NCR’s Q3 Earnings Plunge
Press release from the issuing company
Friday, October 24th, 2014
NCR Corporation reported financial results today for the three months ended September 30, 2014.
“Our third quarter results, as previously announced, were disappointing," said Chairman and CEO Bill Nuti. "Our Retail Solutions business was challenged by customers spending more cautiously than anticipated and further delaying solution rollouts. These trends, along with difficult global macroeconomic conditions and foreign currency headwinds, had significant impacts on our performance in the third quarter, and we expect they will continue to impact our Retail Solutions business in the fourth quarter. However, we remain confident in our transformation trajectory and our positioning of the business for long-term growth. This confidence is underscored by the strong performance of our Financial Services business, software and SaaS growth well in excess of overall revenue growth, and the broader trends favoring adoption of omni-channel consumer transaction technologies, where our global leadership position offers significant opportunity. As we conclude the year and look to 2015, we are focused on enhanced execution and efficiency, including our current restructuring program.”
Q3 Financial Summary
Third Quarter | ||||||||||||||
$ in millions, except per share amounts | 2014 | 2013 | Change | |||||||||||
Revenue | $ | 1,647 | $ | 1,508 | 9% * | |||||||||
Income from operations ** | $ | 41 | $ | 145 | (72 | )% | ||||||||
Non-pension operating income (NPOI) | $ | 204 | $ | 185 | 10 | % | ||||||||
Diluted earnings per share *** | $ | — | $ | 0.58 | (100 | )% | ||||||||
Non-GAAP diluted earnings per share | $ | 0.67 | $ | 0.76 | (12 | )% | ||||||||
* Revenue growth of 10% on a constant currency basis.
** Income from operations includes $127 million related to the previously announced restructuring plan.
*** Diluted earnings per share includes $0.58 related to the previously announced restructuring plan.
In this release, we use the non-GAAP measures non-pension operating income (NPOI), non-GAAP diluted earnings per share, free cash flow and revenue growth on a constant currency basis. These non-GAAP measures are described and reconciled to their most directly comparable GAAP measures elsewhere in this release.
Q3 Supplemental Revenue Information
Third Quarter | ||||||||||||
$ in millions | 2014 | 2013 | Change | |||||||||
Software-as-a-Service (SaaS) | $ | 125 | $ | 37 | 238 | % | ||||||
Software License/Software Maintenance | 157 | 155 | 1 | % | ||||||||
Professional Services | 148 | 130 | 14 | % | ||||||||
Total Software-Related Revenue | 430 | 322 | 34 | % | ||||||||
Hardware | 650 | 626 | 4 | % | ||||||||
Other Services | 567 | 560 | 1 | % | ||||||||
Total Revenue | $ | 1,647 | $ | 1,508 | 9 | % |
Software-related revenue increased 34% in the third quarter, including 238% growth related to SaaS. Excluding the contribution of Digital Insight, software-related revenue increased 7% and SaaS revenue increased 11%.
Q3 Operating Segment Results
Third Quarter | ||||||||||||
$ in millions | 2014 | 2013 | % Change | |||||||||
Revenue by segment | ||||||||||||
Financial Services | $ | 899 | $ | 767 | 17 | % | ||||||
Retail Solutions | 489 | 494 | (1 | )% | ||||||||
Hospitality | 168 | 161 | 4 | % | ||||||||
Emerging Industries | 91 | 86 | 6 | % | ||||||||
Total Revenue | $ | 1,647 | $ | 1,508 | 9 | % | ||||||
Operating income by segment | ||||||||||||
Financial Services | $ | 144 | $ | 93 | ||||||||
% of Financial Services Revenue | 16.0 | % | 12.1 | % | ||||||||
Retail Solutions | 24 | 50 | ||||||||||
% of Retail Solutions Revenue | 4.9 | % | 10.1 | % | ||||||||
Hospitality | 27 | 26 | ||||||||||
% of Hospitality Revenue | 16.1 | % | 16.1 | % | ||||||||
Emerging Industries | 9 | 16 | ||||||||||
% of Emerging Industries Revenue | 9.9 | % | 18.6 | % | ||||||||
Segment operating income | $ | 204 | $ | 185 | ||||||||
% of Total Revenue | 12.4 | % | 12.3 | % | ||||||||
Revenue increased 9% compared to the prior year led by strong growth in Financial Services where branch transformation revenues continued to increase and Digital Insight contributed $93 million of revenue in the third quarter of 2014. Hospitality and Emerging Industries revenue also increased year over year, while Retail Solutions faced reduced customer spending and rollout delays, particularly in the North America market. Foreign currency fluctuations negatively impacted revenue by 1%.
Segment operating income increased 10% compared to the prior year. The increase was led by Financial Services, where growth was driven by a higher mix of software-related revenue. Retail Solutions operating income declined due to challenges in the retail market and lower software license revenue. Hospitality operating income increased due to the increase in revenues. Emerging Industries operating income was negatively impacted by onboarding costs associated with managed services contracts and continued investment in Small Business.
Free Cash Flow
Third Quarter | ||||||||
$ in millions | 2014 | 2013 | ||||||
Net cash provided by operating activities | $ | 124 | $ | 27 | ||||
Total capital expenditures | (58 | ) | (66 | ) | ||||
Net cash provided by (used in) discontinued operations | 66 | (27 | ) | |||||
Free cash flow | $ | 132 | $ | (66 | ) | |||
Free cash flow increased mainly due to improvements in working capital and recoveries from the Fox River environmental-related matter.
More information on NCR’s Q3 2014 earnings, including additional financial information and analysis, is available on NCR’s Investor Relations website at http://investor.ncr.com/.
2014 Outlook
As announced on October 20, 2014, the Company lowered guidance for the full-year 2014 which is reflected as current 2014 guidance in the following table.
$ in millions, except per share amounts | Current 2014 Guidance |
Prior 2014 Guidance |
2013 Actual |
||||||||||||||
Revenue | $6,575 - $6,625 | (1) | $6,750 - $6,850 | (1) | $6,123 | (1) | |||||||||||
Year-over-year revenue growth | 7% - 8% | (1) | 10% - 12% | (1) | 7% | (1) | |||||||||||
Income from operations (GAAP) | $499 - $519 | (2) | $580 - $600 | (2) | $666 | (2) | |||||||||||
Non-pension operating income (NPOI) | $810 - $830 | $900 - $920 | $717 | ||||||||||||||
Diluted earnings per share (GAAP) | $1.30 - $1.40 | (2) | $1.75 - $1.85 | (2) | $2.67 | (2) | |||||||||||
Non-GAAP Diluted EPS | $2.60 - $2.70 | $3.00 - $3.10 | $2.81 | ||||||||||||||
(1) Includes 1% of expected unfavorable foreign currency fluctuations.
(2) For 2013, includes actuarial mark-to-market pension adjustment; for 2014, excludes actuarial mark-to-market pension adjustments to be determined in Q4 2014.
NCR expects approximately $215 million of other expense, net including interest expense in 2014 and that its full-year 2014 effective income tax rate will be approximately 25%.
Related to the previously announced restructuring plan, NCR recorded a charge of $130 million in third quarter of 2014 included in income from continuing operations. In total, NCR expects to incur a pre-tax charge in the range of approximately $150 million to $200 million that will be included in income from continuing operations, with approximately $150 millionrecorded in 2014 and the remainder recorded in 2015. The estimate includes both severance and asset related charges. The cash impact of the restructuring plan is expected to be approximately $50 million in 2014 and $50 million in 2015. Annualized savings are expected to reach approximately $90 million by 2016.
Q4 2014 Outlook
For the fourth quarter of 2014, the Company expects non-pension operating income (NPOI) to be in the range of $241 million to $261 million, compared to $221 million in the fourth quarter of 2013, and income from operations to be in the range of $181 million to $201 million, compared to $297 million in the fourth quarter of 2013. NCR expects its fourth quarter 2014 effective income tax rate to be approximately 30% and other expense, net including interest expense to be approximately $55 million.