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For NCR, a hit and a miss in Q3

Third quarter news was mostly good for NCR, but the U.S. hardware market hurt its financial services business.

October 31, 2013 by Suzanne Cluckey — Owner, Suzanne Cluckey Communications

Overall, the third quarter was a good one for NCR, according to its latest earnings call. But for the company's financial services business, revenues were down, driven by weakness in the U.S. hardware market.

In total, the company realized a 5 percent increase in Q3 revenue — $1.51 billion compared with the same period last year. Gross margin was up by 130 basis points year over year, from 27.3 percent in 2012 to 28.6 percent in Q3 2013.

But, while revenues in retail and hospitality were up 17 percent and 25 percent respectively, the company's largest business unit — financial — was down 4 percent year over year, although the operating margin for financial services did rise by 160 basis points year over year to 12.1 percent.

The sales of software, a growing an increasingly important category in all business units, registered an impressive increase of 40 percent year over year to nearly $200 million. CEO Bill Nuti said, "It was a good quarter on software, very balanced … across all lines of business."

He reiterated his expectation that NCR will meet its guidance for software with total revenues between $725 million and $775 million.

Nuti said software was a key component of the company's 12 percent year on year growth in services.

"Our professional services is up significantly," he said. "And that's attributed to a software business growing as dramatically as it is for us across all lines of businesses."

John Bruno, CTO and EVP of corporate developments, elaborated on Q3 performance in the financial services business. Bruno said that Q3 orders improved and the company would focus on maintaining this momentum in Q4.

"[W]e're up 10 percent on a software growth basis and 8 percent on SaaS," Bruno said. "And from a branch transformation perspective, we had a really good mix of segments from tier one on down to smaller banks and across geographies showing interest in this growing area."

Bruno said that major and mid-major banking sectors "remain a challenge" for NCR. However, he said the company still believed — as stated in the Q2 earnings call — that Q4 orders would be a key metric and that the company expected to deliver year over year growth in orders "based on the funnel activity that we've seen thus far."

Emerging markets continue to perform well for the financial services business, Bruno said.

During Q3, NCR secured an order from Industrial and Commercial Bank of China for more than 2,000 NCR SelfServ ATMs, as well as an order from Agricultural Bank of China for more than 1,500 SelfServ 22 and SelfServ 25 models, and an order of 500 SelfServ units from ATMU Technology Co. Ltd, China's largest ATM coop operator and service provider.

NCR signed a five-year technology services agreement with China Resources Bank of Zhuhai to provide hardware maintenance services for the bank's ATMs. And Bank of Ningbo went live with NCR APTRA Edge, a multi-vendor software application, across its fleet of over 500 ATMs.

"From an emerging markets perspective in Financial Services, I'd summarize it and say we're very pleased with our growth outside of North America," Bruno said. "In particular, China, with 12 percent revenue growth year on year and India delivering 72 percent growth year on year."

During the Q&A segment of the earnings call, NCR Chairman and CEO Bill Nuti offered more insight into the state of the U.S. market — and prospects for future demand:

"Dialog with the customer base has been relatively positive from the point of view that, in all cases, our customers are going to have to do something around Win 7 and EMV," Nuti said. "It's more of a Windows 7 story less than EMV story. EMV is out there in '15. And candidly, it will probably be moved again at some point. ... Win 7 is a real issue and that's something we're beginning to see activity on."

He said branch transformation was also a notable driver with good potential for more significant growth over the next two years. In response to a later question, Nuti reiterated the company's guidance of $80 million to $100 million for the year for that part of the business, and said he expected 2014 to be in the $150 million to $200 million range.

In his remarks, Nuti emphasized the importance to NCR of investing in R&D and staying diversified and balanced as the company continues to grow.

"Always, it comes down to making sure when you are a 130-year-old company that you don't forget there's a number of legacy issues you need to continue to focus on, and that every day, you have to tackle those issues so that you can transform yourself to be contemporary [with] the world the way it is versus the world the way it was."

A complete Q3 report is available at the NCR website.

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photo: mistycabal

Some information for this story provided by Seeking Alpha.

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.