Taking Stock: NCR's Teradata Warehousing Company Should Drive Growth
NCR has little long-term debt and solid market positions.
NCR is one company that's made a smooth transition into technology products for today. It continues to make point-of-sale devices and automated teller machines, but its real growth engine is the Teradata data warehouse.
NCR (NCR-NYSE), established in 1884, was independent until AT&T acquired it in 1991. The integration failed miserably, and NCR was spun off in 1996. The company has been exiting a number of businesses since then, which has depressed reported results. It has instead focused on its three core businesses: Data Warehousing, sold under the name Teradata; Retail Store Automation (fixed scanners and point-of-sale terminals); and Financial Self Service (automated teller machines). These divisions accounted for 19%, 27%, and 22%, respectively, of NCR's $5.92 billion in total revenue last year.
Large companies increasingly select a data warehouse instead of the more conventional database. Databases such as Oracle's 9i and IBM's DB2 tend to be standalone products. Departments make database purchases without regard for overall integration. In addition, applications such as customer-relationship management, sales-force automation, supply-chain management, and enterprise resource planning each generally rely on their own databases. This is great because new databases can be added as demand arises (generally the purchase decision is made below the CFO level), but it becomes harder to integrate all the data and the company finds it difficult to make decisions based on all the data available.
A data warehouse stores data from all the different applications. It provides executives with a better view of the overall business, because information from different applications can be integrated. It's also simpler to manage. The drawback is a higher initial cost, as well as the need to have all departments in agreement.
NCR, which focuses its data-warehousing business on retail, financial, telecom, insurance, utilities, and government entities, has suffered in the economic downturn. Revenue in the fourth quarter declined 8% year over year. NCR expects the warehousing division to grow 10% this year, well below the long-term growth expectation of 20% to 25% per year. Competitors include IBM and Oracle. While there has been some talk about spinning off Teradata, executives haven't laid out any concrete plans.
The Financial Self Services division manufacturers, installs, and maintains automated teller machines, providing a steady but unexciting business. Some of the newer applications are automated check cashing, bill payment, and disbursement of noncurrency items such as entertainment tickets. Another promising area offers nonbank customers the opportunity to purchase money orders. Emerging markets such as China and India give NCR growth in an otherwise mature business. Competition includes Diebold, Fujitsu, and Nixdorf, but NCR appears to be gaining market share.
The Retail Store Automation division manufacturers, installs, and maintains scanners and point-of-sale terminals. Future products include self-check-out terminals and electronic shelf labels. The electronic shelf labels have been too expensive and, despite falling prices, still cost about $5 per label. They let a store change an item's price almost as often as it wants, without the cost of re-marking every item or shelf.
NCR's overall revenue last year was flat relative to 2000. Data Warehousing grew only 1.3%, Retail Store Automation was down 6.4%, and Financial Self Services grew 6.9%. NCR's operating margin declined slightly from 3.4% in 2000 to 3.1%, but Data Warehousing reached profitability in the fourth quarter. Management expects almost no revenue growth this year, though the data warehousing and the retail divisions could provide some upside in an economic recovery.
NCR's balance sheet is clean, with virtually no long-term debt. Despite subdued near-term growth prospects, it remains well-positioned and continues to trade below my fair price of about $60.
William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at firstname.lastname@example.org.
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