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NCR (NCR) Down 1.9% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for NCR (NCR - Free Report) . Shares have lost about 1.9% 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 Q1 Results

NCR Corporation's first-quarter 2019 non-GAAP earnings of 48 cents per share surpassed the Zacks Consensus Estimate of 47 cents. On a year-over-year basis, however, the figure decreased 14.3%. Foreign exchange headwinds, high interest expenses and a higher tax rate impacted the bottom line negatively.

The company’s revenues of $1.54 billion topped the consensus estimate of $1.51 billion. The figure increased 1% year over year on a reported basis and 4% on constant currency basis. Strong performance in the banking segment due to growth in ATM orders, coupled with continued streamlining efforts by the company, drove the top line.

Quarter Details

Banking revenues increased 5% on a reported basis and 9% in constant currency, primarily due to 21% growth in ATM revenues driven by higher backlog conversion. Strength in North America and upgrades on Windows 10 were significant revenue drivers for the segment. Hardware maintenance revenues improved on the back of stronger ATM sales. However, foreign currency fluctuations impacted the year-over-year revenue comparison by 4%.

Retail revenues fell 2% on a reported basis and grew 1% on a constant currency basis. The year-over-year comparison was difficult because of a large implementation services project in the prior year quarter. Moreover, foreign currency fluctuations impacted the revenue comparison by 4%. However, revenue contribution from the acquisition of JetPay, and strength in self-checkout revenues benefited the retail segment.

Hospitality revenues decreased 5% on a reported basis and 4% in constant currency. This decline was a result of lower hardware revenues and a 1% negative impact of foreign currency changes. However, higher cloud and payments revenues were positives.

NCR is also focused on investing in solutions like Emerald software solution, which will help the company transition to a subscription-based model.

The company’s Digital Banking Solution is receiving positive feedback from customers on its new features. During the first quarter, it signed seven new digital banking customers.

In Digital First Restaurant, NCR recently launched its subscription model for Aloha point-of-sale solution and received positive customer feedback.

Margins

Non-GAAP gross profit of $425 million was down 1.4% year over year.  Non-GAAP gross margin contracted 70 basis points to 27.7% due to margin shrinkage in Retail and Hospitality segments.

Non-GAAP operating expenses came in at $278 million, reflecting a decrease of 1.8% due to cost reduction efforts.

Non-GAAP operating income of $214 million fell 0.7% year over year.

Operating income of the Banking segment grew 20% in constant currency, driven by higher hardware and services revenues and lower OpEx.

Operating income of the Retail segment fell 18% in constant currency primarily due to unfavorable revenue mix in terms of both products and customers.

Operating income of the Hospitality segment decreased 15% in constant currency due to the decline in hardware revenues and continued investment in customer satisfaction efforts. However, growth in higher margin software and cloud revenues from Aloha and NCR Silver was a positive.

Balance Sheet & Other Financial Details

NCR exited the quarter with cash and cash equivalents of approximately $414 million, down from $464 million reported in the previous quarter.

The company ended the quarter with $2.91 billion of long-term debt, lower than $2.98 billion reported in the fourth quarter of 2018.

Free cash outflow was of $87 million. Management notes that the first quarter typically uses cash, following which free cash flow improves as the business ramps over the rest of the year.

The company held back from repurchasing additional share this quarter.

Outlook

The company reiterated its outlook for full-year 2019. Non-GAAP earnings per share are expected to be between $2.75 and $2.85 and revenues are estimated 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 is estimated to be between $705 million and $730 million and free cash flow is likely to be $300-$350 million.

A foreign exchange headwind is expected to lead to a 1% impact on revenues.

The backlog in ATM business is expected to lead to another strong quarter for the Banking segment in the second quarter.

NCR continues to focus on cost saving initiatives, which are expected to result in savings of about $100 million in 2019.
 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

At this time, NCR has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, NCR has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.


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