NCR CEO Discusses Q4 2010 Results - Earnings Call Transcript

Feb. 4.11 | About: NCR Corporation (NCR)

NCR Corporation (NYSE:NCR)

Q4 2010 Earnings Conference Call

February 3, 2011 04:30 PM ET


Gavin Bell – VP, IR

William Nuti – Chairman, President and CEO

John Bruno – EVP, Industry Solutions Group

Bob Fishman – SVP, CFO and Chief Accounting Officer


John Williams – Goldman Sachs

Katy Huberty – Morgan Stanley

Gil Luria – Wedbush Securities

Matt Summerville – KeyBanc Capital Markets

Grant [ph] – Northcoast Research

Maria [ph] – JPMorgan

Michael Saloio – Sidoti & Company


Welcome, and thank you from standing by. And welcome to the NCR Corporation Fourth Quarter 2010 Earnings Release Conference Call. (Operator Instructions).

I will now turn the call over to Gavin Bell, Vice President of Investor Relations.

Gavin Bell

Thank you, Catherine. Good afternoon, and thanks everyone for joining us for our Fourth Quarter 2010 Earnings Call. Bill Nuti, NCR’s 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 certain key initiatives. Bob Fishman, NCR’s Chief Financial Officer, will then provide comments on NCR’s total company financial results.

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

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

A replay of this conference call will be available later today on NCR’s website, For those listening to the replay of this call, please keep in mind that the information discussed is as of February 3rd, 2011, and NCR assumes no obligation to update or revise the information included in this conference call, whether as a result of new information or future results.

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

William Nuti

Thank you, Gavin and good afternoon, and thank you all for joining us today. NCR ended 2010 on a strong note. We met our financial targets and importantly continued to rebuild our order backlog and sales funnel which bodes well for continued growth in revenue, NPOI and EPS expansion in 2011. In fact, our order backlog ending the year was nearly $1 billion; historically, a healthy level for NCR. We’re also seeing an improvement in the overall demand environment as the global macro-recovery continues to be slow, but steady.

Our performance during the fourth quarter in full year was attributable to an improved level of execution across NCR.

In financial services, we capture market share in both developed and emerging countries further solidifying our number one position globally. Critical to this success was our growth in ATM and the converged channel software offerings that give our banking customers new opportunities to strengthen relationships with their end customers.

In Retail, our ongoing investments in innovations have greatly strengthened our portfolio of Self-Checkout solutions at a time when retailers indicate greater willingness to invest and move more definitively toward self-service channels.

In our Services business, we expanded margins during the year, improved attach rates and made significant strive toward improving customer loyalty.

Finally, our Self-Service solutions are winning business in emerging verticals including entertainment, travel and healthcare.

In addition to revenue generation, we also continue to strengthen NCR from within. We made strategic investments in our sales operations and improve geographic and customer coverage to create and capitalize on global sales opportunities. And we took important steps to operate more efficiently and effectively including the transition to a more market driven operating model without industry solutions group structure.

With the help of our global continuous improvement program, we achieved our cost reduction target this year, eliminating $100 million in annual costs. And as we’ve outlined to you at our recent analyst day, we see the potential for another $200 million to $300 million in reductions over the next three years, all of which we’ve already began to work on.

Finally, in 2010, we charted a strategic course to restructure our pension portfolio and position NCR to proactively address our under-funded pension, reduce volatility and free up capital to deliver additional value through activities like share repurchases.

With those accomplishments as the backdrop, let me update everyone on the business climate we’re seeing around the world.

In Financial services, our recently announced Win-a-Chase [ph] is indicative of our focus on innovation to improve the customer experience while competitively differentiating NCR in the market. We will install ATMs at 100s of Chase locations in 2011, helping one of the nation’s largest banks deliver faster and easier customer experience.

The rollout will include ATMs equipped with NCR’s next-generation scalable deposit module or SDM technology in which customers can deposit both cash and checks in any orientation as a bunch to a single slot. This new technology designed for NCR’s SelfServ ATMs delivers a consumer deposit experience that is twice as fast as competitive ATMs, delivers a consumer deposit experience as well which will help banks speed transactions, reduce queue lengths and improve the customer experience.

Ryan McInerney, CEO of Chase Consumer Banking was quoted as saying, “Our deposits from the ATMs have been very well received by our customers, and we believe NCR’s new technology will deliver an improved experience that our customers will love.” As we said at our recent analyst day, one of our key objectives is to delight our customers and the NCR team works toward that goal every day.

In addition to the SDM-enabled SelfServ ATMs, NCR also warrants to all cash dispensing ATMs from our SelfServ family in various Chase locations.

Like Chase, Wells Fargo has also conducted a pilot program of NCR SDM technology and informed us that the performance of the technology far exceeded their expectations. In addition, we’re seeing continued momentum in international markets, particularly Asia, and China remains one of the most important emerging markets.

During the fourth quarter, we won a contract with a mid-sized bank for 1,500 SelfServ ATMs. This followed our success earlier in the year in securing orders from China’s top five commercial banks for 6,000 SelfServ ATMs. We’re also making great headway in Brazil. Orders in Brazil were up well over 100% in 2010 and our manufacturing plant in Manaus has played a pivotal role in helping us develop customer engagements in what is the fourth largest ATM market in the world.

In addition, we’re seeing improved opportunities in the U.S. as mid-size and regional banks begin to play catch-up in deploying intelligent deposit.

Our team passed another milestone recently as NCR has now sold its 125,000 NCR SelfServ ATM, more than doubling the cumulative number sold in 2008 and 2009. Now, with wider availability and additional transaction options, SelfServ ATMs help hundreds of financial institutions offer better customer service. To-date, more than 1,300 financial institutions in more than 130 countries around the world have purchased NCR’s SelfServ ATMs.

As you look ahead to 2011 and beyond, innovation will continue to play a critical role in preserving our leadership in financial services. Converged channel solutions that offer the integration of advanced ATM platforms with online and mobile banking applications will be expected by consumers and NCR as at the forefront of developing these solutions.

So, Retail market is also experiencing shifting patterns in consumer habits and expectations that play into NCR’s strategy and core strengths. So, checkout solutions are gaining further traction and we are expanding the capabilities available to retailers with new products like our SelfServ Checkout Enterprise Suite and our Enterprise Preference Manager. These products integrate a retailer’s distinct channels such as mobile, online and the store allowing consumers the ability to connect, interact and transact in a seamless way while providing the retailer with a platform to increase revenue and grow their customer base.

After several years of reduced investment, key indicators point to a continuing upgrade cycle in the retail sector and the ongoing shift to Self-Checkout and ultimately, converged channel solutions; all these offers NCR attractive opportunities for revenue growth and margin expansion.

If you needed any evidence of the growing interest both at home and internationally, hopefully you stopped by our both at the National Retail Federation Show in New York, a couple of weeks ago. The excitement at this year’s show was stronger than our team has seen in many years.

On the Services front, earlier this week, we announced NCR Predictive Services, a managed service for self-service solutions. Unlike other service offerings that proactively monitor for business instructions and then react, NCR Predictive Services is the first managed service that will predict device failures before they happen and dispatch service technicians before consumers are impacted. The new service is initially available for NCR’s SelfServ ATMs and NCR’s SelfServ Self-Checkout systems.

NCR Predictive Services works by gathering and analyzing a wide variety of data from NCR’S self-service devices. This information is then combined with the insights of the NCR’s services data warehouse, which maintains operational data for more than 2 million customer point of service and 12 million annual service actions around the world. NCR Predictive Services also provides the opportunity for secure audit-controlled remote access for fast resolution and diagnosis of issues.

An NCR customer engineer can recover and review logs and perform problem resolution activities within minutes of an issue being identified further reducing the number of extended outages.

A major U.S.-based supermarket chain is one of the first adaptors of NCR Predictive services. The services already deployed in thousands of Self-Checkout lanes, helping this grocer maximize the uptime of self-service technologies and enhancing the shopping experience for their customers.

Industry analyst firm Gartner examined the shift from a reactive services model to a predictive one in a February 2010 report stating, “Only now are we seeing mainstream vendors beginning to move beyond more reactive capabilities to develop service offerings that have the potential to deliver tangible business value over and above that of a technical insurance policy.”

Gartner further reinforces the value of predictive services in a November 2010 report stating, “Gartner and user customer inquiry trends indicate that many organizations are becoming weary of traditional support services that concentrate on remediation after the fact when they would much rather have providers that at least attempt to prevent foreseeable issues becoming problematic.”

NCR Predictive Services is the next evolution of NCR’s Interactive Insight, which is a state-of-the-art continuous improvement process to provide consistent and supplies log analytics across products, customers and countries around the world. Leveraging one of the world’s largest databases of services information, NCR can drive quality improvements into new and existing products as well as analyze any customers’ technology environment to proactively optimize their estate.

Turning now to Entertainment. We finished 2010 with approximately 8,000 kiosks deployed, revenue of approximately $100 million; and EBITDA near, but just below breakeven. Landing at 8,000 kiosks was a conscious decision as we had opportunities to install an additional 1,600 kiosks in the quarter. While this outcome is below our original plan and on the surface is disappointing, it also reflects many successes during the year as some actions that will position us for stronger performance in 2011.

We believe we become well-established as the number two player in this market and are well on our way toward profitability. We also demonstrated operational discipline later in the year to curtail aggressive deployments that could have provided a short-term gain, but were below our thresholds for ongoing profitability. Our management system for this business has matured and we’ve been able to take a more granular look at how our kiosks are performing as well as critically evaluate qualified future sites all with the focus on improving revenue per kiosk and same store sales growth.

John will talk in some more detail about what we’re learning and how we’re moving forward. But at a high level, we remain excited about this business. We have inventory ready to deploy, many strong potential sites and an increasingly unique and differentiated offer in the industry with more innovation on the way. At the same time, we’re going to be smart about when and where we deploy taking a thoughtful and disciplined approach to our rollout in our 2011 capital allocation.

Lastly, it is important to note that we continue to believe that the combination of our entertainment kiosk platform with digital download capabilities and other potential services will deliver the multi-channel experience that consumers are seeking. We are in active discussions with potential partners and are currently testing offers that begin to achieve this vision.

Let’s now discuss our preliminary company outlook for 2011. We believe the improving demand in our core markets, the rebuilding of backlog and the increasing momentum toward adoption of self-service technologies is a strong foundation from which to accomplish our objectives for 2011. We expect revenues in 2011 to increase in the range of 5% to 7% on a constant currency basis. We expect non-pension operating income of NPOI to be in the range of $370 million to $390 million for the year, an increase of 11% to 17%. We expect non-GAAP earnings per share excluding pension expense to be in the range of $0.65 to $0.75 in 2010, an increase of 8% to 14%.

Just to touch on pension briefly. We ended the year on a positive note. Asset returns were favorable; in fact, slightly ahead of global benchmarks for the year. The discount rate ended the year below last year due to the overall interest rate environment, which negatively impacted our under-funded pension although we some favorable direction in the discount rate later in the year as the rates moved up. The results of better than anticipated asset returns somewhat offset by a lower discount rate is that our under-funded position improved by about $50 million as of year-end.

Consistent with our game plan, we ended 2010 with a 60/40 fixed income to equity mix in the U.S. plan, and a plan to move to 80% fixed income by the end of this year and 100% fixed income at yearend 2012. Bob will provide more detail around pension and cash flow in his prepared remarks. Also as you recall, NCR moved to a line of business reporting structure at the beginning of 2011 as such Bob will also be offering 2011 commentary on a line of business basis.

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

John Bruno

Thank you, Bill, and good afternoon, everyone. Bill touched upon our lines of business, but I’d like to give you a broader update and provide some additional detail on our progress deploying self-service technologies across our core and emerging industries.

First, I’ll provide some additional color on our Entertainment business, and start by saying that 2010 was a year where NCR established itself in this business and demonstrated our ability to build and grow at an accelerated pace in this market. So, let’s talk about where we are today and then where we’re going.

We finished the year with approximately 8,000 deployed kiosks with an average fleet age of approximately eight months. As Bill mentioned, we pulled back from our original deployment plan late in the year so that we could focus on improving revenue for kiosk, same store sales growth and time to profitability ahead of deployments. Having said that, revenue per kiosk improved every quarter with same store sales up over 100% year-on-year and 16% sequentially; and while this is very healthy growth, we see room for improvement.

The majority of our network is performing to our satisfaction at this stage of our business model maturity, but approximately 20% of our sites are below planned. This was the main factor in our decision to hold deployments as we better understood the issues that impacted location selection, advertising, network density and availability. We felt it was necessary to focus in our underperforming stores as we tune our network after an aggressive deployment year. As a result, we’re either addressing site-related issues or redeploying machines in our networks to locations that experience higher transaction.

We’re in a position to do so now because we have a solid pipeline of locations that meet our more mature deployment criteria. All of these are taking place at a time when we’re also devoting a significant amount of efforts to improving our content offers across our fleet, and we’re excited that we recently reached another distribution agreement with Warner Home Video. As many of you know, these deals are critical not just to strengthening our content offering, but also in lowering product acquisition cost.

In Q4, we also began testing premium price new release movies in four major U.S. cities with 20th Century Fox and we are very pleased with the results of the new premium offer test in our industry. If you recall that Fox was one of the studios that instituted the 28-day window for all new release rental in kiosks as well as with Netflix. Working together, we developed an offer that was priced during its test run at $2.99 for the first night and $1, thereafter; while the libraries of older movies continue to be priced at a dollar per night.

While the test was somewhat limited, it surpassed all of our expectations and as a result, we will be running an expanded test in Q1 and are already planning in Q2. We’re pleased to see validate the distribution options for premium price new releases of products they value and they also appreciated the increase choice while recognizing the value of premium content from the studios. We will keep you fully informed of our developments in these spaces as we differentiate NCR from the competition.

In addition to content, getting the most out of our kiosk is the function of critical math leading to a positive network effect; improve merchandising mix, good real estate selection and effective in-store and online integrative promotion. As such, we developed a comprehensive process to better manage this business based on a wide array of analytics. We believe we now have the critical mass necessary to achieve the benefits of density in our target geographic location. We’re also excited with our pipeline of opportunities for us to continue to grow our footprint.

From a capital allocation perspective, we’ll be spending significantly less than deployments in last year, approximately $45 million in 2011 or about half of our investment last year. Our new store opening plans are no less aggressive, however. But the decision to relocate approximately 1,600 underperforming kiosks allows us the flexibility to deploy approximately 3,000 new kiosks in 2011.

Lastly, we see a number of competitor locations coming up with contract renewal beginning this year, and while that presents a great opportunity for us, we’ve not included significant capital for large competitive winds in our plan. We will address those needs as they arise.

So in summary in Entertainment, we’re gaining confidence through experience and the implementation of better tools to improve our forecasting capability enabling us to be smarter about how we run this new business. NCR is a company focused on operational excellence and best cost-management. Those skills are being applied to the entertainment business and with our first full year of operations under our belt, we feel good about all that we’ve learned and what we can accomplish in 2011.

Turning now to our core Financial and Retail market, we see self-service technologies driving connectivity gain and customer loyalty. The ATM business is performing well and we’re increasingly excited about the prospects in retail. We continue to invest and in deploy advanced converged channel technologies for retailers.

In addition to our c-tailing offers that were received extremely well by our customers and prospects at NRF this month, we recently launched the NCR Self-Checkout Enterprise Solution. This is a software platform that enables retailers essentially manage Self-Checkout across their store footprint. This new solution generates significant value as it allows simpler and more effective management of self-service lane network while lowering I.T. administration cost, driving informed business decision making and enhancing customer satisfaction levels by creating an improved shopping experience.

Our retail customers are telling us that they recognize changes in consumer behavior whether moving and how they make decisions and also changes on how they make purchases. As the macro-environment slowly improves, they know they need to make investments necessary to remain close to their customers and strengthen those relationships. NCR has innovated and delivered in this market over the last couple of years in both hardware and software, and we’re looking forward to capitalizing on our investments as we move forward.

Lastly, we continue to build our self-service leadership across the merging industry, including travel and healthcare. These industries are experiencing an increase demand placed on them from digitally empowered consumers demanding more automation, better integration and enhanced transaction processing versus their traditional assistive self-service or manual practices today.

In order to be a market leader in these industries, you’ll need to have best in class hardware, enable through a software-driven business model coupled with a broad set of service offering. That is our focus and we’re developing technologies aimed in improving traveler and patient experience, accelerating process time, workflow and providing a more intuitive and user-friendly interface all delivered locally or through cloud-based computing.

The bottom line is we intend to deliver not only to our core industries, but to our emerging industries, the NCR brand product and that’s being the one company that bets your service everyday around the world in more industries and geographies with more solutions supported by the largest, the most qualified field service workforce in our industry.

And with that, I’ll hand it over to Bob.

Bob Fishman

Okay. Thanks, John. NCR’s total revenue from continuing operations in the fourth quarter was $1.4 billion up 5% versus Q4 2009. Fourth quarter revenues also increased 5% on a constant currency basis. We reported GAAP income from continuing operations of $32 million or $0.20 per diluted share. This compares to GAAP income from continuing operations of $41 million or $0.25 per diluted share in Q4 2009.

NCR’s results from continuing operations include special items in both periods. Income from continuing operations in the fourth quarter of 2010, included $52 million or $0.26 per diluted share after tax of pension expense; a $14 million or $0.06 per diluted share after tax impairment charge related to an investment; and an $8 million or $0.03 per diluted share after tax litigation charge.

Income from continuing operations in the fourth quarter of 2009, included $41 million or $0.16 per diluted share after tax of pension expense; a $24 million or $0.10 per diluted share after tax impairment charge related to an equity investment in related asset; and $6 million or $0.02 per diluted share after tax of incremental cost related to the relocation of the company’s global headquarters. Excluding these items, non-GAAP diluted income per share was $0.55 per share in Q4 2010 versus earnings of $0.53 per diluted share in Q4 2009.

To analyze NCR’s operational performance without the effect of special items and pension expense, please see the supplemental financial schedule included in our earnings press release that reconciles our GAAP to non-GAAP results. Also please be advised that a reconciliation table providing earnings per share excluding pension expense on a quarterly employer basis for 2009 has been posted on the Investor Relations section of our website.

Excluding the impact of special items and pension expense, our Q4 2010 gross margin was 22.5%, up 90 basis points from 21.6% in the prior year period resulting from higher product sales, favorable mix and the successful implementation of cost reduction initiatives driven by our continuous improvement programs. And operating expenses, excluding pension expense and special items were approximately in line with our historic expense revenue metric at 14.5% of revenue as a direct result of our sharp focus on optimizing our cost structure while continuing to invest in R&D.

Total company non-GAAP income from operations or NPOI was $112 million in the fourth quarter, compared to a $108 million in last year’s Q4. Other expense was $14 million in Q4 2010, which included a $14 million charge for the impairment of an investment. Other expense at $3 million in the prior year period included a $2 million impairment charge related to an equity investment.

Income tax expense was $7 million in the fourth quarter, compared to a benefit of $4 million in Q4 2009. Excluding the effect of pension and non-recurring items, the fourth quarter 2010 effective tax rate was 21%, compared to 21% in Q4 2009. NCR expects it full year 2011 effective tax rate to be approximately 27%.

And turning to the balance sheet, cash on hand at 12/31/2010 was $496 million with total debt of $11 million at the end of the quarter. Approximately $232 million of board authorization remains under our current share repurchase plan with an additional $7 million available under the dilution offset program.

Moving over to the cash flow statement, NCR generated a $181 million of cash from operating activities in Q4 2010 versus $106 million in the prior year period. Cash from operating activities in Q4 2010 was positively impacted by changing the working capital, primarily due to a decrease in accounts receivable and inventory.

Net capital expenditures total $53 million in Q4 2010, compared to $59 million in prior year period. Discontinued operations yielded $15 million of positive cash flow in Q4 2010 compared to $1 million of positive cash flow in Q4 2009.

NCR generated free cash flow of $143 million in Q4 2010, compared to free cash flow of $48 million in Q4 2009. NCR defines free cash flow as cash flow from operations in discontinued operations related to the Fox River Environmental matter, less capital expenditures for property, clients and equipment in addition to the capitalized software.

We continue to deliver good performance with our working capital. As we mentioned on the Q3 call, timing was an issue, and we were very pleased with our execution on Q4 cash flow.

For the full year of 2010, NCR generated $242 million of cash from operating activities and $37 million of free cash flow, compared to free cash flow of $50 million in 2009 and 2010 guidance of breakeven free cash flow.

Net capital expenditures of $226 million in 2010 were up from $173 million in 2009, primarily due to investments in the entertainment business. We expect free cash flow for full year 2011, to be in the range of $50 million to $75 million. Entertainment CapEx is expected to be about $50 million lower in 2011, so total CapEx for the company will be about $180 million and depreciation will be approximately $160 million.

Cash taxes are expected to be approximately $70 million in 2011. Cash funding requirements for the Fox River Environmental matter are expected to be $35 million cash outflow in 2011. And finally, we’d expect working capital to be higher as revenues are expected to grow in 2011.

Quarterly free cash flow tends to vary by quarter and we expect a similar trend in 2011 with positive cash flow improving as we move through the year.

Further to Bill’s earlier comment, there was some good news on pension. Return on assets was 12% in the U.S. plan and approximately 8% for the international portfolio, and the under-funded position improved by approximately $50 million. A lower discount rate did not help us in 2010 although it did move up in the fourth quarter as it ended at 5.25% in the U.S. and 4.6% in the international plan.

Cash outflow expectations for pension funding over the next three years have also improved. The 2010 funding was $105 million, slightly better than our $110 million forecast. For 2011, the funding is expected to be $125 million in line with our previous forecast. We have lowered the estimated funding requirements for 2012 to 2015 versus our previous estimate due to the change in the under-funded position. Please refer to the chart on our website entitled NCR Pension Update for the updated estimates.

Finally, as Bill mentioned, we transitioned to a line of business reporting structure beginning in the first quarter of 2011. Our expectations for each line of business for the full year of 2011 are as follows – in financial services, we expect revenues to grow 4% to 6% including services which should grow in the low single digits; in retail and hospitality, we expect revenues to increase 2% to 4% including services growth in the low single digits; for entertainment, we expect revenues to rise at 75% to 100% and be in the range of $175 million to $200 million; EBITDA to be in the range of $10 million to $20 million for the year and an NPOI loss of approximately $25 million to $35 million.

In our emerging industries, we expect revenues to be up 10% to 15%. I would also like to note that we will be providing reconciliations of NCR’s historical results to this new line of new business structure when we report our first quarter results.

So, to wrap up my prepared remarks, I’ll refer you to the updated NCR value-equation chart on our website, which can be found in conjunction with the earnings release and reconciliation tables we file today. You’ll see our view of the core business, which we expect will deliver strong NPOI, EBITDA pre-pension and operational EPS.

The entertainment operator business, which we expect will deliver strong revenue growth and positive EBITDA and the improve situation with respect to pension and other balance sheet items. We believe this framework is helpful as investors value our company.

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

William Nuti

Thanks, Bob and John. NCR enters 2011 in a strong position to capitalize on our growing business opportunities while further expending our addressable market. Our goal is simple, drive profitable revenue growth by leading the transition to self-service channels across each and every vertical we serve. The guidance we have set for 2011 affirms accelerated growth, margin expansion and improves cash flows for NCR.

Demand trends have improved and order backlog is healthy. We are well-situated in our core solutions domestically and internationally, both in terms of market share and the pace of innovation we are delivering to our customers. Our market and technology leadership is backed up by a manufacturing footprint that is now optimally structured to serve our global customer base efficiently and effectively. Our cost structure continues to improve measurably and we have a defined strategy in place to restore the funding status of our pensions and less than risk exposure in the portfolio for the future.

Of course, opportunity and positioning are not enough. In all of these areas, we must execute. I am confident that we will and we look forward to keeping you updated on our progress throughout the year. Thank you.

And I’ll now open up the call for questions, operator?

Question-and-Answer Session


Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question is from John Williams with Goldman Sachs. Your line is open.

John Williams – Goldman Sachs

Good evening, everybody. Thanks for taking my question. Just curious if you could give a little color on the Chase deals in terms of the mix between the higher end terminals and cash dispensers only. I mean obviously there’s been a pricing difference there between those, but is there any further color you can give on that?

William Nuti

Yes, generally it was about 50/50 in terms of the full function deposit-taking units and cash dispensed units only. On those products, I wouldn’t read into them anyone of those being a better margin or not, they’re both. Because of the innovations relative to SDM now, we’re a little bit better on the full function side. So, while I would have said last year when we had two modules to accomplish the goal we’re now doing in one module, margins would have been less for full function. This year, they’re a little bit better.

John Williams – Goldman Sachs

Got it. In terms of what you’re seeing from the retailers – had the opportunity to visit your booth at the show here in New York, and the products look like what I would think the Tier 2 retailers would probably want in terms of functionality inside and things like that. What is the pushback that you get at this point from potential customers when you’re trying to sell these products? Is it that they don’t want to make a decision on the actual spending side or is there something else that they’re waiting for? I guess just generally what you feel is the comfort level in the pipeline right now?

William Nuti

I think it’s about the same as last year, John. I feel pretty good about where retailers are relative to investment decisions now. I look at the same data points you do in terms of same store sales growth, revenue growth in retail. Today, some numbers came out, they were relatively positive about January. That’s all good because, of course, January is the end of the fiscal year for retailers.

February is when we start to get a sense of how the next year ahead of us is going to look. I don’t have any data points yet there, I will and certainly by the end of Q1 in terms of the sales call I’ll be making.

But I would say going into the year, first of all, we had a terrific NRF. I mean I was really pleased with the fact that there were many more international customers that came to the event. Our booth was extremely busy. We, obviously, have come out with a new strategy that’s candidly much more focused on software with respect to our c-tailing strategy and underlying products like the Enterprise Preference Manager, which was very well received by our customers.

I agree with your point, we now have a set of products that can address Tier 2, 3 and 4 much more effectively than we’ve done in the past because we were largely a Tier 1 provider. We have to execute there, John, and we have built a channel capability to go a do that. I don’t know how much that’s going to show up in ‘11, but we do expect to continue to innovate products for lower tiers of the retail space, continue to invest in the channel, we’ve made a lot of investments there this year and we hope to see tangible pickup in that business this year going into next year.

John Williams – Goldman Sachs

Bill, one last thing, is there a marked difference between what you see when you talk to retailers about their upgrade decisions versus the banks at this point? Is there still some degree of a gap between the two or do you feel it’s closed somewhat? I mean the comments are that we get from the software side, the FIS and Pfizer’s of the world that we cover seems to indicate that the decision is a bit easier and I was just curious to see if you’re getting that sense as well on the hardware side now.

William Nuti

Yes, no question. I mean it’s about the same, maybe retail a little bit better at this juncture because we had such a hard 2009, candidly, I mean. I think a lot of companies, by the way, John, are doing better in retail because the compares are much easier over 2009. I don’t want to skirt the fact that while we had a terrific 2010 in retail, we also had some pretty easy compares to overcome.

This will year be a year where we’ll have a much better set of compares. And going into the year, I think to your point, we’re feeling as though retailers are at least in contrast to a bank probably a tad more optimistic about investing.


Thank you. Our next question is from Katy Huberty of Morgan Stanley. Your line is open.

Katy Huberty – Morgan Stanley

Thanks. Good afternoon. Bill, the 1 billion of backlog and particularly the Americas growth out of the fourth quarter, above encouraging, but the recovery in international growth rates hasn’t been as straight line as you’ve seen in the U.S. Can you just talk specifically about what the pipeline and the backlog looks like outside of the U.S. versus inside.

William Nuti

Yes, I agree with you Katy. We were pleasantly surprise with the Americas performance in Q4, both on orders and revenue. And candidly, it was a comeback quarter for them because up to about the fourth quarter, they were doing okay; where the other international markets were doing really well. I would say this Asia Pacific specific to Q4 had a very tough compare versus Q4 of 2009 when they were up 12% year-on-year.

And by the way, in 2010, Asia Pacific had the best year of any of the last four year, which I can’t say for the Americas or Europe. Europe probably going into the year was a slightly lower backlog; the Americas, a higher backlog; and Asia Pacific around flat. So, to answer your question very directly that’s kind of where we are and I think a 1 billion of backlog is a good number and our goal is to continue to grow that throughout this year and see if we can get a little more separation on that number between now and this time next year when I’m talking to you.

Katy Huberty – Morgan Stanley

And then just one follow-up on the services margin. There’s obviously some significant pension cost, headwinds, given the people intensity of that business. But are there other things going on underneath the pension cost that can drive expansion i.e. the predictive services that you mentioned? Does that actually lower the cost of service, so that you can get margins up in that side of business [ph]?

William Nuti

It does look – at the end of the day; two things will drive service margins that are fairly pragmatic. One is if things break less, so quality means a lot with respect to our products. If things break less, you need to dispatch fewer people to fix them. And the second is remote diagnostics and remote resolution, predictive gives us the ability to remotely diagnose problems before they’re going to happen and to be better prepared to make a much more efficient dispatch on a product.

So, to the degree that predictive will allow us to have the right part always, with the right person always at the right place because we’re predicting the failure versus reacting to failure that will drive out cost. Over the several years, we still see margin expansion opportunities in the services business not any less equivalent to the kinds of margin expansion we’ve seen or experienced the last four to five years. So, we remain encourage about that business.

John wants to make a comment.

John Bruno

Yes, Katy, one thing that I’d add in the predictive piece is that in our trial, the one thing that’s different about how we’re approach predictive is, is we’re not doing predictive in the case of something comes up. We sense that it needs to be replaced; we dispatch a tech to fix it. We’re doing it on the next call. So, what’s that allowing us to do is just drive better services absorption and doing a preventive maintenance repair on a potential other calls.

The combination of those things is what allows us to focus on margin expansion, and then of course continuous improvement on cost management. That has been the area in which we focus. It is a big, big part of our business and it drives a lot of cost and we have been very, very focus on ensuring that we continuously improve on that year-on-year.

Katy Huberty – Morgan Stanley

Okay, that makes sense. Thank you.


Thank you. Our next question is from Gil Luria from Wedbush Securities. Your line is open.

Gil Luria – Wedbush Securities

Yes, thank you. First, on the backlog of a $1 billion, how much was it at the end of 2010? How much were orders up 2010 versus 2009?

William Nuti

Orders were up in ‘10 about 11% over ‘09 in aggregate deal, and backlog was up 6% year-on-year as well.

Gil Luria – Wedbush Securities

And then in the DVD business, it sounds like you have some pretty exciting plans for it for this year. But up until now it’s come in a lot less than you’d expected it in terms of revenue and certainly, the profitability drag has been bigger than you’ve expected and the timeline to breakeven gotten push out. If we’re nine months from now, 10 months from now and you’re looking into 2012 and you still think there’s going to be a $0.10 to $0.15 loss in 2012, would you continue to invest in this business?

William Nuti

I think we would make different decisions, Gil, and we have plenty of options.

Gil Luria – Wedbush Securities

Got it. Then last question is judging by your guidance for NPOI and adjusted earnings per share; are you accounting for the buyback in your earnings per share guidance? Do you still plan to spend all $250 million this year?

William Nuti

We are not accounting for any buyback in the current guidance and we are going to start getting back into the market when the window is up, I think, in a few days. In terms of how much will actually do this year, Gil, will depend upon market conditions and candidly ongoing assessment of how we can best return value to you.

Gil Luria – Wedbush Securities

Sounds good, thank you.

William Nuti

Thank you.


Our next question is from Matt Summerville of KeyBanc. Your line is open.

Matt Summerville – KeyBanc Capital Markets

Hey, two questions, Bill. First, on the 4% to 6% expectation for the Financial Services going forward segment in 2011, can you give a little more color? Kind of back to Katy’s question on the anticipated growth rates by region? I mean there’s a lot of talk about China and India and all that growth in those emerging markets, and Asia just hasn’t put up positive organic comps for the last few quarters.

William Nuti

Yes, I think the way it will breakout for us, and again, we’ve moved to a – we’re moving to a line of business format now, so I’m shifting gears here a little bit but I’m going to go back to the 10 format for you Matt, just to give you some color.

So, in the Americas, we expect that business to be up a bit year-on-year. We had a flattish to down year in 2010 because a lot of the large banks that were rolling out deposit were closing down those programs. But we were, I should say, we did a good job in the fourth quarter of winning some significant deals from banks that we’ve done a little less business with on the deposit side over the last year that will help us this year, big banks. And then we expect the mid-size regional, who are already beginning to get more active and if they pickup. So, I think the U.S. will be up slightly year-on-year.

Europe will be the same story, up slightly year-on-year; probably with a slightly better mix. Last year, we had a big emerging market mix in that number in Europe. And then Turkey had – it was up 88% year-on-year. I mean that’s probably won’t be repeated and we’re seeing some of the more mature markets with replacement cycles coming due, and Asia Pacific will be up. We’re making investments there as well.

The one market that will probably change the game a little bit for us and will be the bundled into the Americas number will be Brazil, and Brazil will be a big growth year for us.

Matt Summerville – KeyBanc Capital Markets

Thank you for that color. And then just one follow-up question on the Entertainment business, I think it was maybe John’s prepared remarks talking about needing to relocate 1,600 of the machines. I guess if the thought is this aggregate market opportunity is in the tens of thousands of machines across the U.S., why the need to relocate 20% of your install base? And I guess is the year-end number you’re shooting for then, John, 11,000 total kiosks? Am I understanding that right?

John Bruno

Matt, you got it right. Let me back up. So, you got the end question correct on the numbers and let me give you some color on your question. So, the net of it is that over 18 months, we opened up 8,000 stores and 4,000 this past year. We were very aggressive in our first year march, and we trialed and tested a bunch of locations that just did not show up to have the foot traffic and the rental volume that we wanted the machines that we expected to in our plan.

We have a very rigorous expectation step for these machines as they grow. As we’ve explained in previous calls, machines ramp with maturity and overtime. And so, when we went back and look at where we’re at, we did a full stop and said, “Look, the most important thing that we can do is optimize our network and ensure that the bottom performing machines, if we cannot get them to the revenue profile that we want, we redeploy them to the pipeline of opportunities that we now can.” And so, we made the conscious decision to do that.

We thought it was right to do overall for modeling the business. We also thought it was the right thing to do in optimizing our capital outlay because it allows us to redeploy capital that we’ve already put out in the marketplace.

Now, there’s some incremental installation cost there, but it’s far less than building a machine for new market. So, we basically backed up and said, “Do we think that this bottom 20% of the market can get there?” And we said you know what we can be better if we place them against our pipeline faster, we can better improve our ramps. So, that’s how we thought about it. And that’s how we addressed it.

William Nuti

The only other remark I’ll make is we learned a valuable lesson in density matters. So, some of these locations are locations where we’re not planning on any significant density in around smaller retail partners, and we do have retail partners right now that are doing really well. I mean we have a number of partners that where the ramp is terrific and candidly, they need a second machine in those locations. And some of those 1,600 will go to helping these locations are candidly are over-utilized or under-resourced. So, a little bit more color for you there.


Thank you. Our next question is from Kartik Mehta from Northcoast Research. Your line is open.

Grant [ph] – Northcoast Research

Good afternoon. This is Grant in for Kartik. I appreciate the color on the total orders you mentioned. I think you said that total orders were up 11% over 2009. So, I was wondering if you could give some commentary on the growth rates and ATM spend versus retail spend in 2010?

William Nuti

I’ll give you qualitative comments on that. We had a very robust year in retail. In fact, retail orders in the fourth quarter were up, I believe, 26% just in the fourth quarter. So, we had an extremely robust year.

And I would say financial services were average. I think – as I said earlier in the U.S., things were a bit muted because of the large deposit automation rollouts slowing down for big banks. But on an overall basis, I’d say pretty good when you look at the global numbers. So, for financial services, I think we’ll perform at or above benchmark when we you look at the industry; and for retail, well above benchmark. And just to give you the numbers right, we had 32% growth in orders in Q4; 26% growth on the year for retail.

Grant [ph] – Northcoast Research

Okay, thanks. And then the next-generation, the SDM, it seems like a very interesting technology. I was wondering just how many financial institutions in the U.S. have inquired about that technology, just trying to gauge the interest there.

William Nuti

There’s a lot of interest. I mean there’s no technology in the market like SDM today. Just to put this in perspective for you. When deposit automation first came out in the market, most vendors offered a dual module solution. One module accepted cash, another module accepted checks. Then the next generation was a one module solution that accepted cash and check, but not at the same time and only in a specific orientation that you have to place them into the machine.

This new technology, which only NCR offers is a single module, bunch note and check meaning you could put checks and notes in any orientation in a single bunch, and the ATM accepts them all at the same time and reorients checks and cash and reads them regardless of whether you put them right side up, upside down, et cetera. This technology is only available today from NCR.

It has been candidly very well received in the market. I think you saw the comments made by Wells Fargo in Q4 in some trade magazines, and obviously the Win-a-Chase [ph] was a big win for us that were largely driven by the advancements of SDM. And clearly, this technology is going to be of interest in the mid-sized banks because as large banks roll it out, you can’t fall behind large banks in terms of competitive advantage where the two-module solution, if you will, because of the speed issue and the convenience issue when a large bank around the corner may offer a one module solution. So, that just gives you a little bit more color.

Grant [ph] – Northcoast Research

Thank you.


Our next question is from Paul Coster of JPMorgan. Your line is open.

Maria [ph] – JPMorgan

Thank you for taking my question. This is Maria on behalf of Paul. A couple of questions. So, in the beginning of the call you mentioned that you won market share both domestically and internationally. I was wondering what is responsible for the market share gains. I’m assuming domestically the SDM technology, but what aided the market share internationally?

William Nuti

New products. We have some new products in the cash dispenser technology that we rolled out, that we made available to customers for example in Southeast Asia as well as other markets around the world, and of course, Brazil. Given our investments we made there about two years ago that are now mature and have allowed us to play a much bigger role in the Brazil marketplace.

As I said earlier, Brazil orders were up over 100%, to be specific they were up 116% year-on-year in Brazil and I think it’s the combination of SDM, new innovations in cash dispensing technology in Brazil along with investments we’ve made in sales around the world to sellout out sales structure in other markets.

Maria [ph] – JPMorgan

Okay, thank you. And then going back to the guidance for cost reductions between $200 million and $300 million over the next three years, could you talk a little bit about where exactly that’s expected to come from. And then related to that, just the way that you view commodity prices and their effects on input cost and consequently margins going forward? Thank you.

John Bruno

Yes. So, on the $200 million to $300 million of cost, we attempted to lay that out as part of analyst day and we talked about the fact that 50% was off to the bottom line and 50% reinvested back in the business. I link to think of it as a combination of services, operations, primarily. So, it’s about 70% of those cost savings come from those two groups and the rest from all of the infrastructure function and some of the engineering programs. So, it’s widespread. It’s part of our continuous improvement program, but it’s primarily in ops and services.

William Nuti

And then I think your second question was or the related question was with respect to commodity prices. I think so far, so good is what I’d say. We have not experienced significant commodity price, changes on our products now. We also have the benefit of having a very global supply chain, where we have plans in Budapest, in Manaus, here in the U.S. in Columbus, in Beijing and in India. So, we have a worldwide network that drives significant risk aversion for us when it comes to that meaning we can get the materials at the lowest possible cost for the products we’re building for local markets in local markets.

That doesn’t mean that as commodity prices rise and if they rise significantly, we won’t be impacted. We could very well be impacted, but as we sit here today, so far, so good.


Thank you. Our next question is from Michael Saloio from Sidoti. Your line is open.

Michael Saloio – Sidoti & Company

Hi, thanks for taking my question. I’m curious on the retail sales expectations, the 2% to 4% next year. That sounds a little bit conservative to me, if orders were up 26% year-on-year in the fourth quarter or I’m sorry, year-on-year for 2010. I guess what’s causing you to be little bit conservative there?

William Nuti

Well, there’s a – a big component of that number is services. And services are going to grow in the low single digits in retail. So, it does impact what you might and we think is solution growth; hardware, software, professional services quite a bit because about 50% plus of the retail business is services.

The other point I’d make is while we had great growth in orders on the retail side, we also had a great year in revenue on the retail side. So, our backlog coming into the year is actually slightly down in retail versus that of last year. It’s not down tremendously, but it’s down enough where we’ve got to build that backlog here in Q1 to get more comfortable around higher growth on the solutions side.

Michael Saloio – Sidoti & Company

All right, great. That’s really helpful. The second question I had was on Self-Checkout. That was also growing pretty robustly, as of the third quarter. Can you give us an update as of 4Q, and is a big percentage of that order growth you’re seeing in POS still coming from Self-Checkout?

William Nuti

Yes. Fourth quarter revenue growth in Self-Checkout was 38% on year-over-year basis. Annual growth, 10/9 was 43% and we had a record year and that’s just hardware. So, the numbers I’m giving you are just hardware growth. I’ve not included professional services or services in that number. That’s our best year ever in Self-Checkout revenues.

And so far, we were very, very pleased with 2010 and while that’s going to be a tough compare, we’re still encouraged by the amount of business out there in this space and the expansion of Self-Checkout into new segments, you know beyond just grocery.

Michael Saloio – Sidoti & Company

Very helpful, thank you.

William Nuti

Great, thank you.


This concludes today’s question-and-answer session.

William Nuti

Thank you very much, folks and I look forward to talking to you again in April. Bye bye.


This now concludes the conference. Please disconnect your line and thank you for participating.

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