NCR Voyix, the quiet giant of digital banking, just released its Q1 2024 earnings, and while most analysts are focused on the expected hardware dip and the reaffirmation of 2024 guidance, a subtle shift in tone regarding their digital banking segment may signal something far more explosive.

For years, investors have questioned the synergy between NCR Voyix's digital banking arm and its retail and restaurant businesses. The argument has been that the lack of clear integration makes it difficult to assess the true value of this hidden gem. However, during the Q1 call, CEO David Wilkinson hinted at a strategic shift that could finally unlock this latent potential.

Wilkinson described digital banking as an "undervalued crown jewel" and highlighted the segment's consistent 7% growth in 2024, fueled by both new customer wins and aggressive cross-selling within its massive existing base. This is not just about impressive top-line figures; it's about the underlying strategy.

Wilkinson emphasized the consolidation of digital banking operations into a single, execution-focused team, a move likely aimed at driving even greater sales momentum. The consolidation could also point to a renewed focus on operational efficiency, potentially leading to margin expansion that further amplifies the segment's already impressive profitability.

The numbers themselves paint a compelling picture. Digital banking already boasts a 39% adjusted EBITDA margin, exceeding industry averages and demonstrating the inherent profitability of the business. Add to that the 39 new customer signings in 2023, primarily competitive takeaways from legacy players, and you have a recipe for sustained, high-margin growth.

But here's where it gets truly interesting. Wilkinson's repeated use of the phrase "undervalued crown jewel" coupled with the emphasis on operational focus and growth suggests that NCR Voyix might be preparing to showcase this hidden gem in a more prominent light.

Remember, NCR Voyix has been exploring all options to maximize shareholder value. Could this shift in tone be a precursor to a potential spin-off of the digital banking segment?

Consider this: pure-play digital banking companies currently enjoy significantly higher valuations in the market. If NCR Voyix were to spin off this high-growth, high-margin segment, it could unlock a significant valuation uplift for shareholders. Such a move would not only create a standalone digital banking powerhouse but also allow NCR Voyix to focus on its core commerce platform strategy, potentially driving further growth and efficiency in its retail and restaurant segments.

This is, of course, just a hypothesis at this stage. However, the subtle shift in tone during the Q1 call, coupled with the compelling financial performance of the digital banking segment, warrant further investigation.

Key Metrics to Watch

ARR growth: Continued high single-digit growth in digital banking ARR, particularly software ARR, would signal sustained momentum and validate the impact of the operational consolidation.

Margin Expansion: An expansion of adjusted EBITDA margin beyond the projected 39% would point to successful efficiency initiatives and further highlight the segment's profitability.

M&A Activity: While a spin-off is a potential outcome, NCR Voyix could also attract significant interest from strategic buyers looking to acquire this highly profitable, market-leading digital banking platform.

Digital Banking Segment Performance

Reference: NCR Voyix Corporation (VYX) Q1 2024 Earnings Conference Call Transcript

Segment Revenue Growth: Software & Services vs. Hardware

The chart below illustrates the contrasting growth trends between NCR Voyix's software and services revenue and its hardware revenue. While the company's overall revenue declined slightly in Q1 2024, this was primarily due to a dip in hardware sales. The software and services segment, which is the core of NCR Voyix's future growth strategy, continued to show positive momentum.

NCR Voyix may be quietly sitting on a digital banking goldmine, and the subtle signals in the Q1 earnings call suggest they might be ready to let it shine. Investors who delve deeper than the surface-level numbers might just be rewarded with a front-row seat to a potential valuation explosion.

"Fun Fact: NCR Voyix, originally founded as National Cash Register in 1884, played a pivotal role in the development of the modern cash register. Their early innovations helped revolutionize retail transactions and paved the way for the digital payment systems we use today."