Article

NCR Q2 earnings buffeted by winds of exchange

In a Q2 earnings call, company executives talked at length about adverse FX and a shift to higher margin services — and as little as possible about a rumored buyout.

July 30, 2015 by Suzanne Cluckey — Owner, Suzanne Cluckey Communications

Anyone hoping for just a whiff of certainty about NCR Corp. buyout rumors would have been acutely disappointed with the company's earnings call late Tuesday afternoon (more on that later).

Anyone expecting lots of reference to the sorry state of foreign exchange rates and its impact on NCR revenues would have hit a much richer vein (table right). 

As expected, a comparatively strong dollar, resulting in unfavorable exchange rates across NCR's overseas markets, continued to weaken earnings in the second quarter.

Still, CEO Bill Nuti saw positive trends in the company's performance:

We have reached the midpoint of 2015 and remain on track to achieve our full-year goals, despite the increased pressure on revenue and profitability from foreign currency headwinds from our initial 2015 guidance. The NCR team has executed well this year, and I am particularly pleased with the progress we've made towards becoming a software-driven, hardware-enabled company. This progress is evident in our results, culture, in our management system, and the talent we've been able to attract.

Nuti pointed out a notable improvement in free cash flow, with year-over-year growth of $92 million (from $3 million to $95 million). Additionally, he said, the company has seen continued momentum in cloud-based services, which achieved 8 percent revenue growth (9 percent in constant currency).

Of the company's four segments — financial services, retail solutions, hospitality and emerging business — financial services turned in the weakest results for Q2, with revenues up by 1 percent in constant currency, but down 7 percent as reported (table left).

Declines were driven by lower revenues from Russia and China, the latter of which has introduced new regulations favoring local providers, according to Andrew Heyman, SVP and President of NCR Financial Services. In China, he said, the company was looking at revenues of around $100 million in 2015, compared with the $170 million to $180 million range in 2012 and 2013.

The company is seeking to regain ground in China, including "building a local brand with partners" in the country, and also shifting to a more software-driven strategy in that market, Heyman said. He added that a financial services backlog, with order growth in Q2 of 13 percent (in constant currency and excluding China and Russia), augured well for revenues in the second half of 2015.

Branch transformation represents an important and growing part of that backlog, with orders up about 100 percent year-over-year on an already big number, Nuti said.

Importantly, branch transformation — and the omnichannel and managed services that often accompany it — are a portal to higher-margin sales, something NCR execs discussed at length during the analyst Q&A period.

"The margins within that ... would be quite a bit higher than our traditional margins," Heyman said. "Call it another 20 percent higher. So if we're in the 20 percent to 30 percent on any given deal in traditional products, we'd be into the 40 percent to 50 percent range on branch transformation portfolio."

Heyman said that NCR has come out with "about eight" new or refined managed services offerings, and that in terms of backlog in the second half of the year, these will make up approximately half of the growth in financial services

Nuti said he expects to see strong growth in managed services for 2016 as well:

We have built and developed and now launched a set of new offers in the market that are more managed-services based, and they are lower-cost-to-deliver kinds of services that leverage our fixed-cost infrastructure. So one of the things I'm quite enthusiastic about going forward right now is our services growth going into 2016, the mix shift that will begin to occur as a result of higher margin offers, and some of the successes we've had early on in our journey there.

Of course, the Big Question for listeners on the call was whether NCR would be going forward into 2016 under new ownership.

Surprising no one, analysts' first question during the Q&A segment concerned the "strategic review" currently underway at NCR and the weekly barrage of media reports about a possible leveraged buyout of the company.

Nuti dispensed with the question in a few well-rehearsed words:

I will not comment on the latter, just to say that the strategic alternatives review ... remains underway and we expect that process to conclude in the near future.

However, Nuti dropped a broad hint as to how soon the "near future" might be, saying it was "quite possible" that a conclusion to the review would be reached before a planned Analyst Day at the New York Stock Exchange on Sept. 15.

"It has been some time since we held an Analyst Day, and we think the time is right to meet all of you in person and continue having a dialogue about NCR and our strategic vision," he said.

With just a skosh more specificity, that wouldn't be called a hint at all.

View complete NCR Q2 investor relations materials online.

transcript excerpts courtesy seeking alpha

photo istock

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.