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NCR Corp. (NCR) Q4 Earnings & Revenues Beat; Increase Y/Y

Zacks Equity Research

Keeping its earnings streak alive for the fourteenth time in a row, NCR Corporation NCR reported better-than-expected results for the fourth quarter of 2016. The company’s non-GAAP earnings (excluding divestiture and liquidation losses and other one-time items) per share from continuing operations of $1.07 surpassed the Zacks Consensus Estimate of $1.03 and surged 20.2% year over year.

The company’s quarterly earnings also came ahead of the guided range of $1.01 to $1.06 per share. The robust bottom-line performance was mainly driven by strong top-line growth along with efficient cost management and lower share count.

The company reported its fourth-quarter results after the markets closed yesterday. Given the company’s better-than-expected quarterly results and an encouraging full-year 2017 guidance, we hope the market to react positively once it opens today.

Notably, the stock has outperformed the Zacks categorized Computer-Integrated Systems industry in the last three months. During the said period, NCR returned 19.1% compared with the industry’s gain of 8.2%.

Quarter in Detail

NCR’s revenues of $1.802 billion beat the Zacks Consensus Estimate of $1.743 billion and increased 7.3% on a year-over-year basis. On a constant currency basis (i.e. excluding FX impact and IPS business divesture), revenues were up 14% year over year.

During the quarter the company witnessed strong growth in Software as well as Hardware. While the Software business benefited from continued expansion of its cloud and software license offerings, the Hardware business benefited from strong demand for its Self-Checkout and A/ITM edge platforms.

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

The company’s Software revenues on a reported basis were up 9% to $502 million. The year-over-year increase in software revenues was primarily due to 21%, 5%, 10% and 5% increase in Software license, Software Maintenance, Cloud and Professional Services revenues, respectively.

Services revenues inched up 1% to $598 million.

Hardware revenues jumped 11% on a year-over-year basis and came in at $702 million. In the Hardware segment, revenues from ATM and SCO surged 25% and 140%, respectively while that from POS and IPS declined 1% and 91%, respectively. Notably, the decline in IPS was mainly due to the divestment of the business during the quarter.

Non-GAAP gross profit for the quarter increased 3.5% and came in at $530 million, primarily due to higher revenues. However, non-GAAP gross margin was 29.4%, down 110 basis points (bps) from the year-ago quarter.

Income from operations on a non-GAAP basis was $264 million, up from $260 million a year ago. However, operating margin contracted 80 bps on a year-over-year basis, primarily due to lower gross margin, which was partially offset by reduced operating expenses as a percentage of revenues.

Non-GAAP net income from continuing operations was $168 million compared with $156 million in the year-ago quarter.

NCR Corporation - Earnings Surprise | FindTheBest

Balance Sheet & Cash Flow

The ATM and POS manufacturer exited the quarter with cash and cash equivalents of approximately $498 million, up from $318 million in the previous quarter. Receivables were $1.28 billion compared with $1.39 billion in the previous quarter.

However, NCR has a highly leveraged balance sheet. The company ended the quarter with $3.0 billion of long-term debt in its book.

In the fourth quarter, the company generated operating cash flow and free cash flow of $525 million and $449 million, respectively. During the full year, NCR generated operating cash flow and free cash flow of $894 million and $628 million, respectively.

In 2016, the company repurchased $250 million of its common stock. Concurrent with its fourth quarter earnings release, the company announced that it intends to make share repurchases worth $300 million. It also revealed that it has already repurchased $70 million worth of shares so far this year.

Guidance

Buoyed by the better-than-expected fourth quarter performance, NCR provided a strong revenue and earnings outlook for 2017, which is well above our estimates. However, the first quarter guidance was slightly disappointing.

For the year, the company anticipates revenues in a range of $6.60 billion–$6.72 billion (mid-point $6.66 billion), which is much higher than the Zacks Consensus Estimate of $6.55 billion. Non-GAAP earnings per share are expected to come between $3.25 and $3.35 (mid-point $3.30), higher than the Zacks Consensus Estimate of $3.27.

The company expects to generate operating cash flow in a range of $805 million to $830 million and free cash flow between $500 million and $525 million.

Coming to the first-quarter outlook, NCR expects revenues in a range of $1.45 billion to $1.47 billion (mid-point $1.46 billion). The Zacks Consensus Estimate stands at $1.48 billion.

The company expects non-GAAP earnings per share for the fourth quarter to range between 43 cents to 48 cents (mid-point 45.5 cents). The Zacks Consensus Estimate is pegged at 51 cents.

Our Take

NCR reported encouraging fourth-quarter 2016 results wherein the top and the bottom line surpassed the Zacks Consensus Estimate. Also, both revenues and earnings increased on a year-over-year basis, primarily due to strong growth in its every business. Although, the company slightly disappointed on first quarter guidance, its strong full-year 2017 outlook makes us optimistic about its future performance.

NCR Corporation Price, Consensus and EPS Surprise

NCR Corporation Price, Consensus and EPS Surprise | NCR Corporation Quote

Also, NCR’s growing exposure in the ATM and self-service kiosk space is encouraging, given the tremendous growth prospects in the respective markets. Continuous product launches, growing popularity of its self-service offerings and synergies from acquisitions are the catalysts. Continuous deal wins also drive growth.

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

Currently, NCR has a Zacks Rank #3 (Hold).

A better-ranked stock in the Computer-Integrated Systems industry is Fortinet Inc. FTNT, which sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The stock has an expected long-term EPS growth rate of 20.6%, much higher than the industry’s average growth rate of 12.6%. Fortinet has witnessed sharp upward estimate revisions for 2017 and 2018 in the last 7 days.

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