Apr 20, 2017
Executives
Michael Nelson - VP of IR Bill Nuti - Chairman and CEO Mark Benjamin - President and COO Bob Fishman - CFO Paul Langenbahn - Head of Software
Analysts
Katy Huberty - Morgan Stanley Kartik Mehta - Northcoast Research Partners Ian Zaffino - Oppenheimer Dan Kurnos - Benchmark Company Matt Summerville - Alembic Global Advisors Paul Coaster - J. P.
Morgan
Operator
Good day, and welcome to the NCR Corporation First Quarter Fiscal Year 2017 Earnings Conference Call. Today's conference is being recorded.
And at this time, I would like to turn the conference over to Mr. Michael Nelson, Vice President of Investor Relations.
Please go ahead sir.
Michael Nelson
Good afternoon, and thank you for joining our first quarter 2017 earnings call. Joining me on the call today as our host is Bill Nuti, Chairman and CEO; along with Mark Benjamin, President and COO; and Bob Fishman, CFO.
After prepared remarks, Bill, Mark and Bob will take your question. Before we get started, let me remind you that our presentation and discussions will include forward-looking statements.
These statements reflect our current expectations and beliefs, but they are subject to risks and uncertainties that could cause actual results to differ materially from those expectations. These risks and uncertainties are described in our earnings release and our periodic filings with the SEC, including our annual report.
On today's call, we will also be discussing certain non-GAAP financial measures. These non-GAAP measures are described and reconciled to their GAAP counterparts in the presentation materials and on the Investor Relations page of our Web site.
A replay of this call will be available later today on our Web site, ncr.com. With that, I would now like to turn the call over to Mark.
Mark Benjamin
Thank you, Michael. And thanks to everyone for joining us today for our first quarter conference call.
I'll start by highlighting key developments and performance metrics for our business. Bob will then walk you through the financials in further detail, as well as our updated guidance and Bill, Paul, Bob and I will take your questions.
Overall, we're up to solid start to the year as our performance exceed our expectations and places us on track to over-achieve our initial full year financial and operating goals. Our first quarter results speak to the consistent high level of execution across NCR, our global omni-channel and channel transformation leadership, as well as our success converting diversified top line growth and productivity initiatives into meaningful gross margin expansion.
You’ve heard us talk about the benefits of the business and market diversification in the past. Our Q1 results directly speak to and illustrate the importance and impact of that diversity.
We entered 2017 with strong momentum, and through focused execution, we transform that momentum into solid revenue growth and balanced margin expansion across our software services and hardware segments. While key highlights of our performance are evident across each of our business segments, we were particularly pleased by the continued strong growth in our software revenue which increased 8%, including cloud revenue growth of 6% and software license revenue growth of 30%.
When taking together, our unique combination of robust software and cloud offerings, expensive services capabilities and leading hardware solutions uniquely positions NCR to capitalize on a strong momentum in the omni-channel, channel transformation in digital enablement markets. Our sales teams continue to successfully execute against this growing omni-channel market demand and expand our customer base, while also deepening our existing relationships.
Everyday, we are helping drive success for customers of all sizes across different industries around the globe. In Q1, we also fulfilled our commitment to return cash to stockholders as we repurchased 350 million of stock.
Today, we are also raising our full year revenue and non-GAAP EPS guidance, while maintaining our free cash flow outlook for the year. Slide four shows our strong financial performance.
Revenue was up 9% on a constant currency basis, and above the high end of our guidance range, driven by higher revenue across each of our business segments. Our revenue growth was also aided by the further expansion of our recurring revenue, which was up 2% and now comprises 47% of our total revenue.
Our non-GAAP gross margin rate expanded 210 basis points on a constant currency basis to 29.2%, and was clearly a highlight of the quarter. Margin expansion has been a significant area of focus at NCR, and our performance this quarter speaks to our strong execution, the value our offerings bring to market, as well as success we've had improving productivity and gaining scale across our segments.
Non-GAAP EPS also came in above the high end of our guidance range and on a constant currency basis, was up an impressive 51% year-over-year. Lastly, free cash flow was better than expected and puts us firmly on the path to achieve our full year free cash flow guidance.
Slide five is a slide you've seen before, it’s an overview of NCR's strategic offers within the omni-channel market. This speaks to our global leadership and unmatched solutions portfolio in the three areas pivotal to conducting business in an increasingly digital economy; omni-channel software, channel transformation and digital enablement.
Moreover, as the industrial Internet market expands, primarily as a result of the Internet of Things, cloud technologies, Big Data and machine learning, NCR is uniquely positioned to further help our customers migrate high cost low value transactions to high value low cost channels, reducing their costs in quantum ways while meeting the needs of the new consumer experience. In addition, we will continue to invest in cloud platforms that enable cognitive insights, engagement and automation, which will provide our customers with predictive analytics and agents and employee cognitive technology to engage with their customers.
This next generation of NCR software technology will provide our customers with the next generation of productivity gains, untapped sources of revenue growth and significantly enhance customer loyalty. The key takeaway is our belief that NCR is the strongest and most capable partner for customers as they modernize their businesses, processes and consumer interfaces to compete effectively in a rapidly changing world.
Everyday, we have conversations with existing or potential customers and more often than not the end needs are strikingly similar. Every industry is undergoing rapid change and consumer expectations are the primary driving force behind that evolution.
In the midst of all this transition to be successful, businesses need to grow their revenues, increase their productivity, drive loyalty gains, capture ROI on their marketing platforms and expand their touchpoints with consumers. Businesses are increasingly turning to our solutions and capabilities as NCR delivers proven value across each and every one of these critical areas.
This is evident in the financial services market, where Banorte, one of the biggest banks in Mexico, will be utilizing more than 1,600 SelfServ ATMs as it looks to migrate banking transactions from a traditional to a self service model. The primary goals for Banorte are identical to some of the ones I just highlighted; increase efficiency and consumer satisfaction gains via a digitized experience.
Our leadership is demonstrated in the software market as well. We continue to gain traction with our cloud based digital banking solution.
Teachers Federal Credit Union, based in Long Island, New York, has been a long time NCR customer. The financial tuition shares NCR’s omni-channel vision and recently signed a five year digital banking agreement, which will enable the Credit Union the ability to offer its customers with a feature-rich mobile and online banking platform.
Additionally, we recently secured our largest kiosk win with Sprint, one of the U.S. largest mobile operators.
Sprint is leveraging NCR's newest generation of kiosk hardware to enable their store of the future with new digital content and customer applications. The deal includes hardware, deployment, professional services and maintenance for over 600 bill payment kiosks.
This win speaks to the global momentum behind omni-commerce and channel transformation, but also our ability to deliver competitive advantages to our customers. It also demonstrates the benefits of the diversified software services and hardware solution we can deliver to customers.
A key component of our success is continued innovation. NCR's SelfServ 90 and Fast Lane SelfServ checkout solutions recently rewarded for excellence and product design at the iF Design Awards 2017.
We also recently announced an extension to the NCR Aloha platform that will enable restaurants to increase speed of service, improve order accuracy and increase overall customer satisfaction by providing their customers with a self ordering kiosk. The investments we’ve made in our omni-channel solutions are delivering favorable results and well positions NCR to continue to benefit from the macro trends across our industries.
With that, I'll turn it over to Bob, who will walk through our financial performance and outlook in more detail. Bob?
Bob Fishman
Thank you, Mark. Slide six shows our segment results for the first quarter with increases in revenue and gross margin across all our segments.
Software revenue was up 8%, Services revenue was up 4%, and Hardware revenue was up 15%, all adjusted constant currency. The strong Hardware revenue is expected to drive higher margin attached Software and Services revenue and future recurring revenue.
The growth in Software revenue was driven by software license, cloud and professional services. In Services, our hardware maintenance and implementation revenues were both higher in the quarter.
Hardware revenue growth was a result of continued momentum in self check-out and strong performance in point of sale. Software gross margin expanded 90 basis points, Services gross margin expanded 190 basis points and Hardware gross margin increased 190 basis points.
The gross margin rate expansion reflects the results of our strategic focus on business transformation, a positive revenue mix, efficiency and scale gains. Now let's move on to Slide seven to discuss our software results.
Software-related revenue increased 8% year-over-year, driven by software license, which increased 30% due to significant unattached license growth and continued demand for channel transformation solutions. Cloud revenue continued to grow, up 6% driven by prior-period bookings.
We also remain pleased with the momentum of new cloud bookings in the quarter as reflected by net ACV of $18 million, up 29% from the prior year. We have refined the net ACV calculation and we continue to believe it is the best indicator of future cloud revenue growth.
While software maintenance declined slightly, primarily due to favorable one-time items in the prior year, we expect software maintenance growth in the balance of the year. Software gross margin rate expanded 90 basis points, driven by strong software license revenue growth, increased efficiency and scale benefits.
Slide eight shows our first quarter Services results. Services revenue increased 4% driven by hardware maintenance growth as a result of improving channel transformation trends combined with increased manage and implementation services.
We are pleased with the higher file valuem, which is the backlog metric for our services business. Services gross margin rate increased to 190 basis points as a result of business process improvement initiatives and a mix shift towards higher value manage services.
Incremental services margin expansion remains a key focus as we execute our strategy. Turning to slide nine, Hardware had a strong quarter with revenue up 15%, attributed to the strength of channel transformation, particularly in the retail and hospitality industries.
ATM revenue was down as expected due to lower backlog entering the year and lower conversion rates in the first quarter. We expect ATM growth in the back half for the year as larger customer rollouts takes place.
We are seeing a favorable response to the global launch of our AD series, which we see as a competitive differentiator. We are taking a balanced approach to certifying our products as we advance our global deployments throughout 2017.
The key drivers to hardware revenue growth was self-checkout and point of sale revenues, which increased to 124% and 17% respectively. SCO and POS revenues increased due to store transformation growth, which continues to gain momentum globally as consumer preferences shift.
Our new point of sale hardware portfolio continues to gain traction with solid market demand for both our EPOS and MPOS solutions. Hardware gross margin rate improved to 190 basis points as we are gaining scale from new product introductions.
Additionally, recent market share gains across our hardware portfolio are expected to drive incremental higher margin attached revenue and recurring revenues streams in the future. On slide 10 you can see free cash flow for the quarter.
Free cash outflow was $12 million in Q1 2017, an improvement from an outflow of $29 million in the prior year. The Company started the year strong, driven primarily by higher operating income in the period.
As a remainder, the first quarter is typically a use of cash and then free cash flow increases as the business ramps over the remainder of the year. Slide 11 shows our net debt to EBITDA metric with a net debt leverage ratio of 2.7 times for Q1 2017 as compared to 3.2 times for Q1 2016.
Although, the ratio was up slightly from the prior year-end due to the share repurchases in Q1, we anticipate strong free cash flow for the remainder of the year which will enable us to reduce our leverage multiple throughout the year. As a remainder, in Q1, we repurchased roughly 7.4 million share of outstanding stock at a value of approximately $350 million.
On slide 12, you will find our revised full year 2017 guidance. We are raising our full year 2017 revenue and non-GAAP diluted earnings per share guidance.
Revenue guidance is expected to $6.63 billion to $6.75 billion, up from previous guidance of $6.6 billion to $6.72 billion due to improving foreign exchange rates. We expect revenue growth of 1% to 3% as reported and 5% to 7% adjusted constant currency.
We are including expected FX headwinds on revenue of approximately $65 million compared to our previous guidance of $95 million. Our non-GAAP EPS is now expected to be $3.32 to $3.42 for the year, up from previous guidance of $3.27 to $3.37 or growth of 10% to 14% versus the prior year on a constant currency basis.
The increased guidance reflects reduced FX headwinds and our confidence in the business going forward. We are including FX headwinds on diluted EPS of $0.01 compared to our previous guidance of $0.03.
Our GAAP EPS guidance has been adjusted to reflect the impact of the Q1 Blackstone transaction and is now expected to be $2.20 to $2.32. The impact from the Q1 Blackstone transaction was due to the repurchase of preferred shares at a price in excess of the carrying value which is considered of being in dividend for GAAP EPS purposes.
We are reaffirming our expectation for free cash flow to be in the range of $500 million to $525 million or approximately 95% to 100% of non-GAAP net income. Slide 13 shows our revenue guidance by segment for the full year.
The guidance has been revised upward to reflect the more positive FX environment. Software is expected to grow 6% to 8% on a constant currency basis with cloud expected to grow at a similar rate.
Services will grow 3% to 5% and Hardware will grow 5% to 8%. Slide 14 includes our Q2 2017 guidance.
We expect revenue to be up 4% to 6% adjusted constant currency. Our non-GAAP EPS is expected to be $0.72 to $0.77 or up 1% to 8% from the prior year.
Our guidance also includes FX headwinds of $30 million in revenue and $0.01 in diluted EPS. Finally, on slide 15, you can see our revenue and EPS trending over the last three years.
Consistent with prior years, the guidance has more revenue and earnings in the back half of the year. Revenue is trending similar to last year and is supported by our backlog and funnel at the end of the first quarter.
Our earnings per share is trending more favorably than last year, mainly due to the benefit of our share repurchases in the first quarter. This trending analysis and the momentum in the business provides us with confidence in achieving our full year guidance.
With that, I'll turn it over to Mark for closing comments.
Mark Benjamin
Thanks, Bob. Turning to Slide 16.
In summary, we’re off to a solid start to the year and are confident in the underlying momentum across our business, as well as our ability to deliver on our full year goals. Through foreisght and the innovation, we have effectively aligned our teams, solutions and capabilities to deliver against the market forces transforming how our customers and consumers interact and transact everyday across the globe.
Our solid performance in Q1 and full year outlook is supported by our healthy business metrics. Margin remains a major area of focus.
While we had a great quarter from this perspective, there is additional margin improvement we can capture as we drive further software revenue growth and continue building a more efficient NCR through our business transformation program. Today, you’ve heard about omni-channel, channel transformation and digital enablement; areas that are strong growth drivers moving forward and where we have an established global leadership position.
NCR is a critical partner for customers across industries, countries and sizes and we are committed to continue delivering the competitive advantages and market differentiation that helps them succeed. We are on track to achieve our free cash flow target for the year and are executing a balanced capital allocation strategy that will enable us to continue to innovate by also delivering direct returns to our shareholders.
Overall, I am excited about NCR's future and our participation in the 650 million plus transactiond we enable each and every day. I want to thank the entire NCR team for their tireless commitment to driving success for our customers.
That concludes our prepared remarks. Joining Bob and me for Q&A are Bill and Paul Langenbahn, Head of Software business.
Operator
[Operator Instructions] And we’ll take our first question from Katy Huberty with Morgan Stanley.
Kathryn Huberty
Really impressive turn in gross margins across the segment. So I wonder if you could may be rank by segment where you see the most opportunity for further expansion and sort of consistency in the expansion that you saw in the first quarter?
From the outside, it feels like there is lot more to go in Services and Hardware. But I'm less clear on Software because there was, what looks a temporary boost in license mix in the first quarter.
I'm not sure, how sustainable that is. Then I have a follow up.
Mark Benjamin
Certainly, we're very pleased with the quarter, really across the key segments. And we continue to believe that Software really is the great opportunity for future of NCR, as well as on the margin story really as our cloud offering as far as we scale that business.
And we talked about that in the past. I think we're especially pleased with the hardware gross margins in the quarter, and that’s really the combination of the mix of the solutions, the hardware solutions.
As well as last year was the year for NCR to really launch several new key products that drive cost are in that scale and we did that in the ATM and self checkout solutions. So we're especially pleased with the start in our hardware gross margin.
In Services, we had a great quarter. We've invested into that end of our business to improve the client experience.
The team had a great first quarter around SLAs in the field, which tend to drive order and volume growth for us. And we’ll continue to see margin improvements coming on to Services for the future.
I have Paul here, who runs software, so maybe I’ll have your comment.
Paul Langenbahn
Katy, Software is a huge opportunity for us to improve margins. And I think it's important to remember this is really the first time we've had all of NCR software under one roof and under one leadership team where we can start to get some economics of scale.
We think over the next several years, we have the opportunity to improve our software margins by about 1000 basis points. That won't happen all in one year, but we’ve got a plan to get there and the main levers are these; first of all, the simple one, just increased revenue on what is largely a fixed expense base; and we’re being very intentional about architecting our mix of license, cloud and professional services.
We've started two initiatives this year around better managing and rationalizing our portfolio. We've acquired a lot of software products over the year that do similar things, and there is a big opportunity for us to gain a lot of efficiency from that.
We’re investing heavily in our platform. And so if you think about it today, we have very few services that are shared across multiple software products.
We’ve tended to build everything in the full -- from the ground up, and we're investing -- heart of the NCR platform story is really in investment in services that we can leverage across a lot of products. And then I would say, the last one would be around our people and our workforce.
So we’re investing in centers of excellence. We’re bringing more people together in larger R&D centers where we can have the right people doing the right work, the right balance at high cost versus low cost.
And so all of these things that will drive efficiency for us that will not only increased on margins but they’ll allow us to invest more in our bigger ideas. So we’ve got some areas where we want to invest more.
We think we can actually drive more growth, and this kind of allows us to do that.
Katy Huberty
That’s great, thank you…
Mark Benjamin
Katy, for us to improve the gross margin rate and to have it as broad based in each of the segments is very exciting for us. It reflects a lot of the investments and hard work we’ve done over the last few years.
Katy Huberty
Just quick follow up, obviously, there was some excitement around deregulation in the financial industry coming into the year. And you should have any in this comps in the first half versus the back half, just given the timing of the product ramp last year.
So just curious why you think there was weakness in the ATM business. Was there particular geographies or customer deals that got touched?
And that’s it from me.
Mark Benjamin
Katy, it's a fair question. I think we’re still waiting on the impacts of any regulatory or administrative type policy impacts to really impact our order and backlog growth rate, if you will.
I think we had, as you know, we had an incredibly strong fourth quarter in '16. Again, Bob will keep me straight, but revenues up 30%...
Bob Fishman
Yes, 30% and that was coming off of Q3, up 11%. So strong back half of the year; a true great back half; so as you would imagine; we come into Q1, rebuilding the backlog; so the good news is we’re executing on the business, we feel very good about the year; you see that today in our guidance.
And our new solutions, specifically on the ATM side our AD series, which was essentially a soft launch last year with a few FIs is now broadly available in North America. We continue now to expand it through Europe and seek the certification.
So again, similar to last year, it will be a front half back half story when it comes to financial revenues.
Operator
And we’ll take our next question from Kartik Mehta with Northcoast Research.
Kartik Mehta
Bob, I just wanted to ask a little bit about free cash flow, you raised guidance, obviously, for revenue. I know that’s FX related raise guidance for EPS and little bit of it is FX related.
And you said, we’re pretty comfortable with how business is trending. And I am wondering, just maintaining your free cash flow guidance, is that conservatism, is there something else in the business, or could working capital be a drag as the second half is very strong?
Bob Fishman
We were pleased with our free cash flow progress in the first quarter, typically the first quarter is an outflow of cash. And then as we build inventory, revenues starts to ramp in the back half of the year.
So we thought it was prudent to maintain free cash flow guidance at this time. But overall, it’s a good start to the year for us, and should follow a similar trend to the prior year.
Kartik Mehta
And then just looking at the ATM industry, if you kind of look at what's happening in U.S. Just worldwide, I am wondering if you could just give some commentary on the fundamentals in terms of demand and price, if there is any pockets that are doing really well or doing really bad, and just your general thoughts.
Mark Benjamin
So I would say we had some pretty healthy ATM growth throughout Europe really throughout EMEA, if you will; the Americas is -- certainly, North America was consistent and APAC as well was, I think, consistent with our run rates.
Kartik Mehta
So Mark just so I understand, when you say consistent APAC and North America, would that mean that the North America and APAC were down as the Hardware down in the quarter or would that mean something else?
Mark Benjamin
No, I think just consistent with our plans that we built and what we’ve been guiding to. And again as we compare year-over-year and sequentially quarter-to-quarter with order and backlog growth.
Kartik Mehta
So it sounds like North America, you would expect I think in the past, low single digit growth, Asia-PAC maybe mid to high single digit growth. Is that a fair characterization?
Mark Benjamin
I think it's close Kartik, I think it's close.
Operator
And we’ll take our next question from Ian Zaffino with Oppenheimer.
Ian Zaffino
Question would be, I know Bob you mentioned about some share gain in Hardware. Can you maybe give us a specific idea of where those share gains might have been, maybe either the region or the business line?
Could give us a little flavor that would be great? Thanks.
Bob Fishman
We’ve made the comment last couple of quarters that the ATM growth in Q3 and Q4 drove market share gains for us. That has helped drive that higher margin recurring revenue, so that’s what we were referring to, Ian.
Bill Nuti
And Ian the share gains were mainly in the America and in Europe.
Ian Zaffino
And is that big bank small banks, any other detail you can give us on that?
Bill Nuti
Both, Q1 and FI…
Ian Zaffino
And then follow-up question on the buyback, I know you completed this large buyback earlier this year. As you look -- as your free cash flow going forward, I know you have build your basket to get the work with.
But what is the buyback commitment for free cash flow in the second quarter, third quarter and fourth quarter?
Bill Nuti
We don’t have that looked that yet, Ian, that’s a Board level decision. The good news is we are fully authorized an additional $300 million of buyback, so our current pass through is; number one, pay down debt; number two, be opportunistic on the buyback side, when and if the Board chooses; and number three, small M&A.
Ian Zaffino
And on the M&A side, I guess as you threw that out there. Is there anything in particular you’re looking for us, so maybe more on omni-channels, it could be more on, I guess Services?
What you're looking to do there?
Bill Nuti
The broad categories are Software, Cloud and Services.
Operator
We’ll take our next question from Dan Kurnos with Benchmark Company.
Dan Kurnos
You guys have touched on this a little bit already, but if you could just give us a little bit more color exactly where you're at on the local certification progress abroad with the new 80 series. And you talked kind like a balanced approach, I don’t know if you're intentionally making sure that you got your docks in a row or if you're waiting for approval in certain countries.
And then separately, I know it's also a little bit early. But are you seeing any delta and software uptake from all the new product launches?
Obviously, we know what kind of the historical uptake has been. So if you could give us any learnings that you have so far that would be helpful.
Thanks.
Mark Benjamin
Sure. So I would say that we're on a fairly aggressive path around certification of the 80 series.
We have 20 markets in addition to the current North America market that we’re in for certification. The demand is growing, the reception of the solution is making its way through Europe, literally as we speak with great excitement and great interest; so 20 right now is the roadmap for this calendar year.
And when we see opportunities to go faster and get certifications done, we will. Could you go ahead and repeat the second part of your question?
Dan Kurnos
Sure. So obviously you guys have spend a lot of time and money investing in new product launches, including some new hardware solutions.
We know what of the historical uptake rates on software have been. I'm just wondering if you're seeing, because of some of the competitive advantages you called out, if you're seeing any improvements in software uptake relative to historical rates, based on those new product launches?
Paul Langenbahn
Ian, this is Paul. So our software license business had a really good quarter on all metrics, and surely driven by two things.
Number one, the uptake on our enterprise software products; these are the ones that are not directly tied to our hardware end points, largely in the digital enablement, things like loyalty, transaction processing, inventory management. So we're seeing a lot of momentum in our enterprise applications.
And then secondly, in our channel transformational solutions, things like SCO and POS software. We're seeing more customers make enterprise commitments to those solutions rather than buying them as they buy the hardware.
So they’re making a commitment to an enterprise software purchase. So those two things, which is a mix of new products things we’ve been investing in for a while are really drivoing the growth.
Mark Benjamin
One thing that I would also add, just the overall software performance of NCR. The mix of revenues continues to, I think, follow the strategy, growing our software business.
And you see that really in the representation of software revenue to overall NCR really showing a nice year-over-year growth. So revenues in software today represent 31% of our total revenues versus call that 28%, 29% last year.
So I think it's a nice way of calling out the strategy and really how we’re shaping the business.
Dan Kurnos
Just one more if I could, obviously, the typical drivers is cloud. Is there anything else specific to call out around the excel in cloud bookings?
Mark Benjamin
So I’ll let Paul follow up. I would say, as we expect on the last quarter, we’ve been very pleased with our DI business and our digital banking success.
And if you followed NCR for just even a couple of years, you would know that that’s been I think a long road, a hard road, a well thought. And we saw inflection last quarter with that business really turning positive from a organic growth rate, from a customer utilization and usage rate, as well as an improvement just in customer sack and a reduction in churn.
So I would say that’s a chain story for us in these now two quarter consecutively. So Paul?
Paul Langenbahn
Yes, I would say it's absolutely that, and then continued really solid double digit growth performance of our hospitality SaaS stack and our Silver offerings. So you really put all that together and the growth rates are starting to turn for us.
Operator
And we’ll take our next question from Matt Summerville with Alembic Global Advisors.
Matt Summerville
Couple of questions, first I want to ask a question on the Service business. I think it was Bob, in your prepared remarks, you mentioned the file value in that business.
Can you put some numbers and framework around that? What is the file value, how much is it up year-over-year, and is that a regular metric that you will be reporting back to us on, going forward?
And then similarly, in Service, if this is sort of a prominent step function improvement in -- I am looking at operating margin here. In the operating margin in that segment, i.e.
is this 8% or so that you did in Q1, basically the new low watermark for that business?
Bob Fishman
Certainly, Matt. The file value, which is the -- I think that is the backlog for the services business.
We’ve not historically given that. The good news is it's growing and that’s what drives the hardware maintenance piece.
We also have implementation services that are following the channel transformation trend and benefiting from that. On margin, I am as excited about Services gross margin as Paul is about Software gross margin expansion.
So those are the two areas Matt that we really think we have an opportunity to expand margins. So the increase in the first quarter, which is reflective of a couple of things.
One is, we’ve made investments over the years around that business in terms of the technology that we use; the call centers, really all of the things that we use to improve, our SLAs and customer service. We’ve done things around remote and Predictive, and have a number of items that will improve the runway.
So again, you called it low watermark, we would agree with that. We think there is a tremendous opportunity to improve our services gross margins.
Matt Summerville
And then just as my follow up, getting back to Katy’s question. You under the year with a backlog, I believe, up 20% or more on the hardware side of business.
Did the ATM business, therefore, not participate in that? I guess I am still surprised by the lack of growth there.
And then in the prepared remarks, you mentioned lower conversions on the ATM business. What exactly does that mean?
Are there delays with the series 80? Are there more challenging and we know that that can happen from time-to-time certification issues that you’re encountering that are pushing all this off.
Because let’s face, you are up against top comps in the back half of the year. So help to give me confidence with all those things in mind that this business is going to grow in the back half of the year.
Mark Benjamin
That’s fair, Matt. In the 20% backlog up coming into the year, ATM backlog was down.
And that was on the heels of 11% revenue growth in Q3 and 30% in Q4, so we knew we needed to rebuild the backlog. Within that backlog, it’s a very similar phenomena that we saw in '16 where customers are doing the majority of their rollout in the Q3 and Q4, so the back half of the year.
So the lower backlog more of it converting in the back half of the year gives us the confidence that that business will grow even off those tougher compares. So that’s what we’re seeing.
For me, Matt, it’s the same play we ran last year. We continued to drive the orders and then drive the revenue in the back half.
Operator
[Operator Instructions] We’ll go next to Paul Coaster with J. P.
Morgan.
Paul Coaster
You’re obviously having low success in the retail segment lost and when the sale was up 17% year-on-year for the quarter. There is a lot happening in retail though, right.
And some of your customers, where your customers are obviously invest in technology again, presumably in response to Amazon and other things. But there is also the shift from retail to e-tail, which is putting some of your customers I mentioned in out of business in some cases.
So how do we so handicap the risk associated with that part of your business taking a slightly longer term view?
Mark Benjamin
I would start up by saying, our concentration in the retail space is not necessarily overlapped heavily with the fashion or large apartment store footprint, if you will, the ones that are probably making headlines fairly regularly. So for starters we have a little bit of a different footprint within retail.
And certainly, to your point, the retail space and the bricks-and-mortars turning to their electronic or digital methods and transformation, are all good for NCR. So whether it’s a Hardware, Software or Services solution that drive all digital, physical and channel transformations, it's really a unique solution that NCR offers the market.
So if perhaps a smaller footprint location or even reduced number of sites, but with tighter concentration NCR essentially is on all of the pieces of that journey with retail customers. So certainly, not an easy time in retail but our solutions, our channel transformation and omni-channel really are what the market needs today.
Paul Coaster
What is the reactivated growth Digital Insights a couple of quarters ago. Can you pin-point the cause?
Mark Benjamin
What we're seeing in Digital Insights are really two things; we have really I think reestablished ourselves as a leader in the digital banking space; and a high quality provider. In fact, last quarter we reported that we were supporting eight of the top 10 digital banking solutions with DI in the market.
And while we're also seeing really as also the FIs, Paul, continue to transform their customer experience, driving more digital high cost low value to low value or low cost high value transitions digitally. We're seeing an uptake in the end consumer utilization rates within the FIs using DI and that, obviously, also drives revenue growth.
So we’re quite pleased with how they're performing our releases. We continue to enriching the solution and we remain very competitive, so it’s an all around good story.
Paul Langenbahn
I’d say in addition to that, Paul, we did do a good job post the DI acquisition of investing in the data centers, making sure that availability was high and improved customer satisfaction. And then we could leverage and start investing in the functionality and grow the business to the points Mark made.
Paul Coaster
Do you have any background in terms -- either around head-to-head situations where you’ve won against the new incumbent?
Bill Nuti
Paul, we were intently win in that space against large incumbents like Fiserv and FIS, and then small starters. But Paul, do you have any kind of view in that.
Paul Langenbahn
Well, it’s a large industry. There are close to a 1000 FIs that are in the sweet spot for that solution.
So it’s a big market and we feel, as Mark said, really good about our position right now. In fact we’ll continue to increase the number of NCR sales people who can address that market.
So we have other levers we can pull as well.
Bill Nuti
Paul, there are two things that I can point to that we’ve add. Number one, we significantly improved customer stack by virtue of improving the credit factor that we were using for that and in the region.
That team has come up with a variety of new applications and new solutions that we’re now adding to our portfolio.
Operator
And ladies and gentlemen, that does concludes today's Q&A session. At this time, I would like to turn the call back over to Mr.
Nuti for any closing remarks.
Bill Nuti
Okay. Well, thank you all for joining us.
We’ll see you in July.
Operator
And ladies and gentlemen, this does conclude today's conference. We appreciate your participation.