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NCR (NYSE:NCR)

Q4 2013 Earnings Call

February 06, 2014 4:30 pm ET

Executives

Tracy H. Krumme - Vice President of Investor Relations

William R. Nuti - Chairman, Chief Executive Officer, President and Chairman of Executive Committee

John G. Bruno - Executive Vice President of Industry & Field Operations and Corporate Development

Robert P. Fishman - Chief Financial Officer, Chief Accounting Officer and Senior Vice President

Analysts

Paul Coster - JP Morgan Chase & Co, Research Division

Daniel R. Perlin - RBC Capital Markets, LLC, Research Division

Ian A. Zaffino - Oppenheimer & Co. Inc., Research Division

Meghna Ladha - Susquehanna Financial Group, LLLP, Research Division

Natalia Kogay - Morgan Stanley, Research Division

Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division

Gil B. Luria - Wedbush Securities Inc., Research Division

Operator

Good day, everyone, and welcome to the NCR Corporation Fourth Quarter Fiscal Year 2013 Earnings Conference Call. Today's call is being recorded. And now, your host for today's call, the Vice President of Investor Relations, Ms. Tracy Krumme. Ms. Krumme, please go ahead now.

Tracy H. Krumme

Thank you. Good afternoon, everyone, and thank you for joining our fourth quarter 2013 earnings call. Joining me on the call today are Bill Nuti, Chairman and Chief Executive Officer; John Bruno, Executive Vice President; and Bob Fishman, Chief Financial Officer. Our presentation and discussion today includes forecasts and other information that are considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. While these statements reflect our current outlook, expectations and beliefs, they are subject to a number of risks and uncertainties that could cause actual results to vary materially. These risks and uncertainties are described in our earnings release and in our periodic filings with the SEC, including our annual report to stockholders.

On today's call, we will be referring to a presentation posted on our website. 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 these non-GAAP financial measures 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 Investors section of NCR's website.

A replay of this conference call will be available later today on our website, ncr.com. For those listening to the replay, please keep in mind that the information discussed is as of February 6, 2014, and NCR assumes no obligation to update or revise the information included in this call, whether as a result of new information or future events.

With that, I would now like to turn the call over to Bill.

William R. Nuti

Thank you, Tracy, and good afternoon to all of you. I'm on Page 4 of the slide deck, top left corner, Revenue. Revenue for Q4 came in as expected, up 2% year-on-year, up 4% on a constant currency basis. For us, I'll talk more about revenue when I get to the full year.

On operational gross margin, it's an interesting story for us. We did a great quarter in terms of gross margin enhancement in the business. But about half of that came from organically developed software in Financial Services and Retail. So non-Retalix -- non-Radiant software mainly drove that -- about half of that gross margin advantage for us in Q4. But it was a very solid quarter in terms of gross margin expansion for us across the board and operating margins across the board in just about every line of business.

NPOI hit a record for us in the quarter, a record both in terms of dollars and margin, up 22% year-on-year, and we hit an all-time high NPOI margin of 13.2% in the quarter. I think it's the first time we hit 13% since the spinoff from AT&T back in 1997. And we had a great quarter in terms of free cash flow, up 160% year-on-year. Bob will give you more color on cash flow during his prepared remarks. I would like to, before I leave the slide, say a couple of things about execution. This is now the 16th quarter in a row that our team has had year-over-year revenue and NPOI growth. And in the spirit of doing what you say you're going to do, this is the 17th quarter in a row that we've either beat or met EPS consensus estimate. So I'm really proud of the team in terms of their ability to forecast the business and execute to what we say we're going to do.

I'm now turning to Slide 5. On the year, revenue came in at $6.12 billion, up 7% as reported, 9% on a constant currency basis. We did meet our guidance, the low end of guidance on the year at 9%. And if I had to circle back to 2013, I think the main difference between 9% and 10% or even 9% and 11% was North America ATMs. It really was the difference maker for us in 2013. Now on that note, and it's a very positive note, John will talk more about this, we had a very good quarter in terms of orders for Financial Services and, in particular, from North America.

Operational gross margin on the year was up, as you can see, 170 basis points. Again, I attribute almost all of that to the growth we're seeing in software, SaaS and professional services. And NPOI on the year came in up 22% as well, coincident with Q4. And again, we also did record annual NPOI margin of 11.7% on the year. And free cash flow came in as per our guidance as well, and Bob will talk more about this, but we landed at $207 million on the year in free cash flow, thanks to a very solid Q4 execution.

I'm now on Slide 6. We talked a lot about the impact that software has had on revenue growth and margin expansion. But this picture gives you a really good view both of Q4 and the fiscal year. And now what we're doing is we're giving a view towards PS as well, professional services, which, when you think about it, is really a business here in NCR completely aligned with our software business. So it gives you a sense for how big of a pure-play software company we have become and the growth we're seeing in the business over time. But we had a great Q4, both in PS, revenue up 49%; and SaaS was up almost 40% year-on-year in Q4. And on the year, we had a terrific year across the board. PS was up 50 -- sorry, 48%; SaaS up 54%. And we had a terrific year in terms of software growth. And as you can see, Bob will get into this in a moment, 2014 is quite promising on that front. John?

John G. Bruno

Thank you, Bill. We're on Slide 7, and on this slide, we summarize a number of quantitative and qualitative highlights for our lines of business for not only Q4 2013, but also for the full year. I'm not going to speak to each of these bullets, but I wanted to call your attention to a few results that support our continued strategic execution.

Let me start with Financial Services. We're very pleased with our operating margin performance as it demonstrates how we're managing this business, as we transform managing operating expenses and investing in new growth areas such as software solutions and professional services. These investments are driving improved balance and diversification of our revenue streams. On previous calls, we have been asked about our views on North America, in particular. And as we have stated in Q2 and Q3 calls, we expected to see orders growth in Q4. We're very pleased with the 26% orders growth we delivered, led by solid results and branch transformation.

On the full year, branch transformation delivered over $80 million in orders, and that number does not include any post-sale customer support or other managed services. We are also pleased with the traction and progress we're seeing across tiers and geographies, with $25 million of those orders coming from outside the U.S. Also on a full year basis, we're encouraged with the software growth in our funnel, backlog and revenue, demonstrating our customers' interest in what we've been building as they drive their individual retail bank transformation initiatives. And lastly, we're pleased with the overall geographical balance of this business, with 2/3 of revenues being outside North America, demonstrating solid execution against our global strategy.

In Retail, this line of business experienced strong operating income growth in Q4 of 48%, given a higher mix of software and professional services, with software and SaaS revenues up 119% and 228%, respectively. Excluding Retalix, this story is still very good on the same breakout, with software being up 25% and SaaS 80%.

On the full year, 2013 was a record year in SCO and in POS. SCO shipments were up 26% over a very good 2012 and POS increased 15% year-on-year, demonstrating customer preference for our hardware platforms. Also on the full year, our software revenue growth was 125%, with SaaS delivering 230% growth. Excluding Retalix, the software and SaaS revenue growth was an impressive 29% and 80%, respectively. We don't spend a lot of time highlighting some of our other investment areas like Silver, which is our cloud-based POS for small business platform, or our specialized solutions such as Cornell Mayo in specialty retail. But in Q4, both achieved milestones, with Silver signing over 4,800 customers and delivering its third major release; and Cornell Mayo being named the leader in the 2013 RIS Software Leaderboard.

In Hospitality in Q4, this business delivered revenue growth of 17%, with growth in all theaters. The small and medium business segment of Hospitality grew revenue 33% in Q4 and that's a good indicator of the differentiation our solution delivers to a very important part of the market. Software and SaaS revenue continues to be an important part of Hospitality solution portfolio as well; and in Q4, the team delivered 10% and 19% revenue growth, respectively. Equally important was application site growth of 24%. And as I mentioned earlier, we're pleased with traction we're beginning to realize through our geographic expansion efforts and are very excited to add global and local companies in Q4, such as Johnny Rockets and Juan Valdez Café, to our customer base. Overall, on a full year basis, this line of business put up another solid performance across the board, but particularly noteworthy was performance in areas of continued strength, such as 28% SaaS revenue growth and North America SMB revenue growth of 34%, both indicative of a strong demand and preference for our solutions over the competition.

And Emerging Industries. Lastly, I wanted to mention a few noteworthy accomplishments in Emerging Industries, and we remain committed to investing in areas of market growth where we feel our solutions can deliver value, aligns with our strategy and core capabilities. We are pleased that this area of our business is turning the corner and delivered 31% revenue growth in Q4. Our travel line of business delivered revenue growth in the quarter of 62% and our telecom and technology revenues were up 24%, which is the first increase in 5 quarters.

On a full year basis, it was good to see file value and backlog growth in our telecom and technology business with new customer wins globally, demonstrating the value this business brings to our customers.

And lastly, our travel business delivered $43.7 million bar codes in 2013 for applications such as mobile check-in at airports, which represents 67% growth year-on-year. And they continue to build momentum across their entire solutions portfolio, signing up new partners and delivering customer wins in China, the Middle East and in every market they serve.

Now I'd like to turn to Slide 8. As I didn't provide an update on the acquisitions we announced in Q4, I will provide a progress report of our integration efforts. So first, I'd like to start with the acquisitions we announced last quarter. We included here a simple picture that we used at the time announcing the Digital Insight and Alaric acquisitions that we felt was worth repeating. It demonstrates that both acquired companies, not only have standalone differentiation in the market based on the technology they developed, but also how in combination with NCR, we now, as one company, deliver one of the most comprehensive suites of market-leading solutions across Financial Services and, in particular, in retail banking.

NCR continues to lead the market with enterprise software and branch transformation, leveraging our technology and [indiscernible] share leadership in ATM hardware and software. But you'll see here how a customer in the market Digital Insight serves, as one example, can now look to NCR to help them with their business goals, which would be increasing their revenue, lowering their operating cost and delivering technologies their customers demand across all of their channels. Add to that an innovative payments and processing software platform through Alaric that was designed from the ground up to deal with the changing consumer omni-channel profile, and you could see how NCR now has a very comprehensive portfolio of solutions to ensure our customers can better manage transactions across ATMs, mobile and online channels with the highest levels of availability and security.

Overall, our strategic rationale to deliver fully integrated omni-channel portfolio to retail banks and to do so through multiple delivery models, bundled hardware and software, software alone or SaaS, all designed to appeal to the different tiers and segments of the market. The business rationale is simple and, by doing so, will better position NCR for long-term growth, greater recurring revenue, margin expansion and earnings appreciation.

As you can see here, we're forecasting Digital Insight's 2014 revenue to be in the range of $350 million to $360 million, with operating income in the range of $85 million to $90 million. And that includes approximately $10 million of duplicative costs to support our integration plans and data center migration activities.

Now I'd like to ask you to turn to Slide 9. In closing out this section [indiscernible] before turning the call back over to Bill, I wanted to provide you with a brief acquisition update on Retalix and Digital Insight. I won't highlight Alaric as it was relatively small and we moved to integrate it into our core Financial Services business very quickly. However, I'm pleased to report that it's gone very well.

On Retalix, we're also very pleased with our progress. Let's start with the numbers. From business plan perspective, we exceed our expectations. Our Q4 2013 revenue was $86 million and operating income was $14 million. On a full year 2013, revenue was $298 million and operating income came in at $53 million. Within that, we also achieved fiscal year 2013 full year pretax cost synergies of $12 million. In addition to the numbers, we've really experienced the strong customer and market acceptance and have a growing sales funnel. Together, NCR plus Retalix, we've been able to bid on and win large customer initiatives and the combined retail sales force has been able to better position, not only Retalix solutions; but given their expertise in this area, they're doing a very good job positioning NCR's entire portfolio of software, services and hardware. And that was evident in the Retail line of business results I discussed other. In fact, we're finding it increasingly difficult to separate the revenue synergies going forward as the combination of our assets has been very well received by our customers, and that is good news and an indication of a successful integration.

On Digital Insight, it's early days but you can expect us to implement the best practices from other acquisitions and we've assembled a cross-functional team that brings experience and a proven track record to this area. Business continuity, employee engagement and customer success are our top priorities. And as strategic priorities are set, we will incorporate the talented people and innovation from DI into NCR's Financial Services line of business. And for those of you that are familiar with our organization structure and leadership team, you'll recall Andy Heyman, the leader of our Financial Service business today, previously led our Hospitality business and came to us from Radiant. He was also the executive responsible for the Radiant integration. Andy is responsible for the integration of Digital Insight and well-positioned to ensure success. And to date, we received positive feedback from existing Digital Insight customers on the power of NCR's omni-channel banking solution; and early wins in this space include OceanFirst Bank and LegacyTexas Bank.

Now let me turn the call back over to Bill for some final comments on 2014 and our overall quarter reinvention.

William R. Nuti

Thank you, John. Bob will give you some perspective on the numbers in a moment in terms of guidance for 2014. But let me just tell you, I'm genuinely excited about 2014 as the CEO of the company, coming into this year. We have been working on the reinvention of this company for a long time. And coming into '14, we just have a tremendous set of operating assets in the businesses, so well diversified, I couldn't be more pleased with the company's position globally, in terms of geographies; product segments, in terms of hardware, software, SaaS and services; as well as channels to market on a global basis. So I feel very good about our position by vertical market in all of those dimensions.

All of our lines of business this year are poised for growth to grow margins and, again, to also improve their own balance across all of those spectrums. But we will, again, move the needle on software and SaaS and services growth in '14. We'll see another solid year, more than double-digit growth in those categories. We'll also continue our strong track record this year of what has been, I think, a stellar job by this management team in terms of acquisition integration. My concerns are less around integrating acquired companies. It's more now integrating NCR employees into the new NCR.

Revenue growth, gross margin expansion and improving the customer experience remain top strategic performance goals of ours in the year. You'll find that our guidance in the year is consistent, we think, with a very high-performing technology company. We will continue to invest in becoming a better company in delivering a wonderful, delightful experience to our customers. We'll continue to maintain focus on what matters underneath the covers: continuous improvement, productivity, efficiency, quality. We've always been proud of rolling up our sleeves and continuing to churn out good cost and continue to reinvest some of that good cost back into our business. We'll make more investments in innovation, people and advance what is a pretty cool place to work these days.

I'm proud to tell you as well that while we'll also de-lever this year and next year quite significantly, pension is in the rearview mirror. From my point of view, mission accomplished. We'll end this year with a global underfunded position of less than $100 million. We will have significantly reduced our pension liability. We will have a tremendous impact on cash flow going forward and obviously, a much lower pension expense, given I've completed our move also to mark-to-market accounting this past year. And I look at, and Bob looks at pension Phase 3 at closing the chapter to this book by the end of this year.

This new company that we built is poised to lead a category that has emerged over the last few years in the consumer transaction technologies area. Just to be clear on this, you should know this, we conduct nearly 500 million transactions every day around the world on our kit, ATMs, point of sale, be it mobile or stationary in all systems around the world, and we do it securely and we do it well. We're also now a global leader in the new omni-commerce, omni-channel category. Our customers look to us for consulting and guidance and solutions to affect their own strategies in this area. We are one of the largest SaaS companies in the world, and we also have a great global and multi-industry set of experiences that our customers look for. And look, this reinvention that we're all working on here at NCR is also gaining a lot of global recognition, whether it's Barron's or Boston Consulting Group or other soon-to-be-announced institutions that are interested in why and how and, otherwise, how we've accomplish these goals we have. I am so proud of the position we're in, and I expect to have a terrific 2014. Bob?

Robert P. Fishman

Okay. Very good. I am going to be sharing quite a few financial charts. I hope everyone has the PowerPoints in front of them. What I'm trying to do is make the NCR story, the transformation much simpler. So in the past, where you might have gone to 2 or 3 different sources, whether it was the earnings release or the script or the PowerPoints, I tried to assemble the information here all in one place.

So I'm on Page 12. 12 is the operational P&L for NCR. First row is revenue. I'm going to talk a little bit more about revenue when I get into the line of business revenue information. I will repeat what Bill said. It was a record gross margin rate, driven by more software, so up 260 basis points in Q4 and up 170 basis points for the full year. Expenses under control. On a percent of revenue basis, I'm very proud of expense management at NCR. NPOI in Q4, up 22%, and $717 million of NPOI for the full year, up 22%, and again, a record operating margin at 11.7%.

And then from an EPS perspective, growing nicely at 15% in Q4 and 13% for the full year. I've included in the footnote at the bottom the effective tax rate, and you can see we landed at 22% for the full year 2013. My tax team did a really nice job in the year. A couple of numbers I wanted to call your attention to, at this time last year, we gave NPOI guidance of $695 million to $710 million. During the year, we upped it to $700 million to $720 million and we finished at the upper end of that range at $717 million, again, very proud of that result. If you look at EPS at this time last year, we gave you $2.65 to $2.75. We upped it during the year to $2.70 to $2.80, and we landed above the $2.80 at $2.81; so again, to Bill's point earlier, achieving what we said we would do.

I'm going to move to the next chart. It's Page 13. This is what I think of as the GAAP equivalent to the previous chart. You can see the GAAP equivalent is at $2.67. They're very close, actually, to the $2.81 from the previous page. When you look at the GAAP results, I would say that the biggest driver on the year-on-year performance tends to be the mark-to-market pension. And so I footnoted at the bottom of the page that the reason for the decline in EPS year-on-year is primarily due to the fact that the pension benefit in Q4 2012 was much higher than the pension benefit that we got in Q4 2013. That was the major swing item from a GAAP results perspective.

That being said, I'll move to Chart 14. You can think of Pages 14 and 15 as being equivalent to our Schedule B that we include in our earnings release. You can see on Page 14, I've included the revenue growth rate on an as-reported basis and then in the outer column, on a FX-neutral or constant-currency basis. As Bill mentioned, revenue came in as expected in Q4. From my point of view, no real surprises. If I start with the full year results, the guidance for Financial was roughly flat for the year and that's what we achieved. When you look at Retail, we ended the year at 25% revenue growth. Our first prediction for revenue was 22% to 25%. We upped that during the year to 24% to 26% and ended in the middle of the range. When you exclude Retalix from the Retail growth, we had given a range of 7% to 9% and ended up at 7%, FX neutral.

Hospitality, to me, was a very pleasant surprise. We had given what we thought was a very strong guidance at 15% to 18%, and we ended the year at 21% for Hospitality. And then Emerging also came in within our guidance of 3% to 5%, landing at 3%. So overall, as Bill mentioned, guidance for the year of 9% to 11% and finishing at 9%.

Now again, primarily because of the challenges we've had in North America Financial, for the year, North America Financial was down 15%. And that was one of the reasons why we were not able to -- the main driver behind why we're not able to get closer to the middle of the range. I'll say this within Financial, the rest of the world, on an FX-neutral basis, was up mid-single digits.

When I look at Q4, again, no surprise with Financial Services, with the 5% down on an FX-neutral basis. I will point to the North America Financial orders being up 26% in Q4, which means backlog is up low-single digits going into the first quarter of 2014, so some good momentum for Financial Services going into the 2014 year.

Retail Solutions posted good growth in Q4 at 12%. I also look at the math that says, "How did that business do x Retalix?" John had shown a chart that said, "Retalix had driven $86 million." When I back that out, Retail was down 8% in Q4 and down roughly 5% on an FX-neutral basis.

Now they had a difficult compare with Wal-Mart revenue from the prior year. I am pleased to say though, when I take out the big Wal-Mart order in Q4 of the previous year, Retail orders were up close to 6% in Q4, so again, some good momentum for the Retail business going into '14. Hospitality, we talked about an emerging significant growth.

I'm moving to the next Chart 15, the operating margin expansion chart. You can see even with Financial Services being down 1% for the full year, they still drove significant operating margin expansion, both in Q4 and in the full year. So again, most of that attributed to the software mix in their business and good expense management.

Retail Solutions, from my perspective, is a transformed business. They ended the year at a double-digit operating margin, 10%, and drove a 12% operating margin in Q4. Hospitality, keeping their -- our operating margin roughly flat, even with the growth that they're having, it's a very good sign, and we continue to invest into that -- in that business, whether it's internationally or whether it's through additional software applications.

On Emerging Industries, I'm pleased to see and to say they're starting to turn the corner, with $4 million more NPOI in the fourth quarter. And then again, if you look at the 11.7% operating margin that we ended the year with, think of the fact that in 2009, we were at 7%, so a significant improvement. And in 2014, we will likely end the year at 13%, so excellent operating margin expansion.

Okay. I'm moving to one of my favorite topics, free cash flow. It's on Page 16. Again, very proud to say that we achieved our guidance for the full year, came in at $207 million on guidance of $200 million to $250 million. We had a record free cash flow quarter. We drove $317 million of free cash flow in Q4. I've shown you the breakout by type of flow on the right-hand side of the chart.

On this particular page, I'm also giving guidance for 2014. And so you can see it starts with our NPOI guidance of $900 million to $920 million, adds back depreciation and amortization estimates, cash taxes and it's in line with what I talked about at Analyst Day, a 13% cash tax rate. Capital expenditures going up, primarily because of the Digital acquisition. I'd say we're doing a good job of working through the different opportunities that we have, continuing to invest in Emerging Industries, in new software, opportunities for the businesses, as well as process improvement projects. The pension contribution is coming down nicely. Working capital, think again of that is around 15% of the revenue change, so that's the negative $65 million. Interest paid on this chart, and then you can see the rest in Other, which is defined below. That will mean our free cash flow guidance for the year of $300 million to $350 million, 33% to 38% free cash flow conversion, again, on the way to driving 50% free cash flow conversion in the next couple of years.

I do expect that free cash flow will exhibit similar seasonality to what we've seen in the past. We build working capital to drive higher revenue in Q4. So as much as I'd like to get this perfectly linear, I'll always have a situation where more of the free cash flow comes in, in the fourth quarter. That doesn't mean there aren't things I can do to improve that linearity, but I just wanted to give that type of description.

On the next Page 17, another free cash flow page. I often get asked, what can -- what is the core business? What's the operational free cash flow of NCR? And so here, very similar to Analyst Day, I've taken out pension, disc ops and acquisition-related costs to just to give you an idea of what the core business drives, and you can see the $440 million to $510 million is roughly 50% conversion of NPOI.

I'm moving to Chart 18 and 19. 18, I'll talk about debt; 19, I'll talk about pension. The debt chart on Page 18, the first column is where we're at, at December 31, 2013. And you can see that the debt is higher primarily because we borrowed in advance of the closing of the Digital Insight transaction. So we borrowed. You can see the $400 million and $700 million notes, and then that shows up as restricted cash at the bottom section of that chart. What I've also tried to do, though, is show pro forma after the acquisition of Digital Insight. And you can see that the $400 million to $700 million is used in the purchase, but we've also used some revolving credit and increased the term loan. So that shows you on a pro forma basis.

I've also calculated the interest expense for the year and you can expect that to be around $185 million, and I footnoted at the bottom that, that includes $11 million of deferred financing fee. Most importantly, from my perspective though is the ability to de-lever. On a pro forma basis, we'll leave slightly above 4x from a debt-to-EBITDA multiple and then again, the goal that we had said in December was for the debt-to-adjusted EBITDA to be under 3x over the next 12 to 24 months. And I'm very confident we'll do that, driven by both the free cash flow generation and the EBITDA expansion.

On Page 19, I've put together what's a fairly simple chart for pension. My eyes go right to the third row, which is the improvement in the underfunded status. So from a $1.4 billion underfunded in 2011 to less than $100 million underfunded at the end of 2013. I've also included in here that the pension assets in the first row, we have 97% in fixed income in the U.S., 76% to 77% globally, so very well immunized. If you look at the pension contribution, this is a number that's historically been over $100 million. It's down to $79 million in 2013. And then again, if you look in the green shaded box, down to $70 million in '14, and $50 million in '15, again, significantly improving my free cash flow.

And then finally, the pension expense or benefit. This is a number that bounces around a little bit under mark-to-market. You can see that for the year 2013, it's a $78 million benefit and that does include a mark-to-market Q4 adjustment of a favorable $104 million benefit. In terms of '14, excluding any mark-to-market adjustments, we're at a run rate of $10 million of pension expense. So again, I agree with Bill 100%. We've got pension in the rearview mirror. Pension is done from my perspective, a little bit of tidying up to do here as part of Phase 3, but we can now focus on growing NCR.

On Page 20, I summarized the full year 2014 guidance. Revenue up 12% to 14%, non-pension operating income growing significantly from $717 million to $900 million to $920 million and then earnings per share growing to $3 to $3.10. I've also footnoted at the bottom some of the pieces that go into the EPS calculation. In '14 -- 2014, you can expect OIE to be $200 million, a 26% tax rate and a share count of $172 million (sic) [172 million] and then put the comparable numbers for 2013. We will face some headwinds from having a 22% tax rate and a share count of 169 million in the '13 numbers.

An interesting chart for me is 21. 21 gives our revenue guidance by segment, by line of business. And again, when you look at the balance across all 4 business, it really is quite impressive. So overall, 12% to 14%. These growth rates are all in line with what we described at Analyst Day. We've got Financial Services growing 15% to 17%, including Digital Insight. Excluding Digital Insight, we have Financial growing 4% to 5%; Retail growing 8% to 10%; Hospitality, 12% to 15%; Emerging, 10% to 14%. Again, very balanced growth. When I take -- adjust for Digital Insight out of the total number of 12% to 14%, it means the core business is growing 6% to 8%. And again, that's in line with what we have said at Analyst Day. If I was to share a little bit about kind of the linearity for the year, Q1 to Q4, I will say that revenue will ramp during the year. From a growth rate perspective, Q1 will be a little bit slower, although I do expect all of my businesses to grow in Q1 and I'm very proud of that.

And turning now to my last financial chart. My last financial chart is on Page 22. It gives the Q1 2014 guidance. You can see that the non-pension operating income at $155 million to $165 million, again, a number that we're very proud of here, an excellent result, expected result for Q1. The way I think about the guidance for Q1, I've got roughly $18 million of profitability from Digital Insight in the Q1 number and that's on the way to $85 million to $90 million. It's a little bit lower in Q1 because of the January 10 close date, as well as I've got more of those duplicate costs in the number that John mentioned. Those are projects that happened in the first 6 months of the year. So if you take the midpoint of the $155 million to $165 million, $160 million, and back out Digital Insight, you're at $142 million. $142 million is about 10% NPI growth for the core. But you will remember that last year, we had a $16 million benefit included in the $129 million, so when I associated with a change in severance accounting in the U.S.

And I just want to make sure I'm correct on that data point, it was $13 million item in Q1 of 2013. So if I was to adjust for that $13 million item, I've actually got the core growing 22% in the quarter, so very good growth.

The other headwind we faced in Q1 is we had tax extenders for 2012 passed in the first week of January 2013. So we actually had a $15 million benefit -- $16 million benefit included in Q1 of 2013. So that's the reason why the tax rate is higher in Q1 '14. And then I've listed the other expense below. So again, good operational improvement in Q1 2014, growth by all of our lines of business and numbers that we're proud of, reflecting the momentum that we have coming into the year.

My final chart is on Page 23. Again, what we're reflecting here is transformation in all of our lines of business; businesses that are set up to grow faster than the overall markets; businesses that drive software/SaaS and professional services that improve the gross margin. We'll continue to drive free cash flow and focus on working capital. We have the ability to de-lever the balance sheet very quickly. And again, we're not going to take our eye off of any cost-reduction initiatives. 2013 was the fourth year in a row where we took out greater than $100 million related to continuous improvement and we'll take out another $100 million in 2014.

So with that, that ends our summary of both the financials and the guidance and I'll open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And for our first question, we go to Paul Coster with JP Morgan.

Paul Coster - JP Morgan Chase & Co, Research Division

You're guiding to 4% to 5% growth for Financial Services x Digital Insight in 2014. Can you talk a little bit about how you get to that? And the 26% growth you saw in 4Q orders for the hardware side of the business, how quickly does that translate into growth? And do you actually expect that hardware business to grow in '14?

William R. Nuti

Yes. Thank you, Paul. First of all, at the aggregate level in Q4, Financial Services grew orders 11% and that's after growing orders in Q3 17%. What I like about Q4, Paul, is that in Q3, you remember we had a very big order from a Brazilian customer and, in Q4, it was very balanced. It's a clean quarter from that point of view in terms of it being about growth quarter. So on an overall basis, we grew Financial Services 11%. North America was 26% growth. Rest of World was 6%, in terms of Rest of World growth in orders. So a very solid order quarter. They turned around a fairly negative backlog situation in Q3 and Q4 into a positive backlog situation coming into Q1. Their backlog is up low-single digits, and they're starting out Q1 well. Now we have a long way to go in Q1, but I would be surprised if Financial Services didn't grow again in orders in Q1, have a solid book-to-bill and build their backlog up going into Q2. So I feel good about what is a turnaround in that older hardware business, primarily driven by branch transformation orders in Q4 and more momentum in that space coming into 2014.

Paul Coster - JP Morgan Chase & Co, Research Division

All right. Now I know that you're in the mode of under-promising and over-delivering here, but the EPS guidance for 2014 does look a bit conservative, given the shift towards software and services we've already seen and how that will accelerate with the acquisition of Digital Insight. Could you just still comment on the EPS guidance for the year ahead?

William R. Nuti

I think it's fair, Paul. I think you know our style for many years. Both Bob and I prefer to risk-adjust the entire year early on and see how things go in Q1 before we change guidance on the -- I think we've changed guidance annually the last 4 years in a row, if I'm not mistaken. But we'll see where it goes, Paul. As Q1 goes, so goes your year around here. So I feel really good about a guidance of $3 to $3.10 right now, but let's see where Q1 lands before we look at guidance for Q2 and beyond.

Operator

And for our next question, we go to Dan Perlin with RBC Capital Markets.

Daniel R. Perlin - RBC Capital Markets, LLC, Research Division

I can't remember what slide it was. It was the last slide here. But I'm wondering if you can help me bridge something. If we have a jumping off point of $221 million in NPOI, and I think you said your tax rate effective was 25% and you got interest expense another 38%. I don't see how you get to the $0.83. So there's either something in the interest and other line or your taxes are lower. So can you just help me bridge that to start?

Robert P. Fishman

In terms of going from the NPOI of $221 million to the $0.83, again, you would back out the OIE and take that after tax and divide by the share count, that would get you your $0.83.

Daniel R. Perlin - RBC Capital Markets, LLC, Research Division

So if I look at operating -- the interest expense was $33 million and then you had this other $5 million, right? So it's $38 million. Is that number really $33 million? And then is the tax $46 million? I can -- instead of trying to play guesses, I'm just trying to put real numbers here, if that makes sense. I'm like 2 other -- see, I'm just trying to -- I'm trying to get rid of all the noise and just say, $221 million less $38 million gives you $183 million pretax, and $46 million plus the noninterest line gives me $0.80 so there's something that's too much in there and I think it's probably simple, but I need your help to get to it.

Robert P. Fishman

Yes. I mean, roughly speaking, and we include on our website a non-GAAP schedule. But basically, you would take the $221 million, you'd back out interest and other income of $32 million and then you'd take that after tax, and you're right, the effective rate was 25%. You'd divide it by the share count, which is around 170 million, and that will get you your answer.

Daniel R. Perlin - RBC Capital Markets, LLC, Research Division

Okay. So it's $32 million versus the $35 million -- or $32 million and then the $5 million. So it's -- okay. I can work on that. That's very helpful. The other thing is, as you said, Retail was down, I guess, about 5% in this quarter. We're calling for 8% to 10% for the year. Is that -- it's a pretty bogey, and I'm just wondering, is that a function of the self-checkout business that you guys had alluded winning last quarter? Like what gives you the confidence that you can have such a big swing?

William R. Nuti

Yes. I think that both John and I will tag team on this, but Retail is coming into the year, again, with a backlog in the low-single digits as well, similar to Financial Services. So their starting point is reasonable. And from what we can see in terms of orders right now in Q1, Q2, we feel good about the guidance. And yes, there's no doubt that self-checkout orders will play a role in that 8% to 10% growth this year. Also, don't forget, we will continue to see good growth on the Retalix side year-on-year.

John G. Bruno

Yes, that's right, and that's a story of balance in the portfolio. I mean, this business has been hard at work in creating a platform story across point of sale and now, self-checkout. We've talked in previous quarters and we haven't spent as much time talking about the various, what we call, the variants of self-checkout, the smaller footprint. But now you've got businesses that have combined, that came together that, a year or so ago, we didn't have. If you just think about the convenience store part of our business, the petroleum part of our business, those 3 businesses as individual businesses were good in NCR or in Radiant or in Retalix. But what they have a capability of doing together is allowing us to just have better segment penetration moving down market on hardware and you're seeing our organic software for the first time grow year-on-year. I mentioned some of the results in Q4, but we're encouraged by the organic software now plus the Retalix, now going the down market. So we just feel like we have a much better balanced story in Retail which is -- which gives us the confidence. And I think Bob said it best when he said it's a business transformed because it's obviously business that's had the benefit of both the organic and the inorganic investments coming together now for some time. So team's hard at work at delivering that globally.

Daniel R. Perlin - RBC Capital Markets, LLC, Research Division

Okay. And then just one last one, if I could. The -- to kind of steal a slide from Analyst Day and update it, you had a core working capital metrics slide at your Analyst Day, and it basically showed a percentage of quarterly sales as a percentage of the core working capital. It looked like you guys came in at like 55% versus the third quarter of 71%. So clearly, an improvement. I'm wondering if we use that as a benchmark, because it was certainly -- it wasn't good as '12 and it was about even until '11. Is that -- are we shooting for something in the 40s in order to get to that? I mean, I can see your reconciliation table on 16, but I'm also trying to update this other one.

William R. Nuti

Yes, yes. No, no. That's a chart that we very much focused on. It was driving working capital as a percentage of revenue and I think as a number more in line with the yearly sales. You've quoted the quarterly number, the 55%. That was our goal, and that's what we achieved. My goal, again, is to drive 15% of working capital as a percentage of the 12 months of revenue. It would equate probably pretty close to the 55%. So again, that metric doesn't drift. I'd like to get it maybe closer to 14%. I've seen that in the past. So again, I'm always focused on improving working capital. So could it get better than the 55%? Yes, but that's kind of where it's been in '11 and then, again, in '13.

Operator

And for our next question, we go to Ian Zaffino with Oppenheimer.

Ian A. Zaffino - Oppenheimer & Co. Inc., Research Division

Not to belabor the point about the 2014 numbers, but I just look at your 2015 guidance and you gave that very recently and I'm sure you're probably pretty confident in that. So I'm just trying to get a sense of -- does this really show that 2014 guidance is just very conservative, just given that you've 8% growth in earnings into 2014 and then you'd almost need 20% growth into 2015 to kind of hit the midpoint of both guidance ranges. So does this really look like maybe it's -- that 8% growth into 2013 might be a little bit too conservative and should be higher? Or how do we think about that?

Robert P. Fishman

Yes. I mean, we had given the guidance at Analyst Day for '15 of $3.60 to $3.85 and then when we announced Digital Insight, we said that, that acquisition would be $0.15 accretive in 2015, so basically upping us to the range of $3.75 to $4. We feel good about that. We have set ourselves up with the right investments. We have 4 lines of business that are performing well. Bill showed the software chart. That's going to continue to grow, and that's what's going to drive that profitability for '15.

Ian A. Zaffino - Oppenheimer & Co. Inc., Research Division

Okay. And then on -- that's very helpful that you broke out the x Wal-Mart growth of the Retail business. When should we start to see the 2 big self-checkout wins that you had announced flow through? So I'm just trying to think about how we should look at the comps and how to think of it that way.

William R. Nuti

Yes. I think 2014 -- as I said last quarter, 2014 is a year where you should see shipments from those 2 wins that also continued shipments from our other customers around the world, including the large customers that have made large purchases in the past. That, we think, will continue in '14 and '15.

Ian A. Zaffino - Oppenheimer & Co. Inc., Research Division

Okay. So I guess because -- just because you have tough comps, let's just say because you had Wal-Mart in the first quarter of last year, a lot of these orders are going to start shipping. So it shouldn't really be a tough comp from the previous year.

Robert P. Fishman

I think on a year-over-year basis, Ian, it should not be a difficult comp. And Q1 will be a difficult comp, of course, because there was a -- just a fairly sizable shipment from one customer that went out in a single quarter. But on the year, no.

Ian A. Zaffino - Oppenheimer & Co. Inc., Research Division

Okay. And then last question really is, I know the emerging markets have been very good to you guys. What are you seeing there now? What are you kind of hearing realtime there, as far as demand and sort of sentiment, et cetera?

William R. Nuti

Yes. We had a good year in the emerging markets. We had a good quarter in the emerging markets. Some of our best countries in Q4 for growth were India, China, Turkey, Thailand, Kuwait. We've had some great quarters from a number of the emerging markets. And of course, Brazil continues to hum and do well for us. So we feel good about the emerging markets. Again, as Bob stated earlier, when you take North America ATMs out of the equation, Financial Services had a pretty good year on an overall basis. I mean, I'm -- just one key point for you guys will be, while the revenue declined FX-neutral, call it, negative 1% in '13 versus '12, software, software maintenance and consulting revenue grew 6% FX-neutral in '13. So the value proposition and transformation is well demonstrated even in a down year of what we're doing. So it's not just talk and customers validated it in Q4 in 2013 despite the volume drop. So I feel good about emerging markets. I feel good about the mix shift they're driving. It's evident in the operating margins of the business. I think there was a couple of times last year where it might be thought that the operating margin improvement came from onetime events. They're not. This is systemic, a change, a transformation in that business and it showed up quite well for us across the board.

Operator

And for our next question, we go to Meghna Ladha with Susquehanna Financial Group.

Meghna Ladha - Susquehanna Financial Group, LLLP, Research Division

Going back to the 2014 guidance, here we see a huge delta between the NPOI growth at 26% and the EPS growth of 7% to 10%. Bob, is that primarily because of the higher interest expense and the higher tax rate?

William R. Nuti

Yes. It is, Meghna. It's mainly the highest -- higher interest rate and tax rate.

Robert P. Fishman

And you can see that fairly clearly on Page 20 where we break out the '14 guidance and then have the '13 comparables. But you can see OIE increasing from $112 million to $200 million and then the tax rate changing from 22% to 26%.

Meghna Ladha - Susquehanna Financial Group, LLLP, Research Division

Got it. Okay, and the next question for Bill. In your discussions with the regional banks, what are they saying regarding their investment plans around deposit automation this year? Do you think that the EMV Windows 7 upgrade requirement will act as a catalyst?

William R. Nuti

Well, there's no doubt, Meghna. It's already doing that. We're seeing that flow through in orders in Q4 and here, orders in Q1 even in month 1, a solid start to the year. We'll see more of that as the year goes on, not just from retail banks, but large banks as well. I would note that, by the way, a significant portion of our branch transformation business does also Tier 1 banks. We're seeing good traction in Tier 1 banks for service solutions in branch. But Win 7, EMV, having a small impact now, nothing significant and will have more of an impact as the year goes on and at the first quarter of '15.

Meghna Ladha - Susquehanna Financial Group, LLLP, Research Division

Okay. And then with the Hospitality, it continues to -- you guide to like 12% to 15% for the year. But can you go over some of the key assumptions behind your guidance and what's really driving growth in this particular segment?

Robert P. Fishman

It really continues to be a strong North America market and then expansion internationally. John, did you want to...

John G. Bruno

Yes, another -- it's another -- yes, it's another important balance story. So first, we're taking share, and I think that's important to note. So if you look at our growth in North America SMB, that's why I pointed out both SaaS growth, sites growth, North America SMB growth. These are areas we're traditionally strong, so you would've anticipated to see growth for our businesses international, where we're seeing that. But we're also seeing it in the core. The team has just done an exemplary job of understanding their customer base and creating delivery models to satisfy that customer base, both in the direct and indirect channel. Not to mention the fact that NCR and NCR's wallet coming in a couple of years ago, investing very significantly in a number of different things that business would not have been able to afford to do. We're beginning to yield those results. So as long as that business continues to grow and deliver the margins that we expect to deliver, we're going to continue to invest in it. Because even with its share gains, just from an overall concentration basis, it's still a market that's wide open to us. So we're very enthusiastic about it, both domestically and internationally.

William R. Nuti

And Meghna, I would also point to the fact that we have an amazing technology in that business. We have tremendous innovation in our Hospitality solution. We have -- so we've invested significantly as per John's comments, but we have a technology lead. We have the best software and hardware and mobile platforms in the world, and our SaaS platform is unmatched, our SaaS applications, our SaaS solutions, which is why you're seeing the growth you're seeing in SaaS in that business.

Operator

And we go next to Natalia Kogay with Morgan Stanley.

Natalia Kogay - Morgan Stanley, Research Division

This is Natalia Kogay for Katy Huberty here. I know that you don't provide quarterly for cash flow guidance, but could you provide some commentary on -- for cash flow seasonality as we move through 2014? And then specifically, what kind of free cash flow conversion we can expect in 1Q? And I have a follow-up as well.

Robert P. Fishman

Yes, I really do not want to go down the path of giving quarterly free cash flow guidance. I'm trying to stay focused on the longer term here. We're driving free cash flow to de-lever the balance sheet, create growth opportunities. It's a seasonal business. To be honest, if working capital isn't building early in the year, that's when I get concerned because I'm driving a higher revenue in the back half of the year. So I'll be very focused. I like to collect my cash as early as possible. So we're pushing the team to improve all of the metrics, whether it's DSO or inventory. But again, I do believe that the linearity will be improved. I will not have as much free cash flow coming in, in the fourth quarter, as I saw this year on a percentage of the total. But again, that seasonal linearity is just something that exists.

William R. Nuti

And let me just say this to everyone on the line as well. It's important to make this point on cash flow. Both Bob and I are laser-focused on improving cash flow conversion as a percent of NPOI. And trust me, there's a lot of going on that will yield to great results over the next several years. Linearity of that cash flow, and oh, by the way, I just changed the bonus plan for every employee on a bonus plan at NCR this year. We have about 5,000 people on a bonus plan at NCR. Everyone of them now gets paid on 2 components: NPOI and free cash flow. It's the first time we've done it, and it should yield better results, more education and greater focus in the long term.

Natalia Kogay - Morgan Stanley, Research Division

That's really helpful. And then the second question is, in 2013, 41%, I believe CapEx growth outpaced your, I'm thinking, non-pension OpEx growth of 9% and we saw a similar gap in 2012. Can you just comment on what drove that CapEx growth and whether we should expect more of the cost to be expensed in 2014?

Robert P. Fishman

Well, again, at 2014, I've given guidance of $250 million to $260 million, up from to $226 million. The majority of that increase is Digital and investing, continuing to invest in their business, whether it's through data centers or through software enhancements. I would say that as the CapEx has increased over the last couple of years, it's a combination of a focus on process improvement. For example, internally we are doing things like creating a customer portal, a spend analytics tool, a number of things that just improve processes within NCR. I've made a big investment in CapEx in India in terms of the business model in India. I continue to fund Retalix, Hospitality, John's other software businesses and Digital Insight in terms of SaaS applications. So all of these opportunities have to meet a 15% hurdle rate or cost of capital of 10%. But then I throw in a risk premium of 5% on top of that. So again, these are opportunities that compete against each other. I'm slowing down the CapEx when you normalize for Digital. And again, I have turned back some opportunities. But I do want to continue to invest because that's what creates the sustainable revenue growth -- the high sustainable revenue growth into the future.

Operator

And for our next question, we go to Matt Summerville with KeyBanc.

Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division

Two, 2 quick questions here. First is a pretty easy one. I think, branch transformation, you guys have provided some guidance in terms of what you anticipated to generate in revenue in '13 and '14. Bill, can you just go through that again?

William R. Nuti

Yes. So in -- on the revenue side, Matt, think about us hitting about $75 million in revenue on the year, all in. It's -- now the difficulty there is we don't track annuity revenue, services, post-sales support as closely on those units yet. But we hit probably around $75 million. We'll double that in '14, if not, do a little bit better than that in '14. So we're on track with what we described from last several quarters in terms of the opportunity there.

Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division

And then Bob, I'm just -- I'm still trying to figure out cash flow. And Bill, I think it's probably an excellent move to put people on a comp plan that relates to that and I'm big advocate of that. But Bob, I'm looking at how you've defined free cash flow in the past. In the third quarter, you looked at it as operating cash flow less PP&E, capitalized software. In this press release, you're now subtracting discretionary pension contributions and settlement. So I guess, I'm trying to figure out if you actually hit your cash flow forecast or not.

Robert P. Fishman

Yes. No change, Matt. No change. We've always had the same definition. What we've done is we've always taken our free cash flow, the operating cash. We've excluded the -- I should say, we've taken the operating cash adjusted for CapEx and discontinued operations. We think that's very transparent and then when there's onetime pension contributions, we've normalized free cash flow that way. So that's consistent with how we've been doing it. The normal pension contributions are as outlined on Page 16. So $79 million in 2013, $70 million in 2014, but that does exclude any onetime contributions that were made in '13.

Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division

As I look at free cash flow and kind of the way you guys are looking at it as a percent of NPOI, Bill, as you're thinking about this longer term and you're moving the organization more on cash metrics and if I look at companies in my coverage universe that I would characterize as world-class cash generators, they're at about 80% to 85% conversion of operating profit. And I guess, I'm wondering where you think ultimately NCR can get to.

William R. Nuti

In the medium term, Matt, 50% to 60% in that range, that's the next 3 years. Obviously, Bob and I are shooting for higher than that. But longer term, Matt, given the work we've done on pension, we think we could get to 60% to 70%.

Robert P. Fishman

Matt, when you look at some of these things, they'll just naturally come down. The pension contributions, we've said, was going to go from 70% to 50%. Some of the CapEx is being spent to grow our manufacturing footprint, so that won't be around the India project. That's a 2-year project. So just by their nature, some of these outflows will decrease and then the NPOI will help as well, so that 50% to 60% is very achievable goal.

William R. Nuti

Yes, Matt. And think about this one. Fox goes away at some point later this century. I'm kidding about that -- in 2017 or so. So -- but I'm waiting for 2017, Matt, like you can't believe. When that goes away, that's about $40 million a year in run rate costs for us right now in cash.

Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division

Do think there's any chance that Kalamazoo can be another Fox? Or is that more contained, if you will?

William R. Nuti

Yes. More contained, Matt. Yes -- no. No, we're not worried about that.

Operator

And we go next to Gil Luria with Wedbush Securities.

Gil B. Luria - Wedbush Securities Inc., Research Division

And I actually want to start by congratulating you for completing the pension program. I know I'm going to appreciate not having to ask about pensions anymore in the future after 5 years of that discussion over that, so congratulations on that. I wanted to ask first about self-service checkout in the Retail segment. What percentage of revenue was that in 2013? And what percent do you expect that to be in '14?

William R. Nuti

Do you have that?

Robert P. Fishman

Yes. Self-checkout as a percentage of revenue for '13...

William R. Nuti

I'm going to guess for you, Gil. I'm going to guess and let's see if I'm right, because I've got a couple of guys here looking at numbers. I'm going to guess it was about 30% of hardware revenue and probably around 10% to 15% of overall revenue.

Gil B. Luria - Wedbush Securities Inc., Research Division

In the Retail line?

William R. Nuti

In the retail line, all in.

Gil B. Luria - Wedbush Securities Inc., Research Division

And then second question is about -- you provided us with the numbers for Digital Insight for 2014. But could you tell us what the aggregate number are -- is for all the other small acquisitions, Alaric, the Hospitality distributors, all those for 2014 or even the equivalents for 2013? And then if your 2014 guidance includes any other acquisitions, big or small?

Robert P. Fishman

Yes, 2014 guidance right now does not include any other acquisitions. Alaric is small in terms of its contribution. We had said that on the last and then the other ones are relatively small as well. So Gil, we're very focused on the Digital Insight piece. Nothing in '14 in terms of impacting these numbers. This is all basically what we have in our portfolio today.

William R. Nuti

Gil, this is Bill. The math was done. I'm happy to tell you it was correct. Self-checkout was 12% of total revenues in '13.

Gil B. Luria - Wedbush Securities Inc., Research Division

And what's the expectation for '14?

William R. Nuti

Probably around the same, Gil. That'd be my guess, in that same range.

Operator

And with that, ladies and gentlemen, we have no further questions on our roster. Therefore, Mr. Nuti, I will turn the conference back over to you for any closing remarks.

William R. Nuti

Well, thank you to all of you for joining us tonight, and we look forward to speaking to you again in April. Good night.

Operator

And ladies and gentlemen, this does conclude today's conference. Thank you for your participation.

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