NCR Corporation reported financial results today for the three months ended March 31, 2020. First quarter and other recent highlights include:

• Revenue of $1.50 billion, down 2% as reported and down 1% constant currency
• Recurring revenue up 6% as reported and up 7% constant currency
• GAAP diluted EPS of $0.13; Non-GAAP diluted EPS of $0.31
• Cash and cash equivalents of $1.2 billion as of March 31, 2020; Issued $400 million senior unsecured notes on April 13, 2020
• Improved liquidity and financial flexibility
• Business impacted by COVID-19 and Nashville Global Fulfillment Center outage 

“We had a solid start to 2020, until our business was challenged by tornadoes that damaged our Nashville Global Fulfillment Center in early March and by the COVID-19 pandemic,” said Michael Hayford, President and Chief Executive Officer.  “We are executing a plan to manage our business through the pandemic, while prioritizing the health and safety of our employees and customers. We have taken multiple proactive steps to improve our liquidity and increase our financial flexibility. Over our 136-year history, we have persevered through many challenging times, and we believe the actions we have taken recently will allow us to manage through this volatile period while positioning us to capitalize on the market opportunities when we return to a more normal operating environment. We remain confident in our long-term strategy.”

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.

First Quarter 2020 Operating Results

Revenue

First quarter revenue of $1,503 million was down 2% year-over-year. Foreign currency fluctuations had an unfavorable impact on the revenue comparison of 1%.  We estimate the combination of the Nashville Global Fulfillment Center outage and COVID-19 negatively impacted first quarter revenue by approximately $75 - $80 million and was primarily impacted in hardware and attached software.  The following table shows revenue for the first quarter:

Banking revenue increased 1% due to growth in software and services partially offset by an 8% decline in ATM hardware revenue. The ATM revenue decline was mainly the result of COVID-19 border closures and logistical delays.  Foreign currency fluctuations had an unfavorable impact of 2% on the revenue comparison.

Retail revenue decreased 8% due to a decline in hardware revenue driven by a large customer roll-out in the prior year.  Additionally, we experienced delays from the COVID-19 pandemic and the Nashville outage.  This decline was partially offset by an increase in software and services revenue.  Foreign currency fluctuations had an unfavorable impact of 1% on the revenue comparison.

Hospitality revenue decreased 12% mainly due to the decline in hardware revenue. This decline was largely attributable to the Nashville outage and the COVID-19 pandemic. Foreign currency fluctuations had no impact on the revenue comparison.

Gross Margin

First quarter gross margin of $397 million decreased from $411 million in the prior year period. Gross margin rate was 26.4%, down from 26.8%.  First quarter gross margin (non-GAAP) of $404 million decreased from $425 million in the prior year period. Gross margin rate (non-GAAP) was 26.9%, down from 27.7%. The decreases in gross margin rate, both GAAP and non-GAAP, were driven by a decrease in hardware volume across all segments and increased investment in services, partially offset by the increase in software revenue.

Operating Expenses

First quarter operating expenses of $320 million increased from $311 million in the prior year period. First quarter operating expenses (non-GAAP) of $300 million increased from $278 million in the prior year period. The increases in operating expenses, both GAAP and non-GAAP, were primarily due to increased expenses from strategic acquisitions completed in the prior year and higher account receivable reserves, as well as increased investment in our strategic growth platforms.

Operating Income

First quarter income from operations of $77 million decreased from income from operations of $100 million in the prior year period.  First quarter operating income (non-GAAP) of $104 million decreased from $147 million in the prior year period.   The decreases in operating income, both GAAP and non-GAAP, were driven by impacts to gross margin and operating expenses described above.

Other Expense/Income

First quarter other expense (GAAP and non-GAAP) of $52 million decreased from $53 million in the prior year period.  The decreases in other expense, both GAAP and non-GAAP, were due to a decrease in foreign currency losses, partially offset by higher interest expense.

Income Tax Expense/Benefit

First quarter income tax expense of $1 million decreased from $9 million in the prior year period. The first quarter effective income tax rate was 4.0% compared to 19.1% in the prior year period.  First quarter income tax expense (non-GAAP) of $7 million decreased from $20 million in the prior year period. The first quarter effective income tax rate (non-GAAP) was 13.5% compared to 21.3% in the prior year period.  The decreases in income tax expense, both GAAP and non-GAAP, were primarily driven by lower income before taxes and an increase in discrete tax benefits.

Net Income/Loss from Continuing Operations Attributable to NCR

First quarter net income from continuing operations attributable to NCR of $23 million decreased from $37 million in the prior year period. First quarter net income from continuing operations attributable to NCR (non-GAAP) of $44 million decreased from $73 million in the prior year period.

Cash Flow

First quarter cash provided by operating activities of $61 million increased from cash used in operating activities of $16 million in the prior year period. Free cash outflow was $15 million in the first quarter of 2020 as compared to free cash outflow of $87 million in the first quarter of 2019.  The increases in cash provided by operating activities and free cash outflow were both driven by working capital improvements. Additionally, cash provided by operating activities and free cash outflow in the first quarter of 2020 included $25 million of insurance proceeds as an advance for the inventory loss from the Nashville Global Fulfillment Center outage.

Full Year 2020 Outlook and Impact from COVID-19

As NCR continues to closely monitor the impact of the COVID-19 pandemic, our focus has been to take care of our employees, take care of our customers and take care of our company. Given this rapidly evolving environment, as previously stated on March 31, 2020, the Company’s outlook for 2020 previously provided on February 11, 2020 has been withdrawn, and investors should no longer rely upon that guidance.

While it is difficult to project how deep the pandemic will be and how long it will last, we do expect it will negatively impact our business for the remainder of 2020. We expect our Hospitality and Retail segments to be the most impacted by the COVID-19 pandemic, but do expect our Banking segment will also experience negative impacts.

In order to build a stronger liquidity position, we have taken steps to improve working capital and are addressing certain business impacts with spending cuts. We have taken several steps to build our cash reserve to improve our financial liquidity and flexibility, and provide a cushion to help weather the impacts of the pandemic.  These steps include suspending our share repurchase programs, limiting our mergers and acquisition activity, reducing salary for members of our leadership team and certain salaried employees, reducing our planned capital expenditures, eliminating most contractors, curtailing travel, and freezing merit increases and hiring.  Additionally, on March 24, 2020, we drew the remaining available funds of $630 million on our five-year, $1.1 billion revolving credit facility and, on April 13, 2020, we issued $400 million senior unsecured notes. The COVID-19 pandemic is complex and rapidly evolving. The ultimate impact on our overall financial condition and operating results will depend on the currently unknowable duration and severity of the pandemic, as well as any additional governmental and public actions taken in response. There can be no assurance that the measures we have taken will offset the negative impact of COVID-19.