NCR Corporation (NCR) reported financial results today for the three months ended June 30, 2016. Second quarter 2016 revenue of $1.62 billion was up 1% year-over-year.
Excluding the impact of foreign currency and adjusted for the Interactive Printer Solutions (IPS) divestiture, second quarter 2016 revenue was up 4%. Second quarter 2016 GAAP diluted EPS of $0.49 was up from $(2.03) in the second quarter in 2015. The loss in the second quarter in 2015 included a $2.51 non-cash charge related to the settlement of the UK London pension plan. Second quarter 2016 diluted EPS (non-GAAP) of $0.72 was up from $0.66 in the second quarter in 2015. Second quarter 2016 diluted EPS included $0.05 of negative impact relating to unfavorable foreign currency.
“Improving execution across our entire organization drove results that continued our momentum in the second quarter and first half of the year,” said Chairman and CEO Bill Nuti. “Overall, Q2 results came in better than expected on the back of higher revenue driven by software and services. Performance in our Software segment was driven primarily by increased investment from our customers and in Omni-Channel Software, Channel Transformation and Digital Enablement offers. In Services, we continue to benefit from a mix shift to managed and implementation services while our Hardware business is growing share through the introduction of innovative new products. As we enter the back half of 2016, our backlog remains robust and all of our business metrics point to a successful year. Our goal is to continue focusing on improved execution, further drive our business transformation effort and enter 2017 with momentum.”
In this release, we use certain non-GAAP measures including presenting certain measures on a constant currency basis. These non-GAAP measures include free cash flow and others with the words "non-GAAP" or "adjusted" in their titles. These non-GAAP measures are listed, described and reconciled to their most directly comparable GAAP measures under the heading "Non-GAAP Financial Measures" later in this release. Additionally, effective January 1, 2016, NCR began management of its business on a solution basis, changing from the previous model of management on a line of business basis, which resulted in a corresponding change to our reportable segments. Prior results have been recast under the new segment model for comparison purposes.
Second Quarter 2016 Operating Results
Second quarter revenue of $1.62 billion was up 1% year-over-year. On an adjusted constant currency basis, second quarter revenue was up 4%.
- Software Revenue increased 3% to $452 million from $440 million. On a constant currency basis, second quarter Software revenue was up 3%.
- Services Revenue increased 6% to $574 million from $542 million. On a constant currency basis, second quarter Services revenue was up 8%.
- Hardware Revenue decreased 5% to $594 million from $622 million. On an adjusted constant currency basis, second quarter Hardware revenue was flat.
Second quarter gross margin of $446 million increased from $146 million, primarily due to the $303 million negative impact of the settlement of NCR's UK London pension plan in the second quarter of 2015.
Second quarter gross margin (non-GAAP) was $465 million, or flat year-over-year, with an increase in Software and Services offset by a decrease in Hardware.
Second quarter operating expenses of $283 million decreased from $412 million, primarily due to the $124 million negative impact of the settlement of NCR's UK London pension plan in the second quarter of 2015.
Second quarter operating expenses (non-GAAP) of $258 million decreased from $265 million due to continued focus on expense management.
Second quarter operating income of $163 million increased from an operating loss of $266 million, primarily due to the $427 million negative impact of the settlement of NCR's UK London pension plan in the second quarter of 2015.
Second quarter operating income (non-GAAP) of $207 million increased from $200 million. Second quarter operating income was negatively impacted by an additional $2 million of ongoing pension expense.
Second quarter other (expense) of $58 million increased from $45 million. Second quarter other (expense) (non-GAAP) of $53 million increased from $45 million. Other (expense) increased primarily due to the unfavorable impact of foreign exchange.
Income Tax Expense
Second quarter income tax expense of $31 million decreased from $32 million. Second quarter income tax expense (non-GAAP) of $45 million increased from $41 million.
Net Income from Continuing Operations Attributable to NCR
Second quarter net income from continuing operations attributable to NCR of $76 million increased from $(344) million, primarily due to the $427 million negative impact of the settlement of NCR's UK London pension plan in the second quarter of 2015.
Second quarter net income from continuing operations attributable to NCR (non-GAAP) of $111 million decreased from $113 million.
Second quarter cash provided by operating activities of $121 million decreased from $167 million. Free cash flow was $55 million in the second quarter of 2016 as compared to free cash flow of $95 million in the second quarter of 2015. The decreases were due to higher working capital needs as we plan for increased revenues later in the year.
Share Repurchase Program
NCR repurchased approximately 1.4 million shares of its common stock for approximately $37 million during the second quarter under its previously disclosed authorized share repurchase programs.
Additionally, on July 20, 2016, the Company’s board of directors authorized a new $300 million share repurchase program to succeed its 1999 program. The timing and amount of any repurchases will depend upon market conditions. Repurchases may be made from time to time in the open market, private transactions, accelerated stock repurchase programs, issuer self-tenders or otherwise, and may be discontinued at any time. The board also authorized the implementation of a separate plan for systematic stock repurchases to offset the dilutive impacts of the employee stock repurchase plan, equity awards and in-kind dividends on its preferred stock, to replace the 2000 program; the $82 million remaining in that program will be made available in the new program.
We are increasing our 2016 revenue guidance and reaffirming our earnings and cash flow guidance. The expected negative impact of foreign currency on revenue has lessened from $75 million to $70 million, but the expected negative impact on earnings per share has increased from $0.05 to $0.08. We now expect revenue to be $6.325 billion to $6.400 billion (previous guidance of $6.25 billion to $6.35 billion). We continue to expect GAAP diluted earnings per share to be $2.25 to $2.35 and non-GAAP diluted earnings per share to be $2.90 to $3.00. Additionally, we continue to expect net cash provided by operating activities to be $675 million to $725 million and free cash flow to be $425 million to $475 million. The 2016 guidance includes the impact of the IPS divestiture, expected foreign currency headwinds, and ongoing pension expense.
For the third quarter of 2016, revenue is expected to be $1.62 billion to $1.64 billion, GAAP diluted earnings per share is expected to be $0.57 to $0.62, and non-GAAP diluted earnings per share is expected to be $0.77 to $0.82. The third quarter 2016 guidance includes an expected foreign currency negative impact of $12 million for revenue and $0.01 for earnings per share.