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NCR Corp. (NCR - Analyst Report) posted third-quarter 2013 adjusted earnings (excluding all special items and pension expenses) of 76 cents per share, beating the Zacks Consensus Estimate of 68 cents.

Revenues

NCR reported revenues of $1.51 billion in the third-quarter of 2013, up 5.1% from the year-ago quarter. Revenues in the quarter missed the Zacks Consensus Estimate of $1.58 billion. The year-over-year improvement in revenues was mainly due to software revenue growth of 124% and addition of Retalix to the Retail Solutions portfolio.

Service revenue growth was decent, offset by a decline in product revenues. Revenues from the Financial Services segment were $767.0 million, down 4.0% from the year-ago quarter. The downside was driven by a decline in the Americas and Europe theater offset to a considerable extent by growth in the Asia Middle East Africa (AMEA) theater.

In the Retail Solutions segment, the company generated revenues of $494.0 million, up 17.3% from the year-ago quarter. The increase in revenues was driven by growth in all theaters, primarily driven by the impact of the Retalix business.

The Hospitality segment witnessed a 24.8% increase in revenues, attributable to an improvement in the American and Europe theater business.

Emerging Industries’ revenues were $86.0 million, flat on a year-over-year basis. Growth in AMEA theater was offset by a decline in the Europe and Americas theaters business.

Operating Results

Adjusted gross margin in the quarter was 28.6% versus 27.3% in the year-ago quarter. Gross margin improved 130 basis points year on year, primarily due to favorable mix of revenues and software revenue growth.

Adjusted operating expenses increased 6.7% on a year-over-year basis to $270.0 million due to an increase in selling, general and administrative expenses and research and development expenses. Moreover, as percentage of revenues, operating expenses increased 27 basis points from the year-ago quarter to 17.9%.

Adjusted operating income increased 20.9% from the year-ago quarter to $185.0 million. Adjusted operating margin was 12.3% versus 10.7% in the year-ago quarter.

NCR’s adjusted net income (excluding all special items and pension expenses) from continuing operations was$129.0 million or 76 cents in the quarter compared with $104.0 million or 64 cents in the year-ago quarter.

Balance Sheet & Cash Flow

Net cash used in operating activities was $27.0 million compared with net cash provided by operating activities of $32.0 million in the previous quarter. Without considering the impact of pension settlement payment that the company made to the U.S. non-qualified pension plans during the quarter, free cash flow for the quarter came in at ($66) million.

Guidance

For full-year 2013, NCR expects revenues to increase in the range of 9% to 11% year over year. Moreover, NCR expects its full-year 2013 non-pension operating income (NPOI) to remain in the range of $700 million to $720 million. Non-GAAP earning per share are expected to be in the range of $2.70 to $2.80. NCR expects effective income tax rate to be approximately 23%.

Our Take

NCR reported mixed third-quarter results, with earnings per share beating the Zacks Consensus Estimate but revenues missing the same. The company also maintained its fiscal 2013 guidance, anticipating more balanced revenue growth across its segments. The company also benefited from gross margin expansion as the company recorded a decent amount of high-margin software business.

The company also witnessed a meaningful increase in its bottom-line. 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. However, softness in the ATM business in mature markets and competition from Diebold Inc. (DBD - Snapshot Report), European exposure and high debt burden are concerns.

Currently, NCR Corp. has a Zacks Rank #2 (Buy). Investors can also consider other technology stocks such as Plexus Corp. (PLXS - Analyst Report) and Western Digital Corp. (WDC - Analyst Report), both carrying a Zacks Rank #1 (Strong Buy).

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