$NATL与ATM的落幕：对话 Undervalued and Undercovered 的 Hugo Navarro

Today, I'm excited to have on Hugo Navarro from Undervalued and Undercovered. We're going to talk about NCR Atleos. The ticker is NATL. It is a very popular company among small-cap investors, whether they're event-driven, value-driven, activist-driven, or whatever. They make ATMs, and I think you're going to hear an interesting push and pull in the conversation: I look at ATMs and say, “Cash is on the way out. Cash is dying. What is this?” But there's a lot going on there.

A famous quote I always think about is, “It may be a sunset business, but what a beautiful sunset it can be.” That's been applied to tobacco, and I think coal less so. People say coal, and they think of the squeeze in 2022; they don't think of the decade prior. The same applies to tobacco and a lot of other businesses. Just because things are on the way out doesn't mean the stock isn't a good buy. And they also might not be on the way out. So, it's a really interesting discussion. I think you're going to enjoy it.

With me today, I'm happy to have on for the first time, from Small Cap Treasures, Hugo Navarro. Hugo, how's it going?

Hello. Great, and you?

Is it Small Cap Treasures, or is it Undervalued and Undercovered?

Undervalued and Undercovered. The thing is, when I started the Substack, I was not going to do it seriously, so I put a different address than the name of the newsletter. But it's Undervalued and Undercovered.

Anyway, the company we wanted to talk about is NCR Atleos. The ticker is NATL. This has been, on and off, on a lot of value investors' radars over the years because it emerged from a spin, and people looked at the old NCR quite a bit. There's that, but we can talk about that. I'll just pause there because I'm rambling a little bit and turn it over to you. What is NCR Atleos, and why are they so interesting?

Okay, so, quick introduction. I came across NCR Atleos, I think it was around June or something like that. I heard about the company and started researching it as a special situation because I thought there was a high likelihood that they would be announcing buybacks in Q2. They did that. I took a good profit, and then, researching more into the company, I thought that it was a really good long-term play. So I stayed invested and added a little bit to that position.

NCR Atleos is basically an ATM company. They make ATMs and service them, so it's kind of a razor-and-blade model. You sell the device, and then you service it. Just a little bit of a spoiler: The main thesis is that you're going to increase the price of the razor blade. You're going to add more value to your customer and get a higher price for it. So that's what the thesis is about.

Perfect. Look, I've got lots of questions on NCR Atleos. Again, I've followed them for a long time, but I guess I'll just start with the question I like to ask everyone. The market is a competitive place. Tons of people are looking at everything.

This has obviously been on the radar of a lot of investors for a while. So what makes NCR Atleos a risk-adjusted alpha opportunity today? What is the market missing?

Okay, so first of all, let's start with why it's cheap. I think it's a 10% to 11% free-cash-flow yield for the current year. That's pretty cheap, especially in the current market. So why is it so cheap? There has been a bit of discussion about the history over the last few years, especially since Alta Fox did that presentation, and that one went pretty viral.

The first reason is that, historically, NCR has not been a good company to be invested in. They have done a lot of dilutive acquisitions. It's not a great company to be invested in. They did the spin-off, and they put a ton of debt into it. So you have a declining industry, which we will get into, but the consensus around cash is not really positive.

You have a declining industry with a ton of debt that is going through a turnaround of the model that you don't know is going to work. So it's an easy pass for most analysts and most investors. People want to invest in industries that are growing, and the ATM business will probably be flat in a good-case scenario and declining in probably the most conservative case. So that's why it's cheap.

Let's go from there. You mentioned it. When I'm researching this, and when I've seen this in the past, the key question is: This is an ATM business. We can talk about all the different ways they slice the ATM business, but I think when I read your piece, when I see the Alta Fox piece, and when I listen to these guys talk, they say, “Hey, Andrew, don't believe everything you think about cash. This is not an AI growth business, right? It's not growing 100%. But ATMs are taking share for lots of reasons that I'll let you discuss.”

Then, when I step back and think about it, it just seems like the long-term trend for cash usage is down. Maybe you get peaks and valleys here, but it seems like ATMs over time are going the way of the horse and buggy. I'll pause there: Why am I wrong? Why is the company right? Why are ATMs not a declining business?

Yeah, so let's start first with the most basic case. I am really a skeptic around any thesis I invest in, so I like to understand the bear thesis really well. First of all, bull people like me will tell you that money in circulation is at an all-time high, that banks are saying they will stop closing bank branches, and therefore that will increase ATM usage and new ATM orders.

The main problem with that is that some people could argue that ATMs and cash usage have been overshot due to immigration over the past few years, and right now they will come back lower due to the Trump policies, because immigration usually tends to lead to more cash usage. That's the biggest bear point, and I think it's completely right. So we might be at a moment when we are over-earning right now, and the industry does not look good in the long term. The problem here is, for example, I have done a ton of work in coal. I think you have been with some people here talking about coal.

So declining industries can be a fantastic industry to be in. Tobacco, coal, and mining—those industries can perform really well if the capital allocation is right. So, in NCR Atleos, first of all, just look at the market perception of the industry. The market is pricing in a decline in the industry. We have 2 players, so this is a duopoly. We have Diebold, which went through a restructuring.

Diebold Nixdorf really has a $2.5 billion market cap, and it is generating between $190 million and $210 million in free cash flow. So, using the midpoint of around $200 million in free cash flow, the company is trading at 12 times free cash flow.

Diebold Nixdorf is not looking to grow. It is not going to get into ATM as a service. The company has gone through its restructuring and is really conservative, so that is a positive point we will talk about later. The base case of the company not growing and simply doing buybacks is being valued by the market at around 12.5 times free cash flow.

Then we look at NCR Atleos. The market cap is $2.88 billion, and expected free cash flow is between $270 million and $300 million, or basically 10 times free cash flow. You might argue that NCR Atleos has basically the same debt as market cap, so the lower multiple is reasonable. We will argue about the debt later, but just on a free-cash-flow basis, the valuation is not that far off.

For Diebold Nixdorf, the market is not pricing in growth. So, in a bear scenario, you are looking at a cheap valuation.

Let me just jump in there. On the valuation, you laid it out, so let’s ignore Diebold for a second and put it to the side. NCR Atleos is trading at 10 times free cash flow. If I look at enterprise value to EBITDA, I think it is trading around 7.5 or 8 times, which are not expensive numbers.

But you mentioned a sunset industry. Coal was a terrible investment for a long time, until 2021 and 2022 came around. Then all of them were hyper-levered, you got this squeeze because of Russia and Ukraine, and they all did really well. Tobacco and convenience stores are sunset industries. I have a quote that I sometimes use: It is from the person who has the last convenience store in California, and he says, “This might be a sunset industry, but what a beautiful sunset it will be.”

Yeah.

I guess my worry here is, if you are saying this is a sunset industry—

I am not saying sunset, but I mean it is not comparable to tobacco or coal in terms of the rate at which it will decline. It is a no-growth to slight-decline industry.

But if it is no growth to slight decline, and you are using the numbers—a 10% free-cash-flow yield—then you are kind of talking about a maximum return of 10% annualized, right? If you say there is no growth and I have a 10% free-cash-flow yield, the maximum you can get is 10%.

Yeah, that is the thing. But NCR Atleos is not about growing in terms of the number of ATM units. It is about increasing the profit you get per unit. That is the thesis people often pass around because they do that reasoning: a 10% free-cash-flow yield is not that cheap for an industry that will offer no growth.

The thing here is that, around ATM as a service, for every extra dollar the ATM-as-a-service business earns right now, it gets around 60% to 80% of that directly into gross profit. Those are incredibly high incremental margins, and we will get to the offering later.

But let’s talk a little bit more about the industry. In the medium to long term, it looks like a declining-to-stagnating industry. In the short term, I do not think it looks as bad.

First of all, we have to look at the trend in bank branches. It has been declining at around a 2% rate since the financial crisis. That is pretty ugly, and it drives demand for ATMs lower. ATM demand, in terms of the number of ATM units, has been more resilient—a decline of around 0.7%, something like that, which is lower than the decline in bank branches.

This is because, due to technology, you can perform a lot of procedures in current ATMs that you would normally need a bank branch for. If you close a bank branch, you can just leave an ATM there for people to carry out some of those procedures. It is a bit of a trade-off: when you remove one, you can have some incremental demand for the other.

What we are seeing right now is that banks are saying this trend has gone too far. People are complaining that older people in villages do not have access to banking because they do not have branches, and banks want to return to some growth or remain at the current level. I think you see it in the United States and in Spain; it is all over the news. People in villages cannot access banking services because bank branches are closing aggressively due to cost-cutting.

Over the next couple of years, we might see a decent tailwind from that and a slight uptick in demand. Also, so people understand ATMs, they have an average life cycle of 7 years. Every 7 years, they need to be replaced.

There are 2 types of ATMs: normal ATMs and cash recyclers. Cash recyclers are new and are 3 times more expensive because they recycle the cash, which saves some expenses. In the long term, they are worth it, especially for bigger banks.

What is the difference between a cash recycler and an old one? What does it do?

With a cash recycler, you put the cash in and it uses it again, much more efficiently. If you deposit cash, it can be used for the next withdrawal.

Oh, so with an old ATM—a 10-year-old one—if I went and deposited $100 and then you went and withdrew $100, they would be in 2 separate boxes. With a recycler, if I deposit $100, it says, “Great, we have $100,” and then, when someone comes to withdraw $100, it uses that cash. It is much more efficient because otherwise you need somebody to go and replenish it. That is really interesting. I did not realize that.

Yeah. The problem with recyclers, too, is that they are complex. They have more sensors and more technology, so maintenance is more complex.

There are 7-year cycles. In 2019, we saw a huge uptick—I think I heard on an NCR earnings call that it was a 25% or 30% bump in hardware sales. So, 1 7-year cycle after 2019 brings us to 2026. In 2026 and 2027, we will probably continue to see an uplift in hardware sales, as well as an increase in the average price of the device.

Right now, around 20% of what NCR Atleos sells are recyclers, and the rest are normal machines. A recycler costs around $80,000, while a normal machine is around $6,000 to—

Let me jump in there. This is an oligopoly industry, right? There is NCR Atleos, there is Diebold, and there is the South Korean company—

Yeah, a smaller player, not—

When I look at this, building an ATM—even a recycler—the technology is interesting, but it is not rocket science. I look at this and think, “Hey, building an ATM with more than 2 million ATMs worldwide, and with an ATM getting replaced every 7 years, you are talking about more than 200,000 ATMs being sold every year just on the replacement cycle. Why is this a good business?”

My first thought is that this should be like televisions. Building these is not rocket science. It is a pretty big market. Why should there not be 7 players splitting the market and competing it down to nothing? Every ATM is pretty much standard, right? If your ATM has a better feature than mine, I can copy it in 2 seconds.

Not really. That is not true. For example, in the last cycle—2019—NCR Atleos historically suffered around hardware sales because Diebold had a premium free-cash-flow multiple. They were the leader in technology, or they were supposed to be. The recyclers from NCR Atleos in the previous cycle were worse than Diebold’s, and that affected sales.

It is not an easy industry because there needs to be verification of the bills. There is a lot of technology involved, and then you need the software integration. The most important part is servicing. You need huge scale to do that. We will get more into that later, mainly because of the ATM-as-a-service business.

Servicing 1,000 ATMs is more expensive per ATM than servicing 500,000 ATMs, so you get those huge economies of scale.

So you think the reason is the razor-and-blade model? It is not just selling ATMs; it is the support. That is the reason only 2 or 3 players can support the industry. That makes sense to me.

Let’s go to banking as a service. I am a bank, and I have decided to buy an NCR Atleos ATM for one reason or another. NCR Atleos is going to start pitching me on a lot of services, including ATM-as-a-service. Why do banks decide to go with ATM as a service versus owning the ATMs and supplying all of that themselves?

We have to make an important distinction. ATM as a service is an easy sell for regional banks. It is a really tough sell for big banks.

This is basically getting into the segments. You have the network side of the business. On the network side, it is really easy: You have ATMs that are owned by NCR Atleos, and NCR Atleos receives a fee from some banks and institutions for their employees or whoever to use those ATMs.

With those networks, the network is strategically important because it gives you scale. What ATM as a service means is not that the bank purchases the ATM. The ATM is owned by NCR Atleos, so that’s capex, and NCR Atleos owns and operates it for the bank. The sale is not, “You purchase this from me and I will manage it.” Maybe they have some type of that offering, but full ATM as a service is, “It’s my problem, so I will handle everything for you.”

Let’s put a village that has 1,000 ATMs. Let’s say we have 4 banks, and 1 of them has NCR Atleos. NCR Atleos has that bank and also the network. At the beginning, Atleos used to do 1 route with the truck to refill and do the maintenance—to do all the things needed to maintain those ATMs, like change the cash and check that everything is correct. In ATM as a service, every problem needs to be solved by NCR Atleos—uptime, everything.

Basically, a technician with a truck doing 1 route has almost no extra cost to add another ATM. That’s why we see huge incremental margins. In a normal town, we would have 4 trucks doing the servicing, 1 for each bank, but that’s really inefficient.

No, that makes sense. So you’re saying this is a logistics and scale business—a logistics, scale, local-density business. I outsource to NCR Atleos and I believe what they say because, look, when I looked at it, I was like, “Oh, a bank outsourcing its ATMs saves 20% by going with them,” and NCR Atleos, I think, has a 25% EBITDA margin.

I mean, NCR Atleos is basically doing it—this is very rough math—but it’s costing them half of what it’s costing the bank. But that makes sense. If you’re getting route density and everything, that does make total sense. Am I thinking about that correctly?

Yeah. Yeah. If you see the incremental margins of NCR Atleos, right now ATM as a service has 60%–80% incremental gross profit. That’s completely crazy because doing another stop is really low-cost—really, really low-cost. They’re able to execute those savings for clients, and as they get larger, they’ll be able to offer even greater service.

The thing here is that penetration is really slow. I think only 6% of the ATMs that they service from third parties are in ATM as a service. The management gave guidance when they did the IPO of getting to 24% in the midterm. So that’s roughly 4 times the number of ATMs they service under that model. If you look at the economics, it doubles the lifetime value of a customer and substantially increases gross profit.

So, in the value proposition, why would a bank choose that? This is a double-edged sword. On the 1 hand, you lose part of your fleet and a little bit of control, so that’s why it’s very difficult for a large bank to do this kind of deal. It would be difficult for them to get JPMorgan into this because they get the savings, but you have that long-term pain: you’re hooked in in some way with NCR Atleos, and if you want to get out, you will have an increase in cost and things like that.

The second point, which I think often gets diminished, is that you change capex for opex. In the normal model, you would need to purchase the machine up front and then do the servicing, so it creates more cost in year 1 and more cost on capital. If you have your incentives tied to free cash flow, you will prefer the second model rather than the first model, first of all for the savings and second because you avoid having to be as capital-heavy. It could improve your targets if they are tied to return on equity and things like that.

Let me go back—while I’m at it, I want to go back to ATMs as a dying business, right? One thing I had thought: are you familiar with Redbox? Do you remember that company?

No, I don’t think so.

You’re not domestic, and you’re a little younger than me. That’s it.

Redbox used to be literally red boxes—giant red boxes parked outside a CVS, a Walgreens, or a Walmart—and you would go there to exchange DVDs. It was DVD rentals, and you’d pay about $1 for 3 days of a DVD rental or something. It was a really nice business before streaming came along, obviously, and the reason was that it was cheaper than anything else.

DVDs were about $20 if you bought them, and you generally only watched a DVD once or twice. Stores loved them because it was just 1 little box: you parked it, and they would generally share rent with a Walgreens or a CVS. It was completely incremental to them and all this sort of stuff.

Then streaming came along, and I remember there were bulls who were like, “Hey, yeah, streaming’s kind of a risk, but if you want new movies, you’ve got to go to these Redboxes, and it’s a lot cheaper,” and all this sort of stuff. There were older people who didn’t want to do streaming, and Redbox obviously today is dead, done, dying, right?

I’m not saying that happens to ATMs, and I’m not saying that happens here, but when I look at this, I see cash usage over time going down, and I hear them coming in saying, “Oh, an ATM can do so much more than cash.” All of that you can do online in the comfort of your home.

When I hear, “Old people don’t want to do all of this online,” well, they want to do it with a person; they don’t want to do it over an ATM. Opening an account at an ATM versus doing it online—it’s even more efficient online. You have to go; you’re using an ATM.

So I just want to ask you: I get the arguments on ATMs, but why are ATMs—there are 2 million globally—not going down to 1.2 million? Why, in 10 years, would we not be sitting here saying, “Hey, cash usage has gone down because cash sucks. We’ve got a more mobile economy”?

The older people who want to use cash or go in person are dying out, or they’re irrelevant, or they’re finally getting convinced, “Hey, it’s easier to do this from home.” Why is the ATM not a dying business?

First of all, saying you can do these things online isn’t really true. For example, I’m not sure if you have those in America, but here in Spain, when you go to the police, you have these machines where you can renew your DNI—your identification document. You can do things like that.

Also, for some banking procedures, you need personal verification: you need a machine that verifies that you are a real person.

For what type of transactions at the ATM?

At the ATM, it would be, for example, opening an account, large purchases, and things like that. Also, NCR Atleos said in its last conference that the devices could be used for renewing passports and things like that, where you need in-person verification.

But that’s not really an ATM, right? Now we’re getting into different use cases. An ATM is something you use for bank stuff. Renewing a passport is more like government procedures and everything. So I hear you, but you’re kind of mixing the use cases.

Redbox, when they shifted, was like, “We can’t do DVDs anymore because Netflix is streaming. We’re going to switch to games.” Then I think they started doing more retail-dispenser items or something. When you’re talking about needing government passports, we’re no longer talking about servicing a bank. We’re talking about using the ATM for something completely different, aren’t we?

No. No. Yeah. I mean, for some procedures that you would do in a bank branch, you can do some of them at an ATM. Sometimes, depending on the bank, you can do everything digitally, and that’s also a fair point to the bear case. But some people prefer to do things in person, or rather with some type of assistance, and with the ATM you can get, from what I understand, a digital call.

I don’t want to belabor the point, but I guess what I was trying to say is: on 1 hand, I have not opened a bank account in person since I was 15, which is an increasingly long time ago, right?

Yeah.

At 1 end, everything is online. At the other end, my dad goes in person to do everything, right? I’m having trouble with the Venn diagram of somebody who says, “I need to do this in person, but I’m going to do it at an ATM through a digital transaction,” versus, “I mean, I could do it in-app on the Chase app and FaceTime if I want that, or I could do it in person.”

It seems weird to me to say the bull case for an ATM—1 of the use cases—is, “Hey, people are going to go and use it as a giant FaceTime machine.” That seems a little weird. I know that’s not the only use case, but I’m just saying, if I’m thinking 8 years out, and you’re saying ATMs are going to be flat, then I need cash usage to either be similar to what it is today.

And it's hard for me to believe that just because digital is so much easier. Maybe I'm just interpreting it wrong. I never have cash on me; I just carry my credit card and tap to pay for everything. I live in New York City, and the MTA, about 12 months ago, went all tap-to-pay. I just keep seeing more tap-to-pay. Everything's pushing cash out.

Maybe I'm wrong on that. Or you need to say, “Hey, these ATMs are going to have a lot of functions other than just distributing cash.” When I look at the ATM functionality, I say, “Oh, well, it's a Redbox versus online, right? If you don't have the cash.” So I threw a lot out there. I'll just toss it over to you.

Yeah, I think you are correct in most of that. For me, on the long-term horizon, as you said, it doesn't look pretty for ATMs and the cash chain. But I think there's a big gap between what the market is expecting and the rate of decline, because if you look at the statistics and what people say, there are a number of people who are going to continue to use cash and want to keep using cash.

You can push people to go digital, but there's still some demand. If there's still some demand, the banks will have to keep that service, and an ATM is not as expensive to maintain that service compared with a bank branch. To have that minimum service for the people who ask for it, an ATM makes sense. If we're talking 30 years down the line, it's really different, but in the next 5 years, it won't change as much.

Can I ask you this question another way? Branches—you know, JPMorgan Chase and a lot of the other big banks. I want to talk about big banks in a second. The branches are increasingly a sales point, right? You come in, and they're not trying to have you cash your check and get $20 or whatever. That's what the ATM is for.

As you're acknowledging, the branches for JPMorgan are for private wealth management, right? You come in, and they're making the loan or talking to you. It's almost like the old Edward Jones—not Edward Jones, because they're not high-pressure—but they're coming in and trying to do the higher-margin, more holistic wealth management stuff with you. You can tell me if I'm wrong on that point, but I think it's interesting when you say there are people who are going to want to use cash.

I think the bull case for an ATM is that you go there and it's doing a lot of other things. But I'm looking at it and saying, “Hey, a customer who's only using this ATM for pure withdrawals is probably a very low-value customer.” What JPMorgan and others are trying to target are the higher-value customers who are coming in and doing this holistic thing.

Now, that could be good for NCR Atleos. It's like, “Hey, JPMorgan wants to outsource the whole ATM network.” That could be great. I know Fidelity will just let you use any ATM you want and reimburse you. That could be a great future for NCR Atleos. But it could also be a terrifying one, where all the banks are actually pushing that out and just want one ATM in an entire network or something. I don't know. I'll toss it over to you.

Yeah, that's part of the network side of NCR Atleos. They own the ATMs, and banks that don't want to have that footprint use Atleos to manage that usage. If, in a village, we have 1,000 ATMs instead of 2,000, it's even better to have just 1 operator servicing those than to have multiple operators.

There's also a little bit of the question of what's already priced into the market. I don't look at this as a 5-to-10-year hold. It's more probably a 3-to-4-year trading opportunity, in my view. You wouldn't like to own coal for a long, long time, but if it has good tailwinds over a certain period, it might be a good investment.

The point here in the industry's bull case, and the more conservative thesis, is that the decline will be lower than what is expected and priced into the market. First of all, you're seeing what the banks are saying: that they will stop bank-branch closures. That also relates to ATMs, as it's heavily correlated. If we see that year-over-year decline stop, we'll see a rerating, even if it's in the medium term.

I completely agree about the longer-term risk, but I think we have quite a long time to wait and see. The market won't suddenly wake up one day and say, “ATMs are dying,” because a lot of that is already priced in.

Well, you've mentioned valuation a few times, right? So let me just ask you: as you and I are talking, it is trading for—of course, my little stock-price quote went away—about $39 per share. I think we talked earlier in the podcast about how that's around 10 times price to free cash flow to equity, and about 7.5 times EV to EBITDA. What do you think the fair valuation for this company is?

Okay. First of all, if we go into the details, we have 3 levers that are unrelated to growth. The ATM-as-a-service business has been growing, so the way I sometimes look at these setups when assessing valuation is by doing a run-rate analysis and knowing what costs, for example, won't be there next year—what 1-off costs will disappear.

First of all, interest costs. If you take a look at the NCR Atleos bonds, the face interest rate is 9.5%. What the market is pricing in is 6.9%, so that's a big difference in terms of interest rates. They can refinance those bonds in October 2026, and I think they should be able to lower their cost of debt by 1 to 2 percentage points. That would mean savings of $30 million to $50 million, which is quite a lot of money—about a 10% to 20% boost to free cash flow.

Then we have the higher interest cost on the network side. That's another $25 million that, if interest rates go down as we're seeing right now, would be another uplift to free cash flow of around $35 million per 100 basis points, because they have around $2.6 billion in cash in circulation.

The next point is just doing the run rate of the ATM-as-a-service business, even assuming no growth—which is completely nonsensical because they have a really good backlog to continue growing that business. That will also add substantial gross profit without requiring additional capex. For 2026, we probably have an extra $50 million to $75 million in free cash flow just from interest-related items, plus some extra growth from ATM-as-a-service. That probably gets free cash flow close to $400 million, and then we see a better and much cheaper valuation.

That's great, but I just want to go back to the question quickly. The stock is at $39 right now. What do you think the fair value for the stock is?

I mean, it depends a lot on how it matures and how ATM-as-a-service is proven. If they prove that they can reach scale with ATM-as-a-service, this is no longer just an ATM bet on hardware sales or servicing. They basically have a near-monopoly there, because once you get scale, it's very difficult for another player to enter. Even in a market that is shrinking, you get a growing share of a shrinking market.

When they're taking share in ATM-as-a-service, which is what you're hoping for, or what you're pitching, who are they generally taking share from? This is a mature industry.

They are taking share from the banks that actually service their own ATMs.

Is it mainly that? Are most banks still servicing their own ATMs, even the small community banks and everything?

Yeah, the penetration of this type of service is really low. There are other, mainly international competitors with quite a few devices in Europe, like Brink's and Euronet. Some of them, along with smaller competitors, call it ATM-as-a-service, but it's not all of the service that Atleos provides.

What I'm trying to say is that NCR Atleos does the full thing, while the others do 1 or 2 parts, like cash management or maintenance, and call it ATM-as-a-service. But it's not a service that includes the full thing—not full integration.

The US—and again, I paint a domestic lens, and this is a worldwide business, so perhaps that is inefficient—but the US, in my opinion, is overbanked, right? Because of legacy structures and all this sort of stuff, we've got JPMorgan, Citibank, Bank of America, and all these small community banks. We're starting to see consolidation, but I think it needs to go a lot quicker, in my opinion.

I just remember there was an article about 3 years ago that I always laugh at. It was about the CEO of a community bank, and he was like, “Oh, I do all my banking at Bank of America because their app is so much better. We can't invest in the same technology and everything.” I read that and thought, “Oh my God, every small bank in the world does that.”

The reason I ask is that if I thought banks needed to consolidate, and the large banks needed to get larger and the midsize banks needed to get larger, is that a bull case? Or does it seem like a pretty bad bear case for this? Because if JPMorgan hypothetically bought every bank in America and you told me JPMorgan kind of does its own maintenance, that's bad for these guys.

Now, you could also tell me, “Hey, JPMorgan can’t buy anything.” After First Republic, Citi can’t buy anything. But First Horizon, a midsize bank, can buy a lot. If they’re outsourcing, that could be a huge advantage.

I just wanted to ask about that. I realize it’s a very domestic focus, but regarding that tailwind or potential headwind of bank consolidation, where do you think that falls in?

The penetration of this service is really low. Most banks still do their own servicing. For a midsize—not even a small bank, but a midsize bank—to get this offering, NCR Atleos needs to be at a much larger scale. They need many more devices and a larger network so the pricing and cost advantages make sense.

In a recent conference, I think the CEO said that ATM as a service is an easy sell for banks that have and want to outsource 500 or 1,000 ATMs. But beyond that, it starts to be a tough sell, because once you’re talking about 10,000 ATMs, the scale advantages aren’t as good, and maybe it’s not as attractive once you get to that scale.

In the bear thesis you’re mentioning, it will depend on whether NCR Atleos, at that point, will have reached a sufficient scale where it can still offer pricing advantages to the large banks. If they start doing aggressive consolidation right now, it might be pretty bad because NCR Atleos hasn’t reached that scale yet, and even those banks could do the ATM-as-a-service themselves.

I don’t think that’s a core piece of the business. The banks don’t care about doing ATM as a service. If they can outsource it at a lower capex and a lower overall cost, they will do it.

Most people don’t realize the incredible moat that’s been built with the distribution network and the servicing network. This compounds really fast. A year ago, the incremental margins were lower, around 30% to 40%. Now we’re already at 60% to 80%, depending on the quarter. Incremental margins also mean that if you need to pull the pricing lever down to get more clients, you’re able to do that.

Makes sense. Let me ask one last question. I saw there was an interesting conversation based on some of the specific phrases you used on this podcast. I’m pretty sure you were one side of it, but there was an interesting conversation on TRDA.

I’ve followed this for a while, and one thing I’ve heard a lot of people knock this company on is accounting. That seems weird, because having a poor accounting function at an ATM and cash-management business seems strange. But there have been a lot of restatements and amendments, and I think a lot of people believe the add-backs here are pretty aggressive on the EBITDA line.

I’m looking at the 2024 amended 10-K filed in November. There was a restatement, and there’s a lot there. I just want to ask: on the accounting, the add-backs, the accounting restatements, and all this type of stuff, how are you thinking about that risk?

If you look at net income for the company, this full year it will be around $100 million. It doesn’t look cheap if you look at net income, but then you have depreciation expenses of around $250 million or something like that.

The free-cash-flow number that I mentioned includes some add-backs, I think from stock-based compensation and some one-offs. But it also deducts some growth capex, which you could argue many companies report free cash flow without deducting growth capex.

On the accounting side, they have some add-backs, but it’s not really that concerning for me. The cash generation is pretty good, more or less the same as stated, even though I don’t like the add-backs for stock-based compensation because it’s compensation—it’s a real expense. That’s pretty bad, but most companies do it. I don’t find it aggressive compared to what most companies do.

To be completely honest, there are some red flags on the board. Two or three members of the board were also members of the boards of companies that went bankrupt, so that could flag a case for some people.

The CEO was the CFO of—do you know what the company was called? It was MEMC Electronic Materials, which became SunEdison. That was not a good thing.

I had a lot of history with SunEdison. I remember running the math and thinking, “I just don’t understand these sale-leasebacks they’re doing. The math seems crazy. I don’t understand how they’re creating any value from these.” It was just up and to the right, up and to the right.

I was a younger guy, so I didn’t know how to say, “Hey, this is insanity.” But I probably still don’t know how to say, “This is insanity,” to be honest with you.

Yeah, me neither. That could flag a red flag, too. I researched a little bit into that. He was CFO before all that crazy stuff started, before they became basically a hedge fund that was buying things with crazy leverage. He was out before that, so I don’t think that’s a big red flag.

In terms of guidance and confidence with investors, I think he has been doing a pretty good job. He has been delivering on most of what he promised. In the IPO, they overpromised a little bit, but they have mentioned some of the headwinds they’ve been facing, mainly in the ATM-as-a-service business.

One interesting thing I would like to comment on, which I think helps you understand the business and the complications of growing it, is that once they make the sale for ATM as a service, they need to establish the connection and integration with the bank’s IT systems.

They thought that would take 3 to 4 months. It’s actually taking 8 to 9 months from the sale. The sales cycle—

The biggest red flag here is that anyone who’s ever done anything with technology and integration with banks—if you said, “We’re going to integrate this thing that is mission-critical, literally cash in and out the door,” and then said it would take 3 to 4 months, you would have been laughed out of the room.

If you had told me 8 to 9 months, I would have taken the over on 8 to 9 months. I think that’s the biggest red flag I’ve heard here, to be honest with you.

Yeah. They’re pretty honest about most of these things, because it’s not a secret that banks are really inefficient entities. That’s also part of the bull thesis: they’re able to generate all of these cost savings and things like that.

A big part of why this makes so much sense to me is that this is a duopoly, and the other big player isn’t taking part in this market, mainly because—

Let me ask you why. The other big player is Diebold. We talked about them: they emerged from bankruptcy, they’ve got a clean balance sheet, and they’re not pursuing this opportunity.

The reason I think bulls would give is, “Hey, Diebold is conservative, and they’re being run like a post-bankruptcy company. It’s a cash cow, so return the cash,” right?

I think the counter would be—and I’ve had this in some other investments where there are more competitors—that sometimes when one competitor does something and no one else does, it’s a stroke of strategic genius. But a lot of times, when one competitor does something and no one else does, it’s because everyone else has examined the opportunity and said the economics aren’t there.

When I see Diebold, which is bigger—unless you can correct me if I’m wrong—I think they’re bigger. When I see Diebold turning down this growth opportunity—

No, it’s not bigger. They’re about the same size.

I thought they had a little bit more market share, if I remember the pie chart.

They have almost the exact same market share.

Okay, so they’re the same size. When I see them turning it down, I say, “You have a clean balance sheet and you’re turning this down. Is it really just conservatism, or did you do some math and say, ‘Hey, the pricing and all this doesn’t make any sense?’”

The first thing here is something that a lot of people don’t take into consideration. I think that’s the fault of the company, because they don’t make this easy to understand: Diebold does not have the network business.

Building a servicing fleet from the start, if you have no network business, is incredibly expensive. Let’s say you already have 100 ATMs that are yours in a city—it’s really easy to integrate a bank. If you have zero, starting from zero, it’s much more costly and takes much longer.

NCR Atleos has also acknowledged that when it looks to expand, it looks for countries and cities where it already has a sizable network of its own devices. Everything is about the network, the scale, and the scale economics.

Diebold doesn’t have that network. It has premium pricing because it’s known in the industry for premium technology. It has the best technology and is the leader in that area. Right now, it looks like NCR has been improving on that end. It has been seeing really good growth in the hardware.

Compared with Diebold Nixdorf, even though Diebold Nixdorf doesn't report exact numbers specifically on hardware sales, they have been improving on that end. They have invested quite a bit of money there, and just to show the importance of that, recently management has said that when looking at deploying capital, they are looking at acquiring fleets of ATMs and servicing basically underutilized fleets of ATMs, just to increase the network and increase scale economics. It's just about increasing scale and network, and once you have that, you have a huge moat.

You have incremental pricing power, both to get really good margins or, on the other side, to offer better pricing.

I unfortunately have a hard stop at 3:00, so I actually have 4 more questions I want to hit, but we're not going to have time to get to those. I just want to turn it over to you. I do think we've done a nice job talking about a lot of different pieces of this business and framing the upside. My downside, red-team case—I wanted to test that, but I just want to turn it over to you: Is there anything you think we should have hit, or that we should hit harder, that we didn't get to in the confines and constrictions of an hour-long podcast?

Yeah, I think there are some things that people will need to research a little bit. First of all, tariffs: they will have a $25 million to $35 million hit this year.

Tariffs—they're on one day, they're off the next. Who knows at this point?

Yeah, yeah. That's also something that could add some extra upside because they do the manufacturing in India. CEO guidance is basically for $400 million next year. That's pretty conservative. It requires basically no growth, just some refinancing, to reach $500 million in 2027.

If they are successful with the ATM-as-a-service business, that should be okay. So overall, they have some pretty bullish things going for them and a good backlog. They should continue pretty well, and long term, I'm skeptical about ATMs as a service, but right now it makes sense.

Can I ask one last question here? You mentioned interest-rate cuts earlier, right? And that makes sense. They have to own the cash. If you subscribe to their ATM-as-a-service offering, I'm guessing that they have to own and control that cash. That's real working capital. That's a real expense. They have to borrow or pay for it in some way, shape, or form.

You mentioned rates going down. Is there a bear case if interest rates—we just saw them go from 0% to 5% pretty much like that—went from 5% to 10%? Are these guys choking on financing the ATM cost, or are there levers they can pull where they somehow get less cash in the ATM? Does that make sense?

They have already done that. They've taken some efficiency from $3 billion in circulation to $2.6 billion. So they can do things; they have already done some of them. But, yeah, the cost would go up significantly if we go to, like, 10% interest rates.

And they can manage that, right? They can just say, “Hey, we were doing 3× leverage; we have to do 2× leverage because our cash is basically dead at this point.” But it was just one thing—everybody likes to say interest rates are coming down, Fed cuts, and the Fed is cutting, but it can go the other way.

Yeah, also, my main point about interest rates is that their debt is priced too high. Apart from the Fed cutting interest rates, they should also benefit because their bonds are publicly traded.

Oh, well, the bonds were issued. Yeah, yeah, absolutely. I was just thinking about the cash.

Hugo, this was awesome, and I'm looking forward to chatting and having you on again.

Perfect. Thank you, Andrew.