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NCR Corporation (NYSE:NCR)

Q4 2009 Earnings Call

February 4, 2010 8:00 am ET

Executives

Gavin Bell – Investor Relations

Bill Nuti - Chairman and Chief Executive Officer

John Bruno - Executive Vice President Industry Solutions Group

Bob Fishman - Interim Chief Financial Officer

Analysts

Paul Coster – JP Morgan

Gil Luria – Wedbush

[David Sacks] – Unidentified Company

Reik Read - Robert W. Baird

Kartik Mehta – Northcoast Research

Matthew Schneider – Morgan Stanley

[Zahid Fadic – LA & Company]

Operator

(Operator Instructions) Welcome to the NCR Corporation Fourth Quarter Earnings Conference Call. I’d now like turn the call over to Mr. Gavin Bell.

Gavin Bell

Thanks everyone for joining us for our fourth quarter 2009 earnings call. Bill Nuti, NCR's Chairman and Chief Executive Officer will lead our conference call this morning. After Bill's opening remarks, John Bruno, Executive Vice President of our Industry Solutions Group will update you on progress with respect to certain key initiatives, and Bob Fishman, NCR’s Interim Chief Financial Officer will then provide comments on NCR's total company financial results.

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 vary materially. These risk factors are described in NCR's periodic filings with the SEC and in 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 press 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, NCR.com. For those listening to the replay of this call, please keep in mind that the information discussed is as of February 4, 2010, 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.

I’ll now turn the call over to Bill.

Bill Nuti

Let me start with saying that managing through this past fiscal year just completed was certainly challenging but also rewarding in a number of ways. It took tremendous resolve on the part of the NCR team and the determination that we had to remain focused on our short and long term goals was certainly admirable.

Disruptions of historic proportions in the global economy and our core end markets challenged a growing and thriving NCR that had just come off of very successful 2007 and 2008 fiscal years. In that regard, we feel good about how we finished 2009 with Q4 results coming in ahead of expectations.

Strategically it was an important and also very successful year for NCR. Despite the economic challenges we made courageous decisions and continued to invest in our business. We invested in technology innovation, in new markets like entertainment, in new manufacturing footprints in the United States and Brazil, in new employee development infrastructure for lifecycle training of our people, in new IT tools to increase productivity, in continuous improvement programs to improve efficiency and quality long term, and in talent development to bolster our bench strength.

All of these investments underpin the long term growth and profitability objectives we’ve laid out for our shareholders. Equally important, all of these investments were self funded by productivity increases and systemic cost reduction actions that improve NCR’s long term competitive position. I’m happy to say that as we enter 2010 despite the still present economic and end market challenges, we believe our long term goals are firmly in reach and that we’re going to make progress toward them again this year.

As such, we feel we’ve set prudent yet very fair expectations for the full year 2010 for reasons that we’ll address in greater detail on this call. I’d like to start here by quickly recapping the key strategic accomplishments of the year and then I’ll segway into a discussion of the current business environment and how we’re successfully managing through it. I also want to update you on discussions that we’re having at the Board level regarding our pension exposure and our strategy for addressing it.

The headliner for NCR this year was the launch of our entertainment business, a market opportunity we have identified as the third vertical for NCR. The DVD kiosk market is a large and rapidly developing market opportunity where our size, retailer relationships and technology leadership position us to be a global market leader for years to come.

The steps we took to execute this launch in 2009 should demonstrate our commitment and ability to move quickly. We completed two acquisitions in 2009, TNR and DVDPlay. We launched our partnership with Blockbuster and we’ve been aggressive in signing up retail partners as we execute on our deployment goals. John Bruno will update you in more detail in a few moments.

We’ve also made great progress in other emerging self service verticals this year, notably travel, a market we expect that over time we’ll demonstrate significant growth potential and higher margin characteristics. Our recent activities include the development of our outdoor kiosk, the continuing focus on the international market opportunity, and developing important strategic partners like Ultra Electronics for airport check-in.

Partnerships like this are an extension of our commitment to organic innovation. At the same time, recent introductions in areas like self check out in retail and intelligent deposit in financial services continue to drive the discussions with customers in our traditional core industries. At the same time we are focused on innovation, we are also remaking NCR from within, for the benefit of employees, customers and shareholders.

Key initiatives have included the opening of our new global headquarters outside Atlanta and our nearby global services center of excellence, a move that enables us to combine business critical corporate functions in one location while putting us within closer reach of our global customer base, world class research institutions, and in a locale that affords great access to a large diverse and growing skills pool. Our new manufacturing facilities in Manos, Brazil, and Columbus, Georgia, both of which are shipping product on schedule in the first quarter of this year.

Investments in productivity tools, process improvement, and people development within NCR including our NCR University initiative, our continuous improvement infrastructure and cross functional leadership councils dedicated to key goals like cost structure excellence, improved quality, emerging markets leadership, corporate culture and innovation.

Finally, our transition to a more market driven operating model, our industry solutions group structure. This ongoing realignment is helping us to optimize R&D which will create product development efficiencies and new opportunities while devoting the right resources to the industries and geographies we are targeting from a sales, marketing and services perspective. I’ll talk about his further also in a just a moment.

In addition to these strategic moves we’ve also executed well on our commitments to lowering our cost structure and improving our working capital position. Working capital as a percent of revenue was 15% at the end of Q4 and total expenses were down $120 million resulting in an expense to revenue ratio dropping 20 basis points.

NCR removed approximately $50 million in annualized costs in 2009 keeping us on track with our longer term goals. We closed 2009 with a strong balance sheet with $451 million of cash on hand and only $15 million of debt. Even in the midst of a very deep recession our financial position has improved and NCR will continue to focus on capital structure strategy with the goal to drive double digit rates of return on capital.

All of these initiatives and accomplishments together position us to operate as a leaner, smarter, and more profitable company in the years ahead. While this is a lot about where we are going in the future we are keenly aware that we must also stay focused on near term performance and operational execution. We know that short term execution is critical to keeping us on the path toward achieving our long term goals.

On our third quarter conference call we were clear about the challenges we faced in the fourth quarter so we are pleased to have delivered ahead of the expectations we set for the period. Even though end market conditions in Q4 were largely unchanged from prior periods. Our teams worked hard to deliver good results in the face of capital constrained mid-sized banks on the financial side and a dearth of capital spending in retail.

Those sizeable pieces of our business were offset by pockets of continued strength including large US banks who continued rolling out intelligent deposit and banks outside of the United States that deployed cash recycling technologies. These advanced technologies are gaining increased momentum in the marketplace and large banks are adopting these technologies and distancing themselves from other segments of the banking sector.

With that said, as the economy recovers and capital spending improves, we expect other segments of the banking industry including mid-sized institutions will work to reduce this gap and embrace advanced ATM technologies.

I would like to take a moment to highlight a recent important milestone achieved in our financial services business with the sale of our 50,000th NCR self service ATM. We have now sold NCR self serve ATMs to financial institutions in more than 110 countries around the world. As you’ll recall, we launched NCR self serve less than two years ago here in the United States which makes it the most successful ATM launch in NCR stories history.

In addition to the ongoing rollout of advanced ATM technologies at large banks, areas of continued business strength include certain emerging markets like China and India where NCR is a market leader, as well as gains in several of our newer self service verticals. Overall, however, end market capital spending faced continued challenges in the quarter and near term visibility still remains limited as we look into early 2010 particularly in the retail industry. Therefore we feel it’s responsible to retain a somewhat cautious posture relative to expected near term performance.

I’ll turn now to our initial guidance for 2010. We are entering the new year with optimism about NCR’s competitive position in the marketplace and our success in executing against our strategic goals. We feel good about the execution of our teams throughout the company and remain confident that NCR is navigating well through this unprecedented downturn. We expect the end market environment to remain challenging and would expect a sequential improvement in our results as we move through the year, similar to historic patterns that indicate a lower level of revenue in the first quarter of the year.

In our press release this morning we noted that we are now providing our earnings guidance excluding estimated pension expense. We will continue to provide the pension expense estimate as it plays a key role in determining our ultimate GAAP results. Presenting earnings guidance net of pension expense provide our shareholders, external constituents, and our internal team a clearer view of our business results and underscores our focus on operational execution as we target NCR’s return to profitable growth.

We expect revenues in 2010 to increase in the range of 2% to 5% on a constant currency basis. We expect non-pension operating income or NPOI to be in the range of $310 to $330 million for the year, an increase of 9% to 16%. We expect non-GAAP earnings per share excluding pension expense to be in the range of $1.35 to $1.45 in 2010 an increase of 6% to 14%. Pension expense is estimated to be $215 million in 2010. Our pension cash funding requirement is expected to be approximately $110 million in 2010 which is down from the previous estimate of $120 to $150 million and compares to $83 million in 2009.

Our full year tax rate is expected to be approximately 27%. Finally, we expect 2010 free cash flow to be approximately break even as the additional capital requirement to take advantage of the entertainment opportunity, coupled with pension cash funding and severance payments will have the largest near term impact on free cash flow.

As I mentioned earlier, we are transitioning to a more market driven operating model which we call our industry solutions group structure, headed by John Bruno. John will discuss recent business highlights by industry in just a moment. I’d like to provide an indication of our top line results for 2009 and some direction on 2010.

During 2009 revenue in the Americas region decreased 11% attributable to volume declines in both financial and retail end markets. For 2010 we anticipate revenues in the Americas to grow mid to high single digits driven primarily by NCR’s entertainment DVD kiosk rollout. Revenues for the EMEA region declined 20% or 17% on a constant currency basis due to volume declines across all customer industries. On a constant currency basis we expect EMEA region revenues will grow low single digits during 2010.

While full year 2009 revenues for the Asia/Pacific Japan region declined 4% or 5% constant currency, the APJ region ended 2009 on a solid note with 4% constant currency growth in Q4, driven by financial industry customers across the region. On a constant currency basis we expect APJ region revenues to grow low to mid-single digits during 2010.

Based upon our expectation that global revenues will increase 2% to 5% in 2010 we expect revenues from financial industry customers to be up slightly following a high teens revenue decline in 2009. Revenues from retail industry customers are expected to be flat in 2010 following a decline of more than 20% in 2009.

Our emerging industries, including entertainment, to deliver double digit growth in 2010 following a single digit increase in 2009. Entertainment is expected to generate revenues in the $125 to $150 million range in 2010.

Let me address pension briefly. Pension expense had a significant impact on our 2009 reported earnings. Not only has non-cash pension expense had an impact on NCR’s earnings we believe it has had a significant impact on our share price. Our internal team is continuing to work with outside advisors to analyze this very complex issue. We will thoroughly analyze our pension situation and with the support of our Board of Directors, will be communicating our go forward strategy in the next several months.

In wrapping up, given our solid execution with the fact that we will leverage the benefits derived from our transformational structural changes and investments throughout 2010 we are confident that we are well positioned for the upcoming year and beyond. Early signs of a slow recovery point to a better 2010 for NCR but challenges specific to the core industries we serve will affect the timing and trajectory of our growth.

Strategically, 2009 was a highly productive year, a remarkable year from an investment in our future perspective. Based upon how far we came during 2009 we are pleased to be in a position where our longer term goals remain well in reach as global markets recover.

I’ll now turn the call over to John Bruno to update you in more detail on some of our initiatives I’ve mentioned and then Bob will review the quarter’s financial results.

John Bruno

Since Bill covered the financial line of business I’ll start with entertainment. Our deployment progress, the acquisition of DVDPlay, recent customer wins, and growing technology offers, have NCR well positioned in 2010. We surpassed our goal to deploy more than 2,500 Blockbuster branded kiosks by year end, ending 2009 with over 3,800 kiosks deployed, as we significantly expanded our network of rental kiosks through the acquisition of DVDPlay, an operator of approximately 1,300 kiosks across the US and Canada.

We are currently re-branding these kiosks under our Blockbuster Express brand and have plans for further expansion in currency DVDPlay locations. We’re on track to meet our goal to deploy up to 10,000 DVD kiosks by the end of 2010.

We had a number of notable customer wins during the fourth quarter including an agreement with Duane Reed to install our kiosks in more than 200 locations in New York. It’s worth noting this agreement will result in the largest deployment ever of DVD rental kiosks in the New York City. In January we announced further expansion of our New York City footprint through an agreement to install kiosks in 35 Gristede’s Supermarkets.

We will be installing our kiosks across the Tedeschi Food Shops convenience store chain which includes 188 locations across New England and we are currently installing kiosks in Brookshire Grocery Stores, a more than 150 location grocery store chain located in Texas, Louisiana, Arkansas and Mississippi.

These development come on the heals of completing the installation of DVD kiosks in most Florida area Publix locations and the further deployment of kiosks in a number of additional Publix locations in Georgia, South Carolina, and Alabama. All in all we’re pleased with our progress deploying and installing DVD kiosks and the early returns for maturing units are trending in line with our expectations.

During the fourth quarter we also launched our first outdoor DVD kiosk capable of holding up to approximately 1,000 DVDs, giving it the highest capacity of any outdoor DVD kiosk in the industry. In addition to capacity, this outdoor kiosk features some of the latest self service technology offered by NCR, such as improved payment security and user friendly touch screens. It also contains a flexible architecture granting easy deployment of digital media download files in the future.

From an ongoing innovation perspective, NCR and Mod Systems announced a digital kiosk download pilot aimed at addressing the shift in media consumption habits over time. The pilot allows the consumer to choose from any move or TV show stored in the kiosk, quickly download the desired title to a secured digital memory card and then plug the card into their television, set top box, and play the chosen titles in their home.

It’s important to note that our existing DVD rental kiosk including the outdoor kiosk I discussed a few moments ago have all been built and deployed digital download ready. As a result, we have the capability to integrate this technology across our footprint as digital download grows in popularity, furthering our position as the leading provider of automated retail store solutions for the entertainment industry.

The preference for self service entertainment continues to strengthen as the consumer shifts to renting movies from kiosks grows. Outside research group NPD now predicts that as much as 30% of the DVD rental market will be from the kiosk channel by the end of 2010. According to NPD nearly one in five movie watchers are already renting their DVDs and Blu-Rays from rental kiosks like ours. This could grow to nearly one in three in 2010. Our entertainment strategy has us well positioned to share in this channel shift.

Entering 2010, when I look at the entertainment initiative as a whole, we’re executing well. While we were not the first to enter this market, we bring some unique strengths that will advance the state of the art, including scale, intellectual property, technology innovation, capital resources, strong retail relationships, global footprint, and technology leadership in the self service arena. All these strengths enable us to move quickly and intelligently as we build this business.

Now let’s move on to other NCR industry lines of businesses. While the retail market remains exceptionally challenging, we’re focused on building our suite of offers and strengthening our market position for when the environment begins to improve. We recently acquired a company called Netkey, a market leading provider of kiosks and digital signage software applications. These technologies are used to deliver an expanding set of self service applications including gift registry, assisted selling, endless island inventory and human resource functions.

According to ABI research the global market for digital signage in 2010 will exceed $1 billion. The acquisition of Netkey positions NCR well in this emerging segment and extends our reach into our core financial and retail markets.

In January we announced that Hot Topic, a mall and web based specialty retailer of apparel and accessories implemented NCR Netkey self serve kiosk technology and digital signage applications. Approximately 1,500 NCR self serve kiosks are now in use in Hot Topic retail stores.

Also in retail NCR was approved as supplier of point of sale POS technology for Wendy’s restaurant system franchisees which total more than 6,600 restaurants globally. The agreement grants Wendy’s franchisees the opportunity to deploy the NCR real pause 70XRT the industry’s most powerful integrated touch pause workstation.

We continue to invest in and deploy advanced multi-channel technologies to the retail market. One recent introduction is the new coupon to card application which provides retailers with a single solution to manage and deliver loyalty programs and promotional offers to their customers. We also introduced our new NCR real pause receipt label printer, a solution that can help food service operators identify and track orders up to 30% faster than traditional methods.

We are extending our global leadership in airline check-in kiosks to curbside service. China Southern Airlines purchased 40 additional self service kiosks following deployment of 30 kiosks earlier in the year. The additional kiosks are set to be deployed in four of the airlines major hubs and will expand NCR’s presence in one of our most important international markets. Also in travel, we continue to make progress rolling out paperless boarding pass technologies throughout the industry.

Lastly, I want to update you on some organizational development work that we accomplished in 2009, it as the year of aggressive change and transformation for ISG. We centralized our R&D, restructured our go to market and decision support teams, we created a market driven line of business model with general managers and teams focused on five industries and integrated our product development and services functions creating a singular cohesive unit that how owns customer success through the entire solution lifecycle.

With this new model in place I’m confident that we will improve our speed of execution, get even closer to our customers and foster innovation at an improved rate. Our next generation products and technologies will be developed with serviceability and manufacturability in mind from conception through deployment, delivering improved top line and bottom line performance.

In closing, if you step back and look across all these verticals, we are seeing the self service mega trend gaining traction and consumers demonstrating a growing desire for convenient, contemporary electronic channels. NCR is uniquely positioned at the intersection of business to consumer, B2C and now consumer to business interaction what we call C2B, enabling us to take a leadership position in this emerging multi-industry point of service market.

With that I’ll hand it over to Bob.

Bob Fishman

Let me get right into the numbers for the fourth quarter. NCR’s total revenue from continuing operations in the quarter was $1.35 billion down 5% versus Q4 2008. This includes a four point benefit from foreign currency translation. We reported a GAAP loss from continuing operations of $56 million or $0.35 per diluted share. This compares to GAAP income from continuing operations of $55 million or $0.34 per diluted share in Q4 2008.

NCR’s results from continuing operations include special items in both periods. In Q4 2009 there were three items: a $24 million impairment charge related to our e-plans estimate, $6 million in incremental costs directly related to our headquarters relocation, and the $151 million net charge related to Fox River. These three items totaled $116 million after tax or $0.72 per diluted share.

In Q4 2008 there were $53 million in costs resulting from organizational realignment activities, legal matters, and the Fox River environmental reserve. Excluding these items, non-GAAP diluted income per share was $0.37 per share in Q4 2009 versus earnings of $0.58 per diluted share in Q4 2008.

Pension expense was $41 million in Q4 2009 compared to $7 million in Q4 2008. 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. Also please be advised that a reconciliation table providing earnings per share excluding pension expense on a quarterly and full year basis for 2009 has been posted on the Investor Relations section of our website.

The following comments about NCOI exclude the impact of special items and pension expense. Our Q4 2009 gross margin was 21.6% compared to 23.5% in the prior year period as lower product sales and unfavorable mix offset the benefits for our manufacturing realignment and successful implementation of cost reduction initiatives.

Operating expenses excluding pension expense and special items were down 12% or $25 million versus Q4 2008 as a direct result of our sharp focus on optimizing our cost structure in the face of a challenging end market environment. Total company non-GAAP income from operations or NPOI was $108 million in the fourth quarter compared to $127 million in last year’s Q4.

Income tax represented a benefit of $58 million on a GAAP basis in the fourth quarter compared to income tax expense of $7 million in Q4 2008. Income tax benefit in the fourth quarter 2009 was due to the non-proportional benefits of the significant environmental impairment charges incurred in the US. NCR expects its full year 2010 effective tax rate to be approximately 27% although it will be higher in Q1.

Turning to the balance sheet, cash on hand at 12/31/2009 was $451 million with total debt of just $15 million at the end of the quarter. Approximately $26 million of Board authorization remain under our current share repurchase plan with an additional $11 million available under the dilution offset program.

Moving over to the cash flow statement, NCR generated $107 million of cash from operating activities in Q4 2009 versus $108 million in the prior year period. Capital expenditures totaled $59 million in Q4 2009 compared to $33 million in the prior year, primarily due to investments in the entertainment industry.

NCR generated free cash flow of $48 million as we were impacted by lower profitability and larger working capital improvements in the prior year period. NCR defines free cash flow as cash flow from operations less capital expenditures for property, plant and equipment, and additions to capitalized software. We continue to deliver good performance with our working capital.

Further to Bill’s earlier comments, there was some good news for pension. Return on assets was 28% in the US plan and approximately 22% for the overall portfolio and the under funded position improved by approximately $150 million. Cash outflow expectations for pension funding over the next three years have also improved. The 2009 funding was $83 million less than the $100 million forecast. For 2010 the funding is expected to be $110 million down from the previous forecast of $120 to $150 million.

Unfortunately the discount rate did not help us in 2009 as it ended at 5.75% in the US and 5.4% globally. If discount rates had stayed the same as year end 2008 our under funded position would have improved by an additional $350 million, a 25 basis point increase improves our global under funded position by approximately $140 million.

As Bill said earlier, we continue to address the pension issue. We understand its having an affect on our stock. It’s a complex issue and we’re working with outside consultants to analyze our potential options. We’ll continue to work it and we plan to provide more details in the upcoming months.

Finally, in our earning release we have provided information on our under funded situation and the increase in non-cash pension expense for 2010. The increase in pension expense is primarily due to the unamortized loss that was booked at the end of 2008 and flows through our income statement over future years. We have also provided guidance on operational EPS excluding pension expense so that investors can better understand the improvement in the underlying NCR business.

Now I will turn the call back over to Bill for closing comments.

Bill Nuti

I’d like to reference one important development within NCR as I wrap up our prepared comments here which should give you an idea of the enthusiasm we have as we reshape our company. At the beginning of this year we formally launched our innovation council, an initiative to engage employees across the company and harnessing NCR’s legacy of technology and innovation. John is chairing this effort and all of us on the executive team are actively involved.

The council is designed to stimulate and reward new ideas from among the many talented engineers, software developers, and other business leaders in the company. The council includes boards devoted to both venture investment in promising ideas, and incubation of new businesses with the promise to contribute future revenue growth to NCR.

Those of you familiar with NCR’s history know of the many important technology developments attributed to NCR people. From pioneering early work in transistors to development of LCD technology, to more recent innovations like self check out and digital media download. As we embrace new verticals and businesses in the self service market, we think the stage is set for continued ground breaking innovations that will fuel NCR’s growth into the future.

Behind that legacy of innovation we’re taking the organizational steps needed to make the most of the opportunities we’ll create, aligning R&D, engineering, and product design, manufacturing sales and marketing, and customer support. Steps along that path have comprised many of the strategic accomplishments of 2009 that I’ve outlined this morning.

We believe the benefits of those actions will begin to become apparent as market and economic recovery unfolds. We’re not out of the woods yet but certainly expect 2010 will be a better year for NCR and we’re cautiously optimistic about the opportunities our actions portend for performance gains in the future.

Thank you. I would now like to open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Paul Coster – JP Morgan

Paul Coster – JP Morgan

We welcome the way in which EPS guidance is being issued. Can you give us a sense of the range of options that are being evaluated to address the pension fund shortfall?

Bill Nuti

We’re pleased to be able to provide that guidance. You can’t imagine how much work goes into even making a small change like that relative to the regulations, the regulatory environment we work around here at NCR and most public companies work around. The pension, let me just start by saying that the pension overhang is an issue of great importance to myself, to the management team, and to the Board. We’ve had several meetings on this topic over the course of the last several months and we’ve brought in outside advisors to help us to draw to the right conclusions here.

As you also know, a very complex issue and one that needs to be thoroughly vetted before we pull the trigger on any particular path. I don’t want to be coy, you may not even like the answer but the range of opportunities or the range of options are everything from do nothing, as I said on the last call, to taking very aggressive steps to reallocate our pension assets to a more immunized position and pay down the pension and everything in between.

The permutations of what’s being considered I can assure you are vast and the pros and cons of each one of those permutations are being vetted at a very detailed level by the Board. You would be very proud of the amount of effort this Board of Directors is putting into this process and myself and the management team here at NCR.

Paul Coster – JP Morgan

On the kiosk side, the guidance that you’re issuing is far short of my expectations anyway and part of my expectations is derived from the Red Box as a proxy and a similar number of kiosks they’re at much higher revenue levels. Can you explain to us what the delta is versus Red Box perhaps and also how is your relationship with the studios evolving as you get bigger, do you expect to have the same kinds of stresses as they have in their relationships?

John Bruno

No I don’t expect to have the same stress. I don’t expect to have the same stress because we designed the machines themselves in our business model in conjunction with our partner in Blockbuster to be more of an automated retail store capable device that allows you to augment a whole multi-channel offering which includes sell through, holds greater copy depth and the capacity. It’s not just purely a rental arbitrage, so that’s why I expect it receive more favorably and it has been.

Let me get you to the specifics of your question because it’s a great question. We’re trending well against what you would expect to see, what Red Box is doing at the same time and their maturity. The way you really need to think about it is we started this year coming to 2010 with about 4,000 machines and we’re going to end the year at approximately 10,000 that would say that the average of the machines is somewhere between 6,000 to 6,500 machines is going to be on average.

The reason I’m giving the average is because the ramp is so critically important. It takes a machine about a full year to get up to its mature level and the height of what we would expect to be which is approximately 40K per machine in revenue. Some machines will exceed that, some machines will be slightly below that but on average that’s a pretty good number 40K machines.

When you start to think about the average and you think about where we are and the ramp and the cycle you have our machines given the fact that we’re in high deployment mode, obviously averaging around the six months of their life. Six months, roughly 6,000 to 6,500 machines, roughly 20K per machine per year that’s how you get to that guidance number that I’ve given you.

Operator

Your next question comes from Gil Luria – Wedbush

Gil Luria – Wedbush

I wanted to follow up a little bit on the DVD and some of the figures around that. Can you tell us what the contribution was from that business in 2009 and in total what the revenue from acquisitions was in Q4?

Bill Nuti

Of course the business was relatively new in 2009. I think the revenues were just shy of $30 million in total for the year. Of course most of those units were deployed in Q4 so you’d expect that revenues would be light. The acquisition that we made was at the end of Q4 so we didn’t really realize any of the revenue benefits of that acquisition in Q4 expect for a small portion, a couple million dollars. All of that of course will flow through this year.

Just to augment the answer John gave to an earlier question on this, if you assume, and you should, most of the units we deployed in entertainment were deployed in Q4 and outside of the 1,300 we acquired from DVDPlay were NCR organic machines, about 2,700 are relatively new machines, they were deployed in the last three to four months.

As we move through the year we’re anticipating the average number of units, as John said, to be between 6,000 and 6,500 on the 2010 year and for the average age of those units to be about six months. That’s why if you mature out at 40K and ramp in a year and you’re in at six months you should anticipate about 20K per unit is how we get to the guidance, just to give a little more color.

Gil Luria – Wedbush

In terms of the contribution to profitability, what impact do you expect the DVD business to have on NPOI and what impact do you expect the entire endeavor to have on free cash flow in 2010?

Bill Nuti

At current levels of investment we’ll lose about $30 million this year in the entertainment business so its going to impact NPOI negatively to the tune of about $30 to $32 million in that range. We’ll spend this year approximately $85 million in capital on that business.

Gil Luria – Wedbush

A couple other pieces on free cash flow, what do you expect to spend in terms of cash on Fox River and the headquarter move in 2010?

Bill Nuti

If you think about those headwinds on free cash for the year the outgoing pension dollars will be about $110 million of cash out the door, $85 million of course for entertainment we just discussed, and the other items would be...

Bob Fishman

Fox would be approximately $30 million, baked into our free cash flow plan. For headquarters it’d be $15 to $20 million.

Bill Nuti

You’re looking at the company wants to get to about $225 to $250 million in free cash without some of those, what I would call relatively speaking one time items.

Gil Luria – Wedbush

In terms of use of cash, are you also considering side by side with the funding of pensions resuming a buyback of shares?

Bill Nuti

Everything is being considered across the board. The options that we’re considering certainly would include a buyback of shares. I can’t say whether that’s going to be an item that will make the cut but I want to give you full confidence that we’re looking at every single option the company has because we fundamentally believe in, its fact based if you look at our peer group and what they’re trading at in terms of EBITDA multiples versus NCR, we’re undervalued. We’re looking at all options to unlock the value and the complexity associated with pension and the impact that that complexity has had on our company’s valuation and stock price.

Operator

Your next question comes from [David Sacks] – Unidentified Company

[David Sacks] – Unidentified Company

One point of clarification if Bob’s comment before he said that 25 basis point change in the discount rate was $140 million to the pension funding worldwide?

Bob Fishman

That’s correct but that’s the global number. It would be about 25 basis points equals $90 to $100 million in the US and then 25 basis points when you include the international plans is $140 million.

[David Sacks] – Unidentified Company

The $20,000 run rate on average for a six month old machine you’re suggesting that the machine when it’s a year old will be $40,000 roughly in run rate. That seems like a very aggressive ramp in growth. Is there any justification or understanding behind that or some way you can help us jive to the $40,000?

John Bruno

When I gave you those numbers what I was saying it takes about a full year for a machine to mature to $40,000. I wasn’t saying that it takes six months; I was saying it takes about a year. It starts, as you obviously increase number of transaction, you market in the local environment. There are many things that you do to increase revenue per machine. That ramp is very consistent with what we’ve seen in the industry and we feel very comfortable with that because we’ve seen our machines continue to ramp at that rate as we install them.

What I was saying to you is the average is six months because you continue to deploy so you have to think about this as you’re constantly adding new machines at low transaction rates and low revenue rates to other machines that are ramping so you’re pulling down the average. If we were to start the year at 10,000 that’s a different answer on revenue, but when you’re adding machines continually throughout the year in this case we’ll be adding 6,000 machines, that has an affect to the overall revenue ramp and attainment.

[David Sacks] – Unidentified Company

The 1,300 DVDPlay machines that you acquired, are those running in the high $30,000?

John Bruno

Yes. The 1,300 machines that we acquired were running at that level.

Bill Nuti

The other proxy you could use is our next nearest competitor, if you divided the number of machines they have into their revenue number, knowing full well that some portion or percentage of those machines are new machines that they’ve installed over the last several months, you’d pretty much get to about 40K units.

John Bruno

The benefit is more machines, it’s a volume business. The volume affect is more machines at maturity have a better affect on the ramp but when you’re in a growing business you have the opposite affect.

[David Sacks] – Unidentified Company

Of the loss, how much of that is central expense as opposed to unit performance? The $30 to $32 million of operating loss.

Bill Nuti

A big piece of that is the amortization roll off in the first few years of the capital intensive business.

Operator

Your next question comes from Reik Read - Robert W. Baird

Reik Read - Robert W. Baird

A follow up on the $85 million in capital, is that really for the machines that you’re talking about and is inventory an incremental investment to that?

Bill Nuti

Its all in, that’s machines and inventory.

Reik Read - Robert W. Baird

On the retail side of things, you mentioned that things will probably flatten out this year. Does that mean sequentially things are flattening out or does it still need to go down a little bit? Can you talk about the overhang from excess equipment out there and when you think that that might be depleted?

Bill Nuti

For retail we’re expecting 2010 to largely be around flat. We could see growth in the low single digits; we also could see a decline in the low single digits. The good news is a year ago I couldn’t give you a prediction in that range; it would be a much wider band. This year I think we’ve been very responsible in terms of thinking about retail.

We have been mildly encouraged of recent in terms of development in retail and a little bit more of pick up of activity that I think will have more of an impact because the RFPs come out early, in Q2, Q3 than they would in Q1. It’s too early to tell whether or not that’s going to pick up. It has gotten a little better sequentially as time has gone on here throughout the year. We’re also going to be obviously benefited by the comps, to be candid with you our comps will not be as difficult to overcome given the precipitous drop in retail in 2009.

Reik Read - Robert W. Baird

With excess equipment out there how much of a headwind is that and how long does that really last?

Bill Nuti

I have to be candid with you; it hasn’t been a significant issue for us at all in 2009. It wasn’t an issue for us in 2009 and I don’t think it will be an issue in 2010. Simply because of the segment of the market we sell in to. I would say that used equipment is generally speaking an issue but we sell largely Tier 1 products to Tier 1 retailers and I think where you’re seeing the used equipment market have a greater impact would be in the lower tiers of the retail segment rather than our own.

Reik Read - Robert W. Baird

On the North America ATM side of things, you’ve got a couple of big players that are still in the midst of their deposit automation ramp but those will end sometime in 2010. What does the next level of banks look like at this point? Are there followers that are going to be able to pick up the slack there?

Bill Nuti

The followers will kick in I think more towards the latter half of the year. We are seeing more activity there as well, more interest level there as well, but equally its still a more cautious environment today than it was even a quarter or two ago. It still remains relatively cautious. That being said, you’re right, some of the larger banks are going to roll off this year in intelligent deposit, you will see intelligent deposit begin to pick up in international market, particularly Brazil and India over the course of the next few years. We think we’re going to be well positioned for the Brazil marketplace when that transition occurs in 2011 and 2012, similarly for India and other markets.

We do not expect the US to grow all that much this year from a financial services perspective for us. We would say that the mid-sized banks, the regional bank, the national banks certainly will not pick up all of this slack that will be left by the large banks but we think they’re going to start to become very active this year and going into 2011.

Operator

Your next question comes from Kartik Mehta – Northcoast Research

Kartik Mehta – Northcoast Research

If you could just expand on the comments you already started with the last question. I wanted your thoughts on the fundamentals of the ATM and retail market worldwide, you gave your thoughts on North America and I was wondering if you could give your thoughts on Europe, Latin America, and in Asia.

Bill Nuti

We’re seeing more activity in Western Europe; Eastern Europe continues to remain a slower market, in particular Russia and the Eastern Block countries. The Middle East and Africa is picking up a little bit, that’s positive. Certainly the activity in Asia continues to be robust and we’re particularly pleased given our market position there with Asia. I’m talking specifically about China and of course India.

We have some new products that are coming out on the marketplace we think are going to be very competitive in areas like South Asia. We’re also coming out with some new products for China in the recycling space that we think are going to fairly exciting. We expect Asia to continue to be a strong market for the company.

Of course the market we’re now participating in that we’ve not participated in traditionally is Latin America and Brazil. We’re seeing a lot of activity in Brazil, activities we’ve certainly not been engaged in, in the past and we think it will begin to translate into good positive top line performance for us later in 2010. That market, however, the Latin American market particularly Brazil, continues to be a good marketplace for ATMs and for NCR in particular because we were not a market share challenger at least until recently. Hopefully that gives you a little bit of color around the world.

Kartik Mehta – Northcoast Research

I wanted to expand on the point you made about Brazil, obviously your strategies had changed a little bit, and it sounds like you’re having some success. Can you talk a little bit about what the new strategy, is it just that you have a manufacturing plant and that gives you a competitive advantage or are you doing something else different to be able to gain some market share in that part of the region?

Bill Nuti

No, it simply comes down to be a local manufacturer and that market’s a closed market so in order to compete in that marketplace its very important to have operations in the country, certainly those are huge investments whether it be a plant or as we also announced a center of excellence for R&D. Because that market is unique from the point of view that banks tend to build custom products largely based on security requirements that they have so you need to be quite nimble from an R&D perspective in terms of developing those products along with the banks, particularly the public banks.

Then have a local manufacturing capability and sourcing strategy so that you can be competitive in light of the taxation that occurs when you ship into the country. We think we’re very well positioned across all of those key requirements to be successful in the country. Now it’s a matter of picking up on the marketing side and the sales side and beginning to ferret out any of the early days issue which you inevitably face when you build new manufacturing plants and/or R&D centers in new countries.

Kartik Mehta – Northcoast Research

Have you had any business disruptions from the move of the headquarters, obviously a big task you undertook and I wanted to get your thoughts on how you felt it went and if there were any disruptions that happened in 2009 that maybe won’t happen in 2010?

Bill Nuti

We haven’t had any business disruptions from that move.

Kartik Mehta – Northcoast Research

Impact from currency in 2010, I know you gave your constant currency guidance I just wanted to find out what you are expecting from an FX impact for 2010?

Bill Nuti

Right now flat to our plan rate on the year it’s never an environment that we portend we can predict, we’re not economists. At the end of the day we think it’s going to be flat.

Operator

Your next question comes from Matthew Schneider – Morgan Stanley

Matthew Schneider – Morgan Stanley

Can you comment on your overall financial business and some of the higher growth emerging markets and how much you expect that to contribute to grow in 2010?

Bill Nuti

That’s obviously for NCR those are extremely important market. Our market position in financial services outside the United States as a percent of our revenues is close to 80%. A big chunk of our financial services business is in Europe, inclusive of that Eastern Europe and the Middle East of course and China.

While we don’t give any specific information about our lines of business by geography if you will, the color I would give you would be that we expect in 2010 that Western Europe will be a slightly better market than 2009; we’re beginning to see more activity in Western Europe. Eastern Europe will continue to be slow. This year we believe that, at least we don’t see today any marketed change in that environment, that the Middle East and Africa will pick up for us this particular year. Asia/Pacific will remain in a relatively robust.

Matthew Schneider – Morgan Stanley

It seemed like from your comments that the revenue in the quarter came in a little better than you guys had planned. Can you talk about some of the sources of that upside and maybe some of the order trends in financial during the quarter?

Bill Nuti

We were pleased with Q4 in terms of the results in light of the fact that for the most part the economic environment didn’t really change all that much for us and end market conditions remained largely unchanged. We did exceed our own expectations vis-à-vis revenue and earnings on an operational basis in the quarter.

We saw orders in the quarter, we had a very good Q3, and orders in the quarter were largely flat with Q3. I would say financial services orders were better than that, they were up in the single digits, financial services orders in the quarter. That was a positive for us on a sequential basis. Revenue was up sequentially 24% so that in and of itself tells you an awful lot. Orders were up in the low single digits in financial services in the quarter.

Retail was down in the single digits in the quarter as well so that remained, it has been a trouble spot for NCR for the last 18 months, and it will continue to be a challenge for us. As I’ve said many, many times before I think financial services is faring far better for the company that retail, although to Reik’s earlier question I think there are some opportunities in retail for us that we’re looking forward to seeing.

The big growth for us continues to be and will continue to be for many quarters and years to come in entertainment because of the hyper growth we’re experiencing in that space based on the investments that we’re making.

Matthew Schneider – Morgan Stanley

Can you give any more clarity on when you guys expect to announce the results of the pension plan analysis? I know you said a few months but is there any more clarity that we could expect.

Bill Nuti

Not really. I think we’re committed to communicating to the analysts and our investors a strategy here in the next several months. We have a number of important meetings that will come up over the course of these next few months that will help us to determine our course of action. I don’t think it’s going to take longer than June but you never know. That hopefully gives you a little bit of a schedule.

Operator

Your next question comes from [Zahid Fadic – LA & Company]

[Zahid Fadic – LA & Company]

On the total CapEx for 2010 what’s your estimate for that?

Bill Nuti

It’ll be flat on a year over year basis.

[Zahid Fadic – LA & Company]

Roughly $175 million?

Bill Nuti

Yes, in that range.

[Zahid Fadic – LA & Company]

On the EPS guidance you have provided the non-GAAP excluding pension. What would be non-GAAP including pension? The GAAP number that you have given of $0.41 to $0.51 I assume we could normalize that right?

Bob Fishman

Certainly, at this point when we’re giving guidance the non-GAAP number is provided and then the difference between the non-GAAP and the GAAP is really the pension impact. You can do the math off the $215 that we provided and that works out to the $0.94 difference between the GAAP and the non-GAAP, that’s the reconciling item.

[Zahid Fadic – LA & Company]

What about the Fox River and some of the other things you talked about?

Bob Fishman

For 2010 we don’t anticipate any one time items like that. Those items get factored into our non-GAAP number as they happen in the quarters. Again, the non-GAAP item that typically associated with Fox would be a change in the reserve. At this point we’ve just topped up our reserve here in Q4 and so we’re not factoring any non-GAAP change.

[Zahid Fadic – LA & Company]

Why is the GAAP EPS guidance of $0.41 to $0.51, why is that compared to your $0.61 why is it lower? I’m trying to do apple to apples. What number should I compared that $0.41 to $0.51 from the ’09 results?

Bob Fishman

That’s in our earnings release and provided in the table. When we give the non-GAAP of $0.41 to $0.51 that’s comparable to a -$0.21 in 2009.

Bill Nuti

Gavin will certainly be communicating to all of you; we will be doing an investor and analyst day in 2010, the timing of which we’ll determine. We probably will do this in Atlanta but we’re going to certainly reach out to many of you or Gavin will get your opinions and feedback. We’d love to have you down to see our new world headquarters, our services center of excellence and our manufacturing plant if we can make that happen. We’re dedicated to holding an analyst day and we look forward to seeing you then. Between now and then I look forward to talking to you again on the next analyst call. Thanks for your time today.

Operator

That does conclude today’s conference. Thank you for participating. You may disconnect at this time.

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Source: NCR Corporation Q4 2009 Earnings Call Transcript
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