NCR Q4 2006 Earnings Call Transcript

| About: NCR Corporation (NCR)
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NCR Corporation (NYSE:NCR)

Q4 2006 Earnings Call

January 25, 2007 10:00 am ET

Executives

Gregg Swearingen - VP, IR

Bill Nuti - CEO

Pete Bocian - CFO

Analysts

Matt Summerville - Keybanc Capital Markets

John Healy - FTN Midwest Research

Richard Farmer - Merrill Lynch

Reik Reed - Robert W. Baird

Katie Huberty - Morgan Stanley

Presentation

Operator

Good morning and welcome to the NCR Investor Relations Teleconference Call. At this time all participants are in a listen-only mode. After the presentation we will conduct a question-and-answer. (Operator Instructions). At the request of the company this conference is being recorded for playback purposes.

It is now my pleasure to turn the meeting over to your host Mr. Gregg Swearingen, Vice President of Investor Relations. Sir, you may begin your conference.

Gregg Swearingen

Thank you and good morning. And thanks for all of you for joining us for our 2006 fourth quarter earnings call. Bill Nuti, NCR CEO will lead off our conference call this morning, after which Pete Bocian, NCR CFO will discuss our Q4 and full year 2006 financial performance as well as our guidance for full year 2007.

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 risk and uncertainties that could cause actual results to vary materially. These risk factors are described in NCR’s periodic filings with the SEC and our Annual Report to stockholders.

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

A replay of this conference call will be available later today on NCR's website, which can be accessed at ncr.com. For those listening to the replay of the call, please keep in mind that the information discussed is as of January 25, 2007 and NCR assumes no obligation to update or revise the information included in this call, whether as a result of new information or future results. On January 8, NCR's Board of Directors announced its intentions to spin-off NCR's Teradata Data Warehousing business later this year, since we have just begun the operational process we are not in a position to provide details regarding the spin-off today.

I will now turn the call over to Bill.

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Bill Nuti

Thank you, Gregg and good morning, and thank you to all of you for joining us as we discuss what was one of if not the best quarter in NCR's recent history. I would like to thank all of our employees and partners for delivering a strong Q4 which provides momentum as we prepare for the planned strategic separation of Teradata and NCR that we announced earlier this month. Some of the Q4 highlights include Teradata who had the highest revenue and operating profit quarter ever. Financial Self Service who grew a very healthy 6% in the quarter and just as important generated 18% operating margins and the mix of self-service revenues in our retail business continues to improve.

I will now discuss our business unit results and I'll start with Teradata. Revenue of $469 million in the quarter was up 15% from Q4 2005. Full year revenues were $1.57 billion a 6% increase from 2005.

Teradata's operating income was a record $112 million in the quarter up 26% from the $89 million of operating income in the fourth quarter of 2005. Operating margin in the quarter was 24% an increase of 200 basis points from the fourth quarter of 2005. Teradata's operating margin continue to improve as higher revenue more than offset unfavorable revenue mix and increased investments and sales, demand creation and engineering resources.

For the full year Teradata's operating margin improved to 22% versus 21% in 2005. In the quarter Teradata continued to add new customer's, some that we can publicly share are RadioShack Avon products, Paramount, Qatar Airways and VIBO Telecom and fund on commercial bank both in Taiwan. Additionally some of the customers who expanded their Enterprise Data Warehouses during the quarter include Cisco Systems, the Limited Brands, Harris, [UM Private Incorporation], Southwest Airlines, Lloyds Bank, Ford Motor Company, PayPal and DirecTV. Many of our new customer wins and existing customer expansions were joint sales motions with our partners. We have a great roster of partners including Business Objects, Cognos, Hyperion, SAP, Accenture and many others. Overall Teradata's growth in the quarter was broad-based with just about every industry vertical experiencing double-digit growth.

Let me turn now to Financial Self Service. Fourth quarter revenue of $472 million was a 6% improvement from 446 million in Q4 of 2005. We saw a double-digit growth in the EMEA and Asia-Pacific regions, while revenues in the Americas were down as expected from the strong revenues generated in Q4, 2005.

Operating income for the Financial Self Service division was $85 million a slight improvement from the fourth quarter of 2005. Cost reduction efforts continue to be a major focus as highlighted by our most recent announcement, regarding ATM manufacturing restructuring actions. In the fourth quarter revenue growth offset price erosion, that although moderating still outpace the company's actions to reduce cost, as well as an adverse geographic revenue mix that resulted it under utilization of NCR's North American manufacturing facilities.

To give you a little more color on the initiatives regarding changes to our ATM manufacturing footprint. Let me start with the manufacturing presence in Dundee, Scotland will be scaled back. It will now focus on low volume, high complexity solutions as well as new product development.

Dundee will continue to be one of our main hubs of R&D, Product Management and ATM Marketing Personal. To meet demand in Europe, Middle-East and Africa and the Asia-Pacific regions, our plans in low cost regions Hungary, China and India will be producing the bulk of our high volume Financial Self Service solutions. In the Americas, our Waterloo, Ontario, Dallas, Texas and Brazilian manufacturing operations will be transpositioned to our third-party manufacturer Solectron with the work being done on a contract basis. This will provide NCR with world-class manufacturing and sourcing support focused on design for manufacturing and design for service techniques. Solectron will also work with us to create a more efficient supply chain and drive additional cost reductions. The transition model provided by Solectron is very efficient and very proven. This should enable us to transition manufacturing in the Americas to Solectron without interruption in timing or quality in the next nine months. As a result of these changes we will incur some charges during the next few quarters which we will identify for you each quarter. Pete will discuss these items in a little more detail later on the call.

Our top-line results were slightly better than our lowered expectations for 2006 with growth of 2% versus guidance of 0 to 1% growth, but an equal area of focus is operating margin. Where a 12% operating margin is well below the level of profitability we have been running over the last few years and unacceptable for this type of business.

And now let me discuss our retail store automation results. Revenue of $258 million matched last years result. Operating income increased $3 million to $22 million in the quarter, representing a 9% margin. Retail Store Automation operating margin improved in the quarter as we drove a higher percentage of revenues from self-service technologies. Self-service revenues continued to grow double-digits in the quarter, resulting in 27% of our Retail Store Automation revenues coming from self-service technologies. We continue to anticipate that self-service revenues will make up one-third of retails revenue in 2007.

For the year, we saw a meaningful revenue growth from our fast [lane] self-checkout solution, as some of world’s largest retailers realize the value provided by these NCR solutions. In the quarter NCR's customer's service division generated 2% revenue growth, our third consecutive quarter of growth. The mix of revenues continue to improve with ATM maintenance revenues increasing 11% in the quarter, while revenues from lower margin maintenance of third party products declined by 6%. Customer Services had slightly less operating income, 23 million versus 25 million in the year ago quarter. The decrease in operating income was a result of increased parts cost, an adverse mix of installation related activity, and a favorable end of year employee benefit adjustment in 2005.

For future margin expansion, we are continuing to improve our mix of revenues as well as making operational improvements in our service delivery cost structure. A particular area of focus for us and for me is on our parts and logistics delivery system and related costs. In summary, I am pleased with the growth of Teradata in the quarter, and expect to se good growth in both Teradata and in our self-service technologies in the future. The margin story in our financial self-service business is a positive step, but we have more work to complete. The global restructuring of our manufacturing resources is obviously necessary, and a big step forward in this direction.

Let me now turn the call over to Pete to review our financial results.

Pete Bocian

Thanks, Bill and good morning everyone. Total revenue in the quarter was roughly $1.81 billion, up 5% year-over-year with two points of benefit from currency translation. Reported operating income was $205 million, versus a $171 million in the fourth quarter of 2005. We reported GAAP net income of a $174 million or $0.96 per share versus a $150 million of net income or $0.81 per share in Q4 of '05. The prior year reported net income included $17 million or $0.09 a share of non-typical tax items. Excluding the non-operational items in the fourth quarter of 2005, EPS increased 33% from the $0.72 in the fourth quarter of 2005.

For the full year 2006, GAAP net income was $382 million or $2.09 a share. Our GAAP results included $0.04 of early retirement expense from the first quarter of 2006. Excluding the early retirement expense, EPS was 213 in 2006. Our 2005 GAAP EPS was $2.80, but this included a $1.12 of benefit from tax and other non-operational items. Excluding these items, 2005 EPS was a $1.68. So excluding non-operational items in both 2005 and 2006, year-over-year operating earnings improved 27%. In the quarter we had pension expense of 33 million, matching the 33 million of pension expense in Q4 of 2005. Excluding early retirement expense, we had a 136 million of pension expense in 2006 versus a 131 million in 2005. To analyze NCR's operational performance without the effect of pension and one-time items, please see the supplement of financial schedule on the investor page of our website that reconciles GAAP and non-GAP results. For the remainder of my comments regarding our 2006 results, I’ll exclude the impact of pension.

NCR's gross margin was 31.4% in the quarter, a slight decline from 31.8% in last years fourth quarter. For the year, NCR's gross margin was 30.2%, the same as last year. Total company non-pension operating income or NPOI was 238 million in the quarter, compared to 204 million in the prior year period. For the full year, NPOI was 618 million versus 560 million in 2005. 2006 NPOI included 24 million of incremental stock-based compensation expense, which was not reflected in our reported NPOI for 2005. Our 2006 full year NPOI margin was 10% versus 9% in 2005. Although we still have a number of initiatives underway, we want to point that we achieved our 10% NPOI goal a year ahead of what was originally planned. NCR’s expense ratio improved from 19.9% of revenue in Q4 of 2005, to 18.3% in the fourth quarter of 2006. For the full year, our expense ratio improved from 20.9% in 2005 to 20.1% in 2006. Our tax rate in Q4 of 2006 was 16%, which drove our full year tax rate of 20%. Two point less that the rate we expected.

Moving to the cash flows statement; NCR generated a $194 million of cash from operating activities in the fourth quarter of 2006, versus $211 million in Q4 of 2005. We used $78 million for capital expenditures versus $39 million in the fourth quarter of 2005. Free cash flow was a $116 million in the quarter, compared to a $172 million in the year ago period. We calculate free cash flow as cash flow from operations less capital expenditures for property, plant and equipment and additions to capitalized software. For the full year 2006, we generated $482 million of cash from operations versus $514 million achieved in 2005. The reduction in cash from operations was driven by the timing of working capital items. After using $212 million for capital expenditures, we delivered $270 million in free cash flow for 2007, which compares to 367 million of free cash flow in 2005. The decrease in free cash flow was driven by working capital items, the higher CapEx spending in 2006 due to plant manufacturing and real estate initiatives, an increase in the investment and software development, and some corporate infrastructure investments.

In 2007, we expect free cash flow of approximately 425 million. We expect to improve cash flow generation in 2007 through a catch-up on Q4 working capital items, namely collection of accounts receivable related to higher Q4 revenue and net reduction of inventory levels, and from increasing profitability and lower capital expenditures. We expect CapEx to be approximately 175 million in 2007. Keep in mind, our stated CapEx and cash from operations for 2005 are adjusted lower than what we reported in 2005, as a result of the accounting change we made in the second quarter of 2006 relating to a workable service parts. This change doesn’t impact free cash flow, as both CapEx and cash from operations are reduced by the same amount. Depreciation is also revised downward as a result of the accounting change. Depreciation in 2006 was 159 million. We now expect depreciation of roughly 165 million for 2007.

During the quarter we did not repurchase any shares as were working through the Teradata spin-off. Since that material information was not announced until the start of Q1, 2007, we could not repurchase any shares during the fourth quarter. However, during the first three quarters of the year, we repurchased approximately $7.6 million shares for about $280 million. We still have about $264 million of remaining board authorization available for future share repurchases. They were about $933,000 options exercised in the fourth quarter bringing the number of options outstanding down to $8 million. At year-end, outstanding options equaled about 4.5% of the outstanding shares. This is down significantly and a big improvement from the 17% option overhand we had at the end of 2002.

We do not anticipate any major changes in capital structure prior to the strategic separation. As we complete the separation the Board of Directors and the management teams of each company will determine the appropriate capital structure for each respective company, as well as share repurchase and dividend policies.

Now, let me talk about pension. We had a good year in terms of return on pension plan assets. Our 2006 return on U.S. pension assets was approximately 15%. As a result of these asset returns and an increase in the discount rate used to calculate plan liabilities, and our action to freeze the U.S. pension plan. The funded status of our global pension plans improved from an under funded position of 458 million at the end of 2005 to an over funded position of $134 million at the end of '06. This equates on improvement in funded status of almost $600 million.

As of December 31, 2006, NCR adopted FAS 158 which changes the accounting requirements for defined benefit pension and other post retirement and post employment plans. Historically the assets and liabilities for these plans have been calculated and presented on the balance sheet using complex accounting rules, intended to recognize gradually overtime or smooth out changes in their market value. The purpose of FAS 158 is to replace the smooth values on the balance sheet with the market values. As a result of the implementation of FAS 158, total assets decreased by $634 million, total liabilities increased by $77 million and shareholder's equity was reduced by $711 million after the effect of taxes. This change had no effect on the company’s results from operations, cash flow or debt covenants, nor did it otherwise impact the business operations of the company.

Now moving to our guidance for 2007. We are increasing our 2007 earnings guidance range by a nickel to 245 to 255 per share due to lower pension expense. I will talk more about 2007 pension expense in a minute. Our EPS guidance does not reflect changes or charges associated with the proposed spin-off of Teradata. No other charges associated with the recently announced restructuring of our ATM manufacturing resources.

Now onto 2007 revenue growth. We anticipate about 2% to 3% of total company revenue growth for the full-year with one point of benefit from currency. We expect Teradata should grow in the 7% to 9% range as we did in 2006. We have assumed Teradata revenue performance at the low-end of the range in determining our EPS guidance.

Financial Self Service revenues are expected to grow 2% to 3% for the year. Retail store automation will likely grow 5% to 6% with double-digit growth in self-service revenues; we expect self-service revenues to account for one-third of our total retail revenues in 2007.

Customer services revenues is expected to be up 1% to 2%, as anticipated growth in ATM maintenance is expected to offset the remaining declines from third party maintenance. In terms of operating margins for full year 2007, we expect Teradata to generate between 22% and 23%. Financial Self Service operating margins to be approximately 14% for the year, a good step towards our longer term margin objectives for this business. Retail Store Automation is anticipated to be about 5%, while Customer Services is expected to be about 6%.

2007 earnings expansion should be more prevalent later in the year due to a number of initiatives the company has underway, including the restructuring of our global manufacturing resources, initiatives to reduce logistics and distribution expense related to spare parts for our customer services division as well as continued investment in sales and demand creation.

Furthermore the market adoption of Check 21 related ATM technology in the U.S. is expected to commence in a more significant way later in 2007. Regarding the Financial Self Service margin expansion one of the key drivers of this margin improvement is the restructuring of our ATM manufacturing strategy that we announced a few weeks ago. As a result of this restructuring we will incur some costs for those of you new to NCR we use FAS 112 to account for severance which amortizes player as well as future severance costs each year. The severance for the manufacturing restructuring is included in the assumptions we have made in our FAS 112 calculation and in the guidance provided. Outside of severance we expect about 25 to 30 million in one-time restructuring charges associated with real estate and other non-HR related costs. As Bill said we will be identifying these costs for you each quarter as incurred.

Moving on to other non-operational items, we expect our full year 2007 tax rate to be 23%. After completing our year-end pension calculations we now expect 65 million in pension expense for the full year. Lastly I recognize you are all anxious to get more details related to the strategic separation of Teradata and NCR. As you know we have just begun the operational phase of the spin-off process, therefore, we are not in a position to provide much today in terms of detail or color. We expect to be in a much better position after our Q1 earnings are reported. Going forward we'll let the management teams of each new company provide their own expectations for longer term revenue growth and operating margins. That said this is a very exciting time across the company. The separation provides a great opportunity for both Teradata and the new NCR. It also brings a certain level of incremental work. But we are committed to delivering our operating results in 2007 as well as a successful spin-off of Teradata.

Now let me turn the call back over to Bill.

Bill Nuti

Thank you, Pete. Before we open up for questions, I really would like to thank the NCR employees and our partners again for all of their hard work in 2006. We are encouraged by the Q4 performance in each of our business units and excited about the future of each going forward as well as the additional benefits we expect to realize to the planned strategic separation of Teradata and NCR. We expect this transaction to create two strong independent companies with a greater focus on their respective markets, distinct customer basis, business strategies, growth initiatives and operational objectives.

As spoken to many of our customers about the spin-off and they are enthused. They say that this is good thing from the standpoint of innovation for both NCR and Teradata and that this raises the level of their awareness for Teradata. Industry analysts are also saying positive things about it and employees across the company are looking forward to the spin-off. This is a win-win situation. It's beneficial for everyone except maybe the competitors. Teradata continues to be recognized as the leader in the Enterprise Data Warehouse market and growing data warehouse market and should continue to benefit as spending shifts toward more centralized data warehousing architectures. As new data elements and more real-time analytics continue to add to the scale and complexity requirements of data warehouses. Our sales force continues to add new accounts, and our existing customers continue to grow their data warehouses. As the year progresses, Teradata will be ready to compete as an independent company. But just as importantly, the new NCR will be positioned for growth in the self-service market.

Financial institutions are starting to follow the airlines lead, and some have started installing, teller-assisted branches, where individuals use an ATM like kiosk for many transactions with a teller available to help with questions or more complex transactions. In retail, in addition to self-checkout, we see activity around the installation of multi function service centers designed specifically for retailers or what we call money centers, as well as food and deli ordering and self-shipping. And the self-service market continues to expand beyond retail and financial markets. Take for example, in the travel, tourism and entertainment industries, we see airline and car rental self-check-in, hotel self-check-in and check-out and event ticketing as opportunities. The rest of our industry continues to adopt self-service technologies for food ordering.

A newer opportunity for us is patient check-in for the healthcare industry, where a kiosk can be used to check-in at hospitals or at doctor’s office. In addition to these exciting markets, we remain committed to delivering customer value in our core retail solution as well as in customer services, Systemedia and in Payments and Imaging. We are continuing our work to improve our cost structure and productivity. The recently announced changes to our ATM manufacturing presence and other operational improvements should allow us to restore the profitability in our ATM business, free up capital and invest towards our future growth aspirations. 2007 has already been a busy and exciting time for NCR and Teradata. We are off to a good start in delivering value to our customers and to our shareholders. We continue to add resources to drive revenue growth in the data warehousing and self-service businesses, and we are maintaining our focus and determination to get our operations in profitability right.

As we continue to focus externally on the customer and internally on our supply chain and other operational efficiencies, we should see improvement in both our top and bottom lines. I am confident that after the separation, there will be two well-positioned publicly traded companies that will be able to focus more sharply on their respective strategic priorities.

With that let me turn the call over to the operator for Q&A. Operator we will take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from Matt Summerville.

Matt Summerville - Keybanc Capital Markets

Good morning.

Bill Nuti

Good morning

Matt Summerville - Keybanc Capital Markets

First things first, with respect to Teradata the increased growth rate in '07 relative to '06, is that coming from both a combination of heightened market spending if you will versus the additions you've made to the sales force. And then you had given out in the third quarter queue a number on your net increase in spend around demand creation at $20 million bucks. Could you give that for the full year and what you anticipate that being next year or in '07?

Bill Nuti

I will let Pete answer the second; I will start with the first, Matt good morning. With respect to 2007 growth and kind of the drivers of that growth for Teradata, first and foremost we have made substantial additions to the demand creation headcounts in Teradata in '06. In fact it was more than double the number of people we hired in demand creation in '05. And that’s evidenced by some of the numbers that Pete mentioned in the prior call, but he will give you some further clarity on. Certainly the demand for data warehousing, or I should say enterprise analytic is also increasing in terms of the customer base. The importance of getting after your data and using it for competitive advantage in the market is growing, and new industries as well are also interested in this technology in the way that other industries have shown interest and have grown over many years for us. So, we have had some success in new industries like manufacturing in 2006 where the investments we've made in prior years began to payoff there as the typical sales cycles about 18 months commenced with investments before them. And you'll see also geographically, growth come from markets outside the U.S., Europe continues to do well or it has done well in '06 and we expect good growth there, and also in Asia Pacific. So it’s a mix of those things that I would say are going to be the key growth drivers. Pete.

Pete Bocian

Yeah. I think couple of points, 7% and 9% is consistent with what we have talked about before. A one point of margin improvement year-on-year is consistent. We reported in Q3 about, I think $20 million relative to incremental investment in demand creation in Teradata. We finished the year about $27 million, and that will reported out in the K. So I think we did what we said we do in terms of investment and that should lead to our ability to both increase one point next year, get 7 to 9 and continue to invest for our future.

Matt Summerville - Keybanc Capital Markets

So, is that $27 million moving higher in '07, is that what you are seeing?

Pete Bocian

We will continue to invest and we will -- our goal is that we expect the margins to improve a point year-on-year.

Matt Summerville - Keybanc Capital Markets

How do you feel about the sustainability of the growth you are seeing in EMEA and Asia Pacific right now? And then I think one of you guys made the point that you expect a stronger second half for the year with respect to Check 21 adoption in the US and I was hoping may be you could point to a couple of more concrete examples that gives you that confidence?

Bill Nuti

I'll start in reverse with you Matt. First of all, in terms of deposit automation in the US we are leading in the market today. There were couple of thousand ATM machines out there that are already deposit capable in the US, intelligent deposit capable for Check 21. Europe is in a different position, and its been going faster in terms of deposit automation, and our largest customer in the world in fact is in Europe and so we are enthusiastic about the opportunities in the US with Check 21. And again, given where customers are in the deployment cycle; pilot to production, we are more so anticipating a back-end half year improvement in that. But it's highly depended upon factors that are outside of our control such as the data center application being deployed to support Check 21 which is a driver to how customers invest on the front-end. In terms of growth we’ll – the guidance we gave you is 1 to 2% I think growth in that particular space. And Europe is solid. Europe is solid for us in terms of growth; Asia-Pacific has been solid, we had a better year in China this past year; the Americas continues to be challenged to challenge market. And as I said the guidance by the way is 2 to 3%. But as I said, the markets are sustainable in Europe for us. I think they are sustainable in Asia. The work we have to do and what we have to get after is really the America's business.

Pete Bocian

Yeah. And Matt I would add that, for the year 2 to 3% revenue guidance, there will be more Check 21 U.S. later part versus first half. But we do have, as you know, we are 25%-ish kind of Americas and 75% elsewhere. So we do have a lot of other markets that will contribute to growth. I think our comment about latter part of the year certainly relates to the U.S. portion of Check 21, but it also related to the full impact of the manufacturing, restructuring initiatives in terms of their (inaudible). So we still got to execute that plan through the first half, we'll start seeing later half the improvement and then on into 2008. So it's both a revenue mix story, but it was as much a comment about the ATM continued improvement and profitability and marching towards the 14%.

Matt Summerville - Keybanc Capital Markets

Okay. And then Pete you gave color on the anticipated restructuring charges that will hit the P&L and ATMs. Any idea what the severance cost is going to be and then what are your plans for share repurchase between now and the Teradata spin-off?

Pete Bocian

Yeah I gave you the restructuring which as the way we account would be the non-severance portion. The severance portion of the ATM is in our guidance. So it's in the 245 to 255 and we expect that number somewhere in the 75 to 80 for the year. Okay, so not much different year-on-year but absorbing the ATM manufacturing structure. On the share repurchase you are aware we didn’t buy in Q4 because the decision process around the spin we did purchase 280 million in Q1 through Q3. We have $264 million left on the board authorization. We are not going to forecast share repurchases that said we continue to believe that NCR is a good investment.

Matt Summerville - Keybanc Capital Markets

Okay, thanks guys.

Bill Nuti

Thanks Matt.

Gregg Swearingen

Operator, we are ready for our next question?

Operator

Our next question comes from John Healy.

John Healy - FTN Midwest Research.

Good morning guys.

Bill Nuti

Good morning.

John Healy - FTN Midwest Research.

I had a question on the Solectron movement that you guys are going to be going through this year. I was wondering if you could provide a little bit more detail on the timeframe, I know you said nine months, is that nine month until that begins or is that nine months until to be fully up and running. And along with that could you give us some details maybe on what kind of feedback you’ve got from your banking customers regarding this decision?

Bill Nuti

You will see the Solectron rollout. It will execute that throughout the year much like the rest of the program we put in place for manufacturing, restructuring. So it will be as Pete pointed out earlier it will be more back-half loaded in terms of the improvement on margins. In terms of the customer response it's been fine I have talked to many customers about it. Customers, of course, are mainly focused on ensuring that, quality remains which is a hallmark of the company, quality remains at the forefront of our minds. We are confidence Solectron can deliver at or above the quality we deliver from our current manufacturing plants in North America. The other thing on their minds, of course, is time-to-market in terms of deliverability and actually we think we are going to see an improvement there moving to Solectron. And of course, they are proving EMS, Electronics Manufacturing Services Company that has a great track record and really good quality design for manufacturability and design for serviceability, both of which should have a solid impact on the company in the future as well.

John Healy - FTN Midwest Research.

Yes. Now that’s helpful. And then on the ATM side here in America and Check 21. Could you give us a little more color on why are you expecting that demand that come from in the second half of the year, if it's more of your large U.S. banks or credit union the community banks deployed that technology and then along with that, are there any updates on kind of your -- on your bulk Check accepting technology and when that might be available for banking customers?

Bill Nuti

Sure. On the first half of your question, larger banks are going to lead in terms of numbers of units, but its interesting, community banks and mid-sized banks are actually moving more aggressively. But partly the reason is, they have less of a job to do relative to the backend applications in their data centers to support Check 21 and larger banks have significantly more work to do, just given their scale. In terms of the rollout, however, of Check 21 towards the latter part of the year again it’s highly depended upon what we see in the market. The second question you had was?

John Healy - FTN Midwest Research.

I was just hoping to get an update on bulk check accepting technology that something that you guys are planning on rolling out in 2007 and now where the developments are from that technology?

Bill Nuti

Yes, in terms of the bulk check a couple of comments I can make first a little bit of texture on this. Today about 95% of deposits done at the ATM are largely single check. And NCR today has a wonderful solution from merchants who might come to a bank with multiple checks and we have a remote image capture solution out of our payments and imaging division that can solve that problem today, in fact to save them and also a lot of time and increased productivity, because you can capture and scan the check on the prim of your enterprise, they are supposed to having a packaging it up with some cash and take it to the bank. That being said we were not going to be religious about technology and we are in the development for bulk check solution, we will have one in 2007 not -- we missed to give you any timing right now but you can be assured we will have our product available this year.

John Healy - FTN Midwest Research.

Okay great, thanks guys.

Operator

Thank you, our next question comes from Richard Farmer of Merrill Lynch.

Richard Farmer - Merrill Lynch

Thank you, Bill and Pete are you able to provide any more color on the ATM margin dynamics with respect to Dundee and Budapest. How much is the cost mix going to change there by quarter and how is that going to affect the ATM cost based through I guess the bulk of 2007 by quarter.

Pete Bocian

Yeah I think a couple of points of color is that the -- we calendarized within the 14%, the impact of the improvement but clearly that’s not a full year. As you look I guess the way I described it as you look at the non-severance related cost which I identified as $25 million to $30 million that’s about the size of the full-year impact of the action going forward which would start in 2008. So that gives you a sense of the going forward momentum look at some of that in '07, and then a full-year impact as well as other things we are working on whether its deposit and the mix of the revenue etcetera, will get us moving to our future goals.

Richard Farmer - Merrill Lynch

Okay. Thanks. That’s helpful. On the Customer Services business, so can you give us a little bit of an update on some of the specific initiatives that the CS team is working on there and how a big an impact some of those will have on the CS margins in 2007. I heard you mentioned that parts and logistics delivery system and the related cost, but what are the big movers of cost progress that are left to take place in Customer Services?

Bill Nuti

There are three significant drivers to cost structure improvements in WCS all of which we will be focused on in 2007. Some will be completed in '07, some will be moving into '08. The first one of course is parts and logistics, and making sure that we improve the productivity of our parts and logistics system which will have a good impact on cost which -- we are not going to give the targets but it does feed into our 6% NPOI forecast for '07. The second would be call center consolidation continuing to look at ways in which we can improve, well the numbers of call centers we have and where we have them around the world but also most importantly the effectiveness of those call centers in terms of follow the same kind of model going forward to drive a 24/7 support model. And the third is in the productivity of our customer engineering organization improving their productivity in terms of the numbers of calls that they can achieve on a per day basis and there are other programs said were not specifically Richard, CS related that will have an impact going forward not in '07 but in the out years on cost.

First of all things like design for service ability making our products more easily serviced, things like remote, diagnostics and remote internet management using software and the network is a way to reach out to devices and remotely repair them as oppose to having to send a human being out there. And a whole number of programs to be used focused in those areas. So, there are CS related programs that will have an impact this year that feed into the 6% forecast and there are other programs underway that we hope to be able to start this year and complete in the out years.

Richard Farmer - Merrill Lynch

Okay, thank you. Just one more if I could on ATM pricing, I think you mentioned in your comments still that it is moderating. Given, I guess the lag effects of those price changes as a backlog found in the revenue, how important in fact is pricing going to have on the ATM margins in 2007 do you think?

Bill Nuti

It will have some impact although slight. You can think about the pricing environment and I will confirm that it is moderating out there, it still does -- it still is market dependent. The emerging markets are still more competitive because that’s where we are seeing and our competitors are seeing more growth, but if you think about our pricing environment that was near double-digits over the last several years that is moderated to kind of single mid digits price erosion, there is some impact there, some impact there for margins. But the vast majority of margin improvement will come from operational programs such as what we just announced.

Richard Farmer - Merrill Lynch

Thank you.

Bill Nuti

Thanks.

Operator

(Operator Instructions). Our next question comes from Reik Reed of Robert Baird and Company.

Reik Reed - Robert W. Baird

Can you guys just give us an update on the retail environment as it relates to point-of-sale, and then also Bill as part of your comments you had mentioned Teradata was -- had seen some nice broad based strength. I think you had said in the past couple of quarter that retail was still a little bit of challenge there. Can you talk a little bit about how that is changed?

Bill Nuti

Sure in point-of-sales specifically, non-self-service related Reik it was a slower year for point-of-sale rollouts in terms of point-of-sale application software. But a fairly, I would say steady year with respect to hardware, point-of-sale terminal growth. On the Teradata verticals side, retail continues to be a strong vertical for that business, and while we did not have as good of a year in the retail space and Teradata, other verticals certainly picked up the pace for that business and verticals such as financial services, new verticals such as manufacturing and also communications had a very solid year for us.

Reik Reed - Robert W. Baird

But are you seeing a better trajectory in both of those segments with respect to retail at this point? It just seems from your comments that that’s the case, so I just want to make sure.

Bill Nuti

Going into '07 did you mean like?

Reik Reed - Robert W. Baird

Yeah, exactly.

Bill Nuti

No not really. I think we can expect another year in retail that will be gated by the economy and gated by what happens in the consumer demand environment. They are so good at ratcheting up and ratcheting down capital spending in that environment based upon their own performance, it's a difficult environment to forecast. On the retail side, however self-service is gaining traction and we are seeing good opportunities and stronger opportunities in self checkout and in new self-service applications such as kiosks for multi-channel selling. And so I would say the point-of-sale side remains very dependent upon the consumers spending environment and macro economy in the US and we are very focused on improving the mix with respect to self-service and retail, where it does have a material impact on a retailer's productivity and ability to retain and attract new customers.

Pete Bocian

Yeah, right. The only thing I will add is, the retail can -- in Teradata can tend to be lumpy. So you go through cycles. I think the good news there is we’d expanded into the other verticals which basically gives much more of a smoothing effect. So A, we don't have to count on retail as much, it will be lumpy. As Bill said, not one of the stronger vertical this year, but we fully expect the same people that have been buying from us will continue to expand our warehouses.

Reik Reed - Robert W. Baird

Okay, great. That's great. And then in the ATM space, Bill as part of your comments, you had mentioned stability in Europe and Asia, but you need to get after the Americas. Can you talk a little bit about -- the industry seems to be a little bit weaker in the Americas, is there something that you are planning to do internally other than the restructuring that helps you start to generate more demand?

Bill Nuti

When I -- just a little more color on, then get after the comment. When I say get after it, it really is around market share gains and wallet share gains in the Americas market. As you well know, while we are the number one market share leader globally in ATM’s, we are number two in the Americas and we have a goal to be number one here. And so getting after it – it really is in the dimension of market share gains and wallet share gains. And the second would be deposit, we want to lead in deposit, and in the Check 21 space as I said earlier. Our deposit technology has been rolled out for Check 21 to approximately couple of thousand machines, and that is an area where – we have a technology lead, we have a services leading and we are going to do everything we can to use that as an opportunity to achieve the first goal which was market share gains.

Reik Reed - Robert W. Baird

Okay. And than I just want to follow-up on the margin question that we have asked just a bunch of different ways in the Financial Self Service area. But with the restructuring action that you are taking and I am excluding the onetime items here. Will there be some inefficiencies, so therefore from a margin perspective you would expected to take a few steps backwards early and then bring it up later? And can you talk about when you really expect the restructuring to kick-in?

Bill Nuti

The answer to the question is simply is yes. We would expect the first half of the year where we are doing a lot of the work with respect to our manufacturing, restructuring, to been additive to our cost. For example, we are going to have two manufacturing plants in Europe up and running in Q1. And overtime, of course we are going to see one from the volume prospective decrease and the other pick it up and that would be Budapest, who is doing very well by the way in terms of volume product, and so the second half of the year will be more so benefited by that action. Pete?

Pete Bocian

No. I think that’s all you said. It’s a -- that it is a project with a lot of complexity, we need to ensure we continue with the quality of the products that we deliver. So we are -- we are I don’t want to call taking your time, but we will do this right. And the net of it is that we will see more in the second half than the first still. But the expectation is we’ll get from the 12% this year up margins is to 14% for full year '07.

Bill Nuti

Operator, we are going to take on more call.

Operator

Thank you. Our final question comes from Katie Huberty of Morgan Stanley

Katie Huberty - Morgan Stanley

Thanks and good morning. Perhaps you can share a metric for total financial plus retail self service growth given this is the direction you heading in, in terms of managing the business. Then have a quick follow-up on cash flow.

Bill Nuti

So Katie what we will do then both of these companies are separated is we will be coming back to the market, and we will be talking to you about the strategic direction for both of these companies, and at that time we may decide to change the metrics you report where unfortunately we are not going to do that today. But what we can say is, certainly the guidance we gave you for Financial Self Service of 2 to 3 is what you should expect from us in terms of growth. And in the other self-service segment that today is within the retail space, you should continue to expect double-digit growth in that business and represent about 30% of the total revenue of retail or what is today retail automation in 2007?

Pete Bocian

Yeah I think Katie you can kind of -- if you take the ATM piece, you can see the services we do report that. We said 27% of this year is $870 million is the retail self-service component that will move to a third of the business that’s growing 5 to 6%. So you can do the math. I think the only piece that’s not in all that would be the customer services piece on the retail. And as Bill mentioned, as we get into the -- after Q1 reported results we'll get into more clarity or looking into those numbers. But that’s really the only piece that you don’t have to kind of add up the self-service components.

Katie Huberty - Morgan Stanley

Sorry go ahead.

Bill Nuti

The underlying question certainly is that I didn’t want to -- it's an important one, because it's trying to help you and all of the analyst community and investor understand what the new NCR can do in terms of growth. And as we get out and talk to you more about this [genuine] companies, I will assure you we'll give you more transparency of what we intend to do there.

Katie Huberty - Morgan Stanley

Okay, great. And then just quickly on cash flow, can you help me understand the kind of step up in CapEx this quarter, especially in light of the fact that you're exiting some facility?

Pete Bocian

Yeah, the way I look at the cash flow is, we said we’d do about 310 to $320 million for the year, we ended up at 270. In that 310 to 320 was always an assumption around increased CapEx in 2006 versus 2005. So we always had that planned. I think the three drivers though when you compare the 270 versus the 310 to 320, one is strong Q4 relative to revenue. We probably left the couple of days of DSO year-on-year in receivables which is about $30 million that we fully expect to recover in 2007 and early in 2007. The inventories were also a little bit higher, partly because of the self-service transition, but also in the parts space. And we have mentioned a couple of times about initiatives in the parts space, which will impact both the working capital as well as the margins. And then we did have higher expenditures and PP&E kind of in the 20% range or $20 million versus original expectation. And then I have you given you for next year for next year we expect to go from 212 down to 175. So, I would characterize CapEx as kind of a -- some '05 spilled in '06. We did have some higher number, but it was only a piece part of the whole cash flow picture and then we expect to be down to 175 in CapEx next year with a DNA number of about 165.

Katie Huberty - Morgan Stanley

So does the $20 million incremental infrastructure investment help support to separate entities or is that investment cycle still in front of us?

Pete Bocian

Yeah, it was a one time and it's not related to the separation.

Katie Huberty - Morgan Stanley

Okay, great. Thanks so much.

Bill Nuti

Hey Katie, thank you very much. And I also wanted to take an opportunity to thank everybody for joining us today, and we'll look forward talking to you and after Q1. Take care folks.

Operator

This concludes today's conference. Thank you and have a good day.

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