NCR - NCR Corporation Q1 Earnings: Looks Interesting Before The Spin-Off

2023-05-17 02:24:40 ET

Summary

• NCR Corporation is a $3.4-billion market cap global enterprise technology provider that offers software and services to businesses of all sizes. It plans to spin off in Q4 FY2023.
• Executives believe that each company will benefit from greater operational and financial flexibility after the spin-off. I concur.
• NCR is now greatly focused on deleveraging and preparing for the spin-off. It generates a lot of free cash flow while its stock trades at a discount.
• At an adjusted EBITDA of $1.5 billion for fiscal 2023 [in the midrange], NCR stock has an upside potential of 32.7%, based on my conservative calculations.
• I rate NCR stock a "Buy" and see it moving significantly higher by the end of the year.

The Company

NCR Corporation ( NCR ) is a $3.4-billion market cap global enterprise technology provider that offers software and services to businesses of all sizes. Headquartered in Atlanta, Georgia, the company specializes in running stores, restaurants, and self-directed banking operations for its customers, according to its latest 10-Q filing . NCR's software platform, running in the cloud, integrates with customer systems through microservices and APIs. The company provides a range of solutions, including digital banking, retail software, payment processing, networks, ATMs, self-checkout kiosks, POS terminals, and other self-service technologies. NCR also offers telecommunications and technology sector services. The company operates in 5 segments, depending on specific industries and solutions: Retail [29.2% of total sales], Hospitality [11.8%], Digital Banking [7.2%], Payments & Networks [17.1%], and Self-Service Banking [32.4%]. The bulk of the company's adjusted EBITDA is generated by Self-Service Banking [45.7%, post-corporate expenses], as of March 31, 2023.

In Q1 FY2023, NCR reported revenue of $1.9 billion, up 1% year-over-year (4% on a constant currency basis). Recurring revenue increased 4% year-over-year (7% on a constant currency basis) as NCR continued its successful transition from one-time, open-ended sales to multi-year, subscription-based revenue streams, based on the management's words during the earnings call . Adjusted EBITDA increased $31 million to $302 million, representing 11% year-over-year growth (19% on a constant currency basis). Adjusted EBITDA margin increased by 150 basis points to 16% driven mainly by the margin expansion in the Retail, Hospitality, and Digital Banking business segments:

On September 15, 2022, NCR announced its plan to separate into two independent publicly traded companies. The commerce company [RemainCo] will leverage NCR's software-led model to transform global retail, hospitality, and digital banking, driving innovation and operational efficiency. It will reinvest in the business to accelerate growth and recurring revenue. On the other hand, the ATM company [SpinCo] will focus on delivering ATM-as-a-Service to a large customer base, capitalizing on NCR's expertise in self-service banking and ATM networks. It aims to meet the global demand for ATM access and explore new transaction types, including digital currency solutions, to drive market growth. The ATM company also aims to shift towards a highly recurring revenue model for stable cash flow and capital returns.

The management team wants to complete the separation in Q4 FY2023 [dependent on clearing the SEC process]; however, the Board remains open to alternative scenarios that could deliver superior value to shareholders, including a whole or partial sale of NCR, according to the 10-Q filing's MD&A section.

Executives believe that each company will benefit from greater operational and financial flexibility after the spin-off to take advantage of respective and different opportunities.

NCR's management stated during the earnings call that the firm doesn't feel much pressure from the regional banking crisis, while its digital banking segment is performing well despite the challenging environment. They also expect continued growth and expansion in the ATM-as-a-Service segment throughout the year.

The management is now greatly focused on deleveraging and preparing for the spin-off. The CEO mentioned that they will be looking to take out two bonds if they trade at a favorable point and if they feel confident about the transaction. So the 26% YoY growth in the cash balance will likely be used for further debt reduction.

NCR's Valuation

NCR generated $208 million in free cash flow in Q1 FY2023 and guided for ~$50 million and $450 million [in the midrange] for the second quarter and full year 2023, respectively.

Regarding the range of cash flow guidance, the CEO highlighted that working capital was a significant variable. However, in the previous quarter, NCR did an excellent job, generating $150 million in working capital, surpassing the high end of the $500 million range. This strong performance in Q1 gives the management team confidence in achieving the high end of the cash flow range. And at the same time, Wall Street analysts are giving a relatively low forecast for non-GAAP EPS figures in FY2023 - down $0.04 from NCR management's words despite some positive revisions right after the earnings release:

The company remains a real cash cow in my opinion, and after the recent sell-off, which I believe was related to a) the collapse of regional banks and b) a cybersecurity risk event [reported April 17, 2023], NCR is now trading at an FCF yield of over 10%, which has historically been a buying opportunity:

If NCR indeed achieves a free cash flow of approximately $500 million by the end of FY2023, its FCF yield would be nearly 15%, which suggests a substantial underestimation, in my view. Other valuation metrics support my finding. At an adjusted EBITDA of $1.5 billion for fiscal 2023 [in the midrange], NCR's market cap, net of net debt, should be $4.45 billion, at an EV/EBITDA of only 6.5x, which is already quite conservative. This implies an upside potential of 32.7% from the closing price on May 15, 2023.

The Verdict

The way I see it, it seems to me that NCR's Payments & Networks and Self-Service Banking businesses, which together account for ~49.5% of total revenue, should really be separated from the other segments so as not to prevent them [and themselves] from increasing margins going forward. In fact, the "RemainCo" will remain well-diversified by industry and should not lose its financial customers, while "SpinCo" will operate within one industry but will diversify by service type. This should simplify the operational part of both companies and should, in theory, help unlock more value for shareholders. NCR stock is currently trading at a discount that is just over 30% by my relatively conservative estimate - this includes the risk of a repeat of the cybersecurity attack, a decline in financial industry activity, and a huge amount of debt on the balance sheet that is over 46% of total assets [net debt / total assets]. The listed risks cannot be ignored, but as we approach the fourth quarter of fiscal 2023, when the spin-off is planned, I think the discount is unlikely to widen. Therefore, I rate NCR stock a "Buy" and see it moving significantly higher by the end of the year.

Thank you for reading! Please, let me know what you think in the comment section below!

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