With new execs at the top, 'NCR's future is bright'
Yogi Berra might have called last week's NCR Corp. Q1 earnings report "déjà vu all over again":
- Revenue up 3 percent, flat in constant currency.
- Software up 2 percent, flat in constant currency.
- Services revenue up 8 percent, up 4 percent in constant currency.
- Hardware down 3 percent, down 6 percent in constant currency.
NCR Chief Operating Officer Paul Langenborn called it "a good start to 2018, with first quarter results that largely exceeded our expectations and place us on solid ground to achieve our full-year financial and operating targets."
It is true that Q1 showed an improvement year over year in real dollars — $1.51 billion in 2018 compared with $1.48 billion in 2017. Additionally, the company's move from software licensing to a more predictable revenue model of cloud provisioning netted a 9 percent improvement year over year. However, the increase in higher-margin SaaS contracts still has not fully compensated for a sizable continuing decline in licensed sales.
The company's services division also showed improvement, which Langenborn attributed to "the continued execution of our transformation initiatives as we look to modernize our services business and increase agility, efficiency and productivity. This helped drive 230 basis points in gross margin expansion for services in the first quarter."
Good news, definitely. But it was offset by that worrisome ongoing industry-wide slide in demand for ATM hardware, which was reflected in a further drop in ATM revenues of 7 percent, or 11 percent in constant currency. (A 24 percent drop in self-checkout was due to the timing of large customer rollouts, and made even more pronounced by comps that include an unusual bump in revenues of 124 percent in Q1 of 2017, chief financial officer Bob Fishman explained.)
Manufacturers are pinning their hopes on large-scale machine replacements as the migration to Microsoft Windows 10 gains momentum in the run-up to April 2020, when support for Windows 7 comes to an end. Fishman said this could represent "a $200 million to $300 million opportunity over the next couple of years."
Despite plans to close three manufacturing facilities, the company said that it would be prepared to meet this demand, scaling up production, as needed, with the help of third-party providers.
More immediately, he said, the company this year expects a $400 million boost in the back half of 2018 as orders in the first-half — which Fishman said were up year over year in Q1 — are fulfilled in Q3 and Q4.
"Consistent with prior years, the guidance has more revenue and earnings in the back half of the year," Fishman said. "Revenue is trending similar to last year and the three-year average and is supported by our backlog and funnel at the end of the first quarter."
That consistency with prior years, however, isn't entirely reassuring. Last year's back half revenues failed to measure up to expectations.
Given this fact, one analyst on the call seemed skeptical of management's assurances that Q1 and Q2 of 2018 would set up the company for a strong back half of the year.
"Revenues are flat, orders are flat, cash flow is down year-on-year, you have another back-end loaded year," said Paul Coster of JPMorgan Securities LLC. " … I'm a little confused by what sounds like a rerun of what we heard this time last year."
There is one significant difference in 2018, though — a change in leadership at the top of the company.
Only the day before the company's earnings call, NCR had announced the hiring of Michael D. Hayford as CEO. Hayford steps into the shoes of longtime, now-retired CEO Bill Nuti, who led the company for 13 years and oversaw much of the buildup on the software side — which is where NCR today sees the greatest revenue potential.
No stranger to the financial services industry, Hayford is a past executive vice president and chief financial officer at FIS. He joined that company when it absorbed Metavante Technologies Inc., a banking and payments technologies company that Hayford helped to guide as president and chief operating officer.
In addition to Hayford's hiring, NCR announced that Frank Martire would join the company as chairman of the executive board. Most recently, Martire was nonexecutive chairman at FIS, a company he led for six years as president and CEO following the acquisition of Metavente, which he also served as CEO.
In the announcement of the addition of Hayford and Martire, NCR Lead Independent Director Chinh Chu hailed the former executive as a "change agent," and the latter as a person of "unparalleled expertise." Importantly, the two men have direct experience working together to build up companies on the software side of financial services.
For NCR, Hayford and Martire currently are both an unknown quotient and a cause for optimism. As Chu said in the announcement:
" … [W]ith Frank and Mike working together to guide and grow our business — as they previously have with two other comparable businesses — we are confident that NCR's future is bright."
Over the next several quarters, onlookers will learn whether they've "gotta wear shades."
Companies: NCR Financial Services
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. She is now the editor of ATMmarketplace.com and WorldofMoney.comwww