NCR Corporation reported financial results for the three and twelve months ended December 31, 2017. Fourth quarter and full year highlights include:

• Revenue of $1.78 billion, at the high end of previously provided guidance

• Software revenue up 1% driven by cloud revenue growth of 6%; Full year net ACV of $67 million, up 46% from $46 million in the prior year

• GAAP diluted EPS of $(0.38), includes $130 million non-cash charge related to US tax reform; Non-GAAP diluted EPS of $0.92, at the high end of previously provided guidance

• Services gross margin expansion of 280 basis points

• Full year cash flow from operations of $755 million, and free cash flow of $453 million, both within previously provided guidance

• $300 million share repurchase planned for 2018 with $125 million completed to date

• 2018 guidance announced

“Our fourth quarter results were consistent with our guidance and reflect continued momentum in strategic areas such as cloud and Services margin expansion,” said Chairman and CEO Bill Nuti. “While ATM revenue was lower than expected in 2017, growth in unattached software, cloud, and recurring revenues, allowed us to build a stronger foundation going into 2018. NCR continues to position itself as one of the world’s largest cloud companies facilitating omni-channel commerce and digital transformation, and our SaaS solutions are gaining traction as evidenced by consistent double digit net ACV growth. We enter 2018 excited about the year ahead and confident in our company strategy. As such, we are also announcing our repurchase of up to $300 million of shares in 2018.”

“Going forward, we are focused on improving execution and we will leverage our growing strength in cloud, combined with our end-to-end smart edge hardware and services solution assets to deliver unmatched value in the markets we serve, as businesses of every size undergo Omni-Channel, digital enablement, and channel transformation journeys,” said President and COO Mark Benjamin. “As we do this in 2018, we will also prioritize driving sustainable margin improvement in our hardware and services segments via specific programs targeted at driving higher productivity, process efficiency, and, using technology as an enabler. As we finalize these restructuring programs, we plan to achieve run-rate savings of approximately $150 million per year by 2020.”

In this release, we use certain performance metrics as well as certain non-GAAP measures, including presenting certain measures on a constant currency and adjusted constant currency basis. The performance metrics include net annual contract value (or Net ACV) and the non-GAAP measures include free cash flow and others with the words “non-GAAP,” “adjusted,” or “constant currency” in their titles. The performance metrics are listed and described, and the non-GAAP measures are listed, described, and reconciled to their most directly comparable GAAP measures, under the heading “Performance Metrics and Non-GAAP Financial Measures” later in this release.

Fourth Quarter 2017 Operating Results

Revenue
Fourth quarter revenue of $1.78 billion was down 1% year-over-year. Foreign currency fluctuations had a favorable impact on the revenue comparison of 2%.

Software revenue was up 1% primarily due to cloud revenue growth of 6% and professional services revenue growth of 3%. This was partially offset by lower software license revenue of 8% due to lower software license revenue associated with lower hardware sales.

Services revenue was up 4% driven by hardware maintenance and implementation services growth as a result of continued momentum in channel transformation trends.

Hardware revenue was down 7% due to a 21% decline in ATM revenue and a 1% decline in SCO revenue, partially offset by a 23% increase in POS revenue. ATM revenue reflected the lower backlog starting the quarter, but was better than expected. SCO revenue was roughly flat, as expected, but grew 66% sequentially from the third quarter of 2017. POS revenue continued its momentum and was up significantly in the quarter due to product replacements and new product introductions.

Gross Margin
Fourth quarter gross margin of $515 million increased 8% from $479 million. Gross margin rate was 28.9%, up from 26.6%. During the fourth quarter of 2017, our annual pension mark-to-market adjustment was $1 million of benefit compared to $38 million of cost in the prior year.

Fourth quarter gross margin (non-GAAP) of $527 million decreased 1% from $530 million. Gross margin rate (Non-GAAP) was 29.6%, up from 29.4%. The increase in gross margin rate (non-GAAP) was primarily due to continued focus on productivity improvements in our Services segment, partially offset by lower software license revenue, decreased ATM volumes and new product introductions.

Expenses
Fourth quarter operating expenses of $334 million increased from $333 million. During the fourth quarter of 2017, our annual pension mark-to-market adjustment was $29 million of expense compared to $47 million of expense in the prior year.

Fourth quarter operating expenses (non-GAAP) of $284 million increased from $266 million. The increases in expenses were due to increased sales investment as we expand our strategic offers and go-to-market strategy.

Operating Income
Fourth quarter operating income of $181 million increased 24% from $146 million. Operating margin rate was 10.2%, up from 8.1%. During the fourth quarter of 2017, we recorded our annual pension mark-to-market adjustment which was $28 million compared to $85 million in the prior year.

Fourth quarter operating income (non-GAAP) of $243 million decreased 8% from $264 million. Operating margin rate (non-GAAP) was 13.6%, down from 14.7%. Operating margin rate (non-GAAP) reflected lower software license revenue, decreased ATM volumes and increased sales investment partially offset by continued services margin expansion. For the full year, operating margin rate (non-GAAP) increased and is expected to expand in 2018.

Other (Expense)
Fourth quarter other (expense) of $50 million decreased 12% from $57 million. Fourth quarter other (expense) (non-GAAP) of $50 million decreased 11% from $56 million. These decreases were primarily due to higher foreign currency losses in the fourth quarter of 2016.

Income Tax Expense and Impact of US Tax Reform
Fourth quarter income tax expense of $164 million increased from $17 million. Income tax expense includes a $130 million non-cash charge related to the impact of the U.S. Tax Cuts and Jobs Act enacted in December 2017. The non-cash charge represents a provisional amount and NCR’s current best estimate, which may be refined and adjusted over the course of 2018.

Fourth quarter income tax expense (non-GAAP) of $49 million increased from $36 million in the prior year. Income tax expense (non-GAAP) increased due to more favorable discrete benefits in the prior year period.

Net Income from Continuing Operations Attributable to NCR
Fourth quarter net loss from continuing operations attributable to NCR was $35 million decreased from net income from continuing operations attributable to NCR of $68 million in the prior year. Fourth quarter net income from continuing operations attributable to NCR (non-GAAP) of $142 million decreased from $168 million.

Cash Flow
Fourth quarter cash provided by operating activities of $484 million decreased from $525 million. Free cash flow was $402 million in the fourth quarter of 2017 as compared to $449 million in the fourth quarter of 2016. Fourth quarter cash flow was strong, but was lower than the prior year due to a $100 million working capital improvement in the fourth quarter of 2016. Full year cash provided by operating activities was $755 million, and full year free cash flow was $453 million, both within previously provided guidance.

Share Repurchase Program

During 2018, NCR plans to repurchase up to $300 million of its common stock under its previously authorized share repurchase programs, and has repurchased shares of its common stock for approximately $125 million through the date of this release.

Full Year 2018 Outlook

In 2018, our revenue growth is expected to be 0% to 3%. Our GAAP diluted earnings per share is expected to be $2.08 to $2.48, and our non-GAAP diluted earnings per share is expected to be $3.30 to $3.45. Our non-GAAP diluted earnings per share guidance assumes an effective tax rate of 24% for 2018 compared to 25% in 2017. The decrease is due to the expected impact of U.S. tax reform. Free cash flow is expected to be approximately 90% of non-GAAP net income.

To accelerate our transformation journey, we are evaluating programs to prioritize driving sustainable margin improvement in our hardware and services segments targeted at driving higher productivity, process efficiency, and, using technology as an enabler. As we finalize these programs, NCR expects to incur a related pre-tax charge over the next two years in the range of approximately $200 million to $250 million, with $100 million to $150 million in 2018, that will be included in income from operations. The cash impact of the restructuring plan is expected to be approximately $150 million to $200 million over the next two years, with $100 million in 2018. We plan to achieve run-rate savings of approximately $150 million per year by 2020. The estimate of the pre-tax charges and cash impact has been included in our 2018 GAAP diluted earnings per share and free cash flow guidance.

Q1 2018 Outlook

For the first quarter of 2018, revenue growth is expected to be down 1% to up 2%, GAAP diluted earnings per share is expected to be $0.16 to $0.29, and non-GAAP diluted earnings per share is expected to be $0.41 to $0.47.

NCR will provide additional information regarding its first quarter and full year 2018 guidance during its fourth quarter earnings conference call and webcast.