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Here's How NCR Surprised Investors

Dan Caplinger, The Motley Fool

NCR (NYSE: NCR) is a great example of how smart businesses find ways to adapt to changing conditions. Originally known as National Cash Register, NCR realized that the pace of innovation in retail and payment systems threatened to make its equipment obsolete. Therefore, the company not only embraced new technology related to the retail and payment space but also looked more broadly at financial services as a potential addressable market for its products and services.

Coming into Tuesday's first-quarter financial report, NCR investors didn't expect to see a whole lot of growth from the company. NCR's results were quite a bit better than most would have projected. Through a combination of efficiency-enhancing initiatives and seeking out the business segments with the most potential for growth down the road, NCR continues to make progress toward making its long-term strategic vision a reality.

Two kiosks with NCR logos on the screen, sitting on white pedestal and desk.

Image source: NCR.

NCR grows faster

NCR's first-quarter results were a nice turnaround from less impressive performance in the fourth quarter of 2017. Total revenue climbed 3%, to $1.52 billion, doing far better than the slight decline that most of those following the stock were expecting to see. Net income from continuing operations attributable to NCR fell about 2%, to $85 million, but after making some allowances for extraordinary factors, adjusted earnings of $0.56 per share was far higher than the consensus forecast for $0.45 per share on the bottom line.

Fundamentally, NCR is seeing more success from the part of its business that concentrates on more innovative solutions. The services segment saw the fastest top-line growth, boosting sales by 8% on strong demand for hardware implementation and maintenance services. Revenue from the software segment was up a more modest 2%, with the ongoing transition from licensed-based sales to recurring revenue from cloud sources holding back gains. Cloud revenue was higher by 9%, and professional services sales enjoyed an 8% bump.

Hardware remains an important part of NCR's business, but it was once again weaker. Overall segment revenue fell 3%, with the biggest downward pressure coming from the self-checkout arena. ATMs also lost ground, and a rise in demand for point-of-sale devices wasn't enough to offset the weakness elsewhere, despite the fact that the subsegment likely is to become the biggest part of NCR's hardware business within the next quarter or two if current trends continue.

COO Paul Langenbahn was pleased with how the company did. "The first quarter marked a solid start to the year," Langenbahn said, "with results that place us on track to achieve our full year financial and operating targets." The COO noted that strong cloud revenue increases were consistent with NCR's position as a leader in global software.

What's next for NCR?

New CEO Michael Hayford introduced himself to investors, noting his optimism for NCR's future. "We are well positioned to extend our leadership position by further evolving into a software-led technology company," Hayford said, "and I am excited to capture the growth opportunities that we have ahead of us."

Yet some would have hoped that NCR would boost its guidance in light of the first-quarter's results, but the company chose not to do so. NCR still believes that revenue will be flat to up 3% over the course of the year and adjusted earnings should finish 2018 in a range of between $3.30 and $3.45 per share. For the second quarter, NCR expects revenue changes of between minus 1% and plus 1% and adjusted earnings of $0.60 to $0.65 per share. Those figures are on the low end of what most investors have wanted to see looking forward.

Even with the positive surprise, NCR investors didn't seem satisfied, and the stock fell 2% in pre-market trading Wednesday following the Tuesday afternoon announcement. Yet in the long run, the extent of NCR's success in evolving beyond its historical roots has been surprising to some, and the company seems on track to keep up its performance in the years to come.

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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.