Technology solutions provider NCR Corp. (NCR) reported its second quarter results on July 29. Adjusted earnings remained flat year over year at $0.68 but surpassed analysts’ expectations. Revenue for the quarter grew 8% to $1.66 billion, but was slightly below the Street’s expectation of $1.67 billion. Let’s dig in to get a better view of the results.
Segmental Revenues Improved on Higher Software-related Sales
The revenue growth was on account of higher sales of software-related products and services that grew 42% from the year-ago quarter. The improvement was noticed in almost all the operating segments. Revenue from other services grew 3%. But this was partially offset by a 4% decline in low-margin hardware product sales. Also, unfavorable foreign currency impact led total revenue growth to go down by 1%.
Among the four operating segments, the largest segment, Financial Services, performed the best with 15% revenue growth for the quarter. The growth was mostly driven by higher software-related sales and the acquisition of Digital Insight in December. With Digital Insight, which is a leading online and mobile banking software solutions provider, NCR’s dream of becoming a hardware-enabled, software-driven business got a leg up. Core order growth was aided by strong demand from small and medium-sized banks, particularly from North America and Europe.
Hospitality and Emerging Industries segments also showed good momentum with 8% and 6% revenue improvement, respectively. Hospitality revenue improved due to higher software-related sales, particularly in America and Europe. Improvement in Emerging Industries revenue was driven by higher demand from Telecom and Technology end-markets, partially offset by the soft demand in travel end-market.
But Retail Solutions, the second largest segment, pulled down the momentum slightly by registering a 2% decline. The decline was due to tough comparison as in the same quarter last year, the company had won a huge deal from retail giant Wal-Mart (WMT). Order growth was impressive in Europe and Asia, Middle East and Africa, though North America disappointed to some extent.
Higher Expenses Drove Operating Results
Total operating expenses grew 8.4% year over year to $311 million. The expense increase appears to be in line with the company’s plan to invest in software, emerging industries like travel and telecom, and the development of newer technology to remain competitive and innovative. During the quarter, the company experienced high onboarding costs in Telecom and Technology end-markets and continued to invest in small businesses.
Despite higher operating expenses, NCR’s adjusted operating margin increased to 12.7% in the quarter from 11.9% in the second quarter of 2013. But due to high interest expenses and tax rate, adjusted earnings per share remained unchanged from the year-ago quarter.
Interest expense almost doubled to $46 million from $26 million recorded in the same period last year and the increase could be due to higher borrowings on revolving credit facility. Tax rate in the quarter was 27%, up from 25% in the year-ago period.
Though continuous customer wins, benefits from investments, and growing software momentum are positive signals, NCR maintains its projection for revenue growth in the range of 10% to 12% for 2014. This could be due to the slow demand growth for its retail solutions in America and Europe, and falling hardware sales. Adjusted earnings per share are expected to remain between $3.00 and $3.10.
The company expects its GAAP (or reported) earnings to be diluted by around $0.61 per share due to a restructuring charge. NCR is planning a restructuring program that will run through the coming two years and is expected to incur costs in the range of $150 million to $200 million. The restructuring effort is expected to achieve nearly $90 million in annual saving in operating cost by 2016.
The company also expects Digital Insight to be slightly accretive to adjusted earnings per share in 2014, and to grow further in 2015.
NCR’s transition into a hardware-enabled software-driven solutions provider rather than a simple hardware vendor is nicely taking shape. The company is investing heavily to solidify its position in the software space. Continuous investments could reduce the profitability to some extent, but the transition will take the company to newer heights going forward.