Here’s Why NCR Cut Its Outlook

Equipment to handle commercial transactions has evolved dramatically over the decades, with traditional cash registers giving way to sophisticated electronic equipment that handles a multitude of different functions. NCR (NYSE: NCR) has evolved from its beginnings as National Cash Register to keep up with the pace of technological advancement, and it now sports all kinds of products designed to help its business clients handle their operations more efficiently.

Coming into NCR’s second-quarter financial report, investors were hoping that the company would continue to ride its positive momentum in making good on its transformation plan. NCR’s results were reasonably good, but the company had to cut its outlook for the full year, and that made some investors nervous about whether further challenges could lie ahead.

Image source: NCR.

How NCR rang up its results

NCR’s second-quarter results were generally mixed. Revenue was down 4%, to $1.54 billion, which fell short of the consensus forecast among investors. Yet even though adjusted net income from continuing operations was down more than 20%, to $97 million, the resulting adjusted earnings of $0.65 per share were better than the $0.63 per share that most of those following the stock were looking for.

The shift in NCR’s business was responsible for most of the declines in its results. The company has made a move away from product-based revenue toward services-related sales, and gains on the services side were insufficient to make up for product-driven sales declines. In particular, a 16% plunge in hardware revenue was responsible for the downward pressure on NCR’s top line, offsetting a 4% rise in services revenue and a slight 1% rise on the software side of the business.

Similarly, an operating loss on the hardware side combined with declines in software-driven operating income to overwhelm minimal gains from services-related profit. That resulted in the substantial drop in NCR’s overall bottom line.

Even NCR’s most promising niches lost some of their luster during the period. Demand for cloud services across the industry has been strong, but NCR’s revenue from cloud software was up by just 7%. Similarly, professional-services software revenue climbed just 2%, and a 12% drop in licensing revenue related to software products ate up most of the gains NCR achieved elsewhere.

At the same time, challenges on the hardware side are getting worse. Revenue from point-of-sale systems plunged 16%, and ATM sales were down an even steeper 21%. Only a 3% rise in self-checkout equipment stemmed the tide of declines.

Can NCR bounce back?

New CEO Michael Hayford is optimistic that NCR can recover. “I spent my first 90 days engaging with customers and employees around the world,” Hayford said, “and am excited about our long-term growth profile.” The CEO pointed to steps like expanding its executive leadership team and making organizational shifts to be more efficient and take greater advantage of growth opportunities.

Nevertheless, NCR had to cut its full-year outlook in light of the challenges that it has faced in the first half of the year. The company now believes that revenue will fall 1% to 3% for the year, rather than being flat to up 3% as it projected previously. Adjusted earnings of $2.55 to $2.75 per share are $0.70 to $0.75 per share below guidance from three months ago, and NCR is focusing more on improving its execution in order to ensure that 2019 won’t suffer from the same headwinds that the company is struggling against this year.

NCR investors were rightfully concerned about the extent of the cut in guidance, and shares quickly gave up 8% the day after the announcement and have lost a bit more ground since. For NCR to turn things around, it will have to prove again that its value proposition can bring customers the improved results they need to justify the expense involved, and its organizational and internal efficiency moves will have to work to cut costs and boost profit in the long run.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends NCR. The Motley Fool has a disclosure policy.

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