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Executives

Gavin Bell -

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

Peter A. Dorsman - Executive Vice President of Industry Solutions Group and Global Operations

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

John G. Bruno - Chief Technology Officer and Executive Vice President of Corporate Development

Analysts

Roman Leal - Goldman Sachs Group Inc., Research Division

Dan Dolev - Morgan Stanley, Research Division

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

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

Michael Saloio - Sidoti & Company, LLC

Kartik Mehta - Northcoast Research

Zahid Siddique - Gabelli & Company, Inc.

NCR (NCR) Q4 2011 Earnings Call February 6, 2012 4:30 PM ET

Operator

Welcome, and thank you for standing by. [Operator Instructions] Today's conference call is being recorded. If you have any objections to this, you may disconnect at any time. And now I would like to introduce your host for today's conference call, Gavin Bell, Vice President of Investor Relations. Sir, please go ahead.

Gavin Bell

Thanks, Brad. Good afternoon, and thank you, everyone, for joining us for our Fourth Quarter 2011 Earnings Call. Bill Nuti, NCR's Chairman and Chief Executive Officer will lead our conference call this afternoon. After Bill's opening remarks, Peter Dorsman, Executive Vice President of our Industry Solutions Group and Global Operations 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 results excluding the impact of pension and other items. Reconciliations of non-GAAP financial results to our reported and forecasted GAAP results and other information concerning such measures are included in our earnings press release and are also available on the Investor page of NCR's website.

A replay of this conference call will be available later today on NCR's website, ncr.com. For those listening to the replay of this call, please keep in mind that the information discussed is as of February 6, 2012, and NCR assumes no obligation to update or revise the information included in this conference call, whether as a result of new information or future results.

I'll now turn the call over to Bill.

William R. Nuti

Thank you, Gavin. Good afternoon, and thank you all for joining us. 2011 was a highly successful year for NCR featuring record revenue, gross margin and NPOI and $151 million or more than 400% year-over-year increase in free cash flow. We finished the year well ahead of expectations as full year revenues grew 13% and nonpension operating income, or NPOI, totaled $434 million, an increase of 28% versus 2010.

Our operating margins continue to improve as evidenced by full year NPOI margin of 9.1%, excluding the Entertainment business, an increase of 110 basis points compared to 2010 and the highest since the 2007 Teradata spinoff.

We ended the year with order growth up 18% versus last year. It is important to note that this growth does not include Hospitality and Specialty Retail, or HSR, a segment that we expect to be a key growth driver in 2012 and beyond.

Backlog at the end of the year was over $1 billion, up 14% versus the prior year period. We've now delivered 9 consecutive quarters of year-on-year backlog growth, and we entered 2012 with our highest backlog for the first quarter in our history.

Our financial results and strong pipeline demonstrates that our business strategy to deliver profitable revenue growth, gross margin expansion and an improved consumer experience is delivering tangible returns. Our discipline in the areas of strategy execution, investment and innovation, continuous improvement and a focus on delivering great service are all the reasons why 2011 was a successful year and why we entered 2012 with confidence.

In terms of gross margin expansion, we are continuing to make progress in building our capabilities in 2 critical areas, software and services. Software revenues, including our rapidly growing software-as-a-service business, grew 52% in Q4 versus the prior quarter and 31% in full year 2011. And we expect in 2012 to drive total software revenues to well over $500 million.

Looking at our services business, we continued our momentum in Q4 and delivered full year revenue growth of 12% and gross margin expansion of 230 basis points versus the prior year on a non-GAAP basis. In addition, services file value, the equivalent of backlog, was up 8% on both a reported and FX neutral basis versus the prior year period positioning us for a very solid 2012.

It's important to put this in perspective. NCR services generates a recurring revenue stream and drives about half of total company revenue, and file value is a record $1.77 billion, with an improving margin profile. The combination of services file value and solutions backlog of $1 billion is an important metric as we enter 2012. Bear in mind that hospitality and consumables are not represented in these backlog numbers.

Frankly speaking, our focus on changing our business model to being software- and services-led is working. Assuming we continue to execute, which we have every intention to do, it will have lasting implications on NCR's growth and margin profile, as well as the value we deliver to our customers for many years to come. Simply put, the reinvention of NCR is on an excellent path.

Because of these changes we have made, NCR is an increasingly critical business partner to our customers worldwide. The hardware and software innovations we are bringing to market deliver proven value in the form of productivity gains and cost savings while simultaneously improving and contemporizing the consumer experience.

Our growth momentum is being driven by our continued strong performance in our core industries as we look to capitalize on the strong demand trends in our financial, retail and hospitality verticals and on the significant opportunity we have in our emerging industries, Travel and Telecom and Technology. Both of the latter 2 emerging industries have now proven to be potentially large and substantial market opportunities.

Our Financial Services business delivered a strong 2011 compared to 2010, as full year revenues grew 13% and operating income rose 25%, indicating margin expansion of 90 basis points. And global orders grew by 24% year-on-year, positioning us with a strong backlog entering 2012.

We built upon our global leadership in 2011, via market share gains in both developed and emerging markets. Share gains were driven by our ability to deliver unmatched innovation, which is especially important given the emphasis banks place on customer acquisition and service in today's challenging, competitive and economic environment.

Solutions such as our Scalable Deposit Module, or SDM, and our APTRA suite of software solutions differentiated NCR in the marketplace, and are resulting in significant expansion of our installed base. We also formed a valuable alliance with Scopus Tecnologia in Brazil, allowing us to leverage their local market expertise to help accelerate growth in the world's fourth largest ATM market.

In retail solutions, NCR continues to be a leader in point-of-sale, self-checkout and converged channel software solutions that integrate online, social, mobile and store-based channels.

As consumers and businesses continue to shift towards self-service channels, NCR's self-checkout, converged channel software, mobile and point-of-sale solutions remain well positioned to provide significant benefits to retailers.

2011 full year revenues rose 3% while operating income increased 5% as we face tough year-on-year compares. Having said that, we finished 2011 with strong Q4 order growth of 11% over the prior quarter. And we expect solid revenue growth in this business in 2012. In addition, we expect this to be a year of substantial strategic progress as we are well positioned to enter new geographies, expand into the SMB segment and grow our software portfolio.

HSR had a strong close to the year with our integration plan on track. For our first full quarter of financial consolidation, the business generated $105 million in revenue, improved gross margins and contributed NPOI of $17 million.

Looking back, the Radiant acquisition has met or exceeded our expectations to date. The acquisition presented excellent cost and revenue synergies and also served to accelerate our migration toward a hardware-enabled, software-driven business model in the coming years.

Also, combining NCR's leadership with a strong team from Radiant has proven to be successful. We're winning new business, retaining great talent and serving our customers better than anticipated when we began the integration process 5 months ago. We remain on schedule to secure annualized pretax cost synergies in the $40 million to $50 million range over the next 3 years.

I have asked Peter Dorsman, who runs our Industry Solutions Group and global ops to recap the performance of our industries in more detail in a few moments. I'll focus the remainder of my opening remarks on our financial results, strategic direction and outlook entering 2012.

Q4 revenues were $1.6 billion, up 17% compared to last year. Q4 gross margin grew 270 basis points year-on-year to 25.2%. Q4 NPOI was $159 million, up 39% compared to $114 million in Q4 of 2010, while non-GAAP EPS was $0.65 compared to $0.56 in the prior-year period.

For the full year, we generated consolidated revenue growth of 13%, while NPOI totaled $434 million versus $340 million in 2010. Non-GAAP EPS for the year was $1.92 compared to $1.56 for full year 2010, up 23% year-on-year.

Our NPOI and EPS results for the year were due in large part to our consolidated revenue growth, but also reflect the impact of our ongoing global continuous improvement initiative, which resulted in the successful elimination of more than $100 million in annualized costs. The efforts to optimize our cost structure will continue in 2012 as we remain on a 3-year path to achieving our overall reduction of $200 million to $300 million in annualized costs.

Our strategic plan in 2012 will continue to emphasize growing our core industries worldwide with an emphasis on exploiting our higher-margin software solutions and services offers. Beyond our focus on improving revenue mix, we will continue to pursue margin improvement via continuous improvement and global services defect elimination.

As we sharpen our core vertical focus, we are narrowing our portfolio of emerging verticals, zeroing in on those that offer the highest value creation and are most consistent with our business strategy and operating model. This determination is the driving force behind the divestiture of our healthcare software solutions to QuadraMed in the fourth quarter and our just announced agreement with Redbox to sell the assets of our Entertainment line of business.

With the Entertainment transaction, in addition to the asset purchase price of up to $100 million, we secured a 5-year manufacturing and services agreement that provides them the opportunity to procure hardware, software and services for their various automated retail solutions with the commitment of $25 million in margin.

This deal provides us with the ability to establish an important and potentially significant new customer relationship for NCR services with one of the world's largest automated retailers.

Let's now discuss our outlook for 2012. Our core financial, Retail and Hospitality markets are demonstrating solid demand trends in most regions, and we entered the year with a strong backlog position. As I mentioned, we are operating with an intense focus on growing our core industries with supporting contributions expected to be made by our services and emerging market segments.

We expect revenues in 2012 to increase in the range of 7% to 9% on a constant currency basis, excluding Entertainment in 2012. We expect nonpension operating income, or NPOI, to be in the range of $560 million to $575 million for the year, an increase of 29% to 32% from 2011. We expect non-GAAP earnings per share, excluding pension expense, to be in the range of $2.36 to $2.43 in 2012, an increase of 23% to 27%. And finally, following this past year's strong cash flow performance, we expect to generate free cash flow in the range of $100 million to $150 million in 2012, which includes increased cash funding requirements for our U.S. and international pension plans.

I'll now turn the call over to Peter who will discuss our performance by line of business. Peter?

Peter A. Dorsman

Thanks, Bill. And thank you to everyone who has joined us. Looking first at Financial Services, we generated 16% revenue growth in Q4, driven by continued strong and balanced performances across most key theaters including North America, BICMEA and CLA.

Following a 60% increase in Q3, order growth remains healthy and was up 2% year-over-year during the fourth quarter and 24% for the full year, which resulted in backlog growth of 21%. A key component of our performance was the midsize and regional U.S. banks, which continue to ramp up spending in an effort to narrow the competitive gap with large financial institutions.

Regional bank orders and revenue more than doubled in the fourth quarter compared to the prior year period.

Our backlog is a result of our ability to deliver highly innovative solutions to our financial customers that differentiate their offering from competitors. One of these solutions is our single deposit module ATM. Recently, TruWest Credit Union, which serves 60,000 members in Phoenix, Arizona and Austin, Texas, agreed to replace its fleet of non-NCR ATMs with NCR SelfServ 32, 34 and 38 models, complete with our SDM technology.

SDM is also being adopted by the Peoples Bank of Alabama, which is supplying NCR SelfServ ATMs, which will result in productivity gains and an improved transaction experience for its customers.

Our innovations extend beyond ATM hardware. Our recent partnership with PayPal and S1 Corporation will enable realtime, person-to-person payments from bank ATMs to almost anyone with a mobile phone or e-mail address. Consumers will be able to transfer money to another person through our bank ATM simply by entering the amount of money to be sent and the recipient's e-mail address or mobile phone number. The service will initially be available in the U.S. with the ability to send money to people in more than 60 countries around the world.

In our Retail Solutions segment, Q4 revenue fell 2% compared to last year, primarily due to decline in the Europe theater. Orders in the quarter were up 11%, and our year-end backlog is up 5% compared to last year, which as Bill said, bodes well for growth in the segment in 2012.

Similar to Financial Services, retail consumer transaction preferences are evolving, with an increasing focus being placed on convenience and convergence. This is good news for NCR as our comprehensive suite of self-checkout and point-of-sale solutions allow businesses to meet consumer transaction demands while also securing productivity gains through channel convergence and personalized marketing offers and promotions.

We continue to see signs that indicate an upcoming retail upgrade cycle, and we are well positioned to capitalize on our emerging growth business opportunities.

Our leadership in the retail market was validated by NCR receiving its highest ranking to date on the retail information system leaderboard. NCR was named in the top 10 across 24 categories, including second among large vendor customer satisfaction and third in total cost of operation by tier 1 and midsized retailers.

We consistently look to better serve our customers, and the risk metrics demonstrate the success we are having. Recent customer wins in retail include Tully's Coffee, which has selected the NCR RealPOS 70XRT point-of-sale solution as part of its initiative to improve the check-out experience for customers and gain greater business insights into its store operations. Our services business will be providing depot repair services for Tully's as well.

In our Hospitality and Specialty Retail segment, Q4 revenues totaled $105 million, while operating income was $17 million, resulting in a 16.2% operating margin. As Bill mentioned, our Hospitality business possesses strong growth potential and will allow NCR to continue changing its mix of revenue to higher-margin software solutions.

During Q4, we secured a number of wins in the restaurant and theater categories. Einstein Noah Restaurant Group will be implementing the NCR Aloha enterprise solution with each of its restaurants, while Kum & Go, L.C. will be implementing Hospitality's c-store technology within each of its 400-plus stores.

These customers recognize we are a leader in providing value driven solutions that enable faster service, improved order fulfillment and offer centralized management of key business operations.

We recently launched Reel Time, a new dashboard and customer reporting solution. It gives theater operators a realtime view of current and historical data for ticket and concession sales, attendance and feature gross and total revenue.

In addition, we introduced Usherman, a new application that increases a theater's speed of service by enabling ushers to scan and retrieve ticket information while enhancing the guest experience.

During Q4, our services business successfully grew margins and increased attach rates. Customer satisfaction continues to rise and innovations, such as our Predictive Services capabilities, are further penetrating the market.

During Q4, we formed a partnership with Foresight Technologies to offer a range of independent data center design consultancy services across the Middle East and Africa. This is a high-growth area for NCR, and through this partnership, we will extend our reach with a broad offering of services.

Two emerging verticals that offer growth opportunities are Telecom and Technology and Travel. Our hardware-enabled, software-driven approach, supported by a best-in-class services organization is enabling us to continue to win new customers.

In Telecom and Technology, we recently achieved Data Center Unified Computing Authorized Technology Provider status from Cisco. This designation recognizes NCR as having fulfilled the training and program prerequisites required to sell, deploy and support the Cisco Unified Computing System. This distinction is important as NCR will be able to help meet significant market demand for cloud computing services for telecom carriers and enterprises in the high-growth MEA theater.

In Travel, consumers are increasingly adopting mobile and self-service channels to manage their travel journey. We secured significant wins in the MEA region, including the national carrier of the Kingdom of Bahrain and Nasair, the first low-fare airline in the Kingdom of Saudi Arabia. Both chose NCR to design, build and support their full-service mobile websites.

In addition, the Transportation Security Administration will be piloting our credential authentication technology that can digitally read and analyze data and embedded security features on passenger IDs and boarding passes to identify fraudulent credentials.

In summary, we continue to take market share in our core financial and retail verticals, which as Bill mentioned will be a primary area of strategic focus in 2012. Simultaneously, self-service adoption continues in our emerging verticals.

I'd like to turn the call over to Bob now who will review this quarter financial results.

Robert P. Fishman

Thanks, Pete. NCR's total revenue in the fourth quarter was $1.64 billion, up 17% versus Q4 of 2010 on both an actual and constant currency basis.

We reported GAAP loss from continuing operations of $13 million or $0.08 per diluted share. This compares to GAAP income from continuing operations of $33 million or $0.20 per diluted share in Q4 of 2010.

NCR's results from continuing operations, includes special items in both periods. Income from continuing operations in the fourth quarter of 2011 included $56 million or $0.23 per share of pension expense, $98 million or $0.43 per share of an impairment charge related to the Entertainment line of business, $5 million or $0.02 per share of acquisition-related transaction costs, $1 million or $0.01 per share of acquisition-related severance costs and $9 million or $0.04 per share of acquisition-related amortization of intangible assets.

Income from continuing operations in the fourth quarter of 2010 included $52 million or $0.27 per share of pension expense, a $14 million or $0.06 per share impairment charge related to an investment and an $8 million or $0.03 per share litigation charge.

Excluding these items, non-GAAP diluted income per share was $0.65 per share in Q4 2011 versus earnings of $0.56 per diluted share in Q4 2010.

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.

Excluding the impact of special items and pension expense, our Q4 2011 gross margin was 25.2%, up 270 basis points from 22.5% in the prior year period, resulting from higher product and services sales, favorable customer and product mix, including significantly more software and the successful implementation of cost-reduction initiatives driven by our continuous improvement program. And operating expenses, excluding pension expense and special items were approximately in line with our historic expense revenue metric at 15.5% of revenue as a direct result of our sharp focus on optimizing our cost structure while continuing to invest in sales and R&D.

Non-GAAP income from operations or NPOI was $159 million in the fourth quarter compared to $114 million in last year's Q4.

Other expense was $16 million in Q4 2011, which included $9 million related to interest expense. Other expense of $14 million in the prior year period included a $14 million impairment charge related to an equity investment.

Income tax benefit was $10 million in the fourth quarter compared to income tax expense of $8 million in Q4 2010. Excluding the effect of pension and nonrecurring items, the fourth quarter 2011 effective tax rate was 29% compared to 22% in Q4 2010. We ended the year with a 26% effective tax rate, slightly better than our full year forecast of 27%. NCR's full year 2012 effective tax rate is expected to be approximately 27%.

Turning to the balance sheet. Cash on hand at 12/31, 2011, was $398 million with long-term debt of $852 million at the end of the quarter, down from approximately $1.1 billion at the end of the third quarter.

Moving to the cash flow statement. NCR generated $270 million of cash from operating activities in Q4 2011 versus $182 million in the prior year period. Cash from operating activities in Q4 2011 was positively impacted by changes in working capital, primarily due to a decrease in accounts receivable and inventory.

Net capital expenditures totaled $35 million in Q4 2011 compared to $53 million in the prior year period due to a decrease in CapEx spending in the Entertainment business.

Discontinued operations resulted in $6 million of cash outflow in Q4 2011 compared to $14 million of cash inflow in Q4 2010, due to insurance recoveries in the prior year period.

NCR generated free cash flow of $229 million in Q4 2011 compared to free cash flow of $143 million in Q4 2010. NCR defines free cash flow as cash flow from operations and discontinued operations, less capital expenditures for property, plant and equipment and additions to capitalized software.

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

For the full year 2011, NCR generated $375 million of cash from operating activities and $188 million of free cash flow compared to free cash flow of $37 million in 2010.

Net capital expenditures of $163 million in 2011 were down from $226 million in 2010, primarily due to lower investments in the Entertainment business.

We expect free cash flow for full year 2012 to be in the range of $100 million to $150 million, which includes a $90 million increase in pension cash funding contributions versus 2011.

Total CapEx for the company will be about $165 million, and depreciation and amortization will also be approximately $165 million.

Cash taxes are expected to be approximately $65 million in 2012. Cash funding requirements for the Fox River environmental matter are expected to be a $40 million cash outflow in 2012.

And finally, we'd expect working capital to be higher, as revenues are expected to grow in 2012.

I'd like to provide an update on pension. As planned, we ended the year with 80% fixed income in the U.S. plan, and expect to be 100% fixed income in the U.S. plan by the end of 2012. Effective January 1, 2012, for any plan, where less than 10% of its participant are active workers, we will use the average remaining life expectancy to determine the amortization period of prior service cost and actuarial gains and losses instead of expected future years of service. This change is being made in accordance with U.S. GAAP and will be enacted on a plan-by-plan basis.

For those plans, where less than 10% of those participants are active workers, the amortization period will be lengthened resulting in lower pension expenses over the next 7 to 10 years, which is reflected in the GAAP guidance we have provided for 2012.

Pension expense is expected to be $165 million in 2012, a $57 million decline from $222 million in 2011. Although return on assets was approximately 10% in both the U.S. plan and the international portfolio, the underfunded position moved against us by approximately $350 million, primarily due to a 125-basis-point drop in the U.S. discount rate.

Cash outflow expectations for pension funding over the next 2 years have been updated. The 2011 funding was $125 million, in line with our forecast. For 2012, the funding is expected to be $250 million, slightly higher than the previous estimate of $185 million, which reflects the additional contributions required as our global funding gap has widened. Please refer to the chart on our website entitled NCR Pension Update for the updated estimates.

I'd like to conclude by providing our full year 2012 revenue growth expectations, including services and on a constant currency basis for each line of business. In Financial Services, we expect revenues to grow 5% to 7%. In Retail, we expect revenues to increase 2% to 4%. In our Emerging Industries, we expect revenues to be up 7% to 12%. In Hospitality, we expect full year revenues to be in the range of $435 million to $445 million. The Entertainment business is included in 2011 results, but excluded from 2012 guidance.

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

William R. Nuti

Thanks, Bob and Peter. In summary, 2011 was a breakthrough year for NCR as we delivered double-digit profitable revenue growth, significant gross margin expansion and improved consumer loyalty.

In addition, we continue to reshape the business model for our future with significant growth in software and services, becoming a large software company inside of what was once known as a hardware-only company.

Moreover, we streamlined our strategic focus through the acquisition of Radiant, our alliance with Scopus Technology (sic) [Tecnologia] in Brazil and the disposition of our healthcare assets and our just-announced agreement to dispose the assets of our Entertainment line of business.

In 2012, we will continue to focus on profitable growth and favorable mix shift in our core industries, expansion of our Emerging Industries, continuous improvement execution and creating competitive differentiation through world-class service delivery and innovation.

Within the business, we also have an underlying set of strategic imperatives that align with our financial objectives for 2012 and beyond.

First is to deliver on the promise of disruptive innovation in a manner that dramatically increases the value we deliver to our customers, while dramatically lowering the underlying cost structure of our solutions. Second is to emphasize the migration of our revenue mix to higher-margin software and services revenues. And third is to increasingly enable our sales force around the consultative selling model that better leverages the innovation we're bringing to market.

Delivering value to our customers and innovation remains top priorities for all of NCR. We enabled 300 million customer transactions globally each day, which equates to 110 billion transactions each year.

NCR is becoming the backbone behind how consumers are connecting, interacting and transacting with business.

That concludes our prepared remarks. In addition to Bob and Peter, I've asked John Bruno to join us for the Q&A portion of this call. Let's open that up now.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from Julio Quinteros of Goldman Sachs.

Roman Leal - Goldman Sachs Group Inc., Research Division

It's Roman Leal here for Julio. Few questions, first of all, can you remind us what the time line was for -- I believe your gross margin target of about 10% given all the moving parts and the exiting of Entertainment business, how do you think about that? Can you reach that a little bit quicker? Would be very helpful.

William R. Nuti

Yes. I think you're talking about NPOI margin of 10%. We gave you guidance that, that was our goal within the 3-year period last year, so 2013. I think we have an ample opportunity to move that up into 2012. I'd be disappointed in 2012 if one or 2 quarters, we didn't hit that number and be well on track in 2013. So we'll meet or exceed our commitment probably by 6 to 12 months.

Roman Leal - Goldman Sachs Group Inc., Research Division

Great. And are you guys ready to kind of walk us through what do you think the share of services revenue can get to from the roughly 50% currently?

William R. Nuti

I think share of service right now is up to 60%, you're right. The optimal for us to model is software and the services being about 80% of the business and solution, being hardware, being about 20%. I -- look at this juncture, we're growing services more quickly than we anticipated. As we've said, our file value is up 8%, both on a reported and FX neutral basis year-on-year. That's a big number for us. We're going to try to do that again this year. I think we’re at a reasonably good mix on services. The key for us is software growth. We're growing software faster than we thought as well, and I anticipate that we will grow software again more quickly than we anticipate this year. And by the end of next year, that software services number will be 80%, the rest of the company 20%. So we'll be where we want to be by the end of next year.

Roman Leal - Goldman Sachs Group Inc., Research Division

Okay. And on the retail side, what are some of the signals that make you bullish on an upcoming retail upgrade cycle? I mean is this mostly in the U.S? Mostly self-service? Or is it more broad based than that?

William R. Nuti

11% order growth in Q4 is the first signal. So we had a good quarter in terms of order growth in Q4 on Retail. So we're coming out of the blocks with a reasonably good backlog position in Retail in Q1. We have been, for the last 12 months, undergoing a lot of work internally to expand our Retail business in under-penetrated markets, moving more aggressively into the emerging countries, going down market vis-à-vis the channel. And we have a lot of innovation going on in that space. Some of which we'll talk to you about it in April that we think could change the curve of that business dramatically for us. So I feel very good about the outlook we gave you and would be disappointed if we didn't beat it.

Roman Leal - Goldman Sachs Group Inc., Research Division

Great. And just the last one, can you give us any more color on the order growth in the ATM business?

William R. Nuti

Yes. The order growth in the ATM business was 2% in Q4, but off of a Q3 that was up 60. So we had a huge Q3. A lot of orders that we wanted to get in Q4, frankly, were pulled in. So I'm comfortable with where we are. The backlog going into the year on financial is up 21%. So we're in a wonderful position coming into the year. The thing you want to keep an eye on is order growth in Q1, Q2.

Operator

Our next question will come from the Dan Dolev of Morgan Stanley.

Dan Dolev - Morgan Stanley, Research Division

Just 2 quick questions. First thing, you just mentioned order growth, can you talk a little bit -- it seems to me just from not -- what was not on the press release in terms of the financials was Europe. Can you just maybe talk about some of the -- what's going on in Europe right now and how has it been evolving early in the year in terms of orders and ATMs, et cetera? And then if you could just comment on some of the margin issues with Retail -- not issues, but margins are down, just if you can give some color on if you think this is going to be reversing anytime soon.

William R. Nuti

Yes. First I'll talk about Europe. Europe orders in the fourth quarter were down 11%. But on the year, we were up about 2% or 3% in orders. As I've said, many times before, about flattish. We expect the same for '12 kind of flat order growth that was baked into our current guidance. I'd like to think we can do better in Europe, but just given the conditions in Europe I think flat is really where we're going to land at the end of the year in terms of orders. Eastern Europe is doing significantly better than Western Europe. Although in Western Europe, we're doing something that's very important. We're winning market share while the market is challenged. So the good news is when the market does turn in Western Europe, we'll be better positioned in that part of the world. We have good quarters. We have okay quarters. Europe is not a significant issue for us in light of the many macro-concerns people have right now. And again I think flat is where it's going to land. Retail margins in the fourth quarter, Bob, can you?

Robert P. Fishman

Yes, I can take that one. What drove -- well first of all, for full year retail margin, operating margin is up from 4.6% to 4.7%. In Q4, it was down. Revenue was down and that drove some of it. Revenue was down 2%. But the biggest driver was our consumables business within the Retail line of business. Paper prices were higher year-on-year, and it had a negative impact on the overall operating margin.

Operator

Our next question will come from Gil Luria of Wedbush Securities.

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

In the ATM business in 2011, you grew far faster than the market and your competitors pointing to share gains in many regions. In 2012, how much of the 5% to 7% guidance is factoring first your continued share gains?

William R. Nuti

Not a lot, Gil. I mean right now the market is, if you look at any indicator, it's going to grow around 4% to 6% in that range, if you look at RBR or other sources in terms of units. And so our 5% to 7% does not anticipate the kinds of market share gains we experienced in '11, of current guidance.

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

In spite of the ramp in Brazil and the continued success in the U.S. and competitors withdrawing in Europe continuing going forward?

William R. Nuti

I'm sorry, Gil, say that again?

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

Let me just move to the Retail business. How much of a threat or opportunity is the introduction of more mobile products for retailers at the point-of-sale and supplementing the point-of-sale. You mentioned a few products in the prepared remarks that you have mobile, but do you see iPad-based solutions, iPad-only solutions as a threat to your Retail business? Or is there an opportunity for you to sell more products to those customers?

William R. Nuti

Gil, that could be the game changer for NCR. We introduced the product at NRF called Silver, and you should -- we'll get you information on it. It is potentially a game changer for us, assuming we execute from a distribution and go-to-market point of view in SMB, which we intend to do. It is a significantly better product than Square and a significantly more scalable product than Square and frankly better than other alternatives available in the market today. It's a SaaS-based, cloud-based offer that has very low incoming CapEx requirements and a reasonable month-to-month, if you will, subscription fee for the services of point-of-sale and a variety of other applications, and include loyalty and otherwise. It does fit on top of iPad, iPods in point-of-sale devices. We are currently in pilot and testing it. We will be going live and introducing it later this year and scale. You're talking about a product set that could help a company who lost its way in 1969, moving from electromechanical to digital to completely reversing the trend in a go-forward basis. So we are very enthusiastic about the mobile trend. And beyond mobile point-of-sale for small and medium business, we have a variety of mobile -- of applications for mobile self-checkout in-aisle applications, and we've introduced those as well in NRF, and we feel like that is a massive opportunity for the company. John, did you want to talk a little more about that?

John G. Bruno

Sure. Gil I think that's a great question, and I'd like you to think about it this way: There is a significant opportunity for our company as you go down market and you think about the small- to medium-sized business with the number of point-of-sale opportunities that are available to us that have not been pursued through traditional means of our current hardware platform. And as each one of these variants, which I like to see them as nothing more than a window into the cloud. It’s just a screen of glass, whether it's an iPad or an iPod, we want to ride those rails like crazy. SO I love the proliferation of those technologies, and I love the proliferation of those technologies over the broadband because that key to our success allows us to take some very feature-rich capabilities in workflow, cash and cashless transaction processing, our Advanced Marketing Solution, our preference manager, our loyalty application. We have got so much that we have embedded that fits and resides in what is now thin-wrapped appliances that we can expose into that environment. So we like that architecture, and we intend to lead in that space.

William R. Nuti

And Gil, just one more remark on this in terms of our software SaaS business. Our SaaS business now is about $15 million, growing at 133% year-on-year. So when you combine the SaaS assets of NCR and what was once Radiant, we have a fairly sizable business that's growing rapidly, and we think we can continue to exploit that. Now Silver wants -- help to manufacturing ramp later this year will be a key driver of that business going forward.

Operator

Our next question will come from Matt Summerville of KeyBanc.

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

I just have a couple of questions. Bill, can you clarify something for me. Was that Europe down 11%? Is that constant currency? Or does that include some sort of FX dynamic? And was that for NCR overall or the whole ATM business?

William R. Nuti

No. No. The 11% is Europe only. It's both as reported and FX neutral, because we didn't have any FX impact in Q4. It was a flat quarter. That was orders only for financial only in Europe in Q4. But as I said earlier, not unexpected and that it does not have services in it. It's important that I make sure that point, Matt, because services improves that number.

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

Got it. And if we look at North America outside of small bank, can you talk about what you're seeing in that market and then maybe spend a second talking about Asia, markets like China and India specifically, and what you expect for 2012? And then if you could just comment on pricing, again sticking with the ATM business?

William R. Nuti

Yes. North America has been on fire. North America just show you where in financial in Q4, just alone in financial was up 10% year-on-year in the financial space. As we said earlier in the prepared remarks, regional banks was a big portion of that. We're up 130-plus percent in orders in regional banks in Q4. Big banks continue to be very solid for us overall. By the way, revenue in Q4 in the small bank segment or the regional bank segment was up 222%. So we continue to see strong trends there and feel good about North America overall. As you go outside of North America, good traction in the emerging markets. We continue to -- we think we do a nice job in all the emerging markets around the world. Russia continues to be very solid for us, as an example, China, India as well. Pricing has been about the same, Matt. It continues to be more of a challenge in emerging markets where there's just endless opportunity and less of a challenge in domestic markets, or Western European and U.S.-based markets. So no real tangible change in pricing for a long time.

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

And then just one follow-up on the agreement you have with Coinstar on that asset purchase. It's described as up to $100 million in purchase price. Are there some things that we should be looking at? That will kind of help us -- I guess what determines if it's $100 million or not? And is there a low-end bandwidth on that, Bill? Do you know what I mean?

William R. Nuti

Yes. John?

John G. Bruno

Sure. So because it's an asset transaction and as we characterized it, it's the substantial side of the asset. No, there's nothing material to call your attention to. But however, there is a transition period in which we moved between where we are today through the closing of the transaction. And of course, the transaction itself contemplates if items didn't transfer as contemplated in the deal negotiation. But no, nothing at this time. But under the structuring, which it's written, that would be the appropriate way for us to interpret the up to $100 million. That would be correct.

Operator

Our next question will come from Michael Saloio of Sidoti & Company.

Michael Saloio - Sidoti & Company, LLC

My question is also on the Redbox agreement. Can you give us a sense of how much of your EPS guidance for next year is related to the sale?

William R. Nuti

None.

Michael Saloio - Sidoti & Company, LLC

Okay. So asked a different way, could you give us a sense of how the business was doing on the NPOI line in the fourth quarter?

William R. Nuti

Yes. Bob?

Robert P. Fishman

That's included in our schedule B. You can see it as a separate business. So in Q4, it lost $15 million, full year it lost $60 million in 2011.

Michael Saloio - Sidoti & Company, LLC

Okay. And then going back to the last question, was there any -- did you get any upfront payout from Redbox.

Robert P. Fishman

No. As we've reported in the press release, it's an asset purchase agreement for the -- up to $100 million at the time of closing. And then the rest is under a master services agreement, which we will actually deliver as they acquire services in the areas of predominantly services and manufacturing.

William R. Nuti

Michael, the way you should think about the manufacturing and the services agreement is simple. They've committed in the contract to spend up to $25 million over 5 years of profit. So if you apply the 30% margin on that, it's about $75 million of revenue to us over that time period. Or at the end of 5 years, they cut us a check for $25 million if they don't do business with us. And the whole idea of this arrangement, and you should talk to them as well, but the whole idea was to -- beyond selling our assets for up to $100 million was to create a significant customer relationship with Redbox, where we can provide them services for their kiosks. And beyond their kiosks, there are other businesses, like their coin business, as well as a manufacturing agreement, where we think we are a better manufacturer of what we sell in the marketplace than perhaps who they're doing business today. So we'd hope over the next 5 years to expand that agreement and build upon this commitment they've made to us, but it's not in the current guidance.

Operator

Our next question comes from Kartik Mehta of Northcoast Research.

Kartik Mehta - Northcoast Research

I wanted to understand a little bit about conversion of backlog to revenue. You've got this huge backlog, and what's the time frame for that to convert to revenue?

William R. Nuti

Backlog typically converts over 2 quarters, for the most part, Kartik, not entirely. If you think about it, we average about, the conversion of about 45% to 50% each quarter. So if you do the simple math, it's 2 quarters where the backlog kind of converts to full revenue in any given quarter. So I think you're looking at a 6-month window coming into the year, on that 40% [ph] backlog.

Kartik Mehta - Northcoast Research

And then, Bill, as you look at the Radiant business, and obviously that business has got some good growth characteristics, and there's been a lot of talk about EMV, and I'm wondering what opportunities that could possibly provide for you to grow that business.

William R. Nuti

Well, EMV is an opportunity not only for the Hospitality business, it's an opportunity for NCR Retail. The entire conversion to EMV if moving ahead at the pace we think it might -- could cause an upgrade cycle in Retail across the board. Any other comments, John?

John G. Bruno

Yes. I think that everyone in this industry, including the incumbents and others are focused on this EMV upgrade and how it manifests itself because it changes a little bit in the way in which transaction processing is thought through today between securing the payment itself through the peripheral and how transaction processing is cleared. So we're going to continue to participate through standards bodies, through our innovation and of course embed as much of that technology as we can into our software stack. So we pay particular attention to it in Financial Services, in Retail and in Hospitality. But it's also important to us in our Travel business, as you'd imagine, because a lot of things happen at the point of service, via mobile or kiosk, inside an airport for upgrades and so forth. So it's an important part of our go-forward strategy.

Kartik Mehta - Northcoast Research

Just out of curiosity, as that happened in Europe, what kind of impact did you see to get somewhat of a baseline of the potential opportunity here in the U.S.?

John G. Bruno

That's a great question. Unfortunately the answer is not so great because of the -- of our lack of mix and penetration on the geographies. Boy, do I wish I could tell you that we participate in this significant upgrade cycle. But if I did, then I would have told you, we participate in more point-of-sale transactions in more countries than we did. So I think as that happens here in the United States, it has a far more profound impact for us depending upon how it plays out because of our install base. But across places like Europe because we are largely in the largest countries, it didn't have as much of an impact for us because of our geographic mix. That in part and parcel is our strategy to get better balance and participate in those upgrade cycles in emerging markets and developed markets.

Kartik Mehta - Northcoast Research

And then on the self-checkout business, is that business really becoming an international business? Or are there still opportunities in the U.S. that you are witnessing, and where you're seeing retailers order?

William R. Nuti

Yes. Growth continues in that portion of the business in the U.S. in grocery. And we still see greater density of penetration in the U.S., and you'll continue to see that. You'll also continue to see it move into different segments like drug and large-format drug. And the DIY segment continues to move forward aggressively. Same outside the U.S., and now you're seeing self-checkout go global, particularly in the international market, so places like Turkey, Korea, the Czech Republic, Thailand. We're seeing expansion of self-checkout to new markets.

John G. Bruno

And the footprint to Bill's point, whether it's petroleum or convenience, the conversations that we're able to have today based on the acquisition of Radiant and that customer base, as it things about self-service in labor-starved locations, where they only have one or 2 stores associates, has been tremendous. So it bodes very well for what the large big-box retailers have pushed for, which is a format change, smaller footprint, pedestals, self-checkout capabilities, those types of investment that we've made for Europe, as you mentioned, in particular in grocery both very well for the convenience market.

Peter A. Dorsman

And think about self-checkout as a family of products, so the number of variants has increased dramatically. So whereas historically, to Bill's point, we were selling it in food and drug and do-it-yourself kinds of environments, you're now getting it into smaller format stores. They're also getting into products like our convertible SCO, where you can use it as either a self-checkout device or an assisted device, depending upon peak period volume. So think of it as growth opportunities domestically, global and some of it is coming from multiple variants we've introduced.

William R. Nuti

This is the year, Kartik, where the combination of mobile point-of-sale or mobile in-aisle scanning and self-checkout comes to life. And the 2 variants that will see growth will be the traditional SCO unit where you will use it to tender at a station, and then a standalone, if you will, kiosk-based SCO, where you can tender using only credit card, not cash. And so the marriage of mobile and self-checkout comes to life this year in a big way.

Kartik Mehta - Northcoast Research

And then Bill, I just wanted to clarify a comment you made, you said order growth in Europe for ATM was down 11% in the fourth quarter. Is that specific countries in Western Europe? Or are you seeing that float off all across Western Europe?

William R. Nuti

No. It's very specific to the obvious countries in Europe that you would expect. Iberia, primarily Italy and to a lesser extent the U.K., but Eastern Europe is very strong for us. Even France is very strong for us. So we continue to see Eastern Europe be very strong and portions of Western Europe to be strong. But again flattish last year overall, and it'll be the same in '12, the same kind of mix in '12.

Operator

Our last question for the day will come from Zahid Siddique of Gabelli & Company.

Zahid Siddique - Gabelli & Company, Inc.

A couple of questions. The first one is on the kiosk business, where does the Dish Network fit in into the equation?

John G. Bruno

It does not. This deal is with Coinstar, Redbox and as we complete this transaction and we exit the owner operator part of the business, as such it would terminate our relationship and the branding relationship we have with Dish and Blockbuster.

Zahid Siddique - Gabelli & Company, Inc.

And any ongoing litigation would then be taken over by Redbox or I guess would be transferred over to Redbox?

John G. Bruno

No.

William R. Nuti

No, it doesn't exist. It's gone. It's over.

Zahid Siddique - Gabelli & Company, Inc.

Okay. And then a question on the Radiant or the Hospitality business, what kind of margins should we expect in 2012 relative to 2011?

William R. Nuti

Our goal is to hit 50 in that business next year. We think we can hit 50 gross margin, 50 in that business. And we're going to strive for a little bit higher.

Operator

We have no further questions.

William R. Nuti

Well, thank you. Let me remind everyone that in May we have Analyst Day coming up, and that Gavin Bell will give all of you the logistics for that meeting, and we hope to see you there. Thank you very much for attending today's call, and we'll see you again in April. Bye-bye.

Operator

Thank you for your participation on the conference call today. At this time, all parties may disconnect.

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