Apr 30, 2014
Executives
Tracy Krumme - VP, Investor Relations William Nuti - Chairman, President and CEO John G. Bruno - EVP, Industry & Field Operations and Corporate Development Bob Fishman - SVP, CFO and CAO
Analysts
Dan Perlin - RBC Capital Markets Paul Coster - JPMorgan Ian Zaffino - Oppenheimer Meghna Ladha - Susquehanna Matt Lipton - Autonomous Research Kartik Mehta - Northcoast Research Matt Summerville - KeyBanc Capital Markets
Operator
Good day and welcome to the NCR Corporation First Quarter Fiscal Year 2014 Earnings Conference Call. Today's conference is being recorded.
At this time, I would like to turn the conference over to Ms. Tracy Krumme, Vice President, Investor Relations, Please go ahead, ma'am.
Tracy Krumme
Good afternoon, everyone, and thank you for joining our first quarter 2014 earnings call. Joining me on the call today are Bill Nuti, Chairman and Chief Executive Officer; John Bruno, Executive Vice President; and Bob Fishman, Chief Financial Officer.
Our presentation and discussion today includes forecasts and other information that are considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. While these statements reflect our current outlook, expectations and beliefs, they are subject to a number of risks and uncertainties that could cause actual results to vary materially.
These risks and uncertainties are described in our earnings release and in our periodic filings with the SEC, including our annual report to stockholders. On today's call, we will be referring to presentation materials posted on our website.
We will also be discussing certain non-GAAP financial information, such as free cash flow and results excluding the impact of pension and other items. Reconciliations of these non-GAAP financial measures to our reported and forecasted GAAP results and other information concerning such measures are included in the presentation materials and our earnings release and are also available on the Investors section of NCR's Web-site.
A replay of this conference call will be available later today on our Web-site, ncr.com. For those listening to the replay, please keep in mind that the information discussed is as of April 29, 2014, and NCR assumes no obligation to update or revise the information included in this call, whether as a result of new information or future events.
With that, I would now like to turn the call over to Bill.
William Nuti
Thank you, Tracy, and good afternoon to all of you and thank you for joining our Q1 call. I'm now on Slide 3 and I'm going through the Q1 2014 financial highlights.
Let me start with revenue. Revenue was up 8% year-on-year, and 10% when you take into effect constant currency.
And inside that revenue stream is something that we're tracking and providing you more color on, recurring revenue was up 22% year-on-year mainly as a result of the influence that Digital Insight had on recurring revenue, and now recurring revenue represent 44% of total revenue. Remember that recurring revenue for us is hardware maintenance, software maintenance and SaaS, so quite a strict definition of recurring revenue.
Operational gross margin up 120 basis points year-on-year, again a solid quarter year-on-year in terms of growth on operational gross margins driven by software and SaaS primarily and we'll talk more about that in a moment. We had a record quarter in NPOI, to $155 million year-on-year, and that compares to $129 million in the prior year.
Bob will give you some color on [$829 million] (ph), given that you'll remember in Q1 last year we had a one-time accounting item for severance that featured prominently as a positive impact on the NPOI in Q1 last year. But we did achieve an all-time high NPOI margin in Q1 of over 10%, now it's double-digits in Q1, and Q1 is without question from a seasonality perspective always our most difficult quarter.
Free cash flow came in as expected in Q1. Incidentally, free cash flow include cash flow from operations, was up year-on-year and free cash flow was down year on year, mainly as a result of investments in CapEx, primarily software CapEx and disc operations was higher year-on-year by $17 million, again Bob will give you some more color on that.
I'm now on Slide 4 and something I want to make sure you're all aware of, as we continue to execute this reinvention of NCR's continued investment, built within these results today and they have been for quite some time and also built into our guidance on the year, continues to be significant investments we're making in R&D, services as well as sales. I want to take you through a couple of those so you're aware of what we're doing and the impact it's having.
First, let me start off by saying, it is our goal to continue to balance this business model transformation effort we're going through to a hardware-enabled software driven business with the right investments to achieve that goal, and this is a quarter where you saw R&D as a percent of revenue reach an all-time high for NCR of over 4% of revenues. It also happens to be up R&D 15% year-on-year, so growing about twice as fast as the top line.
Much of that is being invested in software and SaaS. However as we balance those investments with hardware, we'll continue to see more investments going up in software and coming down and move to commodity spaces.
Over the last several quarters and going forward, we're also investing in services. We are absolutely riveted on delivering a competitively differentiated solution to our customers and making services a competitive advantage for NCR, and you should be aware that those investments are quite significant as we look at the amount we're investing in headcount, parts and process along with tools and use systems for our services workforce.
In each of our lines of business, we're also making point investments as well. So for example, you are all aware of the investments we're making in DI and services I just went through that, that affects all lines of business.
And as goes Hospitality where we're addressing international expansion, sales, software and SaaS, and then Emerging Industries where we're making investments to onboard and make us a more capable provider of managed services long-term. I'm now on Slide 5 and here's where I want to break out for you our software related revenues in Q1 and update Q1 guidance on the full year.
The net on guidance, there's no change to our full year guidance in terms of software related revenues. However we had a great Q1, a good start to the year towards that long-term 2014 goal.
As you can see on the left, software related revenue was up 45% year on year, and even if I adjust for Digital Insight, organic growth was quite significant and positive in the quarter. However you can see we're becoming quite a large SaaS business with SaaS now up 242% year on year, representing a significant portion of our overall software revenues.
On the right, we still have a view towards our software related revenues that follows. You can see PS at the top and the little SaaS, and on the bottom in gray software licenses and software maintenance, and we're still expecting 2014 software related revenue growth of 40% to 44%.
I'm now on Slide 6 and this is a new chart for all of you. It's a breakout of our product categories and within that what percent each one represents of our total NCR revenues, to give you a sense for the confidence we have and the confidence we think you should have in our ability to continue to expand our gross margins.
And what you can see is a very significant impact of software related revenues having on total revenue today as well as the decline in hardware related revenue and the steady state for the most part of our other services revenue in particularly the last few years. As software revenues have increased, you're seeing an impact to the other services line and you're seeing overall is a very positive impact on gross margin.
Upon that note, let me ask John Bruno to take you through a few of the slides related to this commentary on the impact that these revenue streams are having on NCR, more from a strategic point of view. John?
John G. Bruno
Thank you, Bill, and to that point, I'm on Page 7 and this is entitled 'Uniquely Positioned in Omni-Commerce Landscape',' and I wanted to talk to this slide for a moment and start here because we're a complex business, in that we serve multiple industries in multiple ways [indiscernible] not complex and what makes NCR unique is that we are uniquely positioned in the market. NCR is at the intersection of business model innovation and the ever evolving consumer experience.
In fact, we've always been positioned at this intersection and year in and year out we innovate to enable our customers to deliver improved sales growth, operating efficiency and consumer satisfaction in all the way consumers conduct business, through cash, credit, debit, store value promotion and even [indiscernible]. And we did go to industries consumers care the most about, where they bank, shop, eat, drink and travel our lines of business.
Perhaps most importantly we enable all of this across all of the channels consumers use to connect, interact and transact with business, online, tablet, mobile, kiosk, in-store, et cetera. That's why the complete solutions of hardware, services and now multi-channel software and SaaS offering are compelling and differentiating products of our portfolio.
On Page 8, we want to also make the point that the rapidly growing transaction process that we deliver across all the industries we serve is done so across both physical and digital platforms. This is important because whether it's a retail bank or retail is across all the segments we serve, and includes even travel and hospitality, what is consistent is that our customers are leveraging all their assets to reach consumers for more touch points as they evolve their business models.
More convenient access delivered through and integrated cross channel platform is at the center of our hardware enabled software driven business model and is key to our customer success. That's why more of our discussions are now in the [indiscernible] suite versus operations and procurement.
When we felt consumer transaction technology, it's important to shape the consumer experience and focus on where you can differentiate and offer strategic value and when the software content is high. Branch transformation, mobile banking, mobile order pay, self check out, client telling, loyalty, these are all really good examples of value creation in that space.
We have an expansive software solutions portfolio and on Page 9 you can see a number of examples guidelines of business where our value proposition to customers has changed around our software offering. At NCR, we have a strategic and purposeful plan to take advantage of the ultimate space in the market and define what that is.
We are committed to continuous innovation by line of business and being the number one technology solutions provider by industry. What may not be well understood is that the majority of our software solutions are now unattached software solutions, meaning they can be sold independent of our hardware solutions.
This translates to quite a different go to market delivery model for NCR and is the result of our multiyear strategy and the catalyst to our operating structure. As example, our goal is to not only be the number one global provider of ATM unit but also the number one in ATM multi-vendor software.
We are also number one amongst new [indiscernible] sales, software and the number one vendor under consideration for future retail software purchases according to IHL/RIS Study that was published in January of 2014. Now please turn to Page 10.
On the next five slides we're attempting to provide you financial highlights and performance highlights, guidelines of business as opposed to the consolidated view we provided you previously. It will also include commentary on key developments by the line of business that we believe are important to share as each business is either in various phase of transformation or strategic execution.
Hopefully you'll find this format more useful as you better understand each of our lines of businesses. Starting with Financial Services, we were pleased with the strong results in the quarter.
Revenue was up 11% year on year with strong margin improvement of 500 basis points, primarily due to a favorable revenue mix including a higher percentage of software related revenue of 92% year on year. We had strong orders quarter driven by North America orders growth of 28% excluding Digital Insight and growth in the small to medium-sized banks Branch Transformation and software.
We enter Q2 with a strong backlog both in terms of volume and mix as there is more software and Professional Services in that mix. Excluding Digital Insight, the core also had solid performance with operating margin improvement of 310 basis points and software related revenue growth of 17%.
The key developments for Financial Services I'd like to call your attention to includes balanced performance globally as well as keeping an eye on Russia, continued momentum in Branch Transformation. In fact Branch Transformation revenues were up 300% year on year.
And we had 17 new APTRA Interactive Services customers, of which five are international customers, and we had a strong start to Digital Insight. On Digital Insight, please turn to Page 11.
As we've committed to do and done historically with the acquisitions of Radiant and Retalix, we want to provide you a quarterly update on our integration activities for our full year as we assimilate these companies into NCR's operating model. [indiscernible] they become core to our business and [indiscernible] overall business execution.
Let's start with an update on Digital Insight. I'll start off by [announcing that] (ph) our main objective is to demonstrate commitment to be a global leader in omni-channel retail banking transformation.
This is critical because of the way consumers are interacting with retail banking but it's also critical to the markets we serve, the small to medium sized banks that are a very important part of our growth strategy, not only domestic but internationally. Another key acquisition objective is, we expect to see slightly accretive non-GAAP diluted EPS particularly in 2014 and 2015 and accretive to 2015.
First let's start with the numbers. Q1 revenue of $76 million and operating income of $23 million came in at in line with our expectations.
Qualitatively we had very good feedback from existing Digital Insight customers on the power of NCR's omni-channel banking solutions. Any investments we've made are in line with the transition to run this business within the NCR data center.
We've had good win rate through offer such as mobile in our existing customer base, up approximately 49%. In fact 83% year on year increase in mobile active user rates, 5.5 million total mobile users versus 3 million just last year.
On Page 12, our Retail line of business experienced choppy execution in the quarter. Revenue was flat year on year and up 1% on a constant currency basis, in line with our expectation given the tough comp in Q1 of the prior year.
The operating income decline of 12% was due to an unfavorable mix of revenue and continued investments in the business. While Retail software related revenues were up significantly up 27% year-on-year, they were below our internal expectations.
As we transform to a more software driven business model with larger software deal sizes, we're focused to improve linearity within the quarter and execution in this space overall. Orders were down mid-single digits year-on-year driven by North America.
We did have strong orders in the rest of world. Backlog is up significantly however and roll out of larger order is pushing revenue to the end of the year and into 2015.
Key developments in the quarter for Retail that we want to call your attention to include strong revenue and other growth in Europe, Middle East and Africa, Retalix is continuing to perform very well, experienced strong demand for R10, and NCR at the top in new leadership ranking, number one point of sale software vendor, leader in traditional North American ePOS and self-checkout terminal provider, leader in North America POS share gain and strong order growth in self-checkout. From a market development perspective, we are experiencing capital spending priorities changing to a change in focus to data privacy and security and we are seeing consolidation within U.S.
grocery segment. In the quarter we have also introduced new innovative SaaS solutions such as NCR Cloud Connect and NCR Command Center, to respond to some of these key developments in the market.
Let's turn to Page 13 to review our Hospitality line of business. The revenue came in at $149 million, up 13% year on year with revenue growth across all theaters.
Operating income of $12 million was down 43% year on year. This decline was due to unfavorable revenue mix and investments in international expansion.
Software related revenue was up 2% with SaaS revenue up 11% and SaaS application sites up 20% year on year, showing strong growth in this important part of the segment. The key developments in the quarter we would like to call your attention to are, solid geographic expansion showing our traction in these areas, with revenue growth in Europe, Asia, Middle East and Africa.
We have new international customers, primarily in Brazil and Germany and we have a continued focus on our North American small and medium business market with 22% revenue growth year on year. Also, continued investments in software and our capabilities and new opportunities in applications with the fast adoption of software, SaaS and mobile solutions.
In fact, NCR was recognized by the Technology Association of Georgia as one of the top-ten most innovative companies for our mobile payment solution. The work that the Hospitality [indiscernible] is doing with [indiscernible], mobile pay, loyalty, ordering and customer voice shows that NCR remains a lead innovator.
On page 14 you'll find a summary of our Emerging Industry line of business. This consists of telecom and technology, travel and now small business.
From a financial highlights perspective in the quarter, revenue is $85 million, up 12% year on year with growth in T&T. Operating income of $4 million was down 60% year on year, partly due to lower software related revenue and the increased cost and investments in ramping up our managed service contracts in T&T.
We are constantly reshaping our services' revenue stream because commoditization of [indiscernible] services can negatively impact margins over the long term and we want to be more value-added and move away from the commodity to more managed services. Over that long-term, we will do this across services and what we've done in our product portfolio, which we move up the value chain and offer more software than hardware.
The key developments in the quarter that we felt were important to highlight are, in telecom and technology expanded service offerings by providing on-site maintenance and support for customers. In travel, we have a continued focus on airport and airline innovation in emerging countries such as China and Oman, and we delivered a record 15 million mobile airlines boarding passes, up 90% year on year.
In small business, we will continue to invest in our small business segment to build SaaS based business model which over time we expect to deliver very good results. We have seen an increase in adoption of our NCR Silver customer base to over 7,000 and we now have over 15,000 devices within the Silver product portfolio.
This emerging industry segment is an important area where we continue to make investments as we feel they are critical to generate growth in the future. With that, let me turn the call back to Bill to provide summary comments on our overall execution, highlighted on Page 15.
Bill?
William Nuti
Thank you, John. As I summarize Q1, our revenue growth in the quarter were clearly led by a strong Financial Services, Hospitality and Emerging Industries, and Retail was up slightly in the quarter but again on a difficult compare year-over-year.
What's driving revenue growth is interesting. As you look under the covers, Branch Transformation, mobile, self checkout and demand from our omni-channel software is driving both orders and revenue.
And as I mentioned, recurring revenue is growing as a percent of total revenue as well as on a year on year basis. And certainly strong software growth and SaaS growth in the quarter lifted our margins and will continue to in the out quarters.
I was pleased with the performance of DI in Q1 and the Q1 results were solid and the integration plan we have in place in track. It should be noted as well we're equally pleased with Retalix and Hospitality even in light of the quarterly operational income margin decline.
We are making significant investments in NCR along the way and I wanted to remind you of those. Our investments in R&D, services and the pinpointed investments we're making by line of business will impact both the current quarter, future quarters and provide long-term growth sustainability for our investors.
Cash flow from operations was up year on year but free cash flow down as a result of continued investment, mainly in software capitalization and a higher discontinued operations quarter for us, but we remain on track for our guidance on the year. We are going to modify guidance on the top line and take it down 2 percentage points from the high and low end.
Bib will take you through the reasons why, but think about that as partially a higher expectation on FX impact and lower Retail revenues primarily. And we will also maintain our full year NPOI and EPS guidance.
However, we feel like at this time it's coming at the low end of that range. Bob?
Bob Fishman
Thank you, Bill. I'm on Page 17 which shows the Q1 operational results for the Company.
Here you can see the strong revenue growth up 8% as reported and 10% on a constant currency basis. As Bill mentioned, the operational gross margin rate was 28.6% or 120 basis points higher than last year, driven by significantly more software and SaaS.
Expenses were in line with the prior year at 18.4%, reflecting solid expense management. NPOI was at a record high of 10.2%.
EPS was lower than last year for a couple of reasons. Last year we had a $13 million benefit in NPOI relating to the amendment to the U.S.
separation plan. This year we also had higher interest expense.
The effective tax rate in the quarter was 17%, slightly higher than the prior year of 16%. Last year's tax rate benefited from tax suspenders being biased.
This year's rate benefited from audit settlements in the quarter. Page 18 breaks out the Q1 GAAP results.
We've included a new page in the back of section, it's on Page 33. It does a nice job of bridging the GAAP to non-GAAP results for Q1.
It includes a number of enhancements like splitting out SG&A and R&D and also more clearly breaks out the non-GAAP adjustments. I think you'll find it with an improvement and quite helpful.
On Page 19, you can see the revenue split by line of business. We were pleased with the revenue growth in the quarter.
Financial Services up 14% constant currency and excluding Digital Insight up 4% constant currency. It's nice to see growth in Financial again and it's reflective of the order growth we saw in Q4 and the backlog position starting the year.
Backlog continues to grow in Financial based on strong orders in Q1, especially in North America and Branch Transformation and backlog is up 9% in overall Financial entering Q2. Retail growth of 1% on a constant currency basis was as expected, as the prior year Q1 included a significant amount of revenue from the Walmart self checkout rollout.
Hospitality and Emerging Industries continued with strong growth. Overall, total revenue was up 10% constant currency and the core business excluding Digital Insight was up 4%.
On Page 20 you can see the operating margin by line of business. Financial Services was up 13% for the quarter and up 500 basis points.
Excluding Digital Insight, the core business operating margin was up 310 basis points. Retail Solutions and Hospitality was down from the previous year.
Both businesses experienced an unfavorable mix of revenue and continued investment. While software was up significantly in Retail, it was lower than we had expected.
In Hospitality, we continued to make investments to expand internationally. Our Emerging Industries line of business consists of telecom and technology, travel and small business.
Margins were lower than last year as we incurred onboarding costs associated with new managed services contract. Emerging Industry continues to be an area where we will make investments to generate growth in the future.
On a full year basis, we expect operating margins to improve significantly in Retail, Hospitality and Emerging. I expect Retail to be slightly better than the prior year, Hospitality to be roughly in line with the prior year and Emerging to be around 10% to 12% for the full year, as we continue to invest in small business and travel and grow our managed services.
We expect that Financial Services will continue to be strong throughout the year. On Page 21, we have shown a split of the revenue by software, hardware and other services.
You can see the strong growth in SaaS, PS and total software related revenue. Other services which primarily include our traditional break/fix business showed nice growth at 3%.
Hardware revenue in the quarter reflects a similar trend that we have seen as the Company continues to focus on more software and recurrent services. Software was 26% of revenue in the quarter.
As we continue with our transformation to a hardware enabled software and services business, we think this additional information will help you value NCR more effectively and provide a better understanding into our business. We also think that some of the part's analysis shows we are significantly undervalued.
In terms of the profitability of each stream, you can think of software excluding PS being around 60% to 65% gross margin, total software related revenue including PS of around 50% to 55% gross margin, hardware typically between 20% and 25%, and other services around 25%. These are annual gross margin rates including all corporate allocation and give you a sense of the profitability of each stream.
On Page 22, you can see free cash flow for the quarter. Cash provided by operating activities improved by $10 million, primarily related to improved profitability CapEx was higher by $21 million with roughly half of that in software capital.
Disc ops was worse by $17 million, primarily related to recoveries received in the year ago period related to Fox River. Moving to Slide 23, you can see how our target of $300 million to $350 million of free cash flow builds to an adjusted free cash flow of between $440 million to $510 million when you exclude nonoperational items.
This is around 90% of non-GAAP net income versus 80% in the prior year period. On Slide 24, you can see our net debt position at the end of Q1 2014 after the closing of the Digital Insight transaction.
We end the quarter with a net debt leverage multiple of around 3.7x. As we mentioned based on our free cash flow generation and EBITDA growth, we delever quickly and anticipate ending the year at around 3x leverage, which is much better than what we had signaled earlier.
The EBITDA calculation that we use is detailed in the back of sections in the chart. Forecasting our EBITDA provides another opportunity to help our investors value NCR.
Slide 25 outlines our guidance for the year. The only change is bringing revenue down to 10% to 12% from a previous 12% to 14% growth rate.
Part of the decrease is due to a 1 point negative impact from FX. Excluding Digital Insight, NCR is expected to grow the core revenue 4% to 6%.
We're pleased to be able to reaffirm NPOI and EPS guidance and even with the revenue- at this point we feel more comfortable with the low end of the range for NPOI and EPS guidance even with the revenue headwind. At this point, we feel more comfortable with the low ends of the range for NPOI and EPS, and as always we'll continue to update you as the year progresses.
On the next stage, Slide 26, you can see that we are reaffirming our guidance for Financial and Emerging. We are bringing Retail down to reflect a number of negative headwinds.
We're seeing the change in capital spending priorities as a result of a heightened focus on data privacy and security and we are also seeing a number of consolidations in the U.S. grocery segment.
We are experiencing a slower rollout of some of our larger orders. Finally, we are transforming the Retail business to be less reliant on one-time software licenses and more focused on a recurring revenue stream.
We are bringing Hospitality down slightly to reflect the slower start to the year than expected. Growth in Hospitality is still strong at 8% to 10%.
Our Q2 guidance is listed on Page 27. We expect NPOI growth of 13% to 18%.
The core business excluding DI continues to perform well but faces a challenging OI compare as the prior year Q2 included a large one-time software deal and a vendor settlement. We expect the tax rate to be 29% and other expense including interest expense to be $50 million.
I expect revenue growth to be roughly in line with the growth rate that we saw in Q1, the one exception being Hospitality which will be more in line with the revised revenue guidance, think of mid-to high single digits for Hospitality in the second quarter. In general, revenue will ramp higher in the back half of the year as we grow orders in Q2 and build backlog.
The final chart lists our 2014 goals for the year. We continue to focus on growing our business, driving more software, SaaS and recurring revenue, improving our free cash flow and delevering.
And with that, I will open up the call for questions.
Operator
(Operator Instructions) Our first question will come from Dan Perlin with RBC Capital Markets.
Dan Perlin - RBC Capital Markets
Thank you and thanks so much for all these additional disclosures, super helpful. I wanted to start off on a few things.
One is, we look at the contribution from Digital Insight in the quarter, the margins on that business were materially higher than I anticipated despite kind of a little bit of a partial quarter ownership and I would have thought right of the back pretty significant investment. So is this kind of run rate that we are seeing in this quarter sustainable or should we bring that down because the investments are really just now kicking in?
William Nuti
Dan, this is Bill. I think what you should be thinking about the guidance we gave at the beginning of the year still holds right now.
It was a good, it was a great start, let me just say that to our relationship with Digital Insight. We have all spent a lot of time in California with our teams and are building a relationship, getting to know that business.
And I would not yet want to commit to any higher rate of improvement than we had already given for guidance until we get another quarter under our belt. But suffice it to say we're pleased with the start.
John G. Bruno
Yes, we've given guidance on our last call of $85 million to $90 million of NPOI. We're still comfortable with that.
Again it does include some duplicate cost in terms of the data centers. So those will be incurred as well to – that's included in the number.
Dan Perlin - RBC Capital Markets
We have been hearing that you were expanding your sales force pretty dramatically there. Is that something that you can confirm or is that just kind of your same in the market?
William Nuti
No, I think we are. I think we are working towards that goal.
We're working on that now, Dan. It's part of the investments we've made in Q1.
We think there's a lot of latent opportunity in that segment of the market, but we had a great quarter in Q1 in Financial Services and the small and medium-sized bank segment, our orders in that segment were up 49% year on year, partially driven by better than expected synergies with DI, revenue synergies in that segment. So we're seeing a better run rate there than we expected.
Dan Perlin - RBC Capital Markets
Okay. If I could just jump over to Retail for a second, did the capital spending focus changed in a post Target and as we think about the kind of pace of play in the mix shift, the things that are going on there, are you finding that some of your legacy kind of hardware business in Retail, it's going to falling off a little bit faster than you are able to ramp some of this more recurring SaaS revenue as an example, so the rate of change between those two dynamics is also causing a little bit of a curtailment of the guidance?
William Nuti
Yes, let me give you more specific response. So in Q1, two things, two macro changes occurred, and I'll get to the strategic focus we have in a moment, but one was we began to see our customers shift more attention to data privacy as a result of the obvious impact that Target has had in the market appropriately I think, even the issues that all retailers are faced with.
And so priorities have changed a bit. Now that's a pro and a con for us.
In one dimension, it pushes off a bit some of the opportunities we're working on with them, in hardware and perhaps even in software. But we do have solutions we sell into that segment that we're encouraged by, mainly their SaaS solutions.
So we're seeing a shift there from what would be a one-time hardware sale to more of a longer term SaaS based sales. So as an example, we sell a new product called Connected Payments, which is a SaaS-based payments solutions that is a software offering.
That is quite popular now as a result of the positive impact it has on data privacy. Secondly we had the consolidation of three major grocers in the U.S.
in March, SuperValu, Albertsons and Safeway, and all three were hardware customers of ours and that had somewhat of an impact short term on us as well in the quarter. So those are a few macro factors.
And then we are consciously then beginning to transition more of our revenues over to more recurring revenue streams over time. So those are the three things that are underway that caused us to feel like we didn't take the revenue guidance down for Retail on the year.
Dan Perlin - RBC Capital Markets
Okay. And I'll ask one more and I'll jump off.
On Hospitality, you called a slower start to the year. I'm just wondering, is there a competitive dynamic that's occurring in the market or do you think that's just broad-based industry-wide?
In particular it's obviously going to be more focused in the U.S. but it would seem to be the micros has gotten a lot more aggressive in this space since new management has come onboard, and I'm just wondering if this is an early indication of you guys bailing out a bit more.
Thanks, I'll jump off.
William Nuti
I don't see that, Dan. And by the way, we don't have our head in the sand on competition.
So I want to be clear, we look at the competition closely. I don't see that yet.
I think Q1 for us was a good quarter in terms of top line growth and the operating margin is a bit of a one-time anomaly based on the combination of mix and a very significant year on year investment quarter for us in Hospitality. So as Bob said, we'll get those margins back to where they were last yr on the operating margin line in next several quarters, but we felt that it was prudent given the start to the year just to adjust slightly their growth.
Remember a couple of points on that business is not a lot in aggregate dollar volume. It's about $15 million or $20 million.
So it's not a significant move but we'll keep you updated on that. I do think that we're making good progress internationally but we've certainly invested a bit to do that and I expect that to pick up in 2015 for us.
John?
John G. Bruno
The only thing I'd add, Dan, is it's plain and simple, a revenue growth story which we are proud of and expense growth story which we proceed with, and that's something that we typically don't do in the business except for one that we believe in that type of growth, really makes a whole lot of sense. So if we didn't see the deals in the funnel, the international growth and the capability, I had a different feeling but the fact that we're stating what we are around the margin really tells you we feel good about the business.
We want to make sure we absorb the expense growth appropriately and we execute against the plans of investments that we have. That's really our focus.
So I look at it more as execution than I do competition but we are aware of the competition, but it's not a competitive headwind.
William Nuti
Yes, Dan, I would say one more thing. I'm not a big fan of investing significantly ahead of revenue growth as we have.
Just to put that in perspective, in Q1 expense growth for Hospitality was 26% year on year. So it's a big number in terms of what we're investing there.
Dan Perlin - RBC Capital Markets
Excellent. Thank you, that's very helpful.
Operator
Our next question will come from Paul Coster with JPMorgan.
Paul Coster - JPMorgan
So I'd like to develop on this investment activity a little bit. I'm trying to understand what the point of the focus on R&D expenditure on Slide 2 or 3 is.
Is it that you're saying that it's going to be more than we anticipated or are you just trying to remind us that the Company is investing while sort of doing other things? I'm not quite sure I understand the message there.
William Nuti
That is a reminder, Paul, along the way to make sure people understand that we are investing significantly. I would say Q1 was a higher investment quarter for us and a bit anomalistic but I can't time every 90 days when we have to make certain investments.
We're also making significant investments this year in CapEx, [but I think] (ph) we saw for the CapEx. So I think the escape velocity of our P&L in future years is such that as we begin to level off on some of these investments and businesses, we should have upside as a result of two things.
One, the ROI on these current investments we're making, and then secondarily, the levelling off at some point of the significant investments we're making in certain businesses along the way. But I do want to make sure that we're clear on that.
Also I'd say, Paul, in general we have an opportunity to improve in the area of services efficiency, productivity and other [indiscernible]. I would say today that the investments we're making in services is costing us – and by the way to our guidance – around $10 million a quarter for profit.
That will eventually turn into productivity as you look on programs to improve along those lines. But we see a wonderful opportunity now in the market to make services delivery a competitive advantage.
We've had great success in the last six months, Paul, in service delivery based on these investments we see in some of our peers reducing costs, reducing investments and going into different direction than us. We think that part of the success we've had in Financial Services the last six months has to do with a direct correlation to service delivery in that space.
Paul Coster - JPMorgan
The guidance combining full year guidance with the second quarter outlook, just slightly more backend loaded than [we on] (ph) the street were anticipating. Is this a more backend loaded view than normal or was the street just a little bit kind of sloppy about its expectations here?
And if it is backend loaded more than usual, what is it that gives you the confidence in the numbers in not taking down full year guidance a bit more?
William Nuti
Paul, this year it's about from a seasonality perspective about normal for us in terms of profit. I wouldn't call the street sloppy but I'll leave that with you.
I mean ultimately we measure each quarter from a seasonality point of view. It's about normal for us in terms of what kind of profit contribution as a percent of total profit we see in Q1, Q2, Q3, Q4.
However, we do have more confidence in the back half as a result mainly of Financial Services. That business had a very strong Q1.
Order growth in Financial was up globally 7% on the quarter. We turn towards North America, growth of 28% in orders.
We also saw a good order growth in Asia-Pacific. We had a great balanced quarter there.
I can tell you as well that while the backlog is up 9% year on year going into Q2 for Financial, margins in the backlog are up 36%. So there is a lot more software and PS in that backlog.
So this operating margin advantage we began to signal to you a few quarters ago by giving you this information around margins and the backlog, continues now in Q2. We also had, Paul, a terrific Branch Transformation quarter.
Orders were up 100%, revenue up over 300% and now they are real numbers [for capital] (ph). Our order flow in Q1 for Branch is over $32 million.
But it's real money and we're seeing significant traction there, and that of course helps along with the great software growth we've had.
Paul Coster - JPMorgan
I'll just throw out two quick questions. One is, can you comment on IBM's sale of its point-of-sale business and what that means in terms of competitive landscape?
And also on Branch Transformation, it looks like [indiscernible] competitors feel that the sales cycle has been longer than you and certainly can see the same orders since you're in North America. They cited among other things a longer sales cycle for Branch Transformation because it's sort of real estate associated.
Could you comment on those two things, IBM and branch transformation sales?
William Nuti
The IBM sale of their POS business is helping us and many of you mentioned. We've won a few large contracts as a result of that.
So we think that is a net positive for us and we're seeing some more consolidation around that platform as a result of that. And remember now, we go to market with a complete end to end solution, hardware, software and services and that helped us quite significantly, both in the US and outside.
In terms of Branch, Paul, I have to tell you we still feel very positive about that being around $150 million to $200 million business this year. It's a very high-growth business for us.
The order cycle is not longer than ATM order cycle generally. Once you get a proof of concept, things move quickly.
Now remember, we began our proof of concepts in this space a long time ago. We were first to market with solutions in this space and we're now in production mode with many dozens of banks around the world, not just in the U.S.
So we have a great pipeline in this space. We're now two quarters in a row of orders of $30 million in this space and I think Q2 will be even bigger.
John G. Bruno
The only thing that I would add on the sales cycle discussion really relates to the IBM comment. I would come down to the only pure play now, total solutions provider for retail, we have a pretty expansive portfolio, something that customers are very interested in talking about.
[Indiscernible] installed bases have been around for quite some time, there's lots of legacy infrastructure. So the sales cycle displacement in the space is longer than it typically would be in a small cycle and otherwise because these are incumbent relations for quite some time.
What we are pleased is that we are pleased with the conversations we are having and the funnel of activity that we are driving in that space, we're trying to get a handle on those conversion timelines that we're supposed to do with some of this stuff we're seeing inside of our Retail business itself.
William Nuti
Paul, two more facts for you. I think if you look at Q1, North America order growth for Financial was up 28% and that was driven by Branch Transformation and software.
And remember, Branch Transformation is a higher-margin solution as well. And then we had in North America a strong quarter overall in terms of software as well.
So it was a very solid start to the year there and I think we're well on our way to achieving over goals.
Operator
Our next question will come from Ian Zaffino with Oppenheimer.
Ian Zaffino - Oppenheimer
Question would be on, Bob, you mentioned the FX of 1%. What does that flow down to on the NPOI line?
I'm just trying to get the moving parts. I know you talked about maybe looking at the lower end of NPOI but I'm trying to get to that and figure out how much is fundamental, how much is FX, and hope you can help us with that.
Bob Fishman
From an overall perspective, FX wasn't a huge impact for us in the quarter. Certainly when you look at the revenue in Financials, India and Brazil currencies hurt us from a top line perspective.
Overall for NPOI though, it was fairly flat impact, Ian.
Ian Zaffino - Oppenheimer
I guess I meant [going into] (ph) full year.
William Nuti
Ian, on the year, if you think about the revenue, just think about drop of around potentially $100 million or so in revenue on the year. Partially that's FX driven, partially Retail driven.
Think about the flow-through of that of around $15 million to NPOI, in that range. So we thought we can be at 900 to 920 was about where we would come in, and of course we believe more 920, in nine with 920.
If we're taking about $100 million off the top line with a flow-through of about 15%, it gets you to 900 to 910 or 905, in that range. So we just thought it was prudent.
FX is a portion of that but I can't give you a sense for how much FX would drive the NPOI down by.
Bob Fishman
I would say somewhere around $5 million impact maybe from FX for the full year, if that's your question. Obviously the weaker yen does help us in terms of suppliers that we're buying from.
So that's how I think of the overall impact to the bottom line, Ian.
Ian Zaffino - Oppenheimer
Okay, thank you very much.
Operator
And now we'll go to Meghna Ladha with Susquehanna.
Meghna Ladha - Susquehanna
The two self checkout order that was announced in Q3, Bob, how should we think about the revenue contribution from these orders in Retail this year?
Bob Fishman
I think no change, Meghna. I think we still have a solid year ahead of us in self checkout.
I think we feel good about that. By the way, orders for self checkout in Q1 were up 28% year on year.
So it's a good solid for the quarter for self checkout for us and I think we gave guidance on the last call mid-single digits order for revenue growth of self checkout, we will get about that.
Meghna Ladha - Susquehanna
Okay. And in light of these guidance revision, how comfortable do you feel today with your 2015 targets which you reiterated last quarter?
Bob Fishman
No change, Meghna, we feel the same.
Meghna Ladha - Susquehanna
So despite the weakness that you're seeing in Retail or Hospitality, you still feel very comfortable with the numbers that you've put out for 2015?
Bob Fishman
Yes, we do.
Meghna Ladha - Susquehanna
Okay, thank you.
Operator
And now we'll go to Matt Lipton with Autonomous Research.
Matt Lipton - Autonomous Research
I'll keep it quick. So, Bill, you said last quarter as 1Q goes, more year goes, and I'm just thinking you have three more months of data and you've seen what's happening in Retail, do you feel that the guidance is now roughly conservative going for the rest of the year?
William Nuti
Yes, I think it's right. I mean the thing for me, Matt, is to get guidance right.
We have a good track record here of meeting or exceeding our guidance for a long, long time and getting it right is a key. If I look back on Q1, obviously I'm very pleased with historical Financial Services and often times as Financial Services goes [indiscernible] sometimes too, but it's a great start for that team.
I'm encouraged by our backlog going into Q2. Our backlog is up in both – by the way, the Retail backlog is up 16% or 17% year on year as well going into Q2, but a number of those projects are going to roll out in Q4 and Q1 of '15, they've been pushed a bit by this refocus on data privacy a bit more than they have on some of the hardware offerings that we have, but we [forget] (ph) about that.
And then Hospitality, Matt, just making sure that we continue our plan for the year in terms of a balanced investment portfolio with results. So I think Q1 was a good start.
I think I would have liked to have a few more million in NPOI but I feel good about where we are and at the same time making the significant investments we did in Q1 by still achieving what we have. I feel positive going into Q2.
Matt Lipton - Autonomous Research
I agree, Financial up good in Q1 and you reported Digital Insight user growth of 83%, just since we now have the historical data, could you put that in context for us and then how correlated are user growth and revenue growth for that business?
William Nuti
What was that question, I'm sorry?
Matt Lipton - Autonomous Research
83% user growth in Digital Insight, I was just hoping you might be able to give us some historical context to previous [indiscernible] and how correlated it is to revenues, user growth?
William Nuti
Yes, [indiscernible]. Mobile user growth and DI is highly correlated to our overall growth in general but more importantly in margins.
That is a higher-margin business for us. We look at the revenue per user in that space and feel good about where we're going.
That has a lot of room for improvement to be very candid with you, although we're still repeatedly saying year on year, that number should double in the next 18 months, that I would be very disappointed if we weren't able to achieve that. And candidly, as we begin to move outside the U.S.
and in 2016, in that timeframe see even more considerable growth.
John G. Bruno
And remember it's not just 83% users just to be clear. How we look at the 83% is active users that might be moving online within banking and bill pay and taking on the module for mobile.
So since mobile is a faster growing part of that business as we've guided and discussed on part of the acquisition rationale, we see that mobile being the most attractive segment or the part of it that offer that the industry is most interested in. That offsets the flattishness of the online bill pay part of the business as we prescribed.
So that's why it's a very good indicator to see that level of growth which was consistent with what our investment thesis was, very consistent with what our diligence was and we are pleased to see the active users increase in mobile within the customer base.
Matt Lipton - Autonomous Research
Great, and then just one quick housekeeping for Bob. Is organic software growth around 15% for the quarter a good estimate?
Bob Fishman
It is, I was thinking that 395 left us 74 or 70. So…
Matt Lipton - Autonomous Research
And is there anything [indiscernible] in there as well, just on top of that?
Bob Fishman
Let me see real quickly, Matt. You are about right though, you are in the range.
It was a good quarter for organic software growth and the answer would be, yes, it all should be in there.
Matt Lipton - Autonomous Research
Alright, thanks very much.
Bob Fishman
So around 17%, 18% organic software growth excluding Digital.
William Nuti
Hopefully you got that, Matt, 17% or 18%.
Matt Lipton - Autonomous Research
Yes, I appreciate it. Thanks guys.
Operator
And now, we'll take our next question from Kartik Mehta from Northcoast Research.
Kartik Mehta - Northcoast Research
Bill, I just wanted to make sure I understand the Branch Transformation numbers that you gave out. You said you're hoping for about $100 million to $200 million in revenue this quarter – I apologize, for this year.
Would that mean that there is part of the ATM business that you'd expect maybe isn't doing so well, because that's about 5% organic growth on last year's number, or did I think about that maybe wrong?
William Nuti
Kartik, we're not seeing the cannibalization of in-lobby ATMs as a result of customers buying interactive teller or express banking kiosks from us. So while I think there will be a longer-term impact, I don't think it's going to be significant in that space, although we really don't know yet right now.
I think given the volume we now have, we'll need to monitor that a bit more than we've been able to within our shipping in that. John, any comments there?
John G. Bruno
The way I think about it is, I mean the way I describe it to the analysts, it is a pure play adjacency for us if anything else would be, because if you look at our whole Branch Transformation portfolio, it includes offering inside the branch which was anything from a [indiscernible] to interactive teller to express kiosk to all the kiosks and software that runs alongside it, plus the services that go along with it. Those things were not parts of the revenue and profit areas that we had within the business previously.
Now, do we look at what would that impact potentially be to rest of deal or through the wall or to [drive up], we do but we see very little. In fact we're designing around that because we think that that cannibalization will be offset by us bringing to market over the coming years a lower cost point of service for an ATM because our financial services customers are looking for more points of service not less.
So they change and transform their physical branch [setting] (ph). That bodes extremely well for Branch Transformation and as they do that, reinvest that capital more points of service, to me that bodes well for us to having a better ATM portfolio as we bring lower cost variance into the market.
So, no, we do not see that as a cannibalization and those are the reasons why.
William Nuti
And Kartik, I'd say this, I mean the investments we are now making in R&D, we're not going to talk about new solutions today but what we have coming out in the next two or three quarters in terms of new ATM solutions are really truly disruptive and ground-breaking.
Kartik Mehta - Northcoast Research
Okay. So it seems as though at least for 2014 you will get this Branch Transformation revenue plus whatever traditional ATM revenue you would have anticipated for the year.
Is that a fair assessment then of it?
William Nuti
Yes, it is. And remember for us in large parts while we'll monitor the impact of in-lobby ATM shift potentially from in Branch Transformation kiosks, most of our ATM business is outside the U.S.
So we will not see a tangible impact because we have such a big footprint outside the U.S.
Kartik Mehta - Northcoast Research
And then, Bill, what type of exposure do you have to rush? I know that's a little bit tricky right now and I'm wondering what type of exposure do you have and maybe what you've seen from a fundamental standpoint, any change in behavior or buying patterns you've anticipated?
William Nuti
Yes, we do have, obviously we have a big business in Russia and Eastern Europe. We have not seen anything material as yet.
We're keeping a close eye on it, to be candid with you, Kartik. If there's any great news about that, is an impact, that part of the world for us is less profitability, less gross margins than others but we'll keep you guys updated, but right now it's immaterial.
Kartik Mehta - Northcoast Research
And then just one final question. Bill, if you look at the Digital Insight business and since that business has changed hands a couple of times, have you seen any change in customer behavior when it comes to renewals, are they asking for shorter renewals or maybe on the other hand longer renewals or longer terms as their contracts come up?
William Nuti
No we're not, not right now. I would say that has been a – we've seen a tangible positive out of the move to NCR in terms of this business.
Now both in terms of our employees who feel like they are working for a financial services technology company focused on omni-channel and digital banking as a platform within the context of that solution and customers who feel like NCR can provide now a total end to end solution in that space. So the good news about this acquisition is both internally and externally people feel good about us owning the asset.
In terms of customer buying behavior and what we're seeing there, no change that I can speak to. John, any comments?
John G. Bruno
Not yet, because it's too early. We wanted to really this year to begin to test where we would apply the revenue synergies first within their customer base and their traditional customers within ours, that's number one.
And number two, what were the buying behavior and buying cycle has been and what can incent them. Remember the incentive on the revenue synergy line that we contemplate the investment basis in this case is the potential to bundle offers, meaning having the capability to sell transformation through a bank which includes a little bit of branch, perhaps an upgrade to deposit automation along with [indiscernible] that Digital Insight traditionally sold in the marketplace, because today those buying decisions are independent buying decisions but from the same buyer to the first time we have an opportunity to put them together to that buyer and we think that there's value in that.
But we don't know enough yet to say anything more than buying behavior has been consistent, it's not [indiscernible] the same and the contract terms and conditions themselves have been about the same.
William Nuti
And the metrics, Kartik, I look at is orders for these small and medium-sized banks that we call them national banks here at NCR, and that order flow in Q1 was up 49% year on year and I would say that probably – we know for a fact, call it 2 million to 5 million of those orders were from customers buying ATMs that were DI customers now buying from NCR as opposed to a competitor, we're not the first time.
Operator
(Operator Instructions) Our next question will come from Matt Summerville with KeyBanc.
Matt Summerville - KeyBanc Capital Markets
Just two quick ones. First, Retalix would not have fully anniversaried until February of this year, so what was the incremental revenue and NPOI contribution from that in the quarter?
William Nuti
Matt, that we can't give you this quarter, and the reason why we can't is candidly they are fully integrated now and we could not break out what was Retalix versus NCR if we tried. There's been too much confusion between what solutions we're selling internally to customers that are now overlapping with NCR.
So, I can tell you that Retalix itself, R10 had a great quarter, the solution R10 as a software solution had a great quarter, well above our expectations. But I can't tell you how Retalix in total did any longer.
Matt Summerville - KeyBanc Capital Markets
Maybe a different way of looking at it, how would you characterize the Retalix funnel pipeline backlog of – what's the best way I guess to look at it?
William Nuti
Matt, I would say that Retalix is performing well above the organic for NCR.
Matt Summerville - KeyBanc Capital Markets
And then with respect to Hospitality, we've been hearing pretty consistently since you purchased Radiant that you've been investing in the business every quarter very heavily, it's been a consistent drag on margins, and then you really had a big drop this quarter. You just took your revenue guidance down by a third.
Are these investments that you've been making the last two years not coming through at the rate you would have thought or what's going on there? I see a real disconnect there.
William Nuti
I think they have come through. We have delivered wonderful results as a result of making those investments.
We have [indiscernible] in a business of this size, it's not a big business, call it $700 million in revenue where we're over-investing in one period and then look to reap the benefits and then investment in others. But we have to make investments in international expansion in that space and that can back-sting for us of growth.
It's not going to be to [indiscernible] U.S. SMB and direct accounts.
We have to have success internationally and invest to do so. So while I think the investments we have made have paid dividends the last [indiscernible] in terms of growth, I think they will in the future as well, but I would not be concerned if you think that it's unsustainable.
John G. Bruno
I think Bill used the word and I probably should again, that's the commitment we have seen is an anomaly of time and expense to revenue, it is not anything to spend our [indiscernible] that we're concerned about it. If it was, we'd be taking very different actions.
Matt Summerville - KeyBanc Capital Markets
Got you. Thanks guys.
Operator
Our next question comes from [indiscernible].
Unidentified Analyst
I know you guys have fairly owned Digital Insight for a quarter now but I was wondering if you could help us understand maybe the year-over-year metrics on the business and specifically the revenue numbers of the operating income that you've given, how does that look year-over-year because the mobile user number certainly I think when you bought it, it was 4.8 million and it's already 5.5 million, so that's pretty strong quarter over quarter growth?
William Nuti
I'll take it. I don't think we have the pro forma view.
They were on a different fiscal year than we were. So we don't have the pro forma view, but we'll do our best to get that back to you if we can, pull it together.
I would say though that we characterize Q1 for DI as a really good start, and a lot has gone on in that business. We were pleased with revenue growth and very pleased with margins and profit growth, but on the back of user growth and the areas that count like mobile.
So for us, I couldn't be more pleased with the start of that marriage. We'll try to probably get it off as best we can the pro forma for you but I think you'll find it's pretty good year-over-year compare.
Unidentified Analyst
And of this user growth, are you able to give us a breakdown of how much are new wins versus organic growth of current customers?
John G. Bruno
The majority of the 83% year-over-year growth was expanded user base, user expanded features and functionality of the existing user base as I mentioned earlier, but when we put together that bridge that you're asking for, we'd be able to break that out. There is absolutely organic growth but we're very pleased with [indiscernible].
William Nuti
And very candidly, we want to have the kind of organic growth we want or that we will be pleased with until we get the sales force built and up and running. It's a small – what we acquired was a relatively small sales force of about 15 people direct, and so we need to substantially increase the size of that sales force and then when we do I think sales cycle in that business is about 12 to 18 months in that range, so I expect that we'll begin to see traction on those investments come 2016.
Operator
And that does conclude our question-and-answer session for today, and at this time I'd like to turn the conference back over to Bill for any further remarks or closing.
William Nuti
Thank you all for attending today and we look forward to reporting back to you in July. Have a great evening.
Operator
That does conclude our conference for today. Thank you for your participation.