NCR Corporation Q3 2008 Earnings Call Transcript

| About: NCR Corporation (NCR)

NCR Corporation (NYSE:NCR)

Q3 2008 Earnings Call

October 23, 2008 8:00 am ET


Gavin Bell - Vice President, Investor Relations

Bill Nuti - Chairman and Chief Executive Officer

Tony Massetti - Chief Financial Officer


Kathryn Huberty - Morgan Stanley

Aaron Husock - Lenexa

Reik Read - Robert W. Baird & Co., Inc.

Kartik Mehta - FTN Midwest Securities Corp.

Matt Summerville - Keybanc Capital Markets

Gil Luria - Wedbush Morgan Securities Inc.


Welcome and thank you for standing by. (Operator Instructions) I would now like to turn the meeting over to Gavin Bell, Vice President of Investor Relations.

Gavin Bell

Thanks, [Lori]. Good morning and thank you everyone for joining us for our third quarter 2008 earnings call. Bill Nuti, NCR's Chairman and CEO, will lead our conference call this morning. After Bill's opening remarks, Tony Massetti, NCR's CFO, will provide comments on NCR's total company financial results and our guidance for the full year.

Our discussion today includes forecasts and other information that are considered forward-looking statements. While these statements reflect our current outlook, they are subject to a number of risks and uncertainties that could cause actual results to very materially. These risk factors are described in NCR's periodic filings with the SEC and our annual report to stockholders.

On today's call we will also be discussing certain non-GAAP financial information such as free cash flow and results excluding the impact of pension and other items. Reconciliations of non-GAAP financial results to our reported and forecasted GAAP results, and other information concerning such measures are included in our earnings release and are also available on the Investor page of NCR's website.

A replay of this conference call will be available later today on NCR's website, For those listening to the replay of this call, please keep in mind that the information discussed is as of October 23, 2008 and NCR assumes no obligation to update or revise the information included in this conference call, whether as a result of new information or future results.

With that, I'll now turn the call over to Bill.

Bill Nuti

Thank you, Gavin. Good morning, everyone, and thank you for joining us.

NCR's strong third quarter results were broad based geographically and reflects continued solid demand for our self-service solutions. NCR has delivered strong results during the first three quarters of 2008 and we are well positioned to continue doing so over the balance of the year by remaining focused on our strategy, which is managing for profitable revenue growth, building a sustainable and leading cost structure, and improving our working capital position.

Several major economies around the world have entered a very challenging period and we'll talk a little bit more about that today. That said, we continue to hear from our customers and prospects that NCR solutions improve productivity, reduce their costs, increase revenues and improve the customer experience. While no one is immune to economic dislocations of recent proportions, NCR solutions have a clear and tangible return on investment. This relative customer sentiment is evident in our business results and our outlook for the balance of the year.

We have maintained our business momentum thus far in 2008 as evidenced by solid execution, strong revenue growth, margin expansion and significantly improved cash flows. On the cash flow front we are extremely pleased with our results in Q3 as we generated $157 million of operating cash and $120 million of free cash flow. We remain focused on our key management priorities, and while we have significant work ahead of us, we continue to demonstrate solid execution and make good progress against our goals.

For the remainder of our comments in the prepared statements, we will be comparing NCR's results from continuing operations versus the prior year. The results for prior periods do not include the impact of Teradata, making this an apples-to-apples comparison.

NCR delivered an outstanding third quarter with year-over-year revenue growth of 8% and an 18% increase in non-GAAP income from operations. We achieved revenue growth in each of our three geographic segments and 30 basis points of gross margin expansion in aggregate. Our results by segment in the third quarter were as follows:

Revenues in the Americas grew 9% to $620 million. We were generally pleased with our results in the Americas, which were driven primarily by the increase in sales to financial institutions.

Revenue from EMEA was up 4% to $502 million, with an approximate 3 point benefit from foreign currency. EMEA's results were driven by strong performance in the banking sector in emerging markets.

And revenue from Asia-Pacific/Japan was $257 million, up 14% from Q3 2007, which included an approximate 5 point benefit from foreign currency. Our growth in APJ was driven primarily by strong demand for our products and services in China and Japan.

In dollar terms, the majority of our growth in the quarter came from our banking customers. We also had better-than-expected results in retail, which was particularly impressive given a difficult compare and a competitive peer group that has recently reported negative growth.

In banking, growth continues to be driven by emerging market expansion, market share gains in most key markets, and the success of deposit automation. We're seeing solid demand for our ATM kiosk solutions both in the United States and internationally. In the United States we expect Check 21 rollouts and our new innovative NCR self-serve family of ATM kiosks to continue to be our growth drivers. Among the financial services industry highlights from Q3 were the following:

We continued to ramp up the deployment of our new self-serve multi-check solution for ATM deposit automation at several leading U.S. financial institutions, including J.P. Morgan Chase and several key financial institutions in Europe, the Middle East and Asia.

The rollout of NCR's self-serve continues to progress successfully, with over 8,000 units ordered by more than 230 customers around the globe year-to-date. NCR's self-serve has already been installed by major customers in both developed and emerging markets. Customer reception for our new product line has been extremely positive, and we have completed our series of international product road shows in South America with impressive events in Argentina, Brazil, Chile and Colombia, touching more than 500 customers across that region.

Also in the quarter we announced the acquisition of NCI Limited, a U.K.-based company that is the leading provider of teller connectivity software used by retail banking institutions to realize the benefits of branch automation solutions throughout their retail environment.

NCI's applications are widely used by retail banks in North America and Europe as they seek to innovate branch automation solutions that improve productivity, simplify the cash handling process, and reduce wait times for customers. This acquisition will make it easier for NCR and our banking customers around the world to introduce and integrate branch automation technologies that can transform branch productivity and the customer experience.

And in China NCR continues to lead the ATM market in 2008, securing significant wins with the top five local Chinese banks - Industrial and Commercial Bank of China, Bank of China, China Construction Bank, Agricultural Bank of China, and Bank of Communications, totaling approximately 6,000 units ordered. We are pleased that NCR continues to gain the largest order share in the market, which continues to reinforce our leadership position in the Chinese market.

Apart from the top five major banks, we also achieved positive results from small and medium-sized commercial banks. According to the latest Retail Banking Research Global ATM Market and Forecast to 2013 report, NCR is confirmed as having the largest ATM installed base in China as of year end 2007. With the total unit orders from China's major and nationwide banks in 2008, NCR continues to maintain its leadership position in China. RBR forecasts the China ATM market will continue to maintain double-digit from 2008 to 2013.

This same RBR report, released in August of 2008, shows NCR with 30.1% of the global ATM installed base, which is over 40% larger than our nearest competitor. And in the U.S., which remains the largest single ATM market in the world, NCR for the first time attained the leadership position in shipments of ATMs to banks according to ESP Consulting, a firm that specializes in research on the U.S. market.

We also experienced solid results in the retail industry, driven primarily by our new innovative point of sale solutions. Even in tough times, retailers continue to invest in NCR's solutions because they significantly increase front end productivity, reduce cost and improve the customer experience.

There were several highlights in the retail space as the third quarter marked another significant milestone for our industry leading self-checkout solution, NCR Fast Lane. In partnership with a major European retailer, we installed our new Release 5 unit, our latest and most innovative self-checkout offering to date.

For the first time, retailers will have the convenience of note and coin recycling, designed to improve availability and reduce cash management costs. Release 5 also features our patented two-sided thermal printing as an every unit item, reducing paper consumption and enabling advanced marketing capabilities. Release 5 is the most compact solution available on the market. Drug stores, convenience stores and other space-constrained retailers globally can now offer the choice and convenience of self-checkout to their customers.

On the new product front, NCR also announced the launch of our latest point of sale workstation, the RealPOS 70XRT. This solution is designed to deliver the next generation of CPU innovation, dual core processors, DDR2 memory, SATA disk drives, integrated rate support, gigabyte Ethernet, and Intel Active Management Technology, with the result being advanced performance and functionality, an innovative design, and industry leading service ability and manageability. Retailers around the globe in hospitality and convenience industries, as well as other retail industries, are prospects for this new platform.

The NCR 70 XRT is a compact terminal that leverages the same core technology as our market winning RealPOS 80XRT. Combining Intel's next generation, low-power processor and chipset architecture with a high efficiency power supply, the NCR RealPOS 70XRT can reduce energy consumption by up to 50% over previous generation point of sale terminals. The RealPOS 70XRT is built with an innovative easy glide blade system that allows for tool-free access to internal components, improving system availability and reducing support costs.

In Japan, NCR RealGate Payment, our point of sale application for payments, was the first to complete VISA's payment application best practices validation, which supports NCR's strategy of strengthening our solution portfolio in core industries in Japan.

In the services arena, Carrefour Argentina - that country's largest retailer - selected NCR to provide comprehensive managed services support. Under a three-year agreement, NCR will be Carrefour Argentina's primary technology provider, providing hardware and software help desk services for almost 200 sites, including branches, platforms and administrative offices throughout the country. A total of 16,000 workstations and 63 applications are covered by this agreement.

In China, NCR won a major order totaling 2,500 NCR RealPOS 21 point of sale terminals from Dico's Fried Chicken, China's top Western fast food franchise operation. In addition to the hardware platform, NCR will provide Dico's with post-sale maintenance and support services. The deployment of these new terminals will help Dico's meet the growing expansion of its franchise stores nationwide and expands upon the company's initial order for 500 NCR RealPOS terminals in 2006.

In their most recent financial analysts call, leading U.K. food retailer Tesco referenced the critical importance of self-service technology to their business. They mentioned that they were experiencing improved self-service levels in their stores with the statement that self-checkout systems are very popular with their customers and now account for 20% of all in-store transactions.

Tesco is a prime example of a retailer that recognizes how self service is critical to achieving their business goals. They are innovating the next generation of the front end experience now and getting tremendous business benefits as a result. They understand that over the next 5 to 10 years the retail front end will be completely transformed by self service, lowering operating costs, improving store throughput and productivity, and improving the customer experience.

In addition, we remain encouraged with the overall revenue trends in our emerging industries, which we identify as travel and hospitality, health care, gaming and entertainment, and government and public sector. The combination of productivity gains, cost reduction and increased consumer demand for self service channels are fueling our opportunity to become the global leader in providing solutions to meet this demand. Although we are still looking at small revenue compares in our emerging industries relative to our established banking and retail industries, we see great opportunities ahead.

In the quarter, NCR extended its self service portfolio further into the entertainment market by taking several important steps. We are capitalizing on several opportunities in the growing entertainment market in the U.S. and other major countries. Our goal is to become the market leader in this industry and our product lineup, which includes Touch Automation, ePlay and Ambient, provides us a platform to lead in this industry.

And we continued to build on that position in the third quarter. NCR and Blockbuster Entertainment entered into an agreement to deploy Blockbuster-branded state of the art DVD vending kiosks in a pilot program that could be the first step of a nationwide rollout of thousands of units. The initial deployment of 50 Blockbuster-branded kiosks will begin in the fourth quarter and all units are expected to be installed by Q1. The pilot digital media kiosks will initially offer DVD rentals, but also allow for future applications, including digital download and other services, such as sales of DVDs and video games.

NCR and Toshiba agreed to enter into an equity investment in Mod Systems, an industry leading provider of digital media delivery systems. The investment is part of an ambitious initiative to leverage the breakthrough portable digital storage technology that offers the potential to revolutionize how consumers download movies, TV shows, music and other digital content at a wide variety of locations, then replay it on multiple devices. The initiative will combine technologies developed by each of the companies involved and is aimed at meeting the explosive demand for portability, easier access to high quality visual entertainment and other content.

In the health care space, NCR extended our self service portfolio into the international market with the introduction of our China-customized patient registration and payment solution, MediKiosk, at the 12th China Hospital Information Network's conference. By building on the foundation of NCR's world-leading health care solutions, this customized suite is specifically designed to meet the unique requirements of China's health care industry.

The NCR MediKiosk solution connects to the hospital information system of China's health care institutions and allows patients to register, pay bills and print invoices. The customized solution provides tools to help hospitals streamline workflow, reduce management costs, improve service quality and enhance the overall patient experience.

Whether it's growing these emerging industries or furthering our market leadership in established product solutions like ATMs or self-checkout, we cannot make the most of our many opportunities if we don't execute on our planned operational improvements. In the quarter we continued to make progress towards building a sustainable leading cost structure, a cost structure characterized as industry's best practice, providing both a competitive advantage and financial flexibility.

As part of that commitment, we continued with initiatives to further increase our productivity, make us more responsive, and to position NCR as a company that is simpler to do business with. These actions will also contribute to making NCR more customer focused and market driven.

As we communicated to your during our analyst day presentation last December, we have targeted approximately $150 to $200 million in cost saves in the three-year period 2008 to 2010, of which approximately half would drop to the bottom line and the other half will be reinvested into the business. Our new industry focused structure has provided significant opportunity to provide or improve both our business processes and, most importantly, our ability to better serve our customers.

And we continue to make progress in the third quarter, specifically in the areas of reverse auctions, low-cost region sourcing and logistics optimization. Increased participation from new vendors in reverse auctions and a mix shift from repeat to new auctions have driven savings, and we continue to shed the past legacy of single source suppliers, which has allowed us to generate more competition across lower-cost regions' bidders, countries like India and China.

Also in Q3, we continued moving spend from higher-cost regions to lower-cost regions and localizing the spend with lower-cost suppliers. The redesign of our supply base continues to build flexibility and cost advantages into our supply chain. And we're optimizing our logistics and materials management processes. We continue to consolidate warehouses to reduce cycle times and waste, and we're restructured our materials management to reduce waste and lean the process by co-locating warehouses with factory locations where relevant.

Our cost reduction value engineering teams are focused on a variety of initiatives that will lower cost and drive higher quality. We will continue to focus on creating efficiencies throughout the organization and by doing so expect to achieve our margin objectives over the next three years.

Now I'll turn the call over to Tony, who will discuss our financial results in greater detail. Tony?

Tony Massetti

Thanks, Bill.

NCR's total revenue from continuing operations of $1.38 billion grew 8% versus Q3 2007. This includes a 2 point benefit from currency translation. We reported GAAP income from continuing operations of $82 million or $0.49 per diluted share. This compares with $33 million or $0.18 per share in Q3 2007.

NCR's results from continuing operations did have special items in those quarters. In Q3 2008 there was a $12 million cost - $10 million after tax - related to organizational realignment. And in Q3 2007, NCR's continuing operations had three special items - first, a $24 million after-tax charge for a restructuring initiative in Japan; second, an $11 million after-tax expense for spin off of Teradata; and third, $4 million after-tax cost related to the company's manufacturing realignment. Excluding these items, non-GAAP diluted earnings per share from continuing operations grew 41% to $0.55 per share in Q3 2008 versus $0.39 per share in the prior year.

We had pension expense of $5 million from continuing operations in the quarter compared to $12 million of pension expense from continuing operations in the third quarter of 2007.

To analyze NCR's operational performance without the effect of special items and pension expense, please see the supplemental financial schedule included in our earnings press release that reconciles our GAAP to non-GAAP results. For the remainder of my comments during today's call, I will exclude the impact of the special items and pension expense.

Our Q3 gross margin was 23.5%, up 30 basis points from the 23.2% achieved in the third quarter of 2007, driven primarily by the realization of benefits from our manufacturing realignment and continued emphasis on cost reduction initiatives.

NCR's operating expenses were up 5% or $9 million versus Q3 2007, primarily due to slightly higher SG&A expenses in the quarter. Operating expenses as a percentage of revenue decreased 50 basis points versus the prior year period.

Total company non-GAAP income from operations of $117 million increased 18% from Q3 2007. Non-GAAP operating income was 8.5% of revenue in the quarter, up from 7.7% of revenue in the prior year period.

Below the operating income line, we had $1 million of other expense in Q3 2008 compared to $12 million of other income in the third quarter of last year.

The tax rate in the third quarter was 17.1%. Income tax expense included a $16 million benefit related to routine Internal Revenue Service audit settlements for the years 2000 to 2006. We continue to expect our full year 2008 effective tax rate to be 25%.

Turning to the balance sheet, we ended the quarter with $733 million of cash.

Our short and long-term debt was $308 million.

During the quarter we repurchased approximately 4.1 million shares of our common stock for $104 million. This left approximately $95 million of Board authorization available for future share repurchases as of the beginning of the fourth quarter of 2008. And to give you an update of our share repurchase activity since the close of the third quarter, we have repurchased 3.7 million shares of common stock for $69 million from the start of October through yesterday. This leaves approximately $26 million of Board authorization remaining as of today.

Moving to the cash flow statement, in the third quarter NCR generated $157 million of cash from operating activities versus $65 million in the prior year period. After investing $37 million in capital expenditures, we generated $120 million of free cash flow compared to $40 million of free cash flow in the third quarter of 2007. NCR defines free cash flow as cash from operations less capital expenditures for property, plant and equipment, and additions to capitalized software.

As we mentioned in our Q2 earnings call, we are focused on better management of our accounts receivable and inventory. In the third quarter of 2008 we improved in both areas. During Q3 2008, our accounts receivable balance declined $48 million versus the second quarter, and our inventory balance declined $24 million versus Q2 2008.

We are very pleased with our third quarter operating and financial performance and the solid momentum we are experiencing across the board, although we continue to be somewhat cautious for the balance of the year due to the broader macroeconomic environment and more difficult financial comparisons given NCR's strong performance in the fourth quarter of 2007.

That being said, based on our strong results here to date and our current outlook for the fourth quarter, we are increasing our full year guidance as follows:

We now expect full year revenue growth of 8% to 9%, up from the previous guidance range of 6% to 8% growth. We are increasing our non-GAAP earnings guidance to a range of $1.67 to $1.72 per diluted share, up from the previous guidance range of $1.62 to $1.67 per diluted share. We forecast pension expense of $25 to $30 million in 2008. Our full year tax rate is expected to be approximately 25%. And we also expect free cash flow to be $225 to $250 million in 2008, excluding the cash payments associated with our operational realignment activities.

Now I'd like to turn the call back over to Bill for some closing comments.

Bill Nuti

Thank you, Tony.

Overall, I'd give us a good grade on the first three quarters of 2008. Revenue growth, margin improvement, earnings and cash flow have been strong, and we are optimizing the use of our capital structure to improve shareholder value. Moreover, we remain focused on operating the company more efficiently, both for today and tomorrow.

That we're achieving these results in light of the significant macroeconomic concerns makes them that much more noteworthy. And as Tony just mentioned, we raised our outlook for the full year 2008. So I would like to add a little perspective to why we're feeling good about how NCR is executing and the momentum we're building in terms of our product offerings and go to market strategy.

Obviously our core solutions are sold into two industries - banking and retail - that are under pressure not only at home but abroad. But as our results indicate and our guidance indicates, demand has remained relatively healthy. Speaking to ATMs in particular, we believe the current consolidation in the financial services industry helps to underscore the need for products and services that attract and secure depositors and at the same time help banks more efficiently manage their interactions with customers.

We are in a banking environment that is placing an aggressive renewed focus on attracting depositors. ATM technology for most banks plays a key role in customer acquisition and retention. Also, it's important to understand the strategies of various banks with regard to progressing towards intelligent deposit replacements. Generally speaking, banks whose consumer strategies have been more reliant on lending are the ones being subsumed now. NCR's installed base with large acquirers like J.P. Morgan Chase and B of A are strong, and these are the very banks who have embraced intelligent deposit migration.

So while we keep a close eye on spending in this environment, we feel good about our position with large U.S. banks that are emerging as the survivors and acquirers. And we're also feeling good about the investments we've made in new technologies to support the advanced capabilities that these intelligent deposit leaders of the world are looking for. While the longer-term net effect of bank consolidation might impact the ATM installed base, the near-term impact is difficult to outlook and may well turn out positive. A faster upgrade to intelligent deposit ATMs by large U.S. banks is an example.

Internationally, we still envision growth to be driven by penetration into emerging markets in Asia, the Middle East and Eastern Europe.

We enjoy a strong position with the leading financial institutions in North America and throughout the world as evidenced by the RBR and ESP reports I referenced earlier. This position maintain in the midst of a difficult period for the financial services industry is supported by the technologies and capabilities we're bringing to market.

I've said often this year that NCR is in perhaps the most innovative period in our almost 125 years. We've talked recently about our new ATM platform, self serve; our kiosk innovations for multiple new verticals that NCR has never reached before; our new self-checkout platform, Release 5; our two-sided thermal paper that saves customer's money and has a positive environmental impact, and there are many, many more.

As we extend the reach of our solutions into other verticals in the growing self-service space, we are adding another element to our platform, a new global brand for the new NCR, which will define our company and our vision, leading how the world connects, interacts and transacts with business. NCR is at the center of the self-service revolution, strategically poised between contemporary consumers who demand fast, easy and convenient options and businesses focused on increasing revenues, building customer loyalty, and lowering their cost of operations.

Our leadership in customer interactions is anchored in our deep understanding of consumers and our domain expertise in the industries we serve. NCR is the only company focused beyond a niche self-service technology, geography or market, and our brand will reflect that.

We look forward to sharing more with our customers and our shareholders about the launch of our brand later this year at the upcoming BAI retail conference in November and our analysts' day on December 4 in New York City, but it's not about marketing. NCR remains sharply focused on executing and operationalizing our business strategy, delivering profitable market and wallet share gains in our traditional industries and breakthrough growth in new industries, remaining focused on building a sustainable leading cost structure and evolving to a more externally focused culture that is customer, market, competition and consumer driven.

These priorities take on even more importance in uncertain times, but the current climate does not alter the conviction we all share in our longer-term vision and opportunity to deliver great value to our customers, employees and shareholders.

With that, Operator, we're ready to take questions.

Question-and-Answer Session


Thank you. (Operator Instructions) Your first question comes from Kathryn Huberty - Morgan Stanley.

Kathryn Huberty - Morgan Stanley

Bill, you discussed this briefly but maybe can you go into more detail around what you are hearing from your customers that are in the midst of consolidation as it relates to, you know, is there any risk of a near-term spending freeze? But more importantly, what's the longer-term opportunity as those banks look to upgrade the acquired assets to deposit automation and potentially for the regional banks that have been slower to upgrade, as they're increasingly competing with these larger institutions?

Bill Nuti

I think it's different where you go around the world, Katy, and given our position in certain banks. But I would say in the United States we're in good position because, of course, our positions with the largest banks are quite solid. And the largest banks, who are the acquirers, are acquiring firms that weren't necessarily, for example, moving forward with deposit automation as a primary ingredient to their success next year. So we hope that some of these other networks that they're acquiring, which were not intending to move aggressively towards deposit automation, will move more aggressively towards deposit automation.

The larger banks in the U.S. have not slowed down their deposit automation rollouts. We continue to go at pretty much full steam in the U.S. Our funnel in the national bank segment has improved quarter-on-quarter, meaning the forecast for those national banks - those are the midsized banks in the U.S.

In the U.K., as an example, you're seeing lots of the S&Ls - the Bradford and Bingleys, the Alliance & Leicesters, being rolled up by Santander. We're pretty pleased with our position with Santander on a global basis and certainly in the larger bank segment in the U.K. - Lloyds' HBOS, as an example - similar to the U.S. as well.

Now, there could be a time when banks are rationalizing their footprints, their branches and their ATMs. I don't know if at all there'll be any impact on us. There quite could be, but it's not showing up today, at least, in our funnel or in the strength of our orders. For example, in Q3 we grew orders about 9%, which was over 30% order growth in 2007's Q3. So it was a very strong order quarter year-on-year for NCR.

I'd say Middle East/Africa continues to roll pretty much fairly well. Eastern Europe rolling fairly well; not a lot of dislocations in those markets. The rest of Western Europe is mixed, similar to the U.K., in the impact that's being felt. Asia continues to be strong. It was a very strong quarter for us in China. And I think Asia continues to be fairly positive.

So hopefully that gives you a better perspective about what I'm seeing short-term and long-term.

Kathryn Huberty - Morgan Stanley

Given the strength in self service within retail, can you help us understand what percentage of that business is now self service versus the traditional POS?

Bill Nuti

Approximately 25% right now, Katy, and that's because of the strong point of sale solution orders and revenue growth rate we had. We've been astonished by the success of our point of sale solutions, astonished in a positive way in that we continue to win business, we continue to have success, we continue to win a tremendous amount of market share in point of sale replacements. And they continue to roll in the retail space. But self-checkout also continues to be very, very successful and positive.


Your next question comes from Aaron Husock - Lenexa.

Aaron Husock - Lenexa

We've seen a pretty large move in the U.S. dollar over the past few weeks. I know you're not ready to give 2009 guidance for NCR from a fundamental perspective, but can you just give us a sense, looking at all of your various currency exposures, of how much of a drag the move in the dollar will be on your 2009 revenue?

Tony Massetti

It's a little early to talk about 2009. I can just give you some context with our current guidance. As we mentioned, we saw a 2 point benefit year-on-year in Q3. The full year guidance assumes about a point hurt in Q4, so we're seeing about a 3 point change sequentially when you compare year-on-year. So difficult to say at this point. I would say probably flat to slightly down in terms of a full year hurt year-on-year based on current currency trends.

Bill Nuti

And that will obviously change over the next few months. And in January we'll give you a constant currency perspective of growth for 2009.

But I want to be clear. Regardless of currency movement, we as a company will be prepared to adjust and it will not deter our focus on bottom line improvement.

Aaron Husock - Lenexa

As you're looking at your accounts receivable receivables given the state of some of your customers in the banking and retail industries, can you just kind of take us through the changes you made in your reserves in Q3 and how you're thinking about that going forward?

Tony Massetti

Sure. You know, quality of our accounts receivable continues to be very good. As we talked about in the prepared remarks, collections were excellent in the quarter. You know, our AR was down $48 million sequentially. Our DOSs improved 9 days from Q3 '07 and 5 days from Q2 '08, and since Q1 we've brought AR down from $1.048 billion to the current $943 million.

Reserve levels relatively are in line with where they've been running. Collections continues to be good, and we really haven't seen any changes in our customers from a payment perspective.

Bill Nuti

Yes, I also don't give a lot of time to do some recognition. I mean, Tony's being modest. He's done a great job since coming in on managing working capital, certainly a lot better job than I did last year. And as you can see this year so far, generating over $200 million of free cash flow in and of itself is just outstanding, $120 million of free cash flow in Q3 alone, most of it coming from working capital - just better inventory management, better management of accounts receivable. So he's to be commended and he's continuing to drive that progress in the company, and we see it moving into Q4 as well.

Tony Massetti

Thanks, Bill. It's really an overall very good team effort at NCR.


Your next question comes from Reik Read - Robert W. Baird & Co., Inc.

Reik Read - Robert W. Baird & Co., Inc.

Bill, you had talked about gaining share as one of the drivers in the ATM space. Can you talk a little bit about why you think you're getting that right now? Is it because of the new products, is it the service offerings, is it the software? And talk a little bit, too, about the magnitude of that. Is that one, two or three relative to emerging markets and so on and so forth?

Bill Nuti

Yes, I would say let me start with the U.S. It's clearly the strength of our new products, NCR Self Serve, and the strength of our deposit automation solution - that combined, Reik, with our services capability.

One of the key ingredients to our success is our 12,000 people in services. We're clearly a leader in services globally. There isn't a competitor that can come close to us relative to the army we have on the street, the capability of that army and the quality of delivery. And I know a lot of our industry peers talk about their services capabilities and they should, because I think this industry is full of good service companies. But we do a wonderful job in this area and we continue to. But it's global, so we can handle our customers regardless of where they are regionally.

Outside the U.S., we're an emerging market leader by orders of magnitude, and that's because of the strength of our products but also the strength of our position in those markets. We are as strong in Eastern Europe in terms of product and services or an end-to-end solution as we are in the U.S. So doing business with us overseas in emerging markets is no different in terms of quality on an end-to-end solution basis as it is in the U.S. And it's similar around the world, so our global footprint, our global balance, is a major strength of ours as it relates to our capability to deliver the end-to-end service.

And I think those are key features of the company's success. And it goes to China as well, you know, similarly to China. We manufacture in China. We're a local company in China. We have a manufacturing plant in Beijing. We have service people on the ground. We have products that were built for that particular market. And I think we do a great job of acting local but being global as a company.

So those are some of the ingredients to our success. We've gained significant share over the course of the last two to three years. Candidly, from 2000 to 2005 it was more of a we'd take care, they'd take share kind of scenario. We maybe even lost a few points of share in those five years in the ATM space, and I think we've gained it all back over the last few years despite the fact that we've got great competitors out there, good companies with good products.

Reik Read - Robert W. Baird & Co., Inc.

And just in terms of magnitude of maybe the growth opportunities, you've got deposit automation, you've got emerging markets, where does share gain kind of fit in with those other two?

Bill Nuti

I would say share gain is probably right up there, Reik. And I don't have the data in front of me, but if I were to point to the key factors of growth it would be emerging markets probably number one; market share gain's number two.

Reik Read - Robert W. Baird & Co., Inc.

And then just going back to the national banks within the U.S., you kind of highlighted the need for them to improve their deposit taking capability and ATMs is a key function of that. Is that, just given the environment right now, is that kind of leading to an acceleration of putting this equipment in before year end and then you'd see things maybe slow down a little bit, or do you see it being a little bit more consistent?

Bill Nuti

I see it being a bit more consistent than that, Reik. And again, I'm still out there getting information from the customer base given some of the changes in the market that happened recently, so I'm still out there talking to as many customers as I can and getting a feel for what's going to be in the future.

But what I do know is that our funnel, which is one of our metric systems for forecast that gives us some headlights on the future, has improved fairly well for the national bank segment over the course of the last six months, and it's fairly steady today. So it hasn't taken a hit, if you will, over the last few weeks, and that's a positive. I know that the deposit automation base in the midsized banks is beginning to grow substantially for us, particularly last quarter. So I know there's more activity in deposit automation going on in that segment.

And I know that the last piece of information I have is, of course, some of the acquired banks by some of the larger Tier 1 banks most recently were not moving as aggressively ahead with deposit automation. And now that they've been acquired by these larger banks, who are aggressively pursuing intelligent deposit programs, I suspect - and again, I suspect - that they will also be put on the same level of programs that the mother ship is on, if you know what I'm saying.

Reik Read - Robert W. Baird & Co., Inc.

I take it from your comments that the regional activity is still fairly weak, and given that those guys haven't done much and historically that hasn't been NCR's strong suit in North America, how much of an opportunity does that provide for you guys?

Bill Nuti

Oh, it's good. I mean, this is one of the aspects of what's happened in terms of consolidation that's a real positive for NCR because our position, as you well note, in that segment was not as good. So having the J.P. Morgan Chases and the B of As and the Wellses of the world jump in and take some of these banks on could be a real net significant positive for us in deposit.


Your next question comes from the line Kartik Mehta - FTN Midwest Securities Corp.

Kartik Mehta - FTN Midwest Securities Corp.

I wanted to ask you a little bit bigger picture question and your thoughts. Are you at all surprised by the health in demand for both your self service product and retail product during the environment we're in?

Bill Nuti

You sound like my Board of Directors, Kartik. I think that there are a number of people that have been surprised by NCR's execution and performance given the health or the perception of the health - that's not true - the health of our end markets. It's not a perception. The end markets we've been doing business in have been bad for a while, if we remember. The retail challenges that we face started a year ago or over then. The banking write-downs started a year ago. So the markets that we serve, we've been swimming in this mud for a year.

So for us here running the company we've been feeling that these two markets have been on the downside for quite some time, so to some degree, I guess, we are a bit surprised. But when you step back and you spend time with our customers, you recognize a few things. One, if they're going to invest any money from a capital spending point of view, they're going to invest it on technologies that either reduce cost, increase productivity, improve the customer experience or drive revenue growth, and that's what our products do. So all of our products fit into that sweet spot, Kartik, really well.

I had one customer tell me just a few days ago, tell me that one of our solutions replaces two headcount for this particular customer. So you put one of our solutions - and it was a kiosk solution that did self service - and replace two headcount. So our customers are thinking how they use self service to also reduce costs in their business right now. So that's one aspect of this that I have found interesting. And we don't tout it enough, even internally or externally, because our products have a very, very tangible ROI.

The second thing you'll find with our company and our products is that beyond the fact that there's an ROI for our products, our customers are in a position now more than ever where they have to make changes infrastructurally to the way they're doing business. And our products help to transform businesses and they help to introduce new channels that digital natives or a contemporary generation of person is more attuned towards.

You know, the digital native, this person surrounded by technology from the moment they were born, their primary channels are digital immigrants' - my - alternative channels. They prefer to go to these channels. And so the businesses we do business with are trying to figure out how do they attract this group of the future wealth and buying power, of getting them onto this new channel, and so I hear a lot from our customers around the notion that this channel is important to them regardless of the impact it has on productivity and cost and revenue.

The third thing I would say is we're not an IT spending item. We don't fall mostly under the purview of the CIO. When you're buying an ATM, it's typically the retail bank of a bank institution that's buying the ATM. It's not coming out of the IT department. When you're selling point of sale or self-checkout to a retailer, it's typically store operations that you're selling to and it's their budget. More times than not in retail you could see it under the IT department, but it's not the case typically in banks.

And so when you hear about CapEx coming down or high-tech spending coming down and it's the CIO who's slashing budgets, no doubt that can and could impact NCR. There's no question. But it's more often than not, I think, connected with us in a way that it probably shouldn't be given who the key buyers are of our technology. So sorry for the long answer, but I wanted to give you some context.

Kartik Mehta - FTN Midwest Securities Corp.

I wanted to get your thoughts on - NCR's obviously made a lot of alignments; you've become more efficient in manufacturing, you've taken costs out - and I guess where I'm going with this is I wanted to get your thoughts on your ability to maintain your margin improvement even is revenue growth were to slow. I know that you're not ready to talk about 2009 yet, but assume that this market forces a slowing revenue growth for you. Can you still continue to improve margins just on the actions you've taken?

Bill Nuti

No question, Kartik. We've got a lot of opportunity in the company to get after margin improvement. There's a lot of trapped margin in this company. But I would just give you a perspective that it's going to be more gradual margin improvement over time rather than a big bang in a single quarter or a single year.

So we are pacing and sequencing - and I appreciate the compliment on the work that's been done here - but we continue to pace and sequence our way towards cost reduction, and it's all encompassing. It's not just what we started a few years back with manufacturing realignment and restructuring. It's product cost, things like de-contenting. We're driving higher quality.

That's going on inside the company today, and we're looking at a variety of programs, looking at product cost in general, stripping down our products to the every line item of the [bomb], making sure we're getting the lowest possible cost and the highest possible quality. It's making sure that in services we're doing everything we can to drive productivity and drive parts and logistics capabilities that drive lower costs and higher quality.

So in every aspect of the company there are a variety of cost and quality programs that are going on that over time and gradually will lead to possibly significant margin improvement over the course of the next several years. So that's the kind of direction I would give you.

Tony Massetti

We'll give you more color on that, Kartik, at the analysts' day meeting in early December.

Kartik Mehta - FTN Midwest Securities Corp.

And one last question is your thoughts on [inaudible] bank branch growth and its implication on ATM demand. What I've heard so far is you're benefiting from the emerging markets, you're obviously benefiting from potential market share gains, and you're benefiting from banks that are upgrading their ATMs, and I'm just wondering is there right now a correlation or what type of correlation would you anticipate between branch growth and ATM demand?

Bill Nuti

Yes, I don't know the answer to that yet. I would hope by January or even December I could give you a bit more color. I'm talking to a lot of customers about what this means. And I think the implication is, with some of the consolidation, will there be a shutting down of branches because a branch is sitting next to another branch on the same street corner or town. I don't know the answer to that and what the implication is on ATMs, is there an ATM from one bank sitting next to the ATM from another.

The only thing I'd say about that is, if there are two ATMs, even if they're from two different banks, on the same street corner, if they're both serving the same number of customers they've been serving, it's likely they stay in place, right, because the number of transactions doesn't go down because banks are consolidating. There's still the same number of people.

Branches is a different question, and I don't know the answer to that yet, Kartik, but I hope to have some color for you in December and much more so in January.


Your next question comes from Matt Summerville - Keybanc Capital Markets.

Matt Summerville - Keybanc Capital Markets

Bill, I think you indicated early on in the Q&A that orders in ATMs were up 9 against a plus 30 comp. Can you go through the same numbers for retail?

Bill Nuti

I can. Just to clarify, orders were up 9 points on the 30 comp, the year-on-year, in aggregate  in aggregate. I think that - Tony will correct me, I'm not looking at the data - but I think financial orders were up 5% in the quarter; retail orders were up 12% in the quarter.

By the way, the 5% in ATM up in the quarter or financial up in the quarter is up a really tough comp because we had great growth in Q3 last year in ATMs than we did in retail.

Matt Summerville - Keybanc Capital Markets

Some companies that have already reported spoke of a pretty meaningful drop off the last couple of weeks in September in just the level of business activity, and everything I've heard today, Bill, suggests that was not the case for NCR. So, I guess, can you talk a little bit more about how your backlog looks today versus a year ago?

Bill Nuti

Well, to give you context, we did over 30% of our orders in the last month of the quarter. So we did probably closer to 40% of our orders, I would think, Tony, in the last month - in September  in the quarter.

By the way, we probably had about $30 to $40 million in orders slip, Matt, that just didn't happen, customers who said we're not buying it right now. So it wasn't as if we didn't see slippage. These are not lost opportunities. These are deals that are moving to the right. So there was some impact. We had a great order quarter, but we could have had a really great order quarter is the message I would send to you. That's number one.

Number two, backlog was down slightly year-on-year, but very slightly. I would say on an applestoapples comparison, more flattish year-on-year, but a good backlog, a decent backlog, going into Q4 for the company. So a very, very solid backlog.

Matt Summerville - Keybanc Capital Markets

When you look at the planned cost take out over the 2008 - 2010 timeframe, $150 to $200 million, is there anything you're seeing or how are you thinking about how macro conditions will play into that 50% drop into the bottom line versus 50% reinvestment? Do you think there's a need to back off of that reinvestment number and let more drop to the bottom line?

Bill Nuti

Macro conditions will absolutely have an impact, Matt, on how much we take to the bottom line versus how much we reinvest. We'd be lying if we said anything else.

At the end of the day, if macro conditions worsened, it would accelerate the cost take out. We would adjust to the realities of the world the way it is, not the way we want it to be, and we would probably put off some of those investments to a later date.

We're going to keep a close eye on this. Trust me, Tony and I are ears to the ground every day. And our company, NCR, has shown we can adjust and we will adjust.

Matt Summerville - Keybanc Capital Markets

If I were to assume today was 12/31, what would your pension expense look like next year?

Tony Massetti

Early to say, Matt. We'll go through that analysis toward the end of the year. Of course, we've been monitoring the market conditions and the impact on pensions, but due to the market swings it's just too early to gauge 2009 at this point.

Our modeling does suggest, however, that there'll be very minimal additional cash requirement in 2009 over and above the 2008 levels. So there's a bit of good news in that. But as far as pension expense, too early to say.

We have brought down the forecast for 2008 on pension expense - we talked about that in the prepared remarks - down more toward the mid-20s as opposed to the mid-30s. That's as much as we can tell you at this point on pension expense.

Matt Summerville - Keybanc Capital Markets

And then I think, Bill, on the second quarter call you mentioned the orders you'd received in the first seven months of the year in retail - or on the point of sale side of retail - suggested that shipments would be up on POS 5,000 to 10,000 units '09 versus all of '08, I believe. Can you update that figure?

Bill Nuti

Yes, I think we're still in the same ballpark, Matt. I haven't heard anything different from our customers. These are very large retailers. If there's any good news in the retail environment for us, it's that these are extremely large retailers. None of them, I think, are facing anything more than the significant challenges that other retailers are faced with, and their programs seem to be continuing to stay on schedule. We've seen a little bit of move to the right for smaller retailers, nothing lost, just a little bit of move to the right. So I feel pretty comfortable that, in terms of shipments of our retail POS terminals, '09 will be a bigger year than '08.

Matt Summerville - Keybanc Capital Markets

Tony, if you could reconcile the tax gain, the $16 million in the third quarter, to how that's playing into your full year effective tax rate?

Tony Massetti

Sure. We continue to expect about a 25% non-GAAP tax rate for the full year so if you look at the three quarters so far, we had about 28% the first two quarters, about 17% in Q3 for a year-to-date tax rate through Q3 of about 23%. So to get to 25% for the full year, we're expecting a 28% or 29% rate, Matt, in Q4.

Again, full year rate about 25%, which we've been forecasting the whole year.


Your last question comes from Gil Luria - Wedbush Morgan Securities Inc.

Gil Luria - Wedbush Morgan Securities Inc.

Over the last six weeks have you seen a significant change in banks' ability to make decisions, especially in the emerging markets that have been maybe shaken up even more than the U.S.? Have you seen banks stop making decisions, stop awarding contracts, or are you still seeing some level of decision making there?

Bill Nuti

As I said to Matt - I'll repeat it - I think we had about $30 to $40 million, and it's a guesstimate because you can't do an accounting on every deal that may have moved to the right, so there was some number of orders that banks decided they're just not going to do it right now and they're going to keep their powder dry. It was a relatively small number for us over the last six weeks.

But in my discussions with the larger banks and I did a world tour here - well, not a world tour; a European tour and a U.S. tour - the last few weeks, pretty steady around the world. I was in London, I was in Rome, I was in Moscow, I was in New York and a few other cities in the U.S., Charlotte, and I'd say generally speaking things are staying on course with what was expected programmatically to be delivered in the year.

Gil Luria - Wedbush Morgan Securities Inc.

Any particular region that has a disproportionate share of those delays?

Bill Nuti

I would say the U.K. was a piece of it; a little bit in the U.S. Not in the international markets, certainly not in China, Eastern Europe, or the Middle East and Africa.

Gil Luria - Wedbush Morgan Securities Inc.

You've already discussed the [inaudible] of progress you've been making on working capital. What inning do you think you're in in terms of the progress? I mean, if you really only started in the first or second quarter, how many more quarters do you think you can actually use working capital as a source of cash?

Tony Massetti

That's a good question, Gil. I think the team's worked hard and done a very good job on a couple of fronts - AR, we talked about, inventory. I think there are other elements of the balance sheet assets, liabilities which will drive additional cash in 2009. So what inning? We're probably fourth or fifth, I would say, in terms of progression. And I expect to see gradual sequential improvement in all those areas that I just talked about over the next several quarters.

Gil Luria - Wedbush Morgan Securities Inc.

Over the last six months, Tony, have you found anything about NCR's business that would make you think that won't be able to achieve the DSO level you did at your previous employer?

Tony Massetti

No, I don't think so. DSOs in the quarter were about 62 days. When I started here in March quarter, they were about 80, so we've taken DSO days down about 18 days in a couple of quarters. A DSO day is worth between $10 and $15 million to the company. So I think we'll see gradual progression toward mid to upper 40s over time.

Gil Luria - Wedbush Morgan Securities Inc.

And then $26 million left on your buyback. We asked this last quarter; we'll ask it again. You're probably going to use that fairly quickly in the next few weeks given where the stock is now. Have you already gone to the Board or are you planning to go to the Board to ask for another authorization?

Tony Massetti

Bill and I talk to the Board really every Board meeting about the status of the share repurchase. I went through the numbers with you in the prepared remarks. We have $26 million left. We'll work through that over the next several weeks, and then we'll go back to the Board and discuss again a follow-on buyback. It's really up to the Board's discretion whether it's approved or not. We'll update you on analysts day and then again on the next earnings call.

Gil Luria - Wedbush Morgan Securities Inc.

One last question, the acquisition, how meaningful is it? What is the annual run rate for the acquisition you made?

Bill Nuti


Gil Luria - Wedbush Morgan Securities Inc.


Bill Nuti

It's small. The meaningful nature of that acquisition is the teller assisted cash recycling space is a very large market that we've not participated in at NCR.

The key competitor in that space is [Delaro]. Now a company by the name of [Telarus] that was bought, I think, primarily by the Carlisle Group, most recently, a private equity company who bought the teller assisted cash recycling business, essentially, of Delaro. They have a very successful business in this space.

And we have rolled up over the last year and a half a very good solution to sell into that space and in fact intend to have very good success coming out of the chute here in 2009 in that environment. So NCI, the acquisition of NCI, is the software that connects these teller assisted cash recycling systems to the back office applications of a bank. And interestingly, NCI is also the same application that is used by Delaro, but we've purchased it from them.

Bill Nuti

I appreciate it everybody. I look forward to seeing you at the December analyst meeting, and certainly, if you can't make that, on the next call. Thanks for joining us today.


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