It has been about a month since the last earnings report for NCR (NCR - Free Report) . Shares have added about 0.6% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is NCR due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
NCR Reports Mixed Q3 Results
NCR's third-quarter 2018 non-GAAP earnings of 58 cents per share surpassed the Zacks Consensus Estimate of 52 cents. On a year-over-year basis, however, the figure decreased 37.6%. Lower revenues, margin pressure on hardware and higher investments impacted result.
The company’s revenues of $1.55 billion not only lagged the consensus estimate of $1.58 billion but also fell 7% year over year due to continuous decline in the company’s hardware segment.
The company’s Software revenues were up 1% year over year on a reported basis to $480 million. The figure increased 2% on constant currency basis. The upswing was primarily due to a 6% increase in Cloud and 1% rise in Software License. However, Software Maintenance revenues and Professional Services revenues fell 3% and 2%, respectively.
Services revenues climbed 1% on a reported basis and 4% on constant currency basis to $616 million year over year. The rise was driven by the company’s hardware maintenance and implementation services growth combined with continued momentum in managed service offerings.
Hardware revenues, however, slipped 21% year over year on a reported basis and 20% on constant currency basis to $454 million. Segment revenues from ATM, Self-Checkout, POS and IPS declined 13%, 24%, 29% and 100%, respectively, which negatively impacted the overall hardware revenues.
The decline in ATM revenues was due to supply constraints owing to the company’s transition from 30 Series to 80 Series product line. There was an increase in ATM orders, which is expected to positively impact the top line in the fourth quarter.
Moreover, several large customer rollouts in the year-ago quarter led to a tough year-over-year comparison for POS sales.
The company also completed the buyout of data analytics company Zipscene during the quarter. The recent partnerships with third party partners Jabil and CEVA were positives.
Non-GAAP gross profit of $425 million was down 12.4% year over year. Non-GAAP gross margin shrunk 180 basis points to 27.4% due to increased supply-chain constraint related costs in the Hardware segment.
Cost of $9 million incurred due to restructuring and transformation initiatives was also a headwind for the gross margin.
Non-GAAP operating expenses during the quarter came in at $264 million, reflecting an increase of 5.2% from the year-ago quarter, mainly due to continued investments in improvement efforts.
Non-GAAP operating income of $161 million fell 31.2% year over year due to higher third-party software content and increased investments.
Balance Sheet & Other Financial Details
NCR exited the quarter with cash and cash equivalents of approximately $334 million, down from $343 million reported in the previous quarter.
The company ended the quarter with $2.88 billion of long-term debt, lower than $2.95 billion reported in the second quarter.
The company held back from repurchasing additional share this quarter due to restructuring, lower earnings and costs related to the impending acquisition of JetPay.
The company reiterated its outlook for 2018. Non-GAAP earnings per share are expected to be between $2.55 and $2.75 and revenues are expected to fall 1% to 3%.
However, NCR lowered its guidance for cash flows to accommodate higher working capital related to increased production during the fourth quarter. Cash flow from operations is now expected to be between $640 million and $670 million, down from previously projected range of $690-$720 million.
Free cash flow is now estimated to be $250-$300 million compared with $300-$350 million projected earlier.
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.
NCR announced that it is expanding its business into the payments space with the acquisition of JetPay. The company expects to monetize transactions via payments with this acquisition.
NCR is also focused on launching new solutions like Interactive Teller, consumer self-ordering, NCR OPTIC, Emerald software solution and Self Checkout Release 6.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -5.26% due to these changes.
Currently, NCR has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, NCR has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.