NCR Shares Up on Q3 Earnings Beat, Provides Tepid View

Shares of NCR Corp. (NCR) were up 5.1% on Oct 24 following better-than-expected third-quarter 2014 results.

The company reported non-GAAP earnings (excluding acquisition-related costs, amortization of intangibles and other one-time items) of 67 cents per share, which came ahead of the Zacks Consensus Estimate by a penny. However, earnings decreased from 76 cents reported in the year-ago quarter, primarily due to higher interest expense and foreign currency fluctuations

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Revenues

NCR’s reported revenues not only increased 9.2% on a year-over-year basis to $1.65 billion but also came ahead of the Zacks Consensus Estimate of $1.64 billion. The year-over-year improvement in revenues was mainly due to a 34% increase in software revenues and a whopping 238% increase in SaaS revenues.

The year-over-year increase in software-related revenues was primarily due to the Digital Insight acquisition. Moreover, year-over-year improvements in its business segments (particularly Financial Services segment) positively impacted total revenue in the quarter. Hardware revenues were also up 4% on a year-over-year basis and came in at $650 million.

Revenues from the Financial Services segment were $899 million, up 17.2% from the year-ago quarter. The upside was primarily attributed to Branch Transformation and higher mix of software-related revenues. Better-than-expected growth in North America, Europe and MEA also positively impacted revenues. Digital Insight Corp. contributed $93 million to quarterly revenues.

In the Retail Solutions segment, revenues came in at $489 million, down 1%, primarily due to lower-than-expected orders from North America. The Hospitality segment showed a 4.4% increase in revenues aided by the addition of customers and an international partnership with Yum Brands. Moreover, strong revenue contributions from North America and Europe positively impacted revenues. The company’s focus on North America’s SMB market (13% year over year revenue growth) also supported revenues.

Emerging Industries’ revenues increased 5.8% on a year-over-year basis to $91 million, primarily attributable to higher Telecom & Technology revenues (up 14%), which more than offset the decline in revenues from Travel. Notably, higher adoption of NCR Silver for the Small Business positively impacted quarterly revenues.

Operating Results

Non-GAAP gross margin in the quarter came in at 28.9% compared with28.6% in the year-ago quarter, primarily due to favorable mix of software revenues.

Non-GAAP operating expenses increased 10.6% on a year-over-year basis to $272 million due to an increase in selling, general and administrative expenses (up 6.9% on a year-over-year basis) and research and development expenses (up 11.3% on a year-over-year basis). Moreover, as a percentage of revenues, operating expenses increased 20 basis points from the year-ago quarter to 16.5%.

Non-GAAP operating income increased 10.3% from the year-ago quarter to $204 million. Operating margin was 12.4% versus 12.3% in the year-ago quarter. Margin expansion was primarily attributed to better-than-expected software revenue mix.

Non-GAAP net income (excluding acquisition-related costs, amortization of intangibles and other one-time items) from continuing operations was $115 million in the quarter compared with $129 million in the year-ago quarter.

Balance Sheet & Cash Flow

NCR has a highly leveraged balance sheet. NCR exited the third quarter with cash and cash equivalents of approximately $424 million, down from $483 million in the previous quarter. Receivables were $1.45 billion versus $1.46 billion in the previous quarter. The company has a long-term debt of $3.66 billion compared with $3.84 billion in the previous quarter. Moreover, net debt came in at $3.24 billion compared with $3.36 billion in the previous quarter.

Net cash provided by operating activities was $124million compared with $80 million in the previous quarter. Free cash flow in the quarter came in at $132 million.

Guidance

For the fourth quarter of 2014, NCR expects non-pension operating income (:NPOI) to be in the range of $241 million to $261 million. Effective income tax rate is expected to be approximately 30%.

NCR toned down its forecast for fiscal 2014. NCR now expects revenues to be in the range of $6.575 billion???$6.625 billion (previous guidance was $6.750 million to $6.850). The Zacks Consensus Estimate is pegged at $6.6 billion, in line with the mid-point.

Moreover, NCR expects its full-year 2014 non-pension operating income (:NPOI) to be in the range of $810 million to $830 million (previous guidance was in the range of $900 million to $920 million). Non-GAAP earnings per share are expected to be in the range of $2.60 to $2.70, lower than the previous guidance of $3.00 per share to $3.10 per share The Zacks Consensus Estimate is pegged at $2.65, in line with the mid-point of the company provided range.

Our Take

NCR reported better-than-expected third-quarter 2014 results. The company witnessed margin expansion aided by higher mix of software business. However, NCR provided a tepid fiscal 2014 guidance, anticipating lower revenue growth across its business segments, especially its Retail segment. Also, the year-over-year earnings comparison was unfavorable

Nevertheless, NCR’s growing exposure into ATM and self-service kiosk spaces is encouraging, given tremendous growth prospects in the respective markets. Continuous product launches, growing popularity of its self-service offerings and synergies from acquisitions are catalysts. Continuous deal wins also remain NCR’s strong point. Moreover, NCR has also strengthened its position in the point of sale (:POS) market through the integration of Radiant Systems.

However, softness in the ATM business in mature markets, competition from Diebold, Incorporated (DBD) and Hewlett-Packard (HPQ), and a high debt burden are concerns.

Currently, NCR Corp. has a Zacks Rank #5 (Strong Sell).

Alternatively, investors can consider SunEdison, Inc. (SUNE), a better-ranked technology stock carrying a Zacks Rank #1 (Strong Buy).

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