Breaking Down NCR Corporation (NCR) Financial Health: Key Insights for Investors

Understanding NCR Corporation (NCR) Revenue Streams

Understanding NCR Corporation’s Revenue Streams

The revenue of NCR Corporation is comprised of two primary sources: product revenue and service revenue. For the nine months ended September 30, 2023, product revenue totaled $1,657 million, while service revenue accounted for $4,237 million. This indicates that service revenue represents approximately 71.9% of total revenue, highlighting the company's strong focus on recurring service arrangements.

Year-over-Year Revenue Growth Rate

In terms of year-over-year growth, total revenue for the nine months ended September 30, 2023, increased by 1% compared to the same period in 2022. Specifically, product revenue saw a decline of 4%, while service revenue increased by 3%.

Contribution of Different Business Segments to Overall Revenue

Breaking down the contributions of different business segments, the following data is noted for the nine months ended September 30, 2023:

• Retail: Revenue of $1,696 million, representing 28.8% of total revenue.
• Hospitality: Revenue of $696 million, contributing 11.8%.
• Digital Banking: Revenue of $423 million, making up 7.2%.
• Payments & Network: Revenue of $1,013 million, accounting for 17.2%.
• Self-Service Banking: Revenue of $1,940 million, which is 32.9%.

Analysis of Significant Changes in Revenue Streams

A notable change in revenue streams is the shift towards recurring revenue models, which has become increasingly important. For the nine months ended September 30, 2023, recurring revenue represented 64.4% of total revenue, up from 62.0% in the previous year. This growth in recurring revenue is attributed to increases in banking services, payment processing, and software maintenance. However, product revenue is on a decline, primarily due to reduced sales in ATM, SCO, and POS hardware.

A Deep Dive into NCR Corporation (NCR) Profitability

A Deep Dive into NCR Corporation's Profitability

Gross Profit Margin:

For the nine months ended September 30, 2023, the gross profit margin was 27.7%, compared to 23.5% for the same period in 2022. This increase is attributed to a rise in service revenue and improved cost management.

Operating Profit Margin:

Income from operations for the nine months ended September 30, 2023, was $500 million, resulting in an operating profit margin of 8.5%, compared to 5.5% in 2022, demonstrating improved operational efficiency.

Net Profit Margin:

The net income attributable to the company for the nine months ended September 30, 2023, was ($95 million), reflecting a net profit margin of (1.6%), down from 1.2% in 2022.

Trends in Profitability Over Time

Over the past year, the company has shown a significant improvement in gross and operating profit margins while net profit margins have been negatively impacted by operational challenges.

Comparison of Profitability Ratios with Industry Averages

As of 2024, the industry average gross margin is approximately 25%, while the average operating margin stands at 7%. The company is outperforming the industry in both metrics, highlighting its effective cost management strategies.

Analysis of Operational Efficiency

The company's selling, general, and administrative expenses for the nine months ended September 30, 2023, were $956 million, representing 16.2% of total revenue, an increase from 15.2% in 2022. This increase was primarily due to higher employee-related costs and restructuring activities.

The increase in gross margin percentage, which rose to 27.7% in 2023 from 23.5% in 2022, reflects effective cost mitigation actions and a strategic shift towards higher-margin services.

Debt vs. Equity: How NCR Corporation (NCR) Finances Its Growth

Debt vs. Equity: How NCR Corporation Finances Its Growth

Overview of the Company's Debt Levels

As of September 30, 2023, NCR Corporation reported a total debt of $7.65 billion, excluding deferred fees. This debt is comprised of both long-term and short-term obligations. The breakdown includes:

The company also had cash and cash equivalents totaling $675 million as of the same date.

Debt-to-Equity Ratio and Comparison to Industry Standards

NCR's debt-to-equity ratio stands at approximately 4.13 as of September 30, 2023, calculated as follows:

Debt-to-Equity Ratio = Total Debt / Total Equity
Total Equity = Total Assets - Total Liabilities = $1,647 million (Total Assets of $13,223 million minus Total Liabilities of $11,576 million).

This ratio significantly exceeds the industry average of around 1.5, indicating a higher reliance on debt financing compared to peers.

Recent Debt Issuances, Credit Ratings, or Refinancing Activity

In October 2023, NCR redeemed $1 billion of its senior unsecured notes, which included $500 million of 5.750% notes due in 2027 and $500 million of 6.125% notes due in 2029, at a redemption premium. As of the last report, the company maintained a credit rating of B3 from Moody's, indicating a higher risk profile.

How the Company Balances Between Debt Financing and Equity Funding

NCR has historically balanced its capital structure through a combination of debt and equity financing. The company uses debt to fund growth initiatives and operational needs while managing its interest expenses through refinancing efforts. For instance, the company reported $259 million in interest expenses for the nine months ending September 30, 2023. Additionally, NCR's equity financing includes $11 million paid in dividends on its Series A convertible preferred stock.

Overall, NCR Corporation's strategy involves leveraging its significant debt capacity while maintaining sufficient liquidity to meet its obligations and support ongoing operations.

Assessing NCR Corporation (NCR) Liquidity

Assessing NCR Corporation's Liquidity

Current and Quick Ratios

The current ratio of NCR Corporation as of September 30, 2023, is 1.16, calculated by dividing current assets of $2.625 billion by current liabilities of $2.263 billion. The quick ratio, which excludes inventory from current assets, is approximately 0.85, given that the quick assets are $1.494 billion against the same current liabilities.

Analysis of Working Capital Trends

As of September 30, 2023, NCR Corporation reported working capital of $362 million, a decrease from $400 million at the end of 2022. The decline in working capital is attributed to increased current liabilities primarily due to short-term debt obligations.

Cash Flow Statements Overview

The cash flow statement for the nine months ended September 30, 2023, reveals the following:

Cash Flow Trends

The significant increase in net cash provided by operating activities, up by $483 million compared to the prior year, reflects improved operational efficiency and favorable changes in working capital. However, the cash used in investing activities slightly increased, indicating ongoing capital expenditures.

Potential Liquidity Concerns or Strengths

As of September 30, 2023, NCR Corporation's cash and cash equivalents totaled $675 million, while total debt reached $7.65 billion. The company has a borrowing capacity under the Revolving Credit Facility of approximately $833 million. Despite the high debt level, the liquidity position appears strong with sufficient cash reserves to meet short-term obligations, although ongoing monitoring of cash flows is essential due to the substantial debt burden.

Is NCR Corporation (NCR) Overvalued or Undervalued?

Valuation Analysis

To determine whether the company is overvalued or undervalued, we will analyze key financial ratios, stock price trends, dividend yield, and analyst consensus.

Price-to-Earnings (P/E) Ratio

The current P/E ratio is − (negative due to net losses), reflecting the company's challenges in profitability. In comparison, the industry average P/E ratio is approximately 18.5.

Price-to-Book (P/B) Ratio

The current P/B ratio stands at 0.91, which is below the industry average of 1.5. This indicates that the stock is trading at a discount compared to its book value.

Enterprise Value-to-EBITDA (EV/EBITDA) Ratio

The EV/EBITDA ratio is currently at 8.5, compared to the industry average of 10.0. This suggests that the company is relatively undervalued based on its earnings before interest, taxes, depreciation, and amortization.

Stock Price Trends

Over the last 12 months, the stock price has fluctuated as follows:

Dividend Yield and Payout Ratios

The company does not currently pay dividends, resulting in a dividend yield of 0%. The payout ratio is also 0%, as there are no dividends declared.

Analyst Consensus on Stock Valuation

Current analyst ratings indicate a consensus of:

• Buy: 2 analysts
• Hold: 5 analysts
• Sell: 1 analyst

The average target price set by analysts is $22.00, reflecting potential upside based on the current trading price.

Key Risks Facing NCR Corporation (NCR)

Key Risks Facing NCR Corporation

Overview of Internal and External Risks

The financial health of NCR Corporation is influenced by various internal and external risk factors. These include:

• Industry Competition: The company operates in a highly competitive environment, facing challenges from both established players and new entrants. This competition can lead to pricing pressures and reduced market share.
• Regulatory Changes: Changes in regulations affecting the financial services industry can impact operations and compliance costs. For instance, ongoing adjustments in data security regulations can necessitate additional investments in compliance measures.
• Market Conditions: Economic fluctuations, including inflation and changes in consumer spending, can adversely affect the company's revenue streams, particularly in its hardware and software divisions.

Discussion of Operational, Financial, or Strategic Risks

Recent earnings reports have highlighted several key operational and financial risks:

• Interest Rate Risk: Approximately 44% of NCR's borrowings were on a fixed rate basis as of September 30, 2023. A hypothetical 100 basis point increase in variable interest rates could increase pre-tax interest expense by approximately $19 million .
• Credit Risk: Exposure to credit risk on accounts receivable remains significant, especially given that the business often involves large transactions without requiring collateral. A prolonged downturn in the economy could impair customers' ability to meet their obligations .
• Cybersecurity Threats: The company has faced challenges related to cybersecurity, including a significant ransomware incident that has necessitated ongoing recovery costs, amounting to approximately $12 million for the three months ended September 30, 2023 .

Mitigation Strategies

NCR Corporation has implemented several strategies to mitigate these risks:

• Cost Optimization Initiatives: The company has engaged in various cost optimization initiatives to enhance operational efficiency and mitigate the impact of rising costs associated with employee benefits and interest expenses .
• Diversified Revenue Streams: Focusing on recurring revenue streams, which accounted for 64.7% of total revenue for the three months ended September 30, 2023, helps stabilize cash flows .
• Liquidity Management: As of September 30, 2023, NCR reported cash and cash equivalents of $675 million, which positions the company to meet its short-term obligations despite ongoing uncertainties .

Future Growth Prospects for NCR Corporation (NCR)

Growth Opportunities

Future growth prospects for NCR Corporation are supported by a variety of key growth drivers including product innovations, market expansions, and strategic acquisitions.

Key Growth Drivers

• Product Innovations: The company has invested in increasing its software and service offerings, including cloud services that saw a growth in revenue streams. For instance, self-service banking revenue increased by 4% for the three months ended September 30, 2023, primarily due to recurring ATM-as-a-Service arrangements.
• Market Expansions: NCR has focused on expanding its presence in the digital banking and payments sectors, with digital banking revenue increasing by 7% for the three months ended September 30, 2023, compared to the same period in the previous year.
• Strategic Acquisitions: The acquisition of LibertyX has allowed NCR to tap into the growing Bitcoin-related revenue, contributing to its overall product revenue.

Future Revenue Growth Projections and Earnings Estimates

For the nine months ended September 30, 2023, total revenue was $5.894 billion, a 1% increase compared to $5.835 billion for the same period in 2022. The company anticipates continued growth in recurring revenue, which accounts for 64.4% of total revenue for the nine months ended September 30, 2023, up from 62.0% in the previous year.

Strategic Initiatives and Partnerships

NCR has engaged in several strategic initiatives aimed at enhancing its market position. The company has a focus on partnerships that enhance its service offerings, including collaborations in the cloud and payment processing sectors. This is reflected in the increase in service revenue, which rose 3% for the nine months ended September 30, 2023, reaching $4.237 billion.

Competitive Advantages

NCR's competitive advantages include a strong focus on recurring revenue models and a diverse product portfolio that encompasses both hardware and software solutions. The company reported a total gross margin of 31.1% for the three months ended September 30, 2023, up from 24.9% in the previous year, indicating improved profitability driven by a favorable revenue mix.

Overall, NCR's strategic focus on innovation and market expansion, coupled with its ability to generate recurring revenue, positions it well for future growth in the evolving financial technology landscape.