ATM Order Weakness Hits NCR Hard

NCR (NYSE: NCR) has done a good job of evolving with changing times, going beyond its initial focus on checkout-line hardware to provide a wide range of payment-related services with numerous applications. By doing so, NCR hopes to cash in on the growing number of consumer transactions that involve payment intermediaries, but staying on the cutting edge requires continual effort to find new innovations and keep up with competitors in the popular space.

Coming into Thursday's third-quarter financial report, NCR investors wanted to see at least minimal growth in the company's top and bottom lines. The company was only able to deliver on part of that promise, and even with better earnings results than many had expected, sluggishness with order activity could point to more difficulties in the future. Let's look more closely at NCR and how it did over the past few months.

NCR gets robbed at the cash machine

NCR's third-quarter results continued a string of tough financial releases for the company. Total sales fell by about 1%, to $1.66 billion, missing out on the fractional top-line gain that most of those following the stock had expected to see. Net income climbed 15%, to $106 million, and after accounting for various extraordinary items, adjusted earnings of $0.93 per share topped the consensus forecast for $0.90.

NCR's numbers showed the ongoing battle between the older hardware side of the business and the newer software and services divisions. On the positive side, software revenue climbed 2% from year-ago levels, with gains in cloud-related revenue and professional services helping to offset an ongoing planned decline in outright licensing fees for software.

The company's services offerings also did well, posting 3% sales growth. Yet on the hardware side, revenue was down 6%, and that was enough to pull NCR's entire top line down for the quarter.

Within hardware, there was considerable disparity in performance. Sales of point-of-sale devices were actually up by nearly a fifth, as retailers responded to the increasing demands of their customer bases to adopt advanced payment methods. Yet the ATM side of the business suffered revenue declines of a sixth, and the smaller self-checkout unit saw even bigger percentage drops compared to year-earlier figures.

CEO Bill Nuti explained more about the ATM challenges that the company faces. "ATM orders continue to be negatively impacted by large customer delays in spending in North America," Nuti said, "[along with] weakness in India, the Middle East and Africa, and the upcoming Windows 10 conversion." Yet the CEO also pointed to strong gains in annual contract values due to efforts in digital banking and cloud-based hospitality offerings.

What's ahead for NCR?

NCR isn't worried about the momentary lapse. As Nuti explained it, "We expect that the ATM market will recover in the medium-term and that may ultimately improve our revenue growth, but our strategic focus remains on driving software, cloud, and recurring revenue growth as priority number one."

That optimistic long-term assessment didn't stop NCR from cutting its full-year guidance on several fronts. The payment specialist now believes that revenue will be between $6.475 billion and $6.525 billion, down by roughly $155 million to $225 million from its previous guidance due to the ATM shortfall. Adjusted earnings of $3.10 to $3.20 per share is a $0.22 per-share hit compared to what NCR predicted three months ago, and the company reduced its cash-flow guidance, as well.

Fourth-quarter estimates were also disappointing, with NCR expecting adjusted earnings of $0.83 to $0.93 per share on sales of $1.74 billion to $1.79 billion. Both of those ranges were well below what those following the stock were already expecting.

NCR investors weren't happy with the company's news, and the stock posted a steep 11% fall in after-hours trading following the announcement. NCR needs to reverse this troubling trend of poor performance by executing more efficiently on its best opportunities. Otherwise, competing systems will get a leg up on NCR and make it even more difficult to build positive momentum in the future.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends NCR. The Motley Fool has a disclosure policy.