Apr 26, 2016
Executives
Gavin Bell - Vice President, Investor Relations Bill Nuti - Chairman, President & Chief Executive Officer Bob Fishman - SVP, Chief Financial & Accounting Officer Andy Heyman - SVP, NCR Financial Services Michael Bayer - SVP and President, Retail Solutions
Analysts
Kartik Mehta - Northcoast Research Partners LLC Paul Coster - JPMorgan Matt Summerville - Alembic Global Advisors Aaron Turner - Wedbush Securities
Operator
Good day everyone. Welcome to the NCR Corporation First Quarter Fiscal Year 2016 Earnings Conference.
Today's call is being recorded. At this time, I'd like to turn the conference over to Mr.
Gavin Bell, Vice President of Investor Relations. Please go ahead, sir.
Gavin Bell
Good afternoon and thank you for joining our first quarter 2016 earnings call. Joining me on the call today and offering opening remarks are Bill Nuti, Chairman and Chief Executive Officer, and Bob Fishman, Chief Financial Officer.
Additionally, available on the call today for Q&A are Andy Heyman, Senior Vice President and President, Financial Services; Michael Bayer, Senior Vice President and President, Retail Solutions; and Paul Langenbahn, Senior Vice President and President of Hospitality. Our presentations and discussions today include forecasts and statements 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 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 from operations excluding the impact of special items.
Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures, and other information concerning such measures are included in the presentation materials and in our earnings release. These are also available on the Investor Relations section of NCR's website.
A replay of the call will be available later today on our website, ncr.com. With that, I'd like to turn the call over to Bill Nuti.
Bill Nuti
Thank you, Gavin. And good afternoon, everyone.
Bob will take you through the financials in one moment. But I wanted to provide my perspective on Q1.
NCR got off to a solid start in 2016. Revenue and cash flow performance as we expected while operating income and EPS were ahead of our expectations.
It was doing on the back of higher software growth and improving productivity. That being said, there were no surprises in Q1 and the results do not change our thesis on our potential 2016.
On the positive side, I was encouraged by Q1 orders, a mix of those orders including double digit software orders of a growing backlog, higher services file value and momentum in a number of our strategic solution offers such as branch, store and restaurant transformation as well as unified commerce and payments and security. Additionally, we made more progress than I expected on our business transformation initiative.
Focus on eliminating risk and increasing productivity, reengineering of digit business licenses and making the associated savings sustainable while simultaneously reinvesting and self funding acquired growth investment. On the latter point, the Blackstone relationship has been a significant net positive and we appreciate the access to their resources, assistance and scale.
On the constructive side, I was disappointed with ATM volume and margins in the quarter. While we expected these results, we were collectively driving towards strict goals in these areas and did not achieve them.
That said ATM volume in the backlog remain strong, large distributed are now beginning to rollout and this will improve revenue growth in Q2 and the back half of 2016. As for margins, once NCR's new ATM products ramps to higher volume and our cost come down commensurate with that volume, we should see solid improvement.
Additionally, the strategic agreement we are announcing today with Wells Fargo is truly a bellwether moment for NCR. It is also sign of things to come as customers around the world begin to contemplate moving to a single vendor and to one strategy with NCR.
As we move to the shift today we acknowledge that a change in external reporting may require more of our time. Because of that we are dedicated to providing more contexts on today's call and you more of our time of the coming month.
We are enthusiastic about this change and reporting and are already seeing benefit internally. These are the right metrics NCR will focus on and we hope that you see that as you become more accustom to these changes.
Overall, despite the obvious macroeconomic and FX challenges all global multinational technology companies are facing, I was pleased with where we landed in Q1. And remain optimistic about our potential.
Including an increase revenue and EPS guidance that Bob will talk about in a moment. I'll now turn the call over to Bob Fishman to review the results.
Bob?
Bob Fishman
Thank you, Bill. Slide 4 shows our financial highlights for Q1.
Revenue was down 2% on an as reported basis due to currency headwinds and in line with the guidance we provided in February. Revenue was slightly up on a constant currency basis.
Our recurring revenue increased 3% in Q1 and 7% constant currency. As a reminder, NCR's recurring revenue includes hardware and software maintenance as well as cloud revenues.
At the end of Q1, recurring revenue reached 48% of our total revenue. And as you know, we focused on this metric because this particular basket of revenue generates higher margins than total enterprise margins and is a better indicator of the sustainability of future revenues and margins.
Looking at margins, Q1 operational gross margin was 27.4% which was down 20 basis points as reported and 60 basis points constant currency. This was primarily driven by lower hardware margins which we expect to improve later in the year as unit volume increases and new product introduction ramps up.
We also expect improvement from increased productivity and efficiency gain. Q1 non-GAAP EPS was $0.38 above the top end of our guidance range we previously provided and included $0.04 negative impact from pension expense and OIE that I will cover in more detail on the next slide.
Lastly, free cash flow was as expected due to higher working capital requirements to support revenue later in the year. Slide 5 shows our Q1 operational results on an as reported in constant currency basis.
I'll provide more detail on revenue and gross margin on the segment charts. Expenses were lowered by $4 million and reflect a responsible expense management in the quarter.
The year-over-year decrease in non-GAAP operating income is primarily related to $5 million of additional pension expense in the current quarter. As discussed at our recent Analysts Day, we are now including ongoing pension expense in our operating results and this will negatively impact the year-over-year compares throughout 2016 for both operating income and EPS.
Additionally, in Q1 we completed the amended extend of our credit facility which was described in our recently filed 8-K. As a result we were require to write-off $4 million of deferred financing fees which is included in interest expense.
Non-GAAP EPS was $0.38 and included a negative impact of $0.04 from pension expense and the deferred financing fees write-off. The next slide shows our Q1 GAAP results.
The reconciling items include acquisition related amortization of intangible, acquisition related to costs and restructuring transformation costs. For reconciliation of non-GAAP to GAAP results, please refer to the supplementary materials at the end of this presentation.
Slide 7 shows our new segment reporting for 2016 as discussed during our Analysts Day in March. As a reminder, software includes software license, software maintenance, cloud and professional services.
Services include hardware maintenance, implementation and managed services and hardware includes ATM, Self-Checkout, point-of-sale and our interactive printer solutions business. As you can see our mix of revenue continues to improve.
With software and services comprising 67% of total revenue in the first quarter as compared to 63% last year. In part, this change in mix is attributable to lower hardware sales in Q1 however and importantly continued software growth above overall enterprise growth is an important indicator of the strategic shift in revenue we aspire to achieve along with corresponding margin expansion.
On Slide 8, you will see our software update. On a constant currency basis revenue was up 3% led by growth in software license and software maintenance revenue.
Software license revenue even though up was negatively impacted by software attach and lowers ATM unit volume. With that said, an important and growing part of our software license revenue is sold independent of hardware.
We call that unattached software license and consider this metric important to our long-term success in software. The unattached license revenue grew to 56% of total license revenue, up from 55% in the prior year.
Although Cloud revenue was flat, higher overall net annual contract value suggests return to revenue growth in late 2016 with more normalized growth in 2017. Professional services were down in the quarter due to low starting backlog position.
However, professional services orders was up significantly on the back of a number of omni-channel software wins. Operating income was down $2 million driven by higher revenue offset by software mix and $2 million of higher expenses.
We saw strong performance in a number of our strategic solutions such as branch, store and restaurant transformation, unified commerce and payments and security. Our hospitality industry also continues to demonstrate solid growth inn Cloud ACV revenue and application site.
We also are beginning to experience momentum in omni-channel solutions with unified commerce wins at Foodstuffs, the Atlanta Falcon, My Basket, Checkers, Island Restaurants and California Pizza Kitchen. The next slide shows our Services Q1 results.
Revenue was up 8% on a constant currency basis due to growth in hardware maintenance, managed and implementation services. Operating income was down $2 million due to higher revenue, offset by lower margins and implementation services revenue and $4 million of higher expenses.
We saw managed and implementation services g growth due to our focus on improving the customer experience in several of our strategic solution areas. We also experienced growth in third party implementation services and new higher margin service offers.
To improve our cost structure in the future as well as deliver improved customer service, we created a new regional logistics hub and continue to improve our big data analytics capability which enables customer calls to be handled more efficiently. Finally, our services file value which represent 12 months of recurring hardware maintenance revenue is up year-over-year.
Turning to Slide 10. Hardware revenue was down 9% on a constant currency basis.
ATM revenue was down 17% constant currency. While Q1 ATM revenue was lower than expected, ATM backlog is up significantly enter in Q2 and along with higher revenue and improved backlog conversion, this will contribute to a better second half of 2016.
Branch transformation hardware revenue was up in the quarter and we remain on track to achieve our 2016 objectives. Self-Checkout revenue increased significantly due to our customers' initial roll outs of their longer-term store transformation programs, a new product upgrade cycle and expansion into new geographies.
We had important store transformation wins with Kmart, Oshcon, Smith SuperValu, Tomlin, Magnet, and SaudiMac. Point-of-sale revenue was lower due to Q1 seasonality and some shift to self-checkout as the density of self-checkout improves the front end of retail.
Point-of-sale growth in restaurant was driven by new wins, customer growth and product refreshes. In the first quarter, operating income was down $3 million due to lower revenue and gross margin rate.
The gross margin rate was negatively impacted by higher initial expenses from the roll out of a new ATM product family and macroeconomic challenges in certain countries. The negative operating income in the first quarter is largely due to seasonally lower revenue and our fixed cost base.
This is typical in Q1 where we see lower profit early in the year and higher profit as revenue ramps in the back half of the year. During Q1, we entered into a long-term, strategic partnership with Wells Fargo and we signed our largest deal ever in US, CFI and Mexico.
There is more information and more detailed coming out on the Wells Fargo contract over the next 30 to 45 days. Additionally, global demand in self-checkout will continue will continue to be driven by store transformation growth, expansion into new markets, the refresh cycle to our new platform and changes in labor rate expected to go into effect in early 2017.
Finally, we continue to invest in develop and release innovative new product offers including a new ATM product family as well as new self-checkout and point-of-sale platforms. The next slide shows our revenue by region.
In Q1, we saw growth in the Americas region driven by growth in the software and services segments partially offset by declines in the hardware segment. The Europe, Middle East, Africa and Asia Pac regions saw macroeconomic challenges in certain countries.
On Slide 12, you can see free cash flow for the quarter which was in line with our expectations. Q1, 2016 was free cash out flow of $29 million compared to free cash flow of $24 million in Q1, 2015.
The decrease was due to higher working capital as we plan for increased revenues later in the year. We are reaffirming our 2016 free cash flow guidance of $425 million to $475 million.
Capital expenditures and spend on discontinued operations are on track to achieve our full year goal. And while spend on discontinued operations was a bit higher in Q1, this is impacted by the timing of expenses and recovery.
We expect cash flow operations to improve as revenue and profit build throughout the year. Slide 13 showed our net debt to EBITDA metric with a net debt leverage ratio of 3.2x for Q1, 2016.
The increase in the leverage ratio from Q4, 2015 is related to the common stock repurchases in the quarter. On Slide 14, you will find Q2, 2016 guidance.
Normalizing for the sale of IPS which we expected at end of May, revenue is expected to be flat as reported and up 2% constant currency. This includes a negative FX impact of approximately two point or $25 million.
Our non-GAAP EPS is expected to be $0.60 to $0.65 for the quarter. We expect $0.02 of negative EPS impact from unfavorable foreign currency headwinds and pension expense.
Hardware margins will continue to be challenged in Q2 with improved profitability expected in the back half of the year. For Q2, 2016, we have assumed OIE of $50 million, an effective tax rate of 28% and a share count of 154 million compared to OIE of $45 million, an effective tax rate of 27% and a share count of 172 million in Q2, 2015.
Slide 15 includes our improved full year 2016 guidance. Our revised revenue guidance including the expected sale of IPS at the end of May is $6.25 billion to $6.35 billion and our non-GAAP EPS guidance is $2.90 to $3.
Our free cash flow guidance remains $425 million to $475 million. We are now expecting foreign currency headwinds of $75 million versus 2015 with an EPS impact of $0.05.
This is a better FX environment than expected at the start of the year. The revenue headwinds has improved by $60 million and EPS has improved by $0.05.
Including the FX headwinds and higher pension expense, we expect $0.10 of negative EPS impact for the year. Normalizing for the sale of IPS, revenue is expected to be up 2% to 3% as reported and up 3% to 4% in constant currency.
For the 2016 revised guidance, we have assumed OIE of $205 million to $210 million, an effective tax rate of 25% and a share count of 157 million compared to OIE of $196 million, an effective tax rate of 23% and a share count of 172 million in 2015.The OIE guidance is higher by $5 million to $10 million from our previous guidance due to the $4 million write-off of deferred financing fees and higher foreign currency impacts. Slide 16 shows our expected revenue growth by segment for the full year adjusted for the expected impact of unfavorable foreign currency headwinds and the pending sale of the IPS business.
Software revenue is expected to grow 4% to 5% in constant currency for the full year after growing 3% in the first quarter. Services' revenue is expected to grow 3% to 4% in constant currency for the full year.
Hardware revenue is expected to grow 1% to 3% constant currency for the full year after being down 9% in the first quarter. This reflects the improved backlog position and higher conversion rates in the back half of the year.
You can see on slide 17, our revenue, operating income and EPS trending over the last three years. As expected the guidance is more backend loaded in 2016.
While the revenue trending is similar to prior year, we are showing approximately $60 million higher revenue in the back half than what we've seen historically. This increase is supported by our strong backlog, higher conversion rates, file value and funnel at the end of the first quarter.
Our operating income is higher than what we've done over the last three years and is supported by the higher revenue growth, including higher software revenue, improved hardware margin rates and continued progress with our business transformation initiatives. Our EPS is higher than the last three years mainly due to the higher operating income in the back half of 2016 and the benefit of the share repurchases.
Overall, we expected a slower start to the year and have gained growing confidence through our performance in the first quarter that we are on track to deliver our increased guidance. With that I'll turn it over to Bill for closing comments.
Bill Nuti
Thank you, Bob. In summary, Q1 results as [Technical Difficulty] exceeded our internal expectations and guidance.
Like any quarter there were things that went well and areas for improvement. However on balance Q1 was a good start to 2016 and I am incrementally more positive on the year due to solid orders, software mix, a higher backlog and services file value, omni-channel solutions traction and a fast start on our business transformation initiative.
Ultimately these are the factors that give us the confidence to raise our revenue and the EPS guidance on the year. Before I dismount for questions, we spent considerable time at the Investor Day last month on the maturity of the omni-channel market and how it is becoming increasingly mainstream across multiple industries and on a global basis.
I am pleased today that there were a number of important sign posts in our Q1 results that validate the continued maturation and growth of the omni-channel market. For example, much of NCR's Q1 faster order and revenue growth can be attributed directly to omni-channel implementations, applications or upgrades.
Additionally, the significant growth of self-checkout correlates to the beginning of the retail store transformation cycle. In fact, we are seeing similar trends in branch transformation and retail banks and hospitality transformation and quick service and fast casual dining.
We are even seeing early signs of small and middle size businesses wanting to get on board. Moreover, strategic relationship like Wells Fargo is directly focused on our customers improving their omni-channel experience for their customers, their team member.
Everywhere we looking our P&L, the implement of omni-channel is growing and making an impact. As we look ahead for the omni-channel market, it is important to note that NCR is on the forefront of helping our customers' respond to the disruptive changes in globalization, digitalization, consumerism and the internet-of-things.
It is estimated that by 2020, 75% of businesses will have digital transformation underway. A larger involving channel integration and transformation technologies.
However, only 30% of these efforts are predicted to be successful. As businesses evolve, the need to keep up with and ultimately lead a new ever era of connected markets is a promise.
Channel integration and transformation is this realignment of our new investment and technology and business model to more effectively engage digital customers at every touch point in the transformation journey. NCR is a pioneer in the channel integration and transformation sphere both the physical and digital.
And the organic and inner -- investment we have made today are paying off. And it is a need to upgrade legacy technology charges and business process methodologies becomes even more prevalent.
We are now in a position to lead the way and keeping up with the fast pace of change in a rapidly evolving world. Operator, we'll now open the floor for questions.
Operator
Thank you. [Operator Instructions].
We'll go first to Kartik Mehta with Northcoast Research.
Kartik Mehta
Good afternoon, Bill. Good afternoon, Bob.
I wanted to you talked about the ATM business Bill maybe not meeting your expectations and I am just wondering is there any particular geography or do you think this is more a case of just ordering taking longer than you anticipated?
Bill Nuti
What I talked about Kartik was a fact that at the beginning of Q1 we've established higher goals for ourselves internally. First is what the backlog would suggest we can shift, and I thought we can get $10 million maybe $20 million more of revenue moved into Q1 from Q2 and Q3 by working with our customers on some acceleration of their roll out.
That is not happened so the good news is that the backlog for ATMs now is up about 19% year-over-year. So we have a very strong ATM hardware backlog but in Q1 that would have also driven revenues higher and software attach higher.
So for us we established and set goals. We would have like to have gotten there.
I am not just point and the effort and not surprised by the outcome. In fact, we did a little bit better than we thought we would at the beginning of Q1 but again good news is on the backlog going into Q2 and Q3.
Kartik Mehta
And then Bill it seems those services is continuing to do well. If you broke that out between ATM and retail or however else you would want to break it out, can you talk about the parts that are doing well?
Maybe the parts where you would like to see improvement if there are any.
Bob Fishman
This is Bob. The way that Kartik we like to look at the services business is really is in terms of hardware maintenance, implementation services, managed services, those are the buckets that we are looking at.
All had very solid quarter in Q1. Implementation services we are starting to do more third party implementation services.
The hardware maintenance growth was up because the file value was up. And then the managed services which has the growing trend that we are seeing across really all the industries.
So we saw good growth Kartik across all those three lines of business.
Kartik Mehta
Perfect. And then Bill just one last question.
You talked about maybe or Bob you talked about some headwinds, economic headwinds maybe in Europe. But I don't know if you said EMEA, I apologize.
I just was -- I was hoping you could talk about which countries you are seeing that? And if you've seen any improvement throughout the quarter?
Bill Nuti
Really, year-over-year Kartik, the headwinds we saw mainly pertain to the ATM phase and they really came in the form of the following. The year-over-year compares in Turkey way off meaning Turkey in Q1, 2015 had a great quarter.
Q1, 2016 was weak. The oil market of Middle East and Africa are all challenged right now.
Still we are seeing some issues in Middle East and Africa but they are in my view non-cyclical and I expect them to return to some level of growth here in the back half of the year overall. But when you look across all of that businesses, it really with the ATM space in Q1 where we saw a geographic challenges all other lines did quite well.
Operator
We will hear next from Paul Coster with JPMorgan.
Paul Coster
Just a few quick questions. The first one is -- it sounds good that you've got a strategic win with Wells Fargo, but surely other retail banks now will be looking at that somewhat skeptically with a view to perhaps going in a different direction to differentiate.
Isn't there a risk now of Balkanization? I realize you haven't disclosed much information yet but sort of prima fascia, it sounds like it could work both ways.
Bill Nuti
Paul you might think that on the surface Paul but for us we are seeing interest from all of our large customers to go down a very similar path. I would not want to paint the Wells Fargo partnership in any more than a large bank and a large innovative fin-tech provider coming together and working on their behalf to provide their customers and their team members with great solutions.
We are looking at doing that with other large banks around the world. Andy Heyman, you may have some comments on that.
Andy Heyman
Yes. Thanks, Bill.
Welcome, Paul. I think it's bigger than just the big bank space.
I think what we are seeing is a growing trend based on the desire for significant retail network transformation to simplify the technology infrastructure to enable the cost improvement and the revenue growth that financial institutions are striving to achieve. And whether it's big banks or small banks, whether it's the United States or the rest of the world the trend is growing.
To your question about well could this provide a tailwind for competitors, as we see the competitive landscape shaping out, we see this trend is highly favorable especially as our top two competitors merge by the end of this quarter. So we are optimistic about this trend.
And time will tell if that optimism proves out but we do like a lot what we see just like Wells we have similar win in with our largest deal ever in Mexico. We had our largest deal ever on the same formula in the community financial institution space in the United States.
And we are seeing that demand pick up globally.
Paul Coster
Okay. A couple of things on a couple of points on the guidance.
Bob, you talked to a couple of times about the add-back of pension fund expense being higher than expected. Did you actually mean that?
Or do you mean that -- I mean I don't think the pension expense has actually gone up versus prior expectations. It's just that now we have to add it back because you are not using NPOI -- is that the correct interpretation of what you were saying?
Bob Fishman
Yes. The best way to think about that Paul is there is roughly now that we recap the financial to include pension expense and no longer have NPOI, those $10 million of pension expense in the close year in 2015 and around $20 million in 2016.
So think of it is a full year $10 million headwind, $5 million of that came in Q1 because you remember in Q2 of last year that's when we sold the over funded pension plan in London. So as we get to the later quarter you'll have less of a difference for the full year as $10 million and for Q1 as $5 million.
Paul Coster
Okay. Got it.
All right. And then well I've got a bunch of questions but I'll just round it out with one big one, which is why raise the full year guidance at the moment?
It didn't seem to me to be necessary in view of the -- sort of across the first and second quarter, it was an okay start for the year, but no reason at this point in time to raise the bar on yourselves.
Bob Fishman
Yes. We relative because we -- we got a significant beat in Q1.
We feel good about the balance of the year. FX was moving in our direction for the first time in a while even though we did see some OIE headwind.
So when we put all of that together and looked at the backlog, looked at file value and funnel, we had growing confidence and that allowed to us increase the guidance and send a stronger signal.
Bill Nuti
Yes. Paul, I'd add a few things from my point of view.
We've a very solid start for the year. And overall -- over the -- and in particular software orders, they were up about 11% year-over-year driven by software licenses and PS.
So the mixes of orders were very good and order book is solid overall. The backlog coming into Q2 now is up about 6% year-over-year now and very, very solid and we are anticipating a solid Q2 in terms of orders as well, and in particular software orders.
We have good file value, file value go to solid on the year and so when you do the math on all of that and higher conversion of a very big hub of backlog right now in the back half, it was actually responsible of us to raise guidance.
Operator
[Operator Instructions] We will move next to Alembic Global Advisors' Matt Summerville.
Matt Summerville
Thank you. First of all, just with respect to the ATM business, you mentioned launching a new family of machines.
Can you talk about how the timing of that rollout or availability is going to look as we progress throughout 2016? And then what you think are the top maybe three or four differentiating factors versus your competitors?
Bill Nuti
Hi, Matt. Andy why don't you take that one.
Andy Heyman
Okay. So Matt just as you know this is a very big deal for us and it has been several years in the making from an R&D perspective and was a center piece in the Wells' strategic relationship that we signed in the first quarter.
And several other big relationships in the quarter as well. In the first quarter we shipped a couple of hundred units so it's fully baked now.
We are not talking about labs and pilots, we are in deploying that mode now. We will be shipping many thousands this year so we have -- it's passed all of the key certifications and other quality test that you want to see.
In terms of what's different about this, its a few things; first of all, very much future proved capabilities in terms of supporting omni-channel need. Things like video ready, NFC ready, those kind of things.
The industrial design on the unit is thought of by our customers at a differentiation more Apple like if you will. In terms of its industrial design, that's a second key.
Then the third area is availability on this significantly improved the availability book because the deposit the liability and speed and the cash dispense capabilities are world class and really disrupt our sales in terms of where we look already the leaders with our current generation, this leapfrog ourselves in anybody's else's design in terms of what's going on in the industry. So there is differentiation has been crucial.
I'll just give you one stat as we are seeing in the field right now. If you can imagine this throughput we measure in high density moment, so think of it is on a given busy day 2,000 transactions moving up to 4,000 transactions.
So you can imagine cost per transaction significantly changing in very high volume situation. So lots of benefits for customers that helped them both grow revenues, control cost in a highly secured way.
Bob Fishman
Matt, this is Bob. I just want to Matt mention that a lot of these pieces are interconnected.
We spent capital over the last couple of years. Our capital was down in Q1 because we are going to have a record number of new product introduction across NCR not just in ATM.
It's self-checkout platform, point-of-sale. And those products ramp we really have a fresh start in terms of taking cost out of the product.
And so while you might see margins challenged initially, and as we ramp through the year margin rates will improve primarily in hardware margin in ATM. So it all fits together as this product revenue starts to grow.
Matt Summerville
And then just a follow up -- got it. And then just as a follow-up, kind of a similar question with respect to retail in either point-of-sale -- more so self-checkout -- you mentioned the changes coming in, in labor rates.
And I'm sure we've all sort of seen that. What do you think that does to the adoption curve, the level of conversion, if you will, of non-self checkout lanes to self-checkout lanes?
And what are the conversations you're having with your customers suggesting about that? When is that inflection, if you will -- if it's not happening already -- when is that coming?
Bill Nuti
Yes. Matt.
This is a great question. We are seeing that now.
Candidly the biggest driver for self-checkout today is that it is a component of a retail stores overall store transformation initiative meaning if you want to go speak with the CIOs of mass merchandiser, of large grocery stores, of convenient stores, you will find that within 10 years a very high correlation of them expect that the number of lanes they are currently assisted meaning people are there checking you out, will go from about 80% today down to about 5%, 10 years from now. Now there will be a number of modalities of what we call self-checkout today that will feature prominently in that store transformation solution.
We offer a complete solution today. Some checkout is a component of that solution.
For example mobile point-to-sale, mobile checkouts, click and collect, cash management, loyalty, retail one and the whole host of our software solution above and beyond that are part of that solution. Now labor rate is causing as a function, causing a number of our customers to even more so speed up their transition, so that 10 year horizon that I thought will play out is now probably five to seven years as labor rate rise not just in the US but in terms of in place around the world.
We are now seeing self-checkout being sold in markets like Russia for example in a high degree of volume and other markets. We never saw self-checkout seller again.
So Michael Bayer do you have other comments on that.
Michael Bayer
Yes, Bill. Matt, I would add to what Bill already outlined that is also some factors which were not so much in the forefront of thinking of our customers like availability of labor.
In the lot of the top 20 to 50 cities around the world availability of labor to look at the cash register is a big issue for the retailers. It's also the question of efficiency of labor with ongoing disruption of employees who do self- replenishment or other work being called again and again back to the cash register compare -- combined that with the young generation of people who are much more technology savvy and want to do it their own way and with the global increasing opening hours, you see a business case to self-checkout introduction and customers who don't have self-checkout today.
But you also see now the move to higher density checkout solutions in our installed customer base. So all of that comes together and with the product portfolio we have as well as our specialist sales force and the global reach, we are acting on the forefront of this momentum.
Bill Nuti
And Matt just to put this in perspective for you, in Q1 order growth for SCO, for self-checkout was 100% year-over-year is doubled. So we saw on a big number by the way.
So we saw a very significant increase in customer traction again mainly in line with what we expected in terms of store transformation but no doubt the density of lanes will move more aggressively to -- and more of self-checkout modality as a result of higher labor rate.
Operator
We will hear next from Gil Loria with Wedbush Securities.
Aaron Turner
Hi, guys. This is Aaron on for Gil.
Just a quick one from me. Regarding free cash flow, how do you foresee the seasonality of cash flow for this year?
And specifically what percent do you think we'll see in Q4?
Bob Fishman
Yes. This is Bob.
We typically see a negative free cash flow in the first quarter. We actually beat our internal plan in the first quarter and free cash flow was an out flow primarily because of the working capital build.
When I look at the next three quarters of the year, last year we did roughly $385 million of free cash flow, we will be $480 million this year to get to the mid point. I feel good that all the trends they are headed in the right direction.
So we got CapEx being lower, we'll have another very good year with cash tax rate. And there is no one time item, disk ops is lower.
Overall it comes down to the back half of revenue and profit. So it's hard for me to flowchart the exact number in Q4.
But I'll say that I am very comfortable with how the year is playing out and confident within the guidance range.
Operator
And our final question will be from our follow up from Paul Coster.
Paul Coster
Yes. Thanks.
So just drilling down into the software for a moment. You talked of, I believe, an increase in backlog.
What was the composition of that backlog particularly in terms of the licensing versus maintenance? And the attach versus non-attach?
And what does that have -- what does that imply in terms of future gross margins for that segment?
Bill Nuti
Yes. The license backlog growth that was up mid single digit was a good sign.
I think about PS also being up in the quarter slightly as well. Some of the main driver of backlog growth for us going into Q2 is software license.
And that facing a strong Q1 order growth in that period. Now about a little over half of our revenue in Q1 in software license was unattached.
As the volume of hardware growth for ATM and self-checkout in the back half and both with grow significantly over Q1. The attach for that will also grow for us.
So the opportunity we have is to over achieve our unattached forecast in the back half and really that is a stretched target for the year because by itself the attach growth in the back half is quite high.
Paul Coster
Which is the better margin business? The attached or the unattached?
Bill Nuti
They are both about the same, Paul. They are both about the same.
They both in the mid to high 50s on software license.
Bob Fishman
I would say the software license piece is probably even higher than that because it's typically only carrying the software and more from the previous year. So I would say that the software license when you look at the four streams within software license is probably 80% to 90% in terms of the gross margin.
There can be some third party elements to that but overall that's our highest margin stream.
Paul Coster
Got it. All right.
So the second-half looks like it's going to be pretty strong, but we have heard a variation on this story before. What are the risks that we might see some push-outs of projects for instance?
Bill Nuti
Paul I think we were in similar circumstances last year and we did what we said we were going to do even a little bit higher than that. So we feel like we are in the same seasonality position we were in.
I think Bob and I have incrementally more confident this year given our order flow through, software orders, backlog, file value and frankly the fast pace at which we are driving up our business transformation initiative. But Bob you may have thoughts on that.
Bob Fishman
Yes. There are a few strengths in our favor in the back half of the year.
Certainly we are laughing to Bill's point we got that the higher volume but we are also laughing those conversion rate that troubled us in Q3 and Q4 of last year around the backlog flow through. So conversion rate will be better as well.
And then I have been pleased with the overall transformation initiative. You remember in Analysts Day we said we were going down three paths.
We said we were engaging the help of Alex Partners to do an eight week full body scan or what we call quick strike that eight week analysis and this Friday and we received and we will be implementing at a number of performance improvement around sales enablement, services and software transformation and cost takeout. The other initiative that has been launched is zero based budgeting which will drive in your savings but also give us a run rate over the next couple of year, and then finally we've been going after cost of goods in hardware and cost of services within our overall services platform for end year savings.
So those three initiatives are driving improvement in the back half of the year but it has been also give us the run rate for the next couple of years and the project plans to execute on that.
Bill Nuti
And Paul on conversion rating, a very interesting factoid for you is that while conversion rates of our backlog will go up in the back half of this year, we are modeling them actually to be down from 2014. So if not get return to normalized conversion rate, they might and that might be upset and they might not.
So right now we are modeling this on our customers' roll out schedule and increase in the conversion rate which is still below 2014.
Operator
And I'll turn the conference back to you all for closing remarks.
Bill Nuti
Well, thank you all for joining us. I do want to tell you that we have a number of investor events coming up in the next two months.
We intend to be quite visible in the market. And of course we think you will out there.
But thank you again for joining us. We'll see you in July.
Bye, bye.
Operator
Okay. We'll now conclude today's conference.
Thank you all for joining us.