NCR Corp To Explore Strategic Alternatives For Its Business Units

Deal Overview

On February 8, 2022, NCR Corporation (NYSE: NCR, $42.14, Market Capitalization: $5.6 billion), a leading enterprise technology provider for retail stores, restaurants and self-directed banking, announced that its board of directors has unanimously approved a comprehensive strategic review process, with the assistance of outside advisors, to evaluate a full range of strategic alternatives to enhance shareholder value. The strategic alternatives could include a disposition of a material business or assets of the Company, a spin-off , merger or sale of the company, other structural changes, changes to branding or geographic footprint or other transactions or alternatives. While making the announcement, NCR noted that there would be no assurance of any specific outcome. The company has not set a timetable for the completion of the review process. NCR did not intend to comment further on the strategic review process unless and until the company has determined that further disclosure is beneficial or required by law. NCR stock has risen as much as 10% since the announcement of the strategic review process.

Deal Rationale

NCR Corporation had undertaken a similar strategic process in 2015 but without tangible results. Nevertheless, as per analysts, the company is now in a substantially better position (both operationally and financially) than in 2015 to execute a transaction. Earlier in December 2015, Blackstone was brought in by NCR as an experienced technology investor to add value and accelerate NCR’s strategic transformation to an integrated software and services (SaaS) company. Although Blackstone made a profitable exit in 2019 from its investment in NCR, a new management team was brought in to continue its transformation. Moreover, in 2019, Warburg Pincus was reportedly in talks to purchase the company, while Apollo Global and other PE firms were also speculated to be in the fray. Although the deal didn’t materialize, the company continued to shift from a hardware-centric brand to a software-led-as-a-service company with a higher shift to recurring revenue streams. Moreover, NCR has continued to invest in its business line with recent acquisitions such as Cardtronics and LibertyX.

During the 4Q21 earnings call, CEO Mike Hayford noted that despite its improved products and operations in the last three years (also recognized by the company’s customers, the marketplace and employees), NCR’s stock price does not reflect the substantially improved operational performance. Due to this, the company believes that the best way to maximize shareholder value is to explore various options that will lead to the rerating of the business. Hence, it has initiated a strategic review of its businesses.

NCR held an Investor Day on December 9, 2021, and established a new five year target, which is called 80/15/1. Under the new targets, the company plans to generate 80% of revenue from recurring sources, expects to deliver 15% annual non-GAAP diluted EPS growth each year and generate $1 billion of free cash flow in 2026.

FY21 Results Review

In FY21, the company reported total revenue of $7.2 billion, up 15% YOY (with recurring revenue growth of 25%), mainly due to Banking, Retail, and Hospitality segments recording solid double-digit revenue growth partially off set by The Telecommunications and Technology (T&T) segment. Adjusted EBITDA increased to $1.2 billion, up 39% YOY, from $0.9 billion in the prior-year period due to higher gross margin and lower operating expenses partially off set by higher interest expense and loss on extinguishment of debt. Adjusted EBITDA margin improved 300 bps to 17.4%. Net income from continuing operations attributable to NCR came in at $97 million compared to the net loss from continuing operations attributable to NCR of $7 million in the prior-year period. In FY21, the company reported a diluted EPS of $0.58, up from $(0.30) in FY20, while Adjusted diluted EPS came in at $2.56, up 51% YOY, from $1.69 in FY20. NCR delivered a free cash flow of $460 million in FY21.

FY22 Guidance

For FY22, the company anticipates revenue of $8 billion to $8.2 billion, representing growth between 12% – 15%. Moreover, the company expects an adjusted EBITDA to be $1.5 billion to $1.8 billion, representing a growth rate of 21% to 27%, and adjusted diluted earnings per share of $3.25 to $3.55, representing growth of 27% to 39%. NCR has assumed a tax rate of 26% and a share count of 154 million shares for FY22. The company expects to generate free cash flow between $500 million and $600 million in FY22.

1Q22 Guidance

The company expects 1Q22 revenue of $1.9 billion to $1.95 billion (up 23% to 26% on a reported basis), adjusted EBITDA of $325 million to $350 million, and Adjusted EPS of $0.60 to $0.65. NCR has assumed a tax rate of 26% and a share count of 152.5 million shares for 1Q22. The company expects modest use of cash in 1Q22 due to seasonal factors and higher inventory levels. After 1Q, NCR expects modest sequential quarterly improvement across most financial metrics to achieve its annual guidance.

Company Description

NCR Corporation (Parent)

Headquartered in Atlanta, NCR Corporation is a software and services-led enterprise provider in the financial, retail and hospitality, and telecommunications and technology industries. The Company currently operates through four segments: Banking, Retail, Hospitality, and Telecommunications & Technology (T&T). The Banking segment offers solutions to customers in the financial service industry that power their digital transformation through software, services and hardware to improve efficiency for the financial institution. The Retail segment offers software-defined solutions to customers in the retail industry with digital, to connect retail operations end to end to integrate all aspects of a customer’s operations in indoor and outdoor settings. The Hospitality segment offers technology solutions to customers in the hospitality industry, including table-service, quick-service and fast-casual restaurants of all sizes. The Telecommunications and Technology (T&T) segment offers maintenance, managed and professional services using remote management solutions. Beginning from 1Q22, NCR Corporation will be reporting results in its new segments – Payments & Network, Digital Banking, Self Service Banking, Retail and Hospitality. The Company reported total revenue of $7.2 billion in FY21.

SaaS Business (Spin-Off )

Although NCR has not provided clarity on its strategic alternatives, we assume that the company could spin-off its SaaS related businesses into a separate entity that could command higher valuation and maximize the shareholder value. The new company might include high growth cloud-based bundled POS software offerings and ATMaaS business as a part of the SpinCo.