NCR Q3 earnings report: Welcome news for Wall Street

With a freshly minted C-team at the helm, NCR Corp. is finding "significant cost reduction opportunities," according to the company's recently installed president and CEO, Michael Hayford, who addressed market analysts during a Q3 earnings call late Tuesday afternoon.


This was welcome news for Wall Street.


NCR shares on the New York Stock Exchange hiked up from $23.83 at the close Tuesday to $27.82 shortly after the open Wednesday, and settled at $26.84 by the end of the day.


A previously forecast decline in year-over-year revenues for the quarter ending Sept. 30 was factored into the NCR share price long before Tuesday's close. No one was surprised by the drop of 7 percent from $1.66 billion in 2017 to $1.55 billion in 2018.


But analysts might have been pleasantly surprised by other news from Hayford, who joined the company in April:


"During the quarter, we made notable progress realigning our organization and addressing critical execution areas. We placed strategic emphasis on our supply chain and manufacturing operations, and our success to date positions us to achieve a significant ramp-up in ATM production during the fourth quarter."


"A significant ramp-up" is a phrase the ATM manufacturing industry has not heard in recent years.


Also during the quarter, NCR recurring revenues increased 2 percent, while cloud revenues were up 6 percent, Hayford said. Gross margin in services reached 26.8 percent during the quarter, an improvement of 70 basis points over Q3 2017.


And as for the aforementioned "significant cost savings," Hayford said that NCR intends to drive operational efficiencies in a targeted plan that is expected to net at least $100 million in new efficiencies next year, with some of that coming as soon as Q4 this year. Better yet.


NCR Chief Operating Officer Owen Sullivan, who joined the company in July, walked analysts through the company's plan to accelerate its transformation to a software- and services-led provider.


As announced in the Q2 earnings call, one aspect of this plan is third-party partnerships on the manufacturing and distribution side of the business.


"The benefit to be received with these third-party partners is the ability to shift from a largely fixed cost structure to a more variable structure, thus mitigating our P&L exposure to hardware demand cycles," Sullivan said.


Supply chain issues with key parts of the company's new 80 Series ATMs have been "largely resolved," Sullivan said. "We are significantly ramping production to meet the stronger-than-anticipated demand our 80 Series has generated and are working through our increased backlog."


In Q3, the company saw an increase of 10 percent in ATM orders and an increase of 30 percent in ATM backlog year over year. NCR expects the backlog to continue to grow in Q4, driven at least in part by NCR customers' preparations for migration to the Windows 10 operating system, as Microsoft support for the current Windows 7 OS sunsets in January of 2020.


NCR Executive Vice President and Chief Financial Operator Andre Fernandez, who joined the company in late August, said that the company is beginning to address some of the "cost creep" in processes as NCR becomes a more focused operation.


Fernandez promised greater clarity in the company's future reporting on reorganization efforts in the hardware business — particularly as NCR sharpens its focus on finding operating cost efficiencies in that segment.


"Returning hardware to profitability is a primary objective of the company," he said. "The initiatives we are taking to redesign our manufacturing network and improve supply chain logistics will improve profitability over time."


Hayford wrapped up his prepared remarks with comments about NCR's revived focus on mergers and acquisitions, including the planned acquisition of JetPay, which will allow NCR to monetize transactions conducted through its hardware and software, and its completed acquisition of Zipscene, which gives NCR access to transaction-related behavioral analytics, enabling data monetization.


These strategic, targeted acquisitions, he said, "will expand markets for NCR and our solutions, improve our software and services revenue mix, and also help drive higher recurring revenues."


"I'm pleased with the success we've made to-date," he said. "However, much work remains to be done."


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