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Diebold, NCR Q1 earnings hit the mark but disappoint the market

Results were 'close enough for horseshoes and hand grenades,' but Wall Street wanted more from both ATM brands.

May 1, 2014 by Suzanne Cluckey — Owner, Suzanne Cluckey Communications

Diebold Inc. and NCR Corp. both held earnings calls on Tuesday — Diebold pre-market and NCR after the bell. Expectations were modest, still the market punished both ATM manufacturers for failing to exceed them. Both stocks suffered losses post-report.

Diebold Inc.

"We generated financial results in accord with our own expectations, which provides us a solid foundation as we execute on our Diebold 2.0 turnaround strategy," Diebold president and CEO Andy Mattes said during the call.

For the quarter, total revenue increased by 8.6 percent (or 12.2 percent on a constant currency basis) compared with the same period in 2013. For the quarter, net income attributable to Diebold was $9.8 million, or 15 cents per share.

Mattes said the company was still in the "crawl" stage of its turnaround plan, with a focus on cost and cash, but that progress was being made.

As examples, he cited the delivery of a "sizable" portion of the company's backlog in Brazil, which bolstered revenue and the fact that Diebold had achieved its own earning expectations for the quarter.

In addition, he said, the company had maintained focus on its $150 million cost reduction goal, the achievement of which will allow management to make necessary investments in the company's future:

As we deliver on our commitments, including our $150 million cost reduction program, we continue to see savings flow to the bottom line. These savings enable us to make a number of reinvestments in the business over the next six to eight quarters, one of which includes a major business process outsourcing initiative with Accenture. This and other investments in our business will ramp up as the year progresses. We are in the early stages of our multi-year transformation, and have a long journey in front of us … We remain confident in our ability to generate sustainable shareholder value.

Additional numbers:

• Total gross margin of 23.8 percent, an increase of 3.3 percent year over year. The service margin improved by 5.9 percent, while product margin increasing 0.6 percent.
• Total operating expenses of $140.9 million, or 20.5 percent of revenue, for the first quarter, a decrease of $3.1 million, or 2.2 percent year-on-year.
• Operating profit of $23.3 million, or 3.4 percent of revenue, was realized in the first quarter, compared with an operating loss of $13.9 million, or 2.2 percent of revenue, in the first quarter 2013.
• Net income attributable to Diebold was $9.8 million, or 1.4 percent of revenue, compared with a net loss of $13.4 million, or 2.1 percent of revenue, in Q1 2013.

The company slightly increased its outlook for the full year, anticipating revenue growth in the mid-single digits and reaffirmed its expected range of $1.65 to $1.85 earnings per share.

NCR Corp.

NCR, on the other hand, backed off its full year outlook. Investors were displeased to learn that the company has downscaled its full year guidance by 2 percent — from an estimated 12–14 percent growth rate to a more conservative range of 10–12 percent.

"[T]hink about that as partially a higher expectation on [foreign exchange] impact and lower retail revenues primarily," chairman, president and CEO Bill Nuti. "And we will also maintain our full year [non-pension operating income] and [earnings per share] guidance. However, we feel like at this time it's coming at the low end of that range."

For the quarter overall, revenue was up 8 percent, rising from $1.41 billion in the Q1 of 2013 to $1.52 billion this year. Operational gross margin was up year-over-year from 27.4 percent to 28.6 percent, driven by higher-margin software products and SaaS.

The company achieved record-breaking NPOI with a year-over-year improvement of 20 percent; a decline in free cash was due in part to capital expenditures, about half of which went to software.

The chief drag on earnings was the company's retail solutions business, which experienced flat revenue and significant reductions in operating income and operating margins.

Hospitality and emerging industries showed higher revenues year-over-year, but lower operating income and operating margins. "Both businesses experienced an unfavorable mix of revenue and continued investment," CFO Bob Fishman said.

Of the company's four business lines, financial services put in the best performance of the quarter. NCR reported an 11 percent year-over-year increase in revenue, at $794 million, and a huge increase of 81 percent in operating income, accompanied by a 13 percent improvement in operating margin.

The company credited a number of factors for its performance in financial services, including:

• strong orders driven by North America, small and mid-sized banks, branch transformation and software;
• a strong backlog, both in volume and mix;
• increased operating margin driven by favorable ?revenue mix and a higher mix of software-related revenue;
• excluding Digital Insight, which purchase the company concluded in January, Q1 core revenue was up 1 percent, and operating margin was up 310 basis points;
• software-related revenue was up 92 percent; or 17 percent excluding Digital Insight.
• Performance was balanced globally and driven by branch transformation, which achieved a 300 percent increase year-over-year.

Throughout the call, Nuti stressed that a balanced business was the objective for NCR:

It is our goal to continue to balance this business model transformation effort we're going through to a hardware-­enabled software-driven business with the right investments to achieve that goal. This is a quarter where you saw R&D as a percent of revenue reach an all-­time high for NCR of over 4 percent of revenues …

[W]e're also investing in services. We are absolutely riveted on delivering a competitively differentiated solution to our customers and making services a competitive advantage for NCR.

Both companies' stocks had recovered somewhat by the end of the week. Not a big rebound exactly, but as one analyst said transformation initiatives might be obscuring actual value. The market will be watching to see if the picture becomes clearer in Q2.

photo: joshua miller

About Suzanne Cluckey

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Suzanne’s editorial career has spanned three decades and encompassed all B2B and B2C communications formats. Her award-winning work has appeared in trade and consumer media in the United States and internationally.

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Diebold Nixdorf

As a global technology leader and innovative services provider, Diebold Nixdorf delivers the solutions that enable financial institutions to improve efficiencies, protect assets and better serve consumers.

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