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NCR Corp. (NYSE:NCR)

Q2 2010 Earnings Call

July 22, 2010 16:30 pm ET

Executives

Gavin Bell – Investor Relation

Bill Nuti – Chairman and Chief Executive Officer

John Bruno – Executive Vice President, Industry Solutions Group

Bob Fishman – Chief Financial Officer

Analysts

Coster Paul – JPMorgan

Katie Huberty – Morgan Stanley

Reik Read – Robert Baird & Co

Matt Summerville – KeyBanc

Robert Walker – Stifel Nicolaus

Zahid Siddique – Gabelli

Gil Luria – Wedbush Securities Inc

Kartik Mehta – Northcoast Research

Read Reik – Robert Baird & Company

Matt Summerville – Keybanc

Operator

Good afternoon everyone thank you for standing by all lines in today’s call will be in a listen only mode into the question and answer session. At that time from open line (Operator Instruction). This conference is being recorded if you have any objection you should disconnect at this time and I would now like to turn the call over to Mr. Gavin Bell. Sir, you may begin.

Gavin Bell

Thank you Michel good afternoon and thanks everyone for joining us for our Second Quarter 2010 Earnings Call. Bill Nuti, NCR, Chairman and Chief Executive Officer will lead our conference call this afternoon after Bill’s opening remarks John Bruno Executive Vice President, of our Industry Solutions Group will update you on progress with respect to uncertainty initiative Bob Fishman, NCR’s Chief Financial Officer will then provide comments on NCR total company financial results.

Our discussing today includes forecast another information that are considered forward looking statements while these statements reflect our current outlook they are subject to a number of risks and uncertainties that could cause actual results to very materially.

These risk factors are described in NCR periodic fillings with the SEC and then 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 result including the impact to pension and other items.

Reconciliation with non GAAP financial results we have reported at forecasted GAAP results. And other information concerning such measures are include in our earnings press release and are also available on the investor page of NCR website.

The replay of this conference call will be available later today on NCR website, ncr.com. For those listening to the replay of this call please keep in mind that the information discussed is as of July 22nd, 2010 and NCR assumes no obligation to update or provide the information included in this conference call whether a result of new information were future results. I’ll now turn the call over to Bill.

Bill Nuti

Thank you Gavin and good afternoon and thank you all for joining us today we are very please to report solid results for the second quarter. Our performance that keeps us on track within our operational and financial objectives for 2010. The second quarter featured positive trends in our core solutions businesses as well as continued execution on the past to maintain our position as our industrial to lowest and most efficient cost structure.

Also in the second quarter we've received good news on pension reform legislation, which I’ll cover in just a moment.

First to the quarterly results. Orders grew 9% versus a difficult comparison with the prior year and second quarter revenue grew 5% to 1.18 billion which included a one point benefit from our foreign currency translation.

Gross margin on a non-GAAP basis include 50 basis points year-over-year. And the excluding investments in our entertainment business. Gross margins improved 90 basis points. And would have been our second best quarter in the last four years.

Non pension operating income or NPOI grew 13% to 88 million after top comparison of 78 million in NPOI in the prior year period. Diluted earnings per share excluding pension expense were $0.35 compared to $0.31 in the last year second quarter.

During the second quarter we generated 87 million of cash flow from operations and 42 million of free cash flow. Both significant improvements compared to the prior period. And this improvement in free cash flow is inclusive of our investment and entertainment as well as our on going normal levels of investments in other areas of our business.

Our results for the first half of 2010 give us confidence in our guidance and therefore we are reaffirming our 2010 revenue growth and non-GAAP earnings guidance. Well we're pleased with the performance and good overall execution in the quarter and year to date, we feel it is proven to maintain a cautiously optimistic pasture given the uncertain global economic environment.

As we turn our attention to the second half of the year, our focus is on improved growth and our core industries. We have experienced further stabilization of NCR’s two core markets, financial and retail. During the second quarter when both businesses experienced growth.

In financial services the first half of 2010 and the second quarter in particular presented what we believe will be our toughest comparisons for the year. Even so we feed well and the businesses regaining exporting during Q2 financial orders and revenue accruing and allow to mid single digits.

Performance was laid by our overseas markets particularly in Europe and the Asia pacific were intelligent deposit continues to capture gains in China. We've seeing good trends in Europe despite the financial crises, which to this point does not appeared to have had a meaningful impact on bank spending.

And in Latin America orders were up significantly versus last year and we continued shipping from our recently opened Brazil plant during the quarter and supportive several wins in that country including a key win at (inaudible).This is an early but critical milestone as we look to capitalize on our investments and build on our position in this emerging market over the next several years.

In the US the intelligent deposit upgrade cycle with several of our large US customers is reaching it’s conclusion in 2010. But we are beginning to see early signs and movement from the mid major and regional banks.

Many of these customers remain conservative in those spending plans as issues like financial reform play out, but we are beginning to see several firms on large highlights and we had a breakthrough late in the quarter when we wont a large order for intelligent deposits from a large US with regional bank. The release of long health CapEx dollars by customers such as this one is a positive sign and there is a positive mix effect resulting from sales revenues versus the large National Banks. We are encouraged about the progress so far this year in our constant discussion with our customers. While we watched the situation closely, it’s also important to remember that multi channel offerings are essential to our own going leadership positioning in financial services.

We are seeing continued uptake of our multi channel solutions offerings such as our APTRA Vision and APTRA online Banking solutions which we recently deployed by to Boeing Employees' Credit Union and Old National Bank respectively in the US and by a large European bank. This offerings extend our market leading solutions to our global customers under the same value proposition of reducing costs, growing productivity and deepening relationships with depositors.

For NCR, an increased in software revenues, there is a percentage of our overall mixed. There’s an important part of our margin expansion plan going forward. Last quarters, software revenues were up in the high teams and orders grew by a 30%. Of which APTRA is included.

Our retail business is also showing signs of stabilization as evidence by a high 20s order growth and mid single digit revenue growth during the quarter. Retailers have removed significant costs during the recession which is important for NCR as we neared what many customers acknowledge is a coming upgrade cycle at the point of sale. Upgrade cycle tend to run in a four to five year increment and based on our conversation with customers, we believe the next cycle will be laid by increased adoption of sale service technology. That believe is supported by the positive trend we are seeing in the mix shift of our sale check-out solutions versus assisting service at the point of sale.

In the second quarter we saw strong revenue in order growth in self-checkout and were encourage by the mix shift to self-checkout from the system point to sale performance in the second quarter was very encouraging as revenues grew 83% year-on-year and are at 63% up year to date.

This is good news for NCR both from a product mix perspective and because we maintain investment in retail R&D through out the down turn positioning up to drive returns in our investment as retail customers begin spending. The NCR brand remains strong and our increase confidence is under pin by our leading positions in both self checkout solutions and management software.

Now I would like to turn the call over to John Bruno to give you more detail regarding evolution of our line of business and color on our key industry initiative John.

John Bruno

Thank you Bill and since we’ll provided a good summary of the initiative and activity in our financial service business or provide some additional commentary on our other businesses and let start with retail and double correct and some of those comments and the progress were experience in this result of our R&D investment.

Our recent third party report validate NCR leading global position and retail self-checkout solutions. Retail Banking Research or RBR it should report this past during inside of globally positive self checkout 2010.

According to the report NCR is worlds largest self-checkout solutions provider in terms installment for the share almost 3.5 times higher than its closest competitor more than 2/3rd of our self-checkout service in the U.K of NCR solutions.

And NCR accounts for more than half of all self-checkout and solutions (inaudible). more than a 150 retailers from 12 different retail segments and more than 20 countries use NCR software checkout including some of the worlds largest investment on brand such as (inaudible) just a few. And we’ve continue to investment space. So far in 2010 NCR has introduce several enhancements to our SelfServe Checkout solution inclusive of the smaller footprint granted by down market and address the needs of convenient stores and other space constrains retailers. This news also checkout many is 50% smaller then I started NCR solution and provides fully integrated security features.

We also have some new release of NCR SelfServe Checkout software which deliver several key enhancement that will help to retailers improvement self-checkout solutions; faster and will lower the cost of managing this checkout terminals.

Accordance to our own research retail has chosen self checkout system experience decrease customers rate terms of 40% an increase checkout speed of 20%. As such adopting the broader range of self service technologies freeze up stock to improve service and increase store revenue while delivering greater cost selling.

The further drive innovation of margin expansion in the retail environment. NCR recently introduced the NCR Netkey, royalty kiosk and offer managements solutions that helps to retail us explain the reach have frequent software programs quickly and consistently across channels such as inside the store online or via mobile devices. The solutions consist of a kiosk combined with managements software enables consumers to manage the frequent shopper programs and access personalize office and information material.

Consumers have the absence of proactive material which has drastically with promotion at the kiosks and transport cube handset lower records or even sending to the mobile device. This management software is the first to bring together instead visual advertising and self service kiosks from the single platform. This enables retails deliver rich multi media content across digital plans and kiosks and also has retail, the opportunity to track behavior across channel for a full review of their consumers. This is yet another example of our continued emphasis on software driven business solutions driving great advice to our customers and improved margins for our business.

I am also pleased to report that marine core to many services has awarded a contract NCR for deployment inspiration and immigration and meanings of the new point of sell solution for it’s more than 270 retail and service to allocation throughout the US and Japan. NCCS [ph] it's replacing it’s legacy system with NCR registered [ph] software. Design to improve the customer experience by reducing transaction processing times and integrating with NCR partner provided solutions to expand loyalty program and promotional capabilities to all NCCS point for service including at the fuel pump and a quick service kiosk.

Turning now to our entertainment business, we remained on track with our role also and have expanded our ordinary retail footprints through multiple customer range. We're on target with the play after 10000 DVD kiosk by the end of the year and to manage tracking and line without expectations.

The second quarter of 2010 was our strongest inspirational quarter to-date as we ended up with nearly 1600 locations, notable deployment range including speed way, quick share and $0.99 stores. Along with the ongoing role added over 1000 public stores while we continued our replacement program at safe way installing nearly 400 locations in Texas and California this quarter.

We continue support to our presence in several key markets such for Los Angeles, Phoenix, Dallas, Chicago, Detroit, Columbus and Central Indianapolis and a deploying outdoor kiosk and any of this extra mile locations in the North East while spending our kiosk footprints in the selling United States through grievance was (inaudible) convenient stores and Dallas convenient stores. Well, we are securing additional customers in meeting our deployment growth. We are also taking the lead in the industry as we moved the beyond the kiosks and connecting with consumers through digital download delivery. We are excited about our partnership with emotion which will help us further align our offerings with digital content as well as establish the kiosks presence in airport nationwide.

The NCR made digital download kiosks in our life in Seattle in Atlanta airports on wireless early the indications of the consumer acceptance are promising. Lastly, in entertainment, we continue to have productive conversations with the major studios as we believe we can be a valuable multi channel partner to the movie studio as a landscape video distributions transforms. We look forward to keeping you posted on our progress discussions.

In the other emerging industry such as healthcare and travel, we continue to re architect kiosks based solutions to more of a software driven business model with a focused on software’s services. One notable highlight in the quarter is our introduction of our enhanced hotels solution. This software is a self-service check-in solution that improves the guest experienced to renew more user friendly interface, enhanced work throughout to better guide guest and reduced steps to improve processing time. All intended to improve the self service to check-in experience in hotels.

In our services business, our margins continue to expand to the first half of 2010 and as a result, good performance in leading at a cost structure. What is most encouraging is while reducing costs. The team improves service performance metrics and customers satisfaction across all major industry. In fact, a recent external third party serve are validated in kiosks position with an industry leader and solution innovation and service quality and delivery.

We intend to continue to drive this well in world class performance and services and we are delighted to welcome Chris Askew to our team as our new senior vice president of NCR services. Chris will be responsible for leading our global customer service workforce to derived profitable growth as well as for us to even higher level to customer satisfaction loyalty.

Chris is a talented and highly experience service leader with impressive track record of growing services revenue and profitability. You look forward to benefiting from these expertise in growth oriented service businesses.

That's includes my commentary regarding businesses so now let me turn the call back over to Bill.

Bill Nuti

Thank you John so that covers what has been a quarter of positive trends emerging in each of our core and emerging industries as we laid for you in details on our last call when we define our pension road map, we have a plan that position NCR to optimize our earnings performance and create value for shareholders as we grow the company.

Let me take a moment to cover sub detail pension as I mentioned on our Q1 call our efforts to mitigate the risks and volatility of our pension plan including the number of steps over time. With one part of our plan involving active lobbing and supportive federal legislation and that providing pension funding relief for clients impacted by the 2008 market decline.

NCR was up to fore front of this advocacy after alongside industry partners and members of congress to secure final passage. And I’m very please to report on June 25th president Obama signed the preservation of access to care for medical beneficiaries and Pension Relief Act of 2010.

In summary, the new low gives company the option to select one of two special amortization schedules either 2 plus 7 for 15 year versus the current low. Both schedules will affect the 2008 to 2011 pension plan years. Under the 15 year option, companies will be able to amortize any short fall over a 15 year period. This option is more attractive and we believe it will provide meaningful relief to NCR.

In summary, our current expectation per cash funding of the US qualified plan is approximately 75 million in 2012 and 110 million in 2013 down significantly from our previous estimates of 125 million in 2012 and 175 million in 2013.

With pension reform behind us we’ll continue to manage our pension situation very closely and execute on our pension strategy. With this critical legislation now in place, we will turn our attention to evaluating the options available to us to reduce the valuation gap due to our pension situation. Our Q2 informed in share our planned as we continue to analyze and evaluate our alternatives.

Now let me turn the call over to Bob to give you a deeper dive into the Q2 financial results and provides key guidance and matrix for Q3. I’ll come back to rap up after Bob’s with you. Bob.

Bob Fishman

Thanks Bill. NCR’s total revenue in the quarter was $1.18 billion up 5% versus Q2 2009. This includes of 1 point benefit from foreign currency translation. We reported net income from considering operation attributable to NCR at $20 million or $0.12 per diluted share. This compares to a net income from continuing operation attributable to NCR of $20 million for a $0.13 per diluted share in Q2 2009.

NCR’s result includes special items in both periods. In Q2 2010 result includes $7 million or $4 million after tax and incremental cost directly related to our headquarters relocation.

Additionally, pension expense was $50 million or $33 million after tax in Q2 2010 compared to $39 million or $29 million after tax in Q2 2009. Excluding these items non-GAAP EPS expansion was $0.35 in Q2 2010 versus $0.31 in Q2 2009. To analyze NCR’s operational performance without the effective special items in pension expense please see the supplemental financials schedule included in our earnings press release and on our website that reconciles our GAAP to non-GAAP results.

Our Q2 2010 gross margin excluding pension expense in special items was 22.9% compared to 22.4% in the prior year period demonstrating the benefits from the successful implementation or cost reduction initiatives. Operating expenses excluding pension expenses in special items were $180 million, $181 million were 51.4% of revenues down 10 bases points from Q2 2009. As a direct result of our ongoing efforts to optimized our cost structure.

Total company non-GAAP income from operations or MPOI was $88 million in the second quarter compared to $78 million in last years Q2. Income tax expense was $11 million on GAAP basis in the second quarter versus expense of $13 million in Q2, 2009. We continued to expect the full year 2010 effective tax rate of approximate 27%. Our efforts to streamline on cost structure remained on plan and we are on track to eliminate $75 to $100 million in cost during 2010 with about half of those savings reinvested in the business with the remainder dropping to the bottom line. By enhancing our productivity in sharpening our business focus, we will be able to build upon our strong financial position.

Turning to the balance sheet, cash on hand at June 30th, 2010 was $447 million with total debt of just $10 million at the end of the quarter. Moving to the cash flow statement, NCR generated $87 million of cash from operating activity in Q2, 2010 versus $52 million in the prior year period. Net capital expenditures totaled $53 million in Q2, 2010 compared to $36 million in the prior year primarily due to investment in the entertainment business.

Discontinued operations yielded $8 million of positive cash flow in Q2, 2010 versus $25 million of cash used in Q2, 2009. NCR generated free cash flow of $42 million inclusive of our investment in the entertainment business, we continued to delivered good performance with our working capital and we’ll be continuing to expect breakeven free cash flow for the full year.

From our earning’s released, you will notice that during the second quarter, we revised our presentation of cost and insurance recovery related to certain environmental obligations including the Fox River matter to present those items and discontinued operations in our financial statements such cost, and insurance recoveries will previously classified in other income and extent in the income statement and with then cash flow from operating activity on the cash flow statement. I know that some of you will be interested to know why we made the Fox River classification change this quarter. Like all U.S. public Registrars NCR’s financial statements are subject to customary periodic reviews by the SEC.

In the SEC’s latest review of our financial statements the SEC stats adjusted that the classification of expenses income and cash flows related to the Fox River environmental matter would most appropriately be classified at discontinued operation because the facilities in business related to the Fox River matter were sold by NCR in the 1970s. We agreed with the SEC’s request confirm the statement with our auditors and made the change in classifications.

This change is not effect to measurement of Fox River remediation liability for our projection of few to cash obligations related to the Fox River matter. Simply said we have reclassified the location of these items in our PNL and statement of cash flows.

You will noticed in our Q2 and year-to-date financial statements that revise presentation has been applied consistently in all periods presented the supplemental non-GAAP schedules on the investor relation page of our website has been updated to reflect this classification change for each of the 2009 quarters and the full year 2009.

I'll rap up my remarks with the few comments on the third quarter for the third quarter we expect pension expense of $50 to $55 million or $33 to $36 million after tax. Including the continuing investment in our entertainment business NPOI is looking to be in the $75 to $85 million range.

A significant improvement from the $70 million NPOI in last years Q3. And finally we expect the third quarter effective income tax rate to be in the range of 20 to 25%.

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

Bill Nuti

Thanks Bob. We are looking forward to the second half of 2010. The global economy has heard significant challenges over the past two years. The biggest of which has been our pension funding burden. We’ve taken those challenges, we faced head on and we’ve maintained our strategic vision and continue to investing in our businesses.

While the phase of recovery will remains unpredictable. We are seeing improved visibility in our core businesses. Our balance sheet is solid into our multi year cost improvement plan. We are well in a way to driving with profitable earnings growth as business conditions improved. And to returns on that growth will be enhanced as we continue to implement our well structured plan to eliminate our pension funding gap.

With the elements of strategy delivering the desired results we now must focus on seasoning opportunities to build greater top line momentum in our core businesses. As I outlined earlier, our financial and retail businesses are seeing positive trends and we retain strong market and technology leadership positions globally.

At the same time, our entertainment business in other emerging new verticals creates attractive opportunities for growth in the coming years. Execution in all of these areas is vital for NCR and that's where we focus in the second half from 2010. We will of course keep you posted on our progress and we also look forward to sharing more with you about our goals and strategies later this year when we host you at NCR’s analyst's day. Please stay tuned for more details on that in the months ahead. I want to thank you all for joining the call and now I'll now opened it up to questions. Operator.

Question-and-Answer Session

Operator

Thanks Nuti. (Operator’s Instructions) It looks like our first question is from Paul Coster with JPMorgan.

Coster Paul - JPMorgan

Thank’s very much. The cost seems becoming through in March end looking forward you expect the gross margin to continue to improve and can you provide some color on that if possible?

Bill Nuti

Yeah. Actually gross margin in the second quarter were combination of better mix and cost reduction initiatives. As well as the improvement in services margins that we saw year-over-year on the product mix side, you need to think about the fact that in the U.S. we saw a better mix of regional banks in the total financial services business and they come with better margins in retail it was the outstanding year-on-year growth we saw in self-checkout revenue of 83% up year-on-year and they come with much better margins than I also have to say our point of sale business is doing well in terms of margins in the retail business and then our software business has grew, not just grew in terms of revenue but grew in terms of margins. So we’re very focused on mix shift across those dimensions going forward and we’ve got a lot of focus on cost reductions and value engineering going on in the company as well. And I think the answer to your question is yes, we do expect over the medium to long-term, our margins to improve. I mean, that is the plan and that’s the work where we’re driving towards for the next several years.

Coster Paul - JPMorgan

Got it. Bill, on the entertainment business side, any change you thinking regarding when you’ll achieved breakeven and can you share with us any of the outcome of the negotiations with the studios regarding the window negotiations which I believe should be concluded this summer?

Bill Nuti

Sure. Relative to studios first, things are going well and we have a very good relationship with the studios probably the – we are very active ongoing communications and negotiations with them and we anticipate closing that off by the end of the summer, as I’ve have said. First question, first part of the question was.

Robert Fishman

Was around any change to our – to our position…

Bill Nuti

No change on our EBITDA breakeven and EBIT breakeven guidance, which is will be EBITDA breakeven and slightly positive in Q4 and we will be between 25 and 35 million next year EBITDA positive and EBIT positive by Q4, 2011.

Coster Paul - JPMorgan

And just to clarify on the kiosk side, you still believe, you will be able to avoid the 28 day window?

Bill Nuti

We don’t – at the end of the day they are going to be several studios, we will – we feel confident we will be able to avoid the 28 day window on, relative to a few of them we are still working it through. We would like to reach a point what we have the ability to have a premium offering during the window but candidly a few of them don’t fall our way. We feel very good about the economics of declines of deals we can move through the systems with those guys and are feeling very, very bullish about where we’re going to land by the end of the summer.

Robert Fishman

Yeah, I’d only – I’ll talk, its little bit more complex in fact the, as Bill properly pointed out the contracts are little bit more than just a rustle in the window. The cost of our technology and software and it ways in which we pick about our business longer term, we’re looking at the total automatic retail cooperating in the industry and that’s what you know, what’s gives us comment thinking about what is the retail store look like in a future versus what is it look like today and that’s why it includes more than just ramp up.

Coster Paul - JPMorgan

Great. Thank you very much.

Bill Nuti

Thank you.

Operator

Katie Huberty with Morgan Stanley. Your line is open.

Katie Huberty - Morgan Stanley

Thanks good afternoon. The EMEA growth impressive in the contacts of what we’ve heard from other IT companies. Can you just shed some light on the trends that you sound that region during the quarter and whether you think a positive growth rate is sustainable into the third quarter?

Bill Nuti

I agree with you Katie. I mean, we first of all you know the one thing that I didn’t say in the prepared remarks that I should say, is we over came a time of that headwind in Q2 and posted some pretty impressive number in light of that and a lot of that FX headwind within Europe. We grew 10% and faced the 4 point headwind. So on FX mutual basis we grew 14%. The two things that I would point you in Europe that really supported our growth in the second quarter and candidly in the first half because we had an excellent first quarter in Europe, has been both the growth of our ATM business in emerging markets and the growth of our self checkout business in Western Europe.

Those two solution areas are the primary reasons for our growth and do we thinks its sustainable going into the third and fourth quarter, the answer is yes and that’s because we had order growth there both in the first quarter and second quarter.

Katie Huberty - Morgan Stanley

Thank you

Operator

Reik Read with Robert Baird & Co. Your line is open

Reik Read - Robert Baird & Co

Thanks. Good afternoon, guys. Just back on retail. Bill, you said as you talk about evidence of a refresh which is something we’ve all been waiting for but really haven’t had any evidence of it. Can you talk about what you’re seeing that gives you confidence there, what the timing is and talk specifically about impact done kind of a traditional point of sale business?

Bill Nuti

Yeah, so net-net is the first thing I would point to with respect to retail as the order growth in the second quarter was 27%. That’s a great sign that we’re seeing a significant increase in customer activity for us. And the first quarter, we also had very, very good growth 21% order growth in the first quarter. So 21.5 about a 27 are good signs and then when you drilled down underneath that our self checkout business has experienced just the kind of growth we’ve not seen at NCR, 8% year-on-year revenue growth and self checkout in Q2 63% year-to-date in that business and that’s a good margin next in that business. So that’s also evidence of this refresh taking place.

But we’re seeing little bit of a difference here and that the refresh now is more focused on self service and it is on point of sales. We are seeing self checkout feature more prominently at the point of sale as it replaces traditional assisting point of sales terminals where we once would have deployed an assisted point of sale terminal, grossers in particular are deploying self checkout. So those are the matrix that demonstrates good signs. I don’t know if John you got any other comment.

John Bruno

We only want to point at that, right is, on point of sales that were assisted all the things I discussed that are happening at the point of sale, it seems so more rich content requirement, guest immigration, wealthy and promo cards, these types of things are really pushing the envelope on processing power, user interface and the types of things that have to be associated with of point of sales. That’s an encouraging sign and that’s encouraging signs for the line which we’ve architected our business and that’s why we made our investments both organically and inorganically, but our net acquisition did not face as we planed.

Reik Read - Robert Baird & Co

If you go back to before that the downturn hit, you guys would kind of characterize your mix there is roughly a third self service and may be that’s out of date now just given some of the growth rate. Can you kind of talk about the where that is and where you think it should be a year from now?

Bill Nuti

I think today its more 60, 40, you know, in terms of revenue mix, 60% traditional point of sale 40%, self checkout, that’s up significantly from the year’s past. And I think even if that shift become a little bit more permanent overtime. It will fluctuate. There will be quarters where point of sale because of the size and some of this rollout, will you self check-out business. But on the whole, I think we’re moving quickly from a third of the business to 40% of the business.

Reik Read - Robert Baird & Co

Okay. And then if I could just ask a question on the ATM side of things. In the U.S. Your press release talk about the business being down a little bit in the U.S. Is that really a reflection of the large banks ramping down and I would take it from what you said in your comments. Bill, is it you have some evidence that the regional are ramping, but it’s not enough to offset at this point?

Bill Nuti

Well, it’s a good news, bad news story if you will for us. It’s more good news nor a bad news because while the large banks have slow down and yes, the answer to your question is yes, (inaudible) is correct. What we are seeing is significant margin improvement in the U.S. If you look at our margins in the U.S, they came up significantly and the reason is the mix is much better with regional banks. So, our regional bank mix was the best in Q2 than I’ve seen going back several years as a percentage of our total revenue and the margins in the space are three to four times what they are in the national or large bank segments. So, that’s positive.

Reik Read - Robert Baird & Co

Okay. Great, thank you much.

Bill Nuti

Thank you.

Operator

Matt Summerville with Keybanc, your line is open.

Matt Summerville - KeyBanc

Couple of questions. First on the ATM business it sounded like there is some language in the press release we saw little softness in Asia Pacific during the quarter. Can you put little more color around that and what your expectations there for the rest of the year?

Bill Nuti

Yeah just seasonality Matt. I don’t think and I don’t think its anything more than that for us we continue to expect Asia Pacific to be a positive and good market going forward. We had a terrific Q1 in Asia Pacific and I would just classify as seasonality that the back – if you look at the backlog, if you look at the front log things looked promising there, continue to look promising there.

Matt Summerville - KeyBanc

Its my understanding in terms of pension reform that deal, I thinks if HR 3962 kind of spells our, what you can do from a capital allocation stand point. How does this legislation you know, constrain or not your ability to think about buying back stock over the next couple of years. And then I guess it looks like you kind of went back to talking about the funded status in the plan as of December 31st, last quarter you gave a more you know, up to date kind of metric there are you able to do that this time around as of the end of second quarter?

Bill Nuti

Yeah. I think on – to answer your part of your question Matt, you know, for us we’re going to get a lot of flexibility out of pension reform and we feel pretty good about what is going to mean to the company in terms of financial flexibility. We have – the good news is that in the final form of pension legislation redemptions can be – at least for NCR, can you think about at this, it’s high as about $200 to $250 million a year, if we want to buyback stock. So it doesn’t limit us in terms of buyback and then that’s the good news.

So were able to work closely with member of congress and closely with the administration, I think the work just to the extent that – we virtually have no limit on buyback. And by the way just to make something very clear. If we decided to buyback more than 200 to 250 million in any given year, the only thing we have to do is match that with regard to pension funding. So we’re not limited for say, its just mean that we have to put more into pension funding that year. So we are prohibited to do that and I want to make that clear. But we have up to 2 to 250 without having to match that in terms of funding

Relative to pension where we are today, clearly in the second quarter and we don’t as you know Matt, we mark-to-market on 12/31 at every year. So giving quarterly updates on pension is difficult. We did it Q1 because were announcing part of our pension strategy in Q1. We’re not going to do that every quarter just simply because it fluctuates so much in all throughout a year. However, that being said you could expect it Q2 because the discount rate went down about 50 basis points in the quarter that – that incrementally worse [ph] in that quarter. Where we land at the end of the year, right now we don’t know.

Matt Summerville - KeyBanc

Thanks Bill.

Bill Nuti

Thank you.

Operator

Ajit Pai with Stifel Nicolaus. Your line is open

Robert WalkerStifel Nicolaus

Hi, this is Robert Walker around for Ajit. Just a regarding Intelligent Deposits. You mentioned the 9,000 U.S institutions, you guys can take advantage of this in your press release on the 12. Roughly how many ATM’s that represents or how would you size opportunity in terms of revenue and what percentage have already been upgraded and what is your share there, we can think roughly? Thank you.

Bill Nuti

The way you need to think about the mid-sized or regional banks versus the national bank’s is, they end up a same number of bank owned ATM’s in the U.S., call it you know,. 125,000 thousand units if you will per constituent. So national banks, large national banks and then the regional and mid-sized banks. And the regional and mid-sized banks have really yet to move forward aggressively with deposit automation.

Now some of them will not because there is not a return investment for some of the smaller institutions but there is a good percentage of that base of 125,000 or so ATM’s that will still need to transition to deposit automation. And the way we think about it here is, it’s in the range of 50,000 to 75,000 units very similar to the number of units that are going to be transitioned to deposit automation in the large banks segment. So it’s about the same and the opportunity is the same, of course is many more of the regional and mid-sized and there of the nationals.

Robert WalkerStifel Nicolaus

Okay. And then roughly what do you think your share there is there and then also kind of just globally, to get kind of size there. Obviously its definitely larger, but any kind of how you thinking about that on the global scale?

Bill Nuti

Well, outside the U.S. deposit automation in mid-sized banks are come in different flavors depending upon the market. There are very large mid-sized bank pocket’s however throughout the world, most of which have been somewhat dormant for the last 18 months in terms of spending which, it has muted our margin somewhat. Although we sit here very-very pleased as to our gross margin improvement program without having that mid-sized bank segment participating at the rate that they did in '06 and '07 and '08.

In the U.S., our shares is good in the mid-sized banks. We intend to make it better in the mid-size banks and we think that we have some opportunities to do that and over the course of the next year through innovation, improved innovations and coverage in that marketplace that we anticipate will help NCR from a market share position in that space.

Robert WalkerStifel Nicolaus

Okay. Thanks. And just briefly, it was interesting lowering the pension funding that you’re going to be required to do. If you can just talk briefly about kind of I guess that was result of the bill being passed, but more briefly more information about that?

Bill Nuti

Sure, Bob you want to take that?

Bob Fishman

The question is…

Robert WalkerStifel Nicolaus

Pension funding a little bit more on the financial flexibility provided to the company on pension reform?

Bob Fishman

Well, our view is that by reducing the U.S. contributions from $175 to a $125 million. You know that obviously preserve to $50 million in that particular year. And so, you know, that allows us the flexibility to invest in organic opportunities, in R&D and other items. That we didn’t have before the pension reform was passed. So, that’s what we mean by financial flexibility.

Bill Nuti

Yeah. Just think about pension reform and the 15 year amort [ph] schedule on this way. There is not a lot of – on and NPB basis. It’s not all that valuable to us. what is valuable to us though, is having the 50 million more in cash in 12 and the 75 million more cash in 13 and so on up to 2017. And what is valuable is that the markets now have a longer period of time to adjust and therefore could dramatically improve our under funded pension gap without us needing to invest the cash in the pension. So it is a – it gives us a lot of time and lot of flexibility for the markets to recover more quickly, which means we would, we’re not going have to invest potentially in pension funding and we get the relief on top of that from 2012 to around 2017.

Robert WalkerStifel Nicolaus

Great. That helps. Thank you.

Bill Nuti

Great. Thank you.

Operator

Zahid Siddique with Gabelli. Your line is open.

Zahid Siddique – Gabelli

A couple of questions. The first one on the kiosk, what is key outstanding number of kiosk that you have installed or are in the process of installing?

Bill Nuti

We have today around 6500 installed and we are running at a 100 to 200 a week in that range, right now demanded not the issue, its making sure the choices we make with respect to where we deploy our smart choices around the ability for reason is to ramp to our revenue expectation. So we could I mean, if we wanted to we could ramp faster, but right now is about making smart choices on deployment.

Zahid Siddique – Gabelli

And you still believe you will be able to achieve the 10000 kiosk target by 2010?

Bill Nuti

Yes.

Zahid Siddique – Gabelli

Okay. And on –- also on the kiosk what is your relationship with Blockbuster, they have been in the news lately. And hypothetically they were 5 for chapter 11, how does that impact your relationship?

Bill Nuti

Yes. Just a reminder on Blockbuster, we essentially licensed to brand name and pay royalty to them based on the success of kiosk. We value them as a partner. Their brand name regardless of some of the challenges they face happens to be very valuable to us and is well recognized as a video distribution brand, relative to Blockbuster I’m not going to, I am not going to take a guess on terms of what happens to the company.

I think they are working hard to recapitalize the company and we wish them the best of luck. In the worse case basis we do have some protections in place related to the brand. But we also we’re going to continue to work with them as a partner on a go forward basis in whatever configuration they are in.

Zahid Siddique – Gabelli

So what about the revenue sharing agreement you have, you’ll probably continue with whoever and kept winning the assets, the Blockbuster assets. I guess you’ll just carry on the license with them?

Bill Nuti

Correct

Zahid Siddique – Gabelli

Okay. Last question is on the ATM. I think you mentioned the various regions. What was the orders if you quantify by regions, just for the ATM products not the service, just the product?

Bill Nuti

You mean giving you a sense of what order growth was in the Q2 high region?

Zahid Siddique – Gabelli

Yeah

Bill Nuti

By region, just for financial services?

Zahid Siddique – Gabelli

Right. For the equipment or product?

Bill Nuti

I got you. Okay. So for the America’s think about order growth year-on-year in the low single digits, very low single digits. Think about for EMEA around almost around 20% points and Asia Pacific was down in the mid teams year-on-year of as very-very difficult compare last year.

I am sorry year-to-date that was so net, the way we want to think about it is the America is actually on for Q2 only up about again low single digits for Q2 only EMEA close to 20% and for Q2 only for APEX mid teen down in mid teens.

Zahid Siddique – Gabelli

And for Q2 America was down up for Q2 only. America?

John Bruno

For Q2 only America was up

Zahid Siddique – Gabelli

At low single.

John Bruno

Low single.

Zahid Siddique – Gabelli

Thank you so much

John Bruno

And further APEX is up in the low single digits year-on-year on-year-to date basis, which gets to the point I was trying to make very strong Q1.

Zahid Siddique – Gabelli

Thank you.

John Bruno

Thank you.

Operator

Gil Luria with Wedbush Securities your line is open.

Gil Luria - Wedbush Securities Inc

Thank you, for taking my question in the entertainment retail business I think last quarter you said the revenue ran about 20 million can you give us some update at what it was in the second quarter please.

Bill Nuti

Yeah, just around 25 million, just around 25 million in the quarter.

Gil Luria - Wedbush Securities Inc

Okay and then your two comparators for entertainment retailing you max forces [ph] doing part of reason they seem to be doing well as the streaming business I think our red box is talking about they'll probably announce something probably around those line later this year what’s your plan for tried to address apart from physically going to Kiosk to download digitally do you have plans of competing in other aspects of entertainment retail new orders streaming, something like that, that you’re working on?

Bill Nuti

So, we’re working on a number of initiatives across all of those channel, the one we talk about most is around affordability of digital content because that’s where the investments were made in a tight closest to our business model. That's being said, the infrastructure necessary in order to deliver that, is also capable of delivering media in a variety of formats which would include downloading or streaming. And so, what we’re doing is as we’re looking at the core investments on what it is to be need to do the delivery net into affordable format and then we will continue to make investments as we see the market on both. Because without the set top box type company and we’re not partner with consumer electronics company as a destination, we do that through a partnership with blockbuster and we’ve continued to just drive our focus in the part that we think are most challenging in that digital right management of digital content is in motion.

We just see but that’s going to be a market, that’s going to continue to grow and have 3D technical demand and then we want to be company to solve that issue.

John Bruno

And, Gil this business has met every expectations so far we’ve had a bit. We couldn't be more excited about the potential for this business inside the company. And we’re going to continue to investing what the value change.

Gil Luria - Wedbush Securities Inc.

Great. Jumping to pensions, still with some but there will be 25 debt change to discount the rate equal to 140 million of on refunded status?

Bill Nuti

That’s correct. It’s about a 130 million, it’s about a 130 million Gil all and so, that’s about right. The only thing I’d say is if you try to do the map around what happen in the given quarter you have to also take into account you know at return on assets which actually that we don’t were not doing for the quarter but the reason will be the second quarter will bit the market in Q2 on return on assets.

Gil Luria - Wedbush Securities Inc

Got it. Fox River, can you help us sort out just in terms of what the future cash flow needs were going to be for that what do you expect to spend cash while on Fox River going forward this year and beyond?

Bill Nuti

It is pretty consistent going far with what we’ve said if you knowing the past it's approximately $30 million a year for the next seven or eight years.

Gil Luria - Wedbush Securities Inc

Got it. And one last question it seems like the expense for the head quarter move your expectations for that expense from the first quarter for changed what was the change there that are that increase that expense?

Bill Nuti

Yeah, there was no, no real change you know obviously the head quarters move has gone well, we spend in Q2 roughly $7 million and that was as expected and also in line what will spend in Q1 you can expect obviously that number to you know it reduce significantly it because the move is affectively complete.

Gil Luria - Wedbush Securities Inc

Isn’t there are change in the annual guidance and the non-GAAP reconciliation table thing right there’s a bigger out box for that item in this report guidance then they work for first quarter report?

Bill Nuti

Well, what we do for those you know one time non operational items as the factors are meant to be with the GAAP guidance as really incurred. So what we trying to explain in the foot note is that one, what would leaving operational EPS reaffirming that so no change there. (inaudible) one time might have miss figures in Q2 but the GAAP results full year guidance’s come down correspondingly. That consisted with how we deal with one time items in the past.

Gil Luria- Wedbush Securities

Got it. Thank you

Bill Nuti

Thanks Gil

Operator

Kartik Mehta with Northcoast Research. Your line is open

Kartik Mehta - Northcoast Research

Thank you. Good afternoon Bill. I just wanted to get make sure I understand your comments under the ATM market rate and get far comment on Europe. I think for the America’s you said mix getting better for the market. Asia pacific just seasonality impacting revenue but market overall strong and just wondering if you could give those two are accurate and finally add some comments for how you see a (inaudible) for the ATM side of the business?

Bill Nuti

Yeah, both comments are accurate and with respect to Europe going forward we anticipate our positive trends continuing in Q3 and Q4.

Kartik Mehta - Northcoast Research

And then on the DVD side of business. It's seems like growing. Its exceeding your expectation and currencies as where you get plenty of demand and you’ll easily get to the 10,000. (inaudible) continue to increase investment in that business and then you push off back-even because the business is going well and trying to see in longer terms just be a better business decision?

Bill Nuti

Look right now the way I look at this (inaudible) were in July we have lot of work just to get to 10,000 kiosks. This year we had a lot of work to get that done and put those in the right places. If we get closer to the -- or into the flows of strategic planning for 2011 will determine whether or not we want to increase our investment in entertainment of the rates gets higher over time from our perspective because we do feel strongly that other channels to market going forward might be better investments for the company but we are not going to make that determination until we get towards the end of this year will give you guide and update probably on the next call to the way we see it but right now you know we got to get 10,000 done in 10,000 put in the right places.

Kartik Mehta - Northcoast Research

And finally, do you seen or you said that the sub-check of business is really picking up and wondering the retail verticals where you are seeing the biggest demand product? Thank you.

John Bruno

Thank you

Kartik Mehta - Northcoast Research

It remains in grocery and big box primarily although we did have one size of the general merchandiser in Europe this past quarter made a very significantly investment in this technology but generally it’s greater penetration of checkout lands in grocery big box and DIY

Kartik Mehta - Northcoast Research

Thank you very much

Operator

Read Reik, Robert Baird & Company. Your line is open.

Read Reik - Robert Baird & Company

Yeah. Thanks just one quick follow up the Georgia tax benefits when will those kick in that’s still roughly $80 90 million over five years?

John Bruno

It is since over longer period of time but they kick in more significantly for the company in 2011. We are getting benefits now some benefits this year but not clearly there are not going to be full year benefits of having all of the employees in – on the payroll and 2011, they kick in, they actually become accretive and they are accretive through 2016.

Read Reik - Robert Baird & Company

Okay. Great, thanks a lot.

Bill Nuti

Thank you.

Operator

Our final question comes from Matt Summerville with Keybanc.

Matt Summerville - Keybanc

Thanks. Just two quick follow up. First, I apologies if you gave this Bob, but what’ your free cash flow outlook for NCR for 2010 for the full year.

Bob Fishman

We’re keeping it as we did. You know last quarter, its breakeven free cash flow which includes the investment in the entertainment business of roughly $85 million.

Matt Summerville - Keybanc

Okay. And then, Bill to one of your earlier comments on pension and this reform in the fact that it gives NCRs and others centrally a longer period at a time for the markets to kick in and how about with the funded status? Given that point, do you – are you rethinking in all the asset allocations strategy because as you continue to move theoretically from a little bit more heavily weighting from equity in the fixed income over that period, won’t you kind a limit that upside, especially with the way fixed income prices have run up?

Bill Nuti

Yeah. You know, we’re going to stick with our plan Matt, to do it over three years. Our goal is to be out of the pension business in that timeframe if we can do it. And not have to deal with this a couple of years from now. We do think that we’ll get the benefit of any equity market run up over there three year period in the mix of our returns on assets and total.

Fixed income returns have been relatively good for us and we anticipate that you know they’ll will be good for us going forward. So, you know, we’re going to stay with the play we had in place today to shift the fixed income over three years and continue our focus on getting out of the pension business.

Matt Summerville - Keybanc

Okay. And then Bob you were just talking about that the head quarter relocation expenses kind of being one time in nature, they’ve gone on it 5 to 7 million for three quarter running now. Will we continue to – I guess when we will see the end of this call out in that expense and then the context of 80 to 90 million impacts related incentives for moving down there, I’m not sure what the duration that is but it sounds like over 5 years. If we NPV that and look at all this three relocation expense, can you walk me through how the whole our ROIC of equation on this whole move works?

Bob Fishman

Yeah, we don’t need to answer your first question on – the one time items are obviously cut coming to an end on you know that Baden headquarters as of June 30th, would we – we closed that building. So you might see a one time item come through in Q3. We’re still working through that you know call it $3. $4, $5 million math. But that would be the last one that we anticipate.

In terms of your question around the NPV, the NPV the business case for the move from Baden to Delluit we don’t have significant financial benefit for us and we’re executing on that. So there is a lot of process offsetting you know, the one time items that we’ve called out. So it’s a significant NPV to move from Baden to Delluit and will see those savings in our P&L over the next five to six years as Bill mentioned. So trust me on that it’s a very sound business case from a financial benefit perspective.

Matt Summerville - Keybanc Capital Markets

Thanks a lot for your helpful guidance

Gavin Bell

Thank you Matt. Well thank you very much for everybody for joining the call. And we look forward to speaking to you again in a couple of months guys. Thanks so much. Take care.

Operator

That concludes today’s conference. You may disconnect at this time…

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Source: NCR Corp. Q2 2010 Earnings Call Transcript

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