NCR puts itself up for acquisition; VDC breaks down the “retail” reasons why

On April 22nd, The Wall Street Journal announced the news that ATM-maker NCR is eyeing strategic alternatives as they face lagging stock prices and shareholder pressure. A potential spinoff, sale of assets, or a full acquisition/buyout - all seem like very viable possibilities. On June 2nd 2015, news broke of NCR asking for first-round bids from prospective buyers and on June 16th, two large private equity firms, Blackstone Group LP and Carlyle Group LP, have paired up in a $10 Billion leveraged buyout (LBO) offer for NCR, including debt.

Started by John H. Patterson in 1884, the National Cash Register Company was the maker of the first mechanical cash registers. Moving forward to 2015, the company is now known simply as NCR, and sells transaction services, automated solutions, software and consulting services to clients across a wide array of industries including financial, retail, hospitality, travel and government. The company facilitates over 550 million transactions a day. NCR divides itself into four major segments: Financial Solutions, Retail Solutions, Hospitality Solutions, and Emerging industries.

• Financial Services provide ATM and payment systems along with software and services for cash management, digital banking, maintenance, and management.
• Retail Solutions provide retail-oriented solutions and systems including POS terminals and software, barcode scanners, self-checkout solutions and kiosks, printer media and software – all in support of an omnichannel experience. In addition, this division provides professional services including installation, integration, device management, and maintenance for some of the company’s largest clients.
• Hospitality provides systems and solutions for restaurant chains and venues including POS hardware and software along with professional services and printer media. 
• Emerging Industries which is targeted towards newer industry verticals including telecommunications and technology, and travel includes maintenance and professional services for third-party hardware for certain manufacturers. It also provides small business-specific systems and solutions including comprehensive POS terminals, software and professional services.

In order to remain competitive and adapt to changing market conditions and consumer trends moving online, NCR made large acquisitions, buying companies like Retalix and Radiant Systems to strengthen its Retail Solutions division and enter the Hospitality segment respectively. However, since then, NCR has failed to integrate and generate sufficient growth from the acquisitions and now carries debt of $4 billion. In this blog, I will shine the spotlight on NCR’s acquisitions of these companies, thereby highlighting the company’s present (unenviable) position from a Retail and Hospitality standpoint.

To expand its Retail Solutions business, NCR acquired Retalix, an Israeli vendor of retail, marketing, supply chain and logistics software solutions. The company was purchased for $650 million with the aim of cross-selling to a combined, larger client base, improving margins through its software model while also leveraging R&D best practices. However, NCR did not successfully leverage Retalix’s strengths to position itself as a leader in the next-generation retail solutions segment – from a mobility and e-commerce standpoint. The division has faced challenges with slowing demand from retail customers as they increasingly embrace mobile devices to support transaction processes and cloud-based solutions for their e-commerce initiatives. Retail Solutions has seen revenue declining quarter-on-quarter since Q1 2014 with the latest Q1 2015 results showing a 9% decrease in revenues, at $445 million. This, coupled with an operating margin of 7.7% in 2014, which lowered from 10.1% in 2013, continues to negatively impact overall profitability. The company’s inability to move with the times, especially as it relates to fulfilling its retail customers’ growing focus on e-commerce and online order fulfillment, along with its increasing liabilities are significant contributors to its declining revenues and profitability.

Acquired in 2011, Radiant Systems was a specialized provider of hospitality POS software and solutions which allowed NCR to become competitive in the Hospitality segment. NCR’s hospitality segment makes up only 10% of revenues and has seen declining quarter-on-quarter revenue growth since the first-quarter of 2014. During Q1 2014, revenue growth was 14% quarter-on-quarter, which has dropped to a 1% decline in Q1 2015. The division has also seen its operating margin drop from 16% in 2013 to 13.8% today. Like retail, the hospitality segment encountered slower sales with customers moving away from traditional POS terminals to mobile and handheld solutions, highlighting the massive gap in NCR’s core product line(s). This part of the business has also been affected from the move to mobile POS, as restaurant POS vendors such as Vend and Touch Bistro use subscription-based models for restaurant POS systems to lower capital expenditures. Furthermore, the increased availability of mobile devices has led to smaller restaurants using these solutions to offer greater flexibility and varied payment acceptance, especially as restaurants begin to accept electronic wallets like Apple Pay, which is proving to be a big miss for a company like NCR.

In a positive move for the company, NCR updated its NCR Silver platform, a cloud-based POS solution for the iPad and iPhone that is aimed at serving small businesses. To stay current with evolving market trends, NCR integrated payment alternatives including PayPal, Apple Pay, Bitcoin and LevelUp along with providing enhancements to facilitate safer and more secure transactions. The company has also priced the service more competitively with NCR Silver offered at $59/month, aimed at small businesses, and a NCR Silver Pro Restaurant Edition priced at $129/month. NCR’s Emerging Industries division is also looking to introduce chip and PIN capability later in 2015. With these latest updates, VDC believes NCR is embracing change while staying competitive with offerings in the marketplace today.

NCR’s retail and hospitality-focused acquisitions have not performed according to market (or even company) expectations. Ineffective strategy execution has also resulted in little-to-no organic growth while prompting the company to take on a large debt for financing these sizable acquisitions, in both the retail as well as financial services sector. NCR’s less-than-optimal performance in recent quarters has pushed its largest shareholders to look for strategic alternatives. Will it better for investors to buy parts of the company as opposed to the whole? That remains to be seen. But, for the company to re-invent itself and get back to its glory days with its retail and hospitality divisions, NCR will have to make a concerted research and development effort to introduce innovative products and solutions that align themselves well with end users’ evolving profitability goals and customer engagement initiatives. The company has a great foundation to build off of; it’s now time to change up the structure and better position its business for current and emerging growth opportunities.

VDC will explore this topic further in an upcoming VDC View. Stay tuned!

(With Richa Gupta, Senior Analyst)

Comments

[Richard Drohan]

You don't mention NCR's purchase of Digital Insight (http://www.digitalinsight.com/)in 2014 for $4B! This is a significant acquisition in that DI provides digital banking services (mobile and online) to more than 1800 financial institutions!

[Shahroze Husain]

Thank you for your comment Richard. With this blog, our aim is to focus on NCR’s retail business performance which is our area of expertise. NCR’s $1.65 billion acquisition of Digital Insight, along with its Financial Services arm, warrant a separate discussion altogether, one that we will leave alone given our retail focus.