NCR Corporation reported financial results for the three months ended June 30, 2017. Second quarter highlights include:
- GAAP diluted EPS of $0.64, up 31% from $0.49 in the prior year; Non-GAAP diluted EPS of $0.80, up 13% constant currency from $0.72 in the prior year
- Revenue of $1.59 billion, down 2% as reported and up 3% excluding FX and the IPS divestiture
- Software revenue up 3% driven by cloud growth of 9%; Net ACV of $18 million in the quarter, up 13%
- GAAP gross margin rate expanded 160 basis points to 29.1%; Non-GAAP gross margin rate expanded 150 basis points constant currency to 30.1%
- GAAP operating margin rate expanded 110 basis points to 11.2%; Non-GAAP operating margin rate expanded 90 basis points constant currency to 13.5%
- 2017 Revenue, diluted EPS, and cash flow guidance reaffirmed
“The second quarter is a great example of the strength of NCR’s transformed business model over the last decade. The diversity of our revenue streams and growing strength in software, particularly cloud, drove financial results that were in-line with our expectations and keep us on target to achieve our full year outlook,” said Chairman and CEO Bill Nuti. “We are clearly benefiting from the breadth of our solution offers, and our customers’ increasing investments in omni-channel software, channel transformation, and digital enablement solutions across all of our end-markets. It is also clear that we continue to gain market share in strategic areas that drive recurring revenue, such as cloud and Services, and in an expanding smart-edge of the enterprise, including self-checkout and new modalities of point-of-sale, such as mobile POS, and interactive POS devices in new markets. As we move into the second half of the year, our goal is to further expand our leadership position in the omni-channel market, while continuing to focus on disruptive innovation, solution development, and market-leading Services delivery.”
In this release, we use certain performance metrics as well as certain non-GAAP measures, including presenting certain measures on a constant currency and adjusted constant currency basis. The performance metrics include net annual contract value (or Net ACV) and the non-GAAP measures include free cash flow and others with the words “non-GAAP,” “adjusted,” or “constant currency” in their titles. The performance metrics are listed and described, and the non-GAAP measures are listed, described, and reconciled to their most directly comparable GAAP measures, under the heading “Performance Metrics and Non-GAAP Financial Measures” later in this release.
Second Quarter 2017 Operating Results
Second quarter revenue of $1.59 billion was down 2% year-over-year. On an adjusted constant currency basis, second quarter revenue was up 3%. Foreign currency fluctuations and the IPS divestiture had an unfavorable impact on the revenue comparison of 2% and 3%, respectively.Software revenue was up 3% on a constant currency basis primarily due to continued demand for NCR’s channel transformation with increases in cloud revenues of 9% and professional services of 5%. Software license revenue was down 6% due to unattached software license revenue that is now expected in the back half of the year. Software maintenance revenues returned to growth.
Services revenue was up 4% on a constant currency basis driven by hardware maintenance growth as a result of improving channel transformation trends, combined with increased managed and implementation services.
Hardware revenue was up 1% on a constant currency basis due to continued growth in SCO of 37% and an increase in POS revenues of 20%, driven by ongoing momentum in channel transformation. ATM revenues declined 20%, as anticipated. ATM revenue is expected to improve in the fourth quarter as larger customer roll-outs are scheduled to take place.
Second quarter gross margin of $463 million increased 4% from $446 million. Second quarter gross margin (non-GAAP) of $479 million increased 3% from $465 million. Gross margin rate was 29.1%, up from 27.5%. Gross margin rate (Non-GAAP) was 30.1%, up from 28.7%. The increase in gross margin was due to continued focus on productivity improvements, particularly in our Services segment.
Second quarter operating expenses of $285 million increased from $283 million. Second quarter operating expenses (non-GAAP) of $264 million increased from $258 million. The increase in expenses was a result of increased investment in research and development.
Second quarter operating income of $178 million increased 9% from $163 million. Second quarter operating income (non-GAAP) of $215 million increased 4% from $207 million. Operating margin rate was 11.2%, up from 10.1%. Operating margin rate (non-GAAP) was 13.5%, up from 12.8%. Operating income was up as a result of higher revenue and gross margin rate expansion, offset by higher operating expenses.
Second quarter other (expense) of $48 million decreased 17% from $58 million. Second quarter other (expense) (non-GAAP) of $48 million decreased 9% from $53 million. The decrease was primarily due to a more favorable foreign currency impact and lower interest expense compared to the prior year period.
Income Tax Expense
Second quarter income tax expense of $33 million increased from $31 million. Second quarter income tax expense (non-GAAP) of $45 million was flat.
Net Income from Continuing Operations Attributable to NCR
Second quarter net income from continuing operations attributable to NCR of $97 million increased from $76 million. Second quarter net income from continuing operations attributable to NCR (non-GAAP) of $122 million increased from $111 million.
Second quarter cash provided by operating activities of $95 million decreased from $121 million. Free cash flow was $18 million in the second quarter of 2017 as compared to $55 million in the second quarter of 2016. The decreases were due to higher working capital needs as we plan for increased revenues later in the year. Year-to-date cash provided by operating activities was $138 million compared to $144 million in the prior year, and year-to-date free cash flow was $6 million compared to free cash flow of $26 million in the prior year.
We are reaffirming our full year 2017 revenue guidance. Revenue is expected to be $6.63 billion to $6.75 billion, which represents expected revenue growth of 1% to 3% as reported and 4% to 6% adjusted constant currency. The 2017 revenue guidance includes expected foreign currency headwinds of $25 million in revenue. The 2017 expected growth rates also exclude approximately $124 million of IPS revenue from 2016 due to the IPS divestiture in May 2016.
We are also reaffirming our GAAP diluted earnings per share guidance of $2.20 to $2.32, and our non-GAAP diluted earnings per share guidance of $3.32 to $3.42. We expect GAAP diluted earnings per share to be up 22% to 29% and non-GAAP diluted earnings per share to be up 10% to 13% constant currency. The 2017 non-GAAP diluted earnings per share guidance includes an expected favorable foreign currency impact of $0.01.
Additionally, we continue to expect net cash provided by operating activities to be $805 million to $830 million and free cash flow to be $500 million to $525 million, or approximately 95% to 100% of non-GAAP net income.
Q3 2017 Outlook
For the third quarter of 2017, revenue is expected to be $1.66 billion to $1.70 billion, GAAP diluted earnings per share is expected to be $0.65 to $0.72, and non-GAAP diluted earnings per share is expected to be $0.88 to $0.93. The third quarter 2017 guidance includes expected foreign currency headwinds of $10 million in revenue and $0.02 in diluted earnings per share.
NCR will provide additional information regarding its third quarter and full year 2017 guidance during its second quarter earnings conference call and webcast.