NCR Corporation reported financial results today for the three months ended September 30, 2018. Third quarter and other recent highlights include:

• Revenue of $1.55 billion, down 7% as reported

• Software revenue up 1% driven by cloud revenue growth of 6%

• GAAP diluted EPS of $0.57; Non-GAAP diluted EPS of $0.58

• Services revenue up 1% and gross margin expansion of 70 basis points

• Announced planned acquisition of JetPay to expand our offerings to include end-to-end payment processing

• Announcing program to achieve at least $100 million cost savings in 2019

“Our third quarter performance was in-line with our expectations and we continue working to build a stronger and more efficient NCR,” said Michael Hayford, President and Chief Executive Officer. “During the quarter, we made notable progress realigning our organization and addressing critical execution areas. We placed strategic emphasis on our supply chain and manufacturing operations, and our success to date positions us to achieve a significant ramp in ATM production during the fourth quarter.”

Mr. Hayford continued, “Our evaluation of our business has uncovered significant cost reduction opportunities in areas targeting spend optimization to improve margins. Moving forward, we will drive operational efficiencies through a targeted plan that we expect will result in at least $100 million cost savings in 2019. At the same time, we are enabling higher quality and faster deployment of solutions across our markets while remaining committed to becoming a leading software and services-led enterprise provider of vertical industry solutions. This is demonstrated through our pending acquisition of JetPay, which will enable NCR to fully integrate NCR Payments with our point of sale and capture this recurring revenue stream. Our leadership team is confident in our strategy and committed to continuing to take the steps necessary to accelerate our long-term growth potential and deliver increasing returns to our stockholders.”

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 "constant currency" 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.

Third Quarter 2018 Operating Results

Revenue

Third quarter revenue of $1.55 billion was down 7% year-over-year. Foreign currency fluctuations had an unfavorable impact on the revenue comparison of 2%.

The following table shows the revenue by segment for the third quarter:

Software revenue was up 2% on a constant currency basis driven by cloud revenue growth of 6%.

Services revenue was up 4% on a constant currency basis driven by hardware maintenance and implementation services growth, as well as continued momentum in managed service offerings.

Hardware revenue was down 20% on a constant currency basis. ATM revenue declined 10% on a constant currency basis primarily due to continued supply constraints, which improved throughout the quarter. ATM orders increased for the third consecutive quarter, which is expected to drive improved revenue performance in the fourth quarter. SCO revenue decreased 24% on a constant currency basis due to the timing of customer roll-outs. POS revenue decreased 28% on a constant currency basis in the quarter compared to growth of 18% on a constant currency basis in the prior year, which benefited from several large customer roll-outs.

Gross Margin

Third quarter gross margin of $410 million was down from $472 million in the prior year period. Gross margin rate was 26.5%, down from 28.4%. Third quarter gross margin (non-GAAP) of $425 million was down from $485 million in the prior year period. Gross margin rate (non-GAAP) was 27.4%, down from 29.2%. The decrease in gross margin, on a GAAP and non-GAAP basis, was primarily due to increased costs in the Hardware segment associated with alleviating supply chain constraints.

Expenses

Third quarter operating expenses of $285 million increased from $273 million in the prior year period. Third quarter operating expenses (non-GAAP) of $264 million increased from $251 million. The increase in operating expenses, on a GAAP and non-GAAP basis, was due to continued investment in the business to improve execution.

Operating Income

Third quarter income from operations of $125 million decreased from $199 million in the prior year period. Third quarter operating income (non-GAAP) of $161 million decreased from $234 million. Income from operations and operating income (non-GAAP) reflected lower profit in the Hardware segment and continued investment in the business.

Other (Expense)

Third quarter other (expense) and other (expense) (non-GAAP) of $53 million increased from $49 million compared to the prior year period partially due to higher interest rates and higher foreign currency losses.

Income Tax Expense (Benefit)

Third quarter income tax benefit of $15 million decreased from income tax expense of $31 million in the prior year period. The third quarter effective income tax rate was (21)% compared to 21% in the prior year period. Income tax decreased primarily due to lower income before taxes in the quarter, the impact of U.S. tax reform and tax restructuring transactions.

Third quarter income tax expense (non-GAAP) of $20 million decreased from $41 million in the prior year period. The third quarter effective income tax rate (non-GAAP) was 19% compared to 22% in the prior year period. Income tax (non-GAAP) decreased primarily due to lower income before taxes in the quarter and tax restructuring transactions.

Net Income from Continuing Operations Attributable to NCR

Third quarter net income from continuing operations attributable to NCR of $85 million decreased from $118 million in the prior year period. Third quarter net income from continuing operations attributable to NCR (non-GAAP) of $86 million decreased from $143 million in the prior year period.

Cash Flow

Third quarter cash provided by operating activities of $68 million decreased from cash provided by operating activities of $136 million in the prior year period. Free cash outflow was $22 million in the third quarter of 2018 as compared to an inflow of $48 million in the third quarter of 2017. The decreases were due to lower earnings in the third quarter of 2018, which we expect to improve in the fourth quarter.

Restructuring and Transformation Initiatives

Our previously announced restructuring and transformation initiatives continue to progress on track. In Services, our Mission One performance and profit improvement program continues to deliver revenue growth and margin expansion. In Hardware, we are continuing the move to a more variable cost structure by reducing the number of manufacturing plants and ramping up production with contract manufacturers.

However, in order to focus the organization on the strategic growth areas, we are announcing a spend optimization program to drive cost savings through operational efficiencies to generate at least $100 million of savings in 2019. These initiatives will create efficiencies in our corporate functions, reduce spend in the non-strategic areas and limit discretionary spending. We expect to incur a pre-tax charge of $75 million to $100 million over the next twelve months, with approximately $50 million incurred during the fourth quarter of 2018. The cash impact is expected to be $75 million to $100 million which will be paid in 2018 and 2019. The estimate of the pre-tax charge of $50 million has been included in our 2018 GAAP diluted earnings per share guidance.

Full Year 2018 Outlook

We are reaffirming our full year 2018 revenue guidance. Revenue is expected to be (1)% to (3)%. Our GAAP diluted earnings per share guidance is now expected to be $0.10 to $0.68 (previous guidance of $0.07 to $0.65) due to the impact of U.S. Tax Reform and the spend optimization program. We are reaffirming our non-GAAP diluted earnings per share guidance of $2.55 to $2.75. Non-GAAP diluted earnings per share guidance assumes an effective tax rate of 21% for 2018 compared to 25% in 2017. Additionally, we now expect cash flow from operations to be $640 million to $670 million (previous guidance of $690 million to $720 million) and free cash flow to be $250 million to $300 million (previous guidance of $300 million to $350 million). The reduction is due to higher working capital levels as we ramp production during the fourth quarter as well as the expected cash payments related to the spend optimization program.