NCR Announces Fourth Quarter and Full Year 2018 Results

NCR Corporation reported financial results today for the three months ended December 31, 2018. Fourth quarter, full year and other recent highlights include:

  • Fourth quarter revenue of $1.80 billion, up 1% as reported; Full year revenue of $6.41 billion, down 2% as reported
  • Fourth quarter GAAP diluted EPS of $(0.39); Fourth quarter non-GAAP diluted EPS of $0.84
  • Full year GAAP diluted EPS of $(0.72); Full year non-GAAP diluted EPS of $2.62
  • Fourth quarter services revenue up 2% and gross margin expansion of 250 basis points
  • Full year cash from operations of $572 million and free cash flow of $223 million
  • Completed planned acquisition of JetPay to expand our offerings to include end-to-end payment processing
  • Program to achieve at least $100 million cost savings in 2019 is on track
  • 2019 guidance announced, including return to revenue growth

“In 2018 we made progress in our efforts to build a stronger and more efficient NCR and our fourth quarter results were indicative of the early success as we continue to improve our execution and stabilize our business,” said Michael Hayford, President and Chief Executive Officer. “Our work to simplify and stream line NCR is delivering results. During the fourth quarter, we achieved a significant ramp-up in hardware production, which demonstrates our success restructuring our manufacturing network. In addition, our Services business continues to generate improved margin performance through the ongoing implementation of our transformation initiatives.”

Mr. Hayford concluded, “Looking ahead, we enter 2019 with positive momentum and a commitment to return to growth by investing in our future while also reducing our cost structure. We are elevating our investment in digital-focused strategic growth platforms as we look to accelerate our mix shift to recurring software and services revenues. These investments will be supported by the addition of JetPay, which gives us an end-to-end payments platform and unlocks incremental recurring revenue streams. We are confident the further execution of our strategy will deliver competitive differentiation to our customers, strengthen our long-term growth profile and drive increased value creation for our stockholders.”

In this release, we use certain non-GAAP measures, including presenting certain measures on a constant currency basis. These non-GAAP measures include “free cash flow” and others with the words “non-GAAP,” or “constant currency” in their titles. These non-GAAP measures are listed, described, and reconciled to their most directly comparable GAAP measures under the heading “Non-GAAP Financial Measures” later in this release.

Fourth Quarter 2018 Operating Results

Revenue
Fourth quarter revenue of $1.80 billion was up 1% year-over-year. Foreign currency fluctuations had an unfavorable impact on the revenue comparison of 2%.

Software revenue was flat on a constant currency basis driven by lower software license and software maintenance, partially offset by growth in cloud revenue.

Services revenue was up 5% on a constant currency basis driven by continued momentum in managed service offerings and implementation services.

Hardware revenue was up 4% on a constant currency basis. ATM revenue increased 26% on a constant currency basis primarily due to higher backlog conversion as we significantly ramped production. SCO revenue decreased 16% on a constant currency basis due to the timing of customer roll-outs. POS revenue decreased 12% on a constant currency basis in the quarter compared to growth of 20% on a constant currency basis in the prior year, which benefited from several large customer wins.

Gross Margin
Fourth quarter gross margin of $442 million decreased from $510 million in the prior year period. Gross margin rate was 24.5%, down from 28.6%. The decrease in gross margin was primarily due to higher operating costs in the Hardware segment as well as restructuring and transformation charges of $48 million incurred during the fourth quarter of 2018.

Fourth quarter gross margin (non-GAAP) of $495 million decreased from $523 million in the prior year period. Gross margin rate (non-GAAP) was 27.5%, down from 29.3%. The decrease in gross margin (non-GAAP) was primarily due to higher operating costs in the Hardware segment.

Expenses
Fourth quarter operating expenses of $379 million increased from $308 million in the prior year period. The increase in operating expenses was primarily due to restructuring and transformation expenses of $77 million incurred during the fourth quarter of 2018.

Fourth quarter operating expenses (non-GAAP) of $281 million decreased from $287 million in the prior period. The decrease in operating expenses (non-GAAP) was due to cost reduction benefits realized, partially offset by higher employee-related expenses.

Operating Income
Fourth quarter income from operations of $63 million decreased from $202 million in the prior year period. Income from operations reflected restructuring and transformation expenses of $125 million incurred during the fourth quarter of 2018.

Fourth quarter operating income (non-GAAP) of $214 million decreased from $236 million in the prior period. Operating income (non-GAAP) reflected lower profit in the Hardware segment and higher employee related expenses.

Other (Expense)
Fourth quarter other (expense) of $3 million decreased from $71 million in the prior period. The pension mark to market adjustment was income of $45 million in the fourth quarter of 2018 compared to expense of $28 million in the fourth quarter of 2017. Fourth quarter other (expense) (non-GAAP) of $48 million increased from $43 million compared to the prior year period due to higher interest expense.

Income Tax Expense (Benefit)
Fourth quarter income tax expense of $93 million decreased from $164 million in the prior year period. The fourth quarter effective income tax rate was 155% compared to 125% in the prior year period. Income tax decreased primarily due to lower income before taxes in the quarter and the impact of U.S. tax reform.

Fourth quarter income tax expense (non-GAAP) of $40 million decreased from $49 million in the prior year period. The fourth quarter effective income tax rate (non-GAAP) was 24% compared to 25% in the prior year period. Income tax (non-GAAP) decreased primarily due to lower income before taxes in the quarter.

Net Loss from Continuing Operations Attributable to NCR
Fourth quarter net loss from continuing operations attributable to NCR of $33 million increased from net loss from continuing operations of $35 million in the prior year period. Fourth quarter net income from continuing operations attributable to NCR (non-GAAP) of $126 million decreased from $142 million in the prior year period.

Cash Flow
Fourth quarter cash provided by operating activities of $409 million decreased from cash provided by operating activities of $482 million in the prior year period. Free cash flow was $317 million in the fourth quarter of 2018 as compared to $400 million in the fourth quarter of 2017. The decreases were due to lower earnings in the fourth quarter of 2018 and higher inventory as a result of the hardware initiatives.

Full Year 2018 Operating Results

Full year 2018 revenue of $6.41 billion was down 2% from 2017. Foreign currency fluctuations did not have an impact on the full year revenue comparison.

Full year 2018 GAAP diluted EPS of $(0.72) was down from $1.01 in 2017. Full year 2018 diluted EPS (non-GAAP) of $2.62 was down from $3.20 in 2017.

Full year cash provided by operating activities was $572 million and full year free cash flow was $223 million.

Restructuring and Transformation Initiatives

Our previously announced restructuring and transformation initiatives continue to progress on track. In Services, our performance and profit improvement program continues to deliver revenue growth and margin expansion. In Hardware, we are continuing the move to a more variable cost structure by reducing the number of manufacturing plants and ramping up production with contract manufacturers.

In order to focus the organization on the strategic growth areas, in the fourth quarter of 2018, we announced a spend optimization program to drive cost savings through operational efficiencies to generate at least $100 million of savings in 2019. These initiatives will create efficiencies in our corporate functions, reduce spend in the non-strategic areas and limit discretionary spending. We incurred a pre-tax charge of $64 million during the fourth quarter of 2018 and expect to incur an additional $30 million in 2019 for a total pre-tax charge of approximately $94 million. The cash impact of this program was $19 million during the fourth quarter of 2018 and is expected to be an additional $40 million to $50 million in 2019 for a total cash impact of approximately $60 million to $70 million.

Full Year 2019 Outlook

In 2019, our revenue growth is expected to be approximately 1% to 2%. Our GAAP diluted earnings per share guidance is expected to be $1.91 to $2.01, and our non-GAAP diluted earnings per share guidance is expected to be $2.75 to $2.85. Non-GAAP diluted earnings per share guidance assumes an effective tax rate of 23% to 24% for 2019 compared to 19% in 2018. We expect net income attributable to NCR to be $290 million to $305 million and adjusted earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) to be $1.04 billion to $1.08 billion. Additionally, we expect cash flow from operations to be $705 million to $730 million and free cash flow to be $300 million to $350 million.

2018 Fourth Quarter Earnings Conference Call

A conference call is scheduled for today at 4:30 p.m. (EST) to discuss the fourth quarter 2018 results and guidance for full year 2019. Access to the conference call and accompanying slides, as well as a replay of the call, are available on NCR’s web site at http://investor.ncr.com/. Additionally, the live call can be accessed by dialing 888-820-9413 (United States/Canada Toll-free) or 786-460-7169 (International Toll) and entering the participant passcode 2136365.

More information on NCR’s Q4 2018 earnings, including additional financial information and analysis, is available on NCR’s Investor Relations website at http://investor.ncr.com/.