In the NCR Corp. Q2 earnings call on Tuesday afternoon, company chairman, president and CEO Bill Nuti got to say three little words that the big three ATM manufacturers haven't used much recently:
"Better than expected."
After an extended period of currency headwinds, shrinking hardware margins, sluggish global economic recovery and organizational belt tightening, NCR made good progress toward its turnaround goals in the quarter ended June 30, Nuti said.
"Overall, Q2 results came in better than expected on the back of higher revenue driven by software and services."
The results attest to a sound turnaround plan and act as shot in the arm to a company in the midst of a challenging shift from a hardware-driven mentality to a model focused on software and services.
Renewed confidence
Based on these and other indications, the company is reaffirming confidence in its full-year earnings per share guidance of $2.90–$3 per share, numbers that NCR leadership revised upward from $2.85–$2.95 share based on encouraging Q1 indicators. The company also raised its full-year revenue guidance at that time, from $6.25 billion–$6.35 billion to an expected $6.325 billion–$6.4 billion.
In Q2, NCR reported a 1 percent year-over-year increase in revenue that translated to a rise of 4 percent in constant currency. According to senior vice president and chief financial and accounting officer Bob Fishman, the company exceeded revenue expectations for the quarter by a healthy $40 million.
"This was driven by strong performance in software and services and continued momentum in our hardware business," he said. "Our recurring revenue now comprises 43 percent of our total revenue, up from 42 percent in Q2 2015."
The proverbial (and persistent) lump in the oatmeal was hardware margins, which drove down the overall figure 30 basis points to 28.7 percent, despite steadily growing margins in software and services.
Fishman said he expected an improvement on the hardware side in the second half of the year as new product introductions ramp up.
Specifically, Nuti said that the new NCR ATM product family, the Series 80, will ship 4,000 units in the second half of the year, nearly six times as many as the approximately 700 units shipped as of June 30. This, he said, will result in positive revenues for the category in the second half of the year.
Americas first
Regionally, the Americas recorded the best global performance during Q2, with a year-over-year increase in revenues of 5 percent (8 percent in constant currency).
In the Europe, Middle East and Africa region, revenues declined 2 percent from the previous year, which translated to a wash in constant currency.
Asia-Pacific, revenues were down 5 percent year over year, or negative 4 percent in constant currency. In the past year, all nondomestic ATM providers have suffered a downturn in the region, due largely to protectionist policies in China.
The country last year introduced regulations prohibiting vendors from selling directly into the market, which has sent manufacturers scrambling to invest in partnerships with domestic providers.
During the call, NCR Senior Vice President of Hospitality and Travel solutions Paul Langenbahn provided revenue for the company's solutions divisions which he will take charge of on Jan. 1 as Executive Vice President for Solution Management.
3 strategic offers
The company's focus on solution sets rather than market segments reflects its vision — and the growing reality — of integrated retail and financial systems.
As Langenbahn said during the call, "the market for omnichannel is here and beginning to coalesce around three strategic offers: omnichannel software; channel transformation; and digital enablement."
Langenbahn reviewed results for the NCR products that support its solution sets — software, services and hardware.
Software revenue rose 3 percent year over year, driven by growth in software maintenance and professional services revenue. Unattached software license revenue, a key metric, increased 9 percent year-over-year, Langenbahn said.
Services revenue was also up — 6 percent as reported and up 8 percent in constant currency. Gains were supported by strong growth in hardware maintenance, as well as implementation and managed services.
Hardware revenue was down 5 percent year over year as reported and flat in constant currency. Still, performance improved considerably over Q1, which saw a year-over-year decline of 17 percent. However, Langenbahn reiterated that hardware revenues in the third and fourth quarters would see a turnaround.
Brexit backlash?
Predictably, analysts on the earning call wanted to know what effects NCR expected to feel from the U.K.'s vote to exit the European Union.
Andy Heyman, NCR senior vice president and president of NCR financial services, said it was too early to tell how Brexit would affect business.
"I think time will tell how things settle out. ... For us at NCR, we look at this as change [being] a good thing. It's an efficiency play. It's going to cause a tremendous amount of focus on driving cost out of the system. ...
"And we also think that it will help our service business as we see financial institutions look to increase demand around outsourced models, which we think plays well into our strengths."
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