Smart companies have to change with the times, and NCR (NCR -1.21%) has come a long way from its days as National Cash Register. Nowadays, analog registers look like antiques, and NCR has moved on to embrace the technology that most of its clients and end users take for granted.
Coming into Tuesday's third-quarter financial report, NCR investors were prepared to deal with falling top- and bottom-line results, and the company wasn't able to prevent that from happening. However, with some recent strategic moves, NCR has revealed some of where it sees the best prospects for future growth, and its chosen direction has a lot of potential.
Here's the latest from NCR
NCR's third-quarter results didn't look too good. Revenue fell 7% to $1.55 billion, which was an even faster rate of descent than the company posted three months ago and was about double the drop that most of those following the stock were expecting. Net income was off 28% to $86 million, although after accounting for some extraordinary items, adjusted earnings of $0.58 per share fared better than the consensus forecast for $0.54 per share even though it marked a substantial drop from year-earlier levels.
As we've seen in previous quarters, NCR has made a strategic decision to emphasize software and services-based revenue, moving away from its traditional hardware business. That's been a tough move so far, with segment sales from both software and services rising at just a 1% pace. Cloud and software-licensing revenue have seen gains for NCR, but the software maintenance and professional services areas experienced modest declines from year-earlier levels.
Meanwhile, the hit that NCR is taking on the hardware side is large. All three sources of hardware revenue saw double-digit percentage declines during the quarter, with point-of-sale equipment taking the biggest hit in experiencing a nearly 30% drop in sales. Self-checkout equipment posted a 24% drop in revenue, and even the automated teller machine business had to deal with 13% lower sales during the period.
Hardware also posed a problem for NCR on the cost front. The company saw its gross margin fall by nearly 2 percentage points, and NCR said that higher costs in hardware associated with trying to resolve supply chain constraints were primarily responsible for the pressure on margin levels. Without significant savings in income taxes, the damage to NCR's bottom line would have been even worse.
What's ahead for NCR?
CEO Michael Hayford tried to keep the long-term picture in mind. "We made notable progress realigning our organization and addressing critical execution areas," Hayford said, adding, "We placed strategic emphasis on our supply chain and manufacturing operations." The CEO also noted that an expected ramp-up in production of ATMs could help future results.
Looking ahead, NCR thinks it can do better from an efficiency standpoint. Hayford believes that operational moves could save $100 million for the company in 2019.
Yet the most important move that NCR made was its pending acquisition of JetPay. The purchase should help NCR integrate its payment platform with its point-of-sale products, helping it become a more vertically integrated provider of payment services. That's been a high-growth area, and spending to take a bigger position in that booming industry could pay off for NCR.
NCR reaffirmed its guidance for the full year, with expectations for sales to drop 1% to 3% and adjusted earnings of $2.55 to $2.75 per share. However, with the higher production expectations, NCR cut its cash flow projections by about $50 million.
NCR investors didn't seem too concerned about the news, and the stock didn't move much in after-hours trading following the announcement. The company seems to be making some progress, but NCR has a long way to go before it can declare victory over the difficult industry conditions that it's run into lately.