It has been about a month since the last earnings report for NCR (NCR). Shares have lost about 2.4% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is NCR due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
NCR Reports Q4 Results
NCR fourth-quarter 2018 non-GAAP earnings of 84 cents per share surpassed the Zacks Consensus Estimate of 83 cents. On a year-over-year basis, however, the figure decreased 8.7%. Margin pressure on hardware, together with restructuring and transformation charges of $48 million, impacted results.
The company’s revenues of $1.801 billion topped the consensus estimate of $1.785 billion. The figure increased 1% year over year on a reported basis and 3% on constant currency basis, due to streamlining efforts. Increase in ATM orders positively impacted the top line. Growth in Services segment was also a tailwind.
Full-Year Financial Highlights
For 2018, revenues fell 2% year over year. Non-GAAP earnings of 84 cents per share fell 18%.
Full-year results were affected by headwinds such as hardware delivery related challenges, supply chain issues with the deployment of 80 Series ATMs, production manufacturing ramp up at outsource partners and issues with new distribution center.
The company’s Software revenues were down 1% year over year on a reported basis to $502 million. The decline was primarily due to a 6% decrease in Software maintenance, 5% decline in Software License and 1% fall in Professional services. The 4% (reported) and 5% (constant currency) year-over-year increase in Cloud was more than offset by the decrease in unit revenues mentioned above.
NCR entered the payments space with the acquisition of JetPay, which positively impacted the Cloud revenue growth. The acquisition will also aid its strategy of shifting to more Software and Services lead recurring revenues.
Services revenues climbed 2% on a reported basis and 5% on constant currency basis to $633 million. The rise was driven by the company’s hardware maintenance and implementation services growth combined with continued momentum in managed service offerings.
Hardware revenues grew 2% year over year on a reported basis and 4% on constant currency basis to $666 million. Segment revenues from ATM rose 21% on a reported basis and 26% in constant currency, more than offsetting 16%, 13% and 100% decline in Self-Checkout, POS and IPS, respectively.
NCR is also focused on investing in solutions like Emerald software solution, which will help the company transition to a subscription-based model.
Non-GAAP gross profit of $495 million was down 5.4% year over year. Non-GAAP gross margin contracted 180 basis points to 27.5% due to margin shrinkage in Software and Hardware segments. This was partially offset by margin expansion in the Services segment as a result of improved productivity due to Mission One transformation initiatives.
Non-GAAP operating expenses came in at $379 million, reflecting an increase of 23.1% due to restructuring and transformation expenses of $77 million incurred during the quarter.
Non-GAAP operating income of $214 million fell 9.3% year over year due to higher employee related expenses and lower Hardware margins.
Balance Sheet & Other Financial Details
NCR exited the quarter with cash and cash equivalents of approximately $464 million, up from $334 million reported in the previous quarter.
The company ended the quarter with $2.98 billion of long-term debt, lower than $2.88 billion reported in the third quarter.
Free cash flow of $317 million was impacted by lower year-over-year earnings and higher inventory associated with increased hardware production.
The company held back from repurchasing additional share this quarter due to restructuring, lower earnings and higher costs.
The company provided outlook for full-year 2019. Non-GAAP earnings per share are expected to be between $2.75 and $2.85 and revenues are expected to grow 1-2%.
Net income is expected to be $290 million to $305 million and adjusted EBITDA is projected within $1.04-$1.08 billion.
Cash flow from operations are estimated to be between $705 million and $730 million and free cash flow is likely to be $300-$350 million.
NCR continues to focus on its M1 initiatives on services and restructuring activities. Moreover, it has taken up cost saving initiatives, which are expected to result in savings of about $100 million in 2019.
How Have Estimates Been Moving Since Then?
Fresh estimates followed a downward path over the past two months. The consensus estimate has shifted -7.33% due to these changes.
At this time, NCR has an average Growth Score of C, a grade with the same score on the momentum front. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
NCR has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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