NCR Beats on Q1 Earnings & Rev - Analyst Blog

NCR Corp. NCR posted first-quarter 2014 adjusted earnings (excluding acquisition-related costs, amortization of intangibles and other one-time items) of 50 cents per share, beating the Zacks Consensus Estimate by a penny. However, on a year-over-year basis earnings decreased 7.4%.

Revenues

NCR reported revenues of $1.52 billion in the first-quarter of 2014, up 7.7% from the year-ago quarter. Revenues in the quarter also beat the Zacks Consensus Estimate of $1.50 billion.. The year-over-year improvement in revenues was mainly due to 45.0% increase in software revenues and a whopping 242.0% increase in SaaS revenues. Moreover, year-over-year improvements across all its business segments positively impacted total revenue in the quarter.

Revenues from the Financial Services segment were $794.0 million, up 11.2% from the year-ago quarter. The upside was primarily attributed to Branch Transformation and higher mix of software-related revenues. Moreover, Digital Insight Corp. contributed $76.0 million to quarterly revenues.

In the Retail Solutions segment, revenues came in at $490.0 million, up a marginal 0.2%, primarily due to strong order flow from rest of the world, which was partially offset by lower-than-expected orders from North America. The Hospitality segment witnessed a 13.7% increase in revenues aided by addition of international customers especially in Brazil and Germany. Moreover, strong revenue contributions from Europe and the Asia, Middle East, and Africa positively impacted revenues. The company's focus on North America's SMB market (22% year over year revenue growth) also supported revenues.

Emerging Industries' revenues increased 11.8% on a year-over-year basis to $85.0 million, primarily attributable to higher Telecom & Technology revenues (up 18%), which more than offset the decline in revenues from Travel (down 9%) and Software (down 11%).

It is worth noting that NCR completed the acquisition of Digital Insight Corp., a provider of online and banking solutions. The company's solutions complement NCR's existing business and enhance its capabilities. Moreover, the acquisition has helped NCR customers to access account balances, make payments via mobile banking apps for Apple AAPL iOS and Android devices.

Operating Results

Non-GAAP gross margin in the quarter came in at 28.6% compared with 27.4% in the year-ago quarter., primarily due to a favorable mix of software revenues.

Operating expenses increased 8.5% on a year-over-year basis to $308.0 million due to an increase in selling, general and administrative expenses (up 6.9% on year-over-year basis) and research and development expenses (up 14.6% on year-over-year basis). Moreover, as a percentage of revenues, operating expenses increased 15 basis points from the year-ago quarter to 20.3%.
 
Operating income on a non-GAAP basis increased 20.2% from the year-ago quarter to $155.0 million. Operating margin was 10.2% versus 9.2% in the year-ago quarter. Margin expansion was primarily attributed to better-than-expected software revenue mix.

NCR's net income on a non-GAAP basis (excluding acquisition-related costs, amortization of intangibles and other one-time items) from continuing operations was $85.5 million or 50 cents in the quarter compared with $90.5 million or 54 cents in the year-ago quarter.

Balance Sheet & Cash Flow

NCR has a highly leveraged balance sheet. NCR exited the first quarter with cash and cash equivalents of approximately $515.0 million, down from $528.0 million in the previous quarter. Receivables were $1.44 billion versus $1.34 billion in the previous quarter. The company has a long-term debt of $3.89 billion, up from $3.32 billion in the previous quarter. Moreover, net debt came in at $3.38 billion, up from $2.79 billion in the previous quarter.

Net cash provided by operating activities was $31.0 million compared with $265.0 million in the previous quarter. Free cash flow used in the quarter came in at ($51.0) million.

Guidance

For the second quarter of 2014, NCR expects non-pension operating income (NPOI) to be in the range of $205.0 million to $215.0.Effective income tax rate is expected to be approximately 29.0%.

NCR toned down its revenue forecast for fiscal 2014. NCR now expects revenues to be in the range of $6.750 billion - $6.850 billion, up 10.0% to 12.0% year over year (previous guidance was an increase of 12.0% to 14.0%). The Zacks Consensus Estimate is pegged at $6.855 billion.

Moreover, NCR expects its full-year 2014 non-pension operating income (NPOI) to remain in the range of $900 million to $920 million. Non-GAAP earnings per share are expected to be in the range of $3.00 to $3.10 (mid-point $3.05 per share). The Zacks Consensus Estimate is pegged at $3.06 per share.

Our Take

NCR reported better-than-expected first-quarter results. The company witnessed margin expansion aided by higher mix of software business.. However, NCR provided a tepid guidance, anticipating lower revenue growth from its Retail and Hospitality segments.

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 and competition from Diebold Inc. DBD, European exposure and high debt burden are concerns.

Currently, NCR Corp. has a Zacks Rank #3 (Hold). Western Digital Corporation WDC is a better-ranked technology stock carrying a Zacks Rank #2 (Buy).