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Cloud Strength Helps NCR Keep Growing

By Dan Caplinger - Feb 8, 2018 at 7:02PM

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Find out why the payment processing and services company keeps seeing weakness in its ATM division.

Companies need to change with the times, and NCR (NCR -5.18%) has gone well beyond its cash-register manufacturing roots to become a broader provider of payment services. By being open to innovations such as cloud computing, unattached software, and other ideas that generate recurring streams of revenue, NCR has reinvented itself and prevented new advances from leaving the company behind.

Coming into Thursday's fourth-quarter financial report, NCR investors were prepared for some difficulties, including slowdowns in both sales and earnings. The company managed to overcome some of those challenges, and it's increasingly optimistic about its future prospects. Let's take a closer look at NCR and at what its latest report says about how 2018 will go.

NCR logo, in white on green background

Image source: NCR.

NCR heads toward the clouds

NCR's fourth-quarter results didn't look great on their face. Total revenue was down 1% to $1.78 billion, but that wasn't quite as bad as the 3% decline that most investors were expecting. One-time tax issues caused a GAAP (generally accepted accounting principles) loss for NCR, but even though adjusted net income from continuing operations was down 15% to $142 million, adjusted earnings of $0.92 per share topped the $0.87-per-share consensus forecast among those following the stock.

Tax reform had a big immediate hit on NCR. The company said that it took a $130 million charge related to new tax laws, but it should benefit from the lower corporate tax rates under the legislation.

As we've seen in past quarters, NCR's performance reflected the clash between old and new technology. Services revenue rose the most of NCR's major segments with a 4% gain, half of which stemmed from favorable currency impacts. The software segment also posted a 1% boost to segment revenue, as gains in cloud and professional services were enough to outweigh declines in the money that NCR brought in on software license fees.

Hardware was still a sore spot for NCR. Point-of-sale devices remained a strong niche for NCR, with a gain of 23% making it the only positive contributor to revenue growth within the segment. Yet ATM revenue slumped 21%, and sales related to self-checkout devices were mostly flat. Even so, NCR tried to point to the positives, noting that ATM revenue was still better than expected and that self-checkout posted strong growth compared to the third quarter of 2017.

CEO Bill Nuti put the figures in context. "While ATM revenue was lower than expected in 2017," Nuti said, "growth in unattached software, cloud, and recurring revenues allowed us to build a stronger foundation going into 2018." The CEO also pointed to the company's consistency in meeting guidance.

Can NCR ring up more growth?

NCR is optimistic about its longer-term future. In Nuti's words, "NCR continues to position itself as one of the world's largest cloud companies facilitating omni-channel commerce and digital transformation, and our SaaS [software-as-a-service] solutions are gaining traction as evidenced by consistent double-digit net [annual contract value] growth."

However, NCR's guidance for 2018 is somewhat modest. The payment services company sees revenue growth of just 0% to 3%, which would be toward the lower end of what investors want to see from the company. Adjusted earnings of $3.30 to $3.45 per share are a bit better, with the current consensus forecast falling slightly below the midpoint of that range. Short-term guidance for first-quarter revenue to be between a loss of 1% and a gain of 2% was similarly disappointing, and an expected range for adjusted earnings of $0.41 to $0.47 per share is well below the current consensus figure of $0.56 per share.

NCR investors didn't seem to react particularly strongly to the news, and the stock was unchanged in after-hours trading following the announcement, after initially posting a modest decline.

Ideally, NCR should be able to move its business forward at the same time that it squeezes more profit from its existing opportunities. That way, investors get the best of all worlds from the payment services specialist.

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