NCR Corp. (NCR) posted decent third quarter earnings per share of 46 cents per share, beating the Zacks Consensus Estimate of 33 cents. Subsequently, shares soared 1.80% in after-market trade.
Revenue
NCR Corp. reported third quarter 2010 revenue of $1.21 billion, an increase of 6.3% from $1.14 billion in the year-ago quarter. The quarter’s revenue was slightly above the Zacks Consensus Estimate of $1.2 billion. Revenue includes a negative impact of one percentage point from foreign currency translation.
Year-over-year revenue growth benefited from improving global economic conditions, fueled by overseas markets, such as Europe and the Asia-Pacific, as well as steady growth witnessed in ATM and retail businesses. The company is witnessing strong business trends in Europe despite the recent financial crisis in the region.
NCR Corp. reports results according to geographic segments. Accordingly, the Americas reported revenues of $535.0 million, an increase of 4.1% from the year-ago quarter. This increase was fueled by growth in the entertainment industry and increased sales to the retail and hospitality industries, rationalized to a certain extent by lower volumes of products and services agreements in the financial services industry. Foreign currency translation had a positive impact of 1%.
Revenues from the Europe, Middle East & Africa (EMEA) region were $429.0 million, an increase of 10.0% from the year-ago quarter. The increase in revenue was primarily driven by higher sales to customers in the financial services, retail and hospitality industries, partially offset by a 7% negative impact from currency translation.
The Asia-Pacific and Japan (APJ) region reported revenues of $243.0 million, an increase of 5.2% from the year-ago quarter, attributable to higher retail sales in the Northern region, and higher service revenues generated from the retail and financial services industries in the South. APJ revenues were positively impacted by a foreign currency translation of 6%.
Operating Results
Gross margin for the quarter was 20.4%, versus 19.7% in the year-ago quarter. Gross margin was positively impacted by cost-control initiatives and improved business mix.
Operating margin was 2.8%, compared to 2.6% in the year ago period. However, excluding the impact of pension expense and incremental costs directly related to the company’s headquarters’ relocation, adjusted operating margin came to 7.5%, up from 6.2% in the prior-year quarter.
Income from continuing operations for the third quarter was $78.0 million, or 48 cents per share, versus $15.0 million, or 9 cents reported in the year-ago quarter. Income from continuing operations for the recently concluded quarter includes $50.0 million of pension expense, $6.0 million of incremental costs incurred in connection with the relocation of the company’s global headquarters and $39 million ($0.24 per diluted share) of income tax benefit.
Excluding these items, non-GAAP income from continuing operations was 46 cents per diluted share compared to 37 cents in the year-ago quarter.
Balance Sheet & Cash Flow
NCR Corp. used up cash of $48.0 million from operating activities during the third quarter of 2010 compared to cash generated from operating activities of $59.0 million in the year-ago period. Capital expenditures were $55.0 million, up from $39.0 million in the year-ago period. NCR ended the quarter with $360.0 million in cash and cash equivalents, down from $447.0 million in the previous quarter.
Guidance
NCR Corp. still expects full-year 2010 revenue to be up 2.0% to 5.0% on a constant currency basis from 2009. Non-GAAP operating income (excluding the impact of pension expenses) is expected to be in the range of $325.0-$335.0 million, up from the previous guidance range of $310.0-$330.0 million.
This apart, the company narrowed its expectation of GAAP operating income to a range of $92.0 million to $102.0 million, from its previous expectation of $83.0 to $103.0 million. The GAAP EPS is expected to be in the range of 65 to 73 cents, up from 36 to 46 cents and non-GAAP EPS in the range of $1.42 to $1.50, up from the previous guidance range of $1.35-$1.45.
Non-GAAP EPS excludes the impact of pension expenses of roughly $215.0 million. The effective tax rate is expected to be approximately 27.0%.
For the fourth quarter, NCR Corp. expects pension expenses of roughly $59.0 million, non-GAAP operating income in the range of $104.0 and $114.0 million and a tax rate of between 25.0% and 30.0%.
Our Take
Revenues improved across regions, especially in EMEA, where sales were driven by customers across sectors. However, overall, sales improved due to recovery in macroeconomic conditions especially in retail, financial services and the hospitality industries. We believe that the upward revisions to the fiscal 2011 guidance indicate that NCR Corp. is well positioned to deliver solid momentum across its businesses.
We are encouraged by the company’s market leadership, successful acquisitions, new product introductions and continued customer wins. However, we believe that near-term visibility is limited, since it will be some time before the company’s robust business model and restructuring initiatives begin impacting the results.
We currently have a long-term Neutral recommendation and a short-term Sell rating (Zacks #4 Rank) on NCR Corp.
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