.

Charles Nabhan -- Stephens, Inc. -- Analyst

Got it. Appreciate the color, guys. Thank you.

Tim Oliver -- Chief Financial Officer

Sure. Our pleasure.

Operator

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

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

Thanks. Good evening. Just a couple of questions. First, on the retail business, Tim, in your prepared remarks, you mentioned a little bit of a timing dynamic.

Could you touch on that dynamic? Because it sounded like it may impact the third quarter of this year if I heard you correctly. Could you just talk through that?

Tim Oliver -- Chief Financial Officer

Yes. I should have been clear. We had a very big second quarter of -- a year ago in scope shipments. We had a large rollout for one of our major customers.

We did not have that in Q2 of this year, but we'll have a similar rollout in Q3. And so, it made the comparison in this year's Q2 easy or harder and should make the one in Q3 a little bit easier.

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

Got it. OK. And then just with respect to the Self-Service Banking business, can you maybe comment just globally on what you're seeing overall in terms of ATM demand? And I thought you did a great job in Hospitality, talking about how adding an incremental site for platform and payment is worth X and Y. Could you do the same thing? What does that math look like for ATM-as-a-Service? Thank you.

Tim Oliver -- Chief Financial Officer

Yeah. The ATM-as-a-Service business, if you take the revenue stream over the first seven years of the life of that ATM, it's going to be about two and a half times the revenue that you would have gotten from an upfront sale with perpetual license and a service agreement. When we wrap the totality of the ATM-as-a-Service business around the unit, you should expect two and a half times of revenue over that seven-year period. As you know, as in the traditional sale, our current model, much of that revenue occurs in Year 1.

In the new ATM-as-a-Service model, that new two and a half times revenue will occur linearly across the seven-year period with a crossover point at about 22 months of when your crossover revenue start to accrete to the upside.

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

And then just overall comment on global demand. Maybe add some regional color as well.

Tim Oliver -- Chief Financial Officer

Yeah, good, good everywhere. As we said in the first quarter, we anticipated coming into the year that our revenue in this business would be down 3% or 4% for the year, entirely driven by some flat units, entirely -- decline driven entirely by the shift to recurring revenue of ATM-as-a-Service. We're going to hit or exceed our ATM-as-a-Service numbers for the year, and in fact, this business will have revenue close to flat or up slightly for the full year. So, we are three or four points better from a growth dynamic in this business than we thought when we started the year, and it's everywhere.

The demand is very good everywhere. We enter Q3 with a little more backlog than we entered Q2.

Mike Hayford -- President and Chief Executive Officer

And I'll just add some comments. So, we think the demand environment is still good out there for ATMs, but we're also benefiting from maybe the challenges one of our close competitors is facing right now. And then I think the other big part is Tim talks about ATM-as-a-Service. I think we hit that market just about right in terms of when we came out with an offering.

As the demand side has shifted to have more full-service, full-stack outsourcing, we just have to be there with, we think, the best offering. So, I think those two things combined have created a much stronger year in Self-Service Banking for us than we anticipated.

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

Great. Thank you both.

Operator

And the next question will come from Kartik Mehta with Northcoast Research.

Kartik Mehta -- Northcoast Research -- Analyst

Tim, you alluded to this a little bit, but I want to make sure I understood. You had a fantastic second quarter, but you didn't increase your guidance, you kind of said the higher end of the guidance. And I'm wondering, is that strictly because of the separation of the company, concerns about the macro environment, and want to be cautious in the second half or something else completely?

Tim Oliver -- Chief Financial Officer

No reason to be cautious. I think, look, we're well ahead of our budget for both revenue and profit at this point in the half. We're about $25 million ahead from where we thought we'd be from an EBITDA perspective and somewhat ahead of revenue as well. If you project those forward, we will pay the high end of the range.

If you presume we started at the midpoint of our range, we'll pay at the high end of this range. If I thought that the most likely outcome was above the high end of the range, I would have raised our guidance, but I don't believe that's the case. I believe that we're pacing the high end of that range is a likely outcome for us, so we left it in place. But that wasn't meant to caution any excitement on this quarter.

It was a terrific quarter. It came in much better in every regard than we thought. We made great progress nearly everywhere strategically. And what's really important is the cost actions we've taken, and you can see it in gross margin, up some 300 basis points year over year.

And we're keeping all the, let's call it, indirect cost out, took out last year when it was a little harder to control direct costs. So, I feel very good about where we are. We're going to have a great year, and the second half will be better than the first. I think we'll post growth in the second half that looks relatively similar to the first half.

The second half, we'll defer more money and more revenue and profit to recurring revenue streams, but still grow through that. And our margin rates were up about 240 basis points in the first half of the year. That's primarily driven by good cost productivity and the absence of some negatives that occurred in the first quarter of last year, we're still going to expand margin in the second half of the year close to two points as a company. So, I think all the goodness we're seeing in the first half will continue into the second and allow us to deliver some really terrific results.

Kartik Mehta -- Northcoast Research -- Analyst

And then, David, just on Retail/Hospitality business. Toast and the companies like that are making a lot of noise and seem to be gaining share. And I'm just wondering how you think your product is positioned and how you would portray kind of market share, and what's happening with NCR's products.

David Wilkinson -- President, Commerce Business

Yeah. Sure, Kartik. So, I agree that we see Toast growing their share in the market, adding sites. We too are adding sites as we look, as Tim described, we're adding both payment sites and sites connected to our platform that allows us to expand the recurring revenue.

It's not a zero-sum game in that space either, so they're playing in a slightly different segment than the core enterprise segment that we play in as well. So, from a product side, we're very well positioned. We're seeing good feedback from our customers in terms of what we're hearing on Net Promoter Score and net new wins, so we're continuing to win. We're continuing to win against the competition, and we think we're well-positioned.

Kartik Mehta -- Northcoast Research -- Analyst

Perfect. Thank you very much.

Operator

And our next question will come from Erik Woodring with Morgan Stanley.

Erik Woodring -- Morgan Stanley -- Analyst

Hey, guys, good afternoon. Thank you for taking my questions. I have two as well. Maybe on the first one, it's nice to see such strong growth in a number of your KPIs, platform lane conversions in Retail, platform in Payment sites and Hospitality, ATM-as-a-Service units, all really growing quite nicely.

I realize the shift to subscription is, I think you mentioned, a four-point headwind. And in some cases, as you spelled out, it will take some time to see the revenue tailwind emerge. But can you maybe help us better understand when we should expect the strong uptick in these KPIs to actually drive an inflection in total revenue growth kind of closer to that 6% to 9% that you've targeted at the HoldCo company -- the HoldCo level? And then I have a follow-up. Thank you.

Tim Oliver -- Chief Financial Officer

Yes. Let me go through the segments that we currently report. I think you're seeing it in Hospitality already. They grew very nicely at Software and Services this quarter and had huge margin expansion because of that revenue mix.

They missed on POS hardware, which we really don't -- that's not the focus of that business or either of our two commerce businesses at this point. So, that is an excellent quarter, and I think that's very much the trend you're going to see in Retail. As the Hospitality and the Retail lanes become a bigger percentage, the platform needs to get a bigger percentage of the total. It will start to move the needle.

And the reason we're doing the math and translate it to ARR is to start to show you to try and do the math to make sure you understand these metrics. Admittedly are small currently, but they matter a great deal to our future period growth. The crossover for the -- you pick up about -- you basically double the ARPU when you get a lane on the platform, you get about $400 right of the gate and then starts to grow from there. So, rather than the Hospitality business where you immediately pick up the Software and Services upside, it takes a little longer on the Retail side.

You get them on the platform, you double your revenue stream out of the gate and then it takes the next 12 to 18 months to upsell and cross-sell new product set to continue to have that ARPU grow pretty dramatically. I think that business is likely to see 2024 be a relatively benign growth year as they shift pretty dramatically toward as a service, but still in the mid-single digits. So, seeding future period growth is still growing in the mid-single digits. I don't think that's a typical outcome.

On the Self-Service Banking side, it's all about how fast we pace the ATM-as-a-Service business. We have lapped -- on the software side of that business, we have lapped the transition to a subscription basis, and actually, is a net positive for us currently. We started that -- with this two and a half years ago. As we start to do hardware now, it takes about 22 months for each contract to cross over.

We're growing that business pretty dramatically. We'll call out for you every quarter how many machines we deferred forward, what that revenue impact, the profit impact was, and when you can expect to see that come back in our growth rate. And our current model, we've got modest growth for the next two years in that business. By the time you get to 2026, actually, a really nice growth rate that's in the mid-single digits and moving toward the high single digits as you exit '25 and going to '26.

But that will be entirely dependent on how quickly the ATM-as-a-Service business takes off, and we'll communicate that very clearly. To a certain extent, the short run, we'll have more revenue growth early if we don't move toward ATM-as-a-Service as quickly as we think.

Erik Woodring -- Morgan Stanley -- Analyst

Awesome. That was really helpful color. Thank you. And then maybe, Michael, I know you keep kind of acknowledging NCR would consider alternative scenarios beyond the current spin that they emerge.

But can you maybe share if you've had any of those conversations? Or separately, at what point is it too close to the proposed spin where you'd kind of have to shut the door on any alternative options? And that's it for me. Thanks so much.

Mike Hayford -- President and Chief Executive Officer

Yeah. I mean, I'll just start with -- and I share that it's a little bit of a rhetorical statement to say that a public company or a public company's CEO or public company's board is open to ideas that would create more shareholder value, so I'll start with that. We make it explicit as we've gone through a process over the last 18 months. Having said that, we embarked on the spin almost a year ago at the end of September.

We felt that that was a path that we could execute on that we can control, and most importantly, we felt that this is a path that will create more shareholder value by separating the two companies. And so, that's the path we expect to execute. Having said that, if people come knocking on the door, and people come knock all the time not only the last 12 months. But literally, if you're a public company, people are always talking to you about optionality.

I think right now, the whole group here is heads down on a spin, and I anticipate we'll get to that spin as we talked about in the fourth quarter, and so that's what we're planning to execute on.

Erik Woodring -- Morgan Stanley -- Analyst

Awesome. Thanks so much for the color, guys. Congrats again.

Operator

And we have a question from Ian Zaffino with Oppenheimer.

Isaac Sellhausen -- Oppenheimer and Company -- Analyst

Hey, good afternoon. This is Isaac Sellhausen on for Ian. I just had one question on the cost side. I know you mentioned it in the prepared remarks, but I guess, what you've seen as far as component, labor, freight inflation? It sounds like things have trended in the right direction, but just curious what does guidance assume? Does it assume a continued normalization or for inflation to sort of stay in the same range? Thank you.

Tim Oliver -- Chief Financial Officer

Yeah. The guidance for the full year always presumed that we would lap those difficult environments as we started this year. We've seen the savings in premium freight and premium labor, especially the lack of linear manufacturing and the need to ship products much more quickly last year. We've lapped that now.

The component shortages that we experienced have been solved not just because there's more availability, but because we went and requalified a bunch of new vendors and new designs to make sure that we're insulated or somewhat more insulated from that dynamic going forward. So, good old-fashioned hard work from a productivity perspective, better work from our supply chain group and the elimination of some of the premium freight is all coming through as we expected. It will continue in the second half of the year. As I said earlier, we'll expand margin in the second half of the year about two points, then we were able to get to almost two and a half points of margin expansion in the first half of the year.

So, it's a very similar improvement. It continues on through. And the cost-saving actions that were taken in Q4 of last year and in Q1 of this year are also showing nice returns.

Isaac Sellhausen -- Oppenheimer and Company -- Analyst

OK, great. Thank you very much.

Operator

Thank you. And that does conclude the question-and-answer session. I'll now turn the conference back over to Mike Hayford.

Mike Hayford -- President and Chief Executive Officer

Thanks. Thanks, everybody, for joining us today on NCR's second-quarter earnings call. As you can all see, the NCR team delivered on an outstanding quarter literally across the board, and we exceeded all the expectations that we came into the quarter to deliver. I would say, given the potential for the distractions across our entire company during this time of guiding toward the spin, especially proud of the way the team kept the focus, kept the focus on the customers, kept the focus on execution, kept the focus on delivering really tremendous numbers for the quarter.

So, I want to thank everybody on the NCR team for making that happen. As we get closer to the spin reflected in the last five years at NCR, our team here is very proud of the fact that we have been able to transform NCR income a Software-led-as-a-Service company. We've increased our recurring revenues close to 65%. That was in the 40%, 45% range to start with five years ago.

We've expanded adjusted EBITDA, as you saw this quarter, close to 20%, to the 500-basis-point improvement from when we started when we were a more hardware-centric company, and we continue to approach almost 80% of our revenue coming from Software and Services. We started five years ago with the customer-first strategy. In 2018, we rolled that out. When we did that, our Net Promoter Score was 14.

And for those of you that follow Net Promoter Score, 14 is not very good. Each year, we've continued to improve. Our whole team has put a focus on it. And I'm proud to say in our most recent survey, we scored a 61, which is quite an improvement over 14 five years ago.

If you think about the future of NCR, I could say that that indicator of strong customer set and that strong improvement over the time period is possibly the best indicator of future success, in this case, both companies. We now have happy customers. Happy customers are keen to executing the strategy, accelerating the growth, and transforming NCR into software services-led company. That success is driven by the efforts of every NCR team member each and every day as they take care of our customers.

Over the last five years, I had the chance, Owen has been with me on a lot of trips, David, Tim, and we've got to meet with our customers around the globe and our employees around the globe. And when you get out in the field and see that and you see what makes NCR special, it really is the 35,000-plus NCR employees literally at every corner of the globe that work every day hard, work hard to make NCR, the company, put us in a strong position and put us in a real good position to create this two great companies out of one. I know Owen sitting here would agree with me that we're very excited to be turning over the reins to Tim and David at NCR Voyix and NCR Atleos to continue to execute the strategy, take care of our customers, take care of our employees, increase shareholder value. I'm confident that both will do great running the respective companies and that both new companies will create long-term shareholder value.

I'm going to thank everybody for joining us today on our second-quarter call.

Operator

[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

Charles Nabhan -- Stephens, Inc. -- Analyst

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

Kartik Mehta -- Northcoast Research -- Analyst

David Wilkinson -- President, Commerce Business

Erik Woodring -- Morgan Stanley -- Analyst

Isaac Sellhausen -- Oppenheimer and Company -- Analyst

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