NCR Corp (NCR) Q2 Earnings Top & Revenues Miss,'17 View Same

NCR Corporation (NYSE:NCR) reported mixed results for the second quarter of 2017. The company’s non-GAAP earnings (excluding restructuring, acquisition-related expensesand other one-time items) from continuing operations of 80 cents per share surpassed the Zacks Consensus Estimate of 75 cents and surged 11.1% year over year.

Quarterly earnings also came ahead of the company’s guided range of 72–77 cents. The robust bottom-line performance was primarily driven efficient cost management and a lower share count.

Notably, the stock outperformed the industry over the last one year. NCR’s shares have returned 37.2% compared with the industry’s decline of 8.2%.

Quarter in Detail

The company’s revenues of $1.593 billion missed the Zacks Consensus Estimate of $1.612 billion and decreased 1.7% on a year-over-year basis. On a constant currency basis (i.e. excluding FX impact and IPS business divesture), revenues were up 3% year over year.

The company’s product revenues came in at $618 million, down 8.6% from the year-ago-quarter. However, service revenues increased 3.3% year over year and came in at $975 million.

During second-quarter 2016, NCR modified its reportable segments to reflect changes in its reporting structure. The new reportable segments are Software, Services and Hardware segments.

The company’s Software revenues on a reported basis were up 3% to $464 million. The increase was primarily due to a 9% and 5% increase in Cloud and Professional Services revenues, respectively. Nonetheless, Software license was down 6%. Software maintenance revenues were flat year over year.

Services revenues increased 2% to $588 million on a reported basis. On a constant currency basis Services revenues increased 4%. The increase was primarily due to hardware maintenance growth.

Hardware revenues however decreased 9% year over year on a reported basis to $541 million. The segment’s, revenues from ATM and IPS declined 21% and 91%, respectively, while that from SCO and POS surged 37% and 18%, respectively. The increase in SCO and POS revenues was primarily due to store transformation growth during the quarter. On a constant currency basis, Hardware revenues increased 1%.

Non-GAAP gross profit for the quarter increased 3% and came in at $479 million, primarily due to strong execution as a result of strategic focus on business transformation, a positive revenue mix, efficiency and scale gains. Also, the non-GAAP gross margin was 30.1%, up from 28.7% reported in the year-ago quarter.

Income from operations on a non-GAAP basis was $215 million, up from $207 million a year ago. Also, operating margin expanded 70 bps on a year-over-year basis, primarily due to strong execution as well as better productivity.

Non-GAAP operating expenses during the quarter came in at $264 million, reflecting an increase from $258 million in the year-ago quarter.

Non-GAAP net income from continuing operations was $122 million compared with $111 million in the year-ago quarter.

Balance Sheet & Cash Flow

The ATM and POS manufacturer exited the quarter with cash and cash equivalents of approximately $377 million, down from $401 million in the previous quarter. Receivables were $1.32 billion compared with $1.29 billion in the previous quarter.

However, NCR has a highly-leveraged balance sheet. The company ended the quarter with $3 billion of long-term debt in its book.

In the second quarter, the company generated operating cash flow of $95 million and free cash flow was $18 million.

Rhe company did not repurchase any share in the quarter under review. However, during the six months ended Jun 30, 2017, the company repurchased $350 million of its common stock.

Guidance

NCR reiterated its revenue and earnings outlook for 2017. However, the third-quarter guidance was slightly disappointing.

For the year, the company continues to anticipate revenues in the range of $6.63–$6.75 billion, representing year-over-year growth of 1% to 3% on a reported basis and 4% to 6% at adjusted constant currency. The Zacks Consensus Estimate is currently pegged at $6.69 billion.

Non-GAAP earnings per share are expected in the range of $3.32–$3.42. The Zacks Consensus Estimate is $3.37.

The company continues to expect operating cash flow in the range of $805 million to $830 million and free cash flow between $500 million and $525 million.

Coming to the third-quarter outlook, NCR expects revenues in the range of $1.66–$1.70 billion. The Zacks Consensus Estimate stands at $1.73 billion.

The company expects non-GAAP earnings per share for the third quarter in the range of 88–93 cents. The Zacks Consensus Estimate is pegged at 93 cents.

Our Take

NCR reported mixed second-quarter 2017 results wherein the bottom line surpassed the Zacks Consensus Estimate and the top line missed the same. Also, the company third-quarter and FY17 guidance are disappointing.

The company remains the largest supplier of ATM machines in Asia-Pacific and North America, while maintaining its leadership in the Asian and European markets. Per the latest report by global research company RBR Research, the global ATM installed base is expected to reach 4 million units by 2020 from 3 million units in 2014. Currently, India is the world’s fourth-largest ATM market with China, the U.S. and Japan holding the first three spots, respectively. This creates huge opportunities for companies like NCR.

We believe that the company’s commitment to protect the trust and integrity of the ATM channel has been inspiring banks and a host of other financial institutions to opt for its services. Continued product launches, growing popularity of its self-service offerings and synergies from acquisitions are the other growth drivers. Continuous deal wins also drive growth.

However, softness in the ATM business in mature markets, competition from Diebold Inc. (NYSE:DBD) and HP Inc. (NYSE:HPQ) , and a high debt burden remain concerns.

Currently, NCR carries a Zacks Rank #4 (Sell).

A better-ranked stock in the technology sector is Applied Optoelectronics, Inc. (NASDAQ:AAOI) , sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Applied Optoelectronics has an expected long-term EPS growth rate of 18.75%.

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