Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Gregg Swearingen - VP of IR

Bill Nuti - President & CEO

Pete Bocian - CFO & SVP

Analysts

Reik Read - Robert W. Baird & Company

Matt Summerville - KeyBanc Capital Markets

Richard Farmer - Merrill Lynch

Katie Huberty - Morgan Stanley

Gil Luria - Wedbush Morgan Securities

TRANSCRIPT SPONSOR
Wall Street Breakfast

NCR Corporation (NCR) Q1 2007 Earnings Call April 26, 2007 10:00 AM ET

Operator

Good morning. And thank you all for holding. At this time, I would like to inform you that your lines are on a listen-only mode until the question and answer segment of the call today. This call is being recorded. If you do have any objections, you may disconnect at this time.

I would now like to turn the call over to Gregg Swearingen, Vice President of Investor Relations. Thank you, sir. You may begin.

Gregg Swearingen

Good morning. And thanks for joining us for our 2007 first quarter earnings call. Bill Nuti, NCR's CEO will lead our conference call this morning. And after Bill's remarks, Pete Bocian, NCR's CFO, will discuss our Q1 financial performance. 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 our annual report to stockholders.

On today's call, we will also be discussing certain non-GAAP information such as free cash flow and results excluding the impact of pension and other non-operational items. Reconciliation's of non-GAAP financial results to a 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 also be available later today on NCR's website, which can be accessed at NCR.com. For those listening to the replay of this call, please keep in mind that the information discussed is as of April 26, 2007. 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.

Now, I would like to turn the call over to Bill.

Bill Nuti

Thank you, Gregg. Good morning. And thank you all for joining us as we discuss the first quarter results. We had a good start to the year as we drove 20% revenue growth in our ATM division, 10% revenue growth in Teradata and 4% revenue growth with continued margin expansion in our customer services business unit.

Overall, we generated 5% revenue growth and excluding pension expense and special charges related to our manufacturing realignment and Teradata spin-off, our NPOI margin was 8%. I'm especially encouraged by these results given the initiatives we are working on beyond our normal operating activities. We are making good progress on both the manufacturing realignment and the strategic separation of Teradata.

Before Pete reviews the financial results in greater detail, I will discuss the business unit results beginning with our Teradata Data Warehousing division. Teradata reported first quarter revenue of $358 million, which is a 10% increase from the first quarter of 2006. Operating income in the quarter was $65 million, a modest decline from the $67 million earned in Q1 2006.

Although, Teradata earned higher revenue in the first quarter of 2007, the year-over-year margin comparison was affected by increased investments in sales and demand creation resources, as well as an increased legal reserve related to a 2002 matter in China.

Additionally, in the first quarter of 2006, operating margin was benefited by a higher than typical mix of software. Despite the mixed results in the first quarter, we are maintaining our guidance for Teradata's growth and operating margin for 2007.

We had a good quarter in terms of adding new customers. Some of them included Philadelphia Park Casino, Compania de Telecommunications de El Salvador, NIB Bank in Pakistan and a few other accounts that wish to rename nameless but are ranked by Fortune Magazine to be amongst the world's largest banks, pharmaceutical companies, and software firms.

Overall, there was strong growth in the communications, media and entertainment, financial and travel and transportation verticals, which was tempered by a year-over-year decline in revenue from the retail vertical.

A few of our existing customers that expanded the size and scope of their data warehouses included communications companies such as AT&T, Vodafone, Telefonica de Espana, Kyivstar, Polkomtel. Financial institutions such as Charles Schwab and Company and Prodesco in Brazil. Additionally, China Post, eBay, the Limited brands, and the United States Air Force all upgraded their systems this quarter.

Moving on to the results for our financial service segment, revenues were up 20% to $312 million and operating income grew to $28 million from $13 million. Operating margin expanded to 9% in the quarter versus 5% in Q1 2006. Strong demand in both Eastern and Western Europe as well as in Asia offset an expected revenue decline in the Americas region.

In Europe, we saw growth in the developing Eastern European markets, while deposit automation continues to be deployed in Western Europe. The Asia Pacific region also saw strong growth due to the favorable timing of some large transactions. These are good results for the first quarter and exceeded our own expectations, especially given the manufacturing transition we have underway.

Now, I would like to give you an update on our manufacturing realignment. Our transition of ATM manufacturing from Dundee, Scotland to Budapest, Hungary and to some extent India and China is slightly ahead of schedule.

Additionally, our Budapest plant is now fully ramped. Over the next several months, we will see the cost associated with the Dundee facility decrease as we work toward completion of realigning the high volume manufacturing.

In the Americas, our transition to Selectron is proceeding as planned. We are working with Selectron to develop the transition plan. At this point, we are still producing all of our ATMs in the Americas. We anticipate that Selectron will be taking over the manufacturing operations in the third quarter.

Regarding Check 21, NCR now has several thousand installed units in the United States. Banks are pleased with the results of the deposit automation solutions they have deployed. Additionally, consumer acceptance is high. In fact, deposits on Check 21 enabled ATMs tend to be 20% to 50% higher than those on envelope enabled machines.

Moving on to retail, I am disappointed in the slow start to the year in our Retail Store Automation division. However, we have identified what needs to be done to return this business unit to growth and we are still encouraged by the future of retail self-service and the improving revenue mix.

In the quarter, Retail Store Automation reported revenue of $155 million down 10% from the first quarter of 2006. Although Retail Store Automation's revenue mix continues to improve with a higher mix of self-service technologies, the adverse timing of both traditional point-of-sale and self-service transactions resulted in lower revenue and profitability in the seasonally weak first quarter.

Operating loss of $10 million increased from a $7 million operating loss in the first quarter of 2006. We continue to expect self-service revenues to comprise about one-third of the segment's revenues in 2007 up from 27% in 2006.

On the flip side, Customer Services division had a very solid quarter. We generated revenue of $437 million of 4% revenue growth rate from the first quarter of 2006. As you know, revenue growth is a positive change not only for this business but for NCR's overall topline.

You will remember that over the last few years, we have intentionally decreased the size of this business to remove lower margin third-party business. It is encouraging to now focus on growth as well as our continued actions to improve profitability and efficiency. Operating margin for customer services improved to 6% in Q1 2007 versus 5% in the first quarter of 2006.

Operating income increased to $28 million compared to $20 million in Q1 2006 as operating income was aided by a more favorable revenue mix and continued emphasis on cost reduction. We are pleased with the ongoing improvement in Customer Services and we continue to be focused on revenue growth and improving operational activities to drive further progress.

I'll turn the call over to Pete to review our financial results. Pete.

Pete Bocian

Thanks, Bill. And good morning, everyone. Total revenue of $1.35 billion was up 5% year-on-year with about two points of benefit from foreign currency translation in the quarter. Adjusting for the two points of currency tailwind, revenue increased about 3%. We reported GAAP net income of $34 million or $0.19 per share, versus $0.22 per share in Q1 of 2006.

The comparison of GAAP earnings per share includes some non-operational items in both years. In Q1 2007, special charges related to our manufacturing restructuring and the Teradata spin-off amounted to $48 million in the quarter or $41 million after tax, which equates to $0.22 per share. I will discuss these items in more detail in a few minutes.

In Q1 2006, NCR included $9 million of customer services related early retirement expense in its GAAP results, which equated to $0.04 per share, normalizing both Q1 of '07 and '06, operationally we achieved EPS of $0.41 in Q1 of '07 versus $0.26 in Q1 of '06.

In the quarter we had pension expense of $11 million versus $44 million in Q1 of 2006. This reduction of pension expense was primarily driven by our decision to freeze our U.S. pension plan at the end of 2006 and by the $9 million special charge in the first quarter of 2006.

We still anticipate around $65 million for full year 2007 pension expense with some pension settlement type expenses expected in the second half of the year. For the remainder of my comments, I'll exclude the impact of the 2007 special charges and pension expense from NCR's results.

To analyze NCR's operational performance without the effect of the special charges and pension expense, please see the supplemental financial schedule on the investor page of our website that reconciles GAAP to non-GAAP results. Our Q1 gross margin was 29.4%, a slight decline from the 29.7% we reported in the first quarter of 2006.

NCR's expenses were $295 million in Q1 of '07, a slight increase from the $290 million incurred in the first quarter of 2006 driven by FX movement and $9 million of incremental demand creation expenditures in Teradata.

Total company non-pension operating income, or NPOI, was $101 million or 8% of revenue, this compares to $91 million or 7% of revenue in last year's Q1. Below the operating income line, we reported other income of $3 million, the same as in Q1 of 2006.

Our tax rate in Q1 was 24% as compared to 18% in Q1 of 2006. The year-over-year difference in tax rates was driven by profit and losses by country in the seasonally weak first quarter.

Turning to the balance sheet, we now have $1.08 billion of cash, or $774 million of net cash, after adjusting for $306 million of long-term debt. NCR did not repurchase shares in the first quarter and likewise, the company does not intend to repurchase shares through the anticipated strategic separation of Teradata from NCR. We want to maintain flexibility, as it's important that we maintain a strong capital structure for each company.

Moving to the cash flow statement. In Q1, NCR generated $151 million of cash from operating activities versus generating $12 million in Q1 of 2006. After using $53 million for capital expenditures, we generated $98 million of free cash flow in Q1 of '07, which compares to using $23 million of free cash flow in Q1 of '06.

The significant improvement was driven by a recovery of accounts receivables, from our strong fourth quarter of 2006, as well as better working capital management in Q1. We still expect to generate about $425 million in free cash flow in 2007, excluding special items. We calculate free cash flow, as cash flow from operations less capital expenditures for property, plants and equipment, and additions to capitalized software.

Now let me provide more color on the special charges included in NCR's Q1 results. In the first quarter of 2007, we incurred $46 million of severance and employee related benefits related to our manufacturing realignment.

As many of you know, we utilize FAS 112 for accounting for severance activity, although NCR will continue to use FAS 112 the Q1 severance charge related to the manufacturing realignment was significant enough to warrant our taking a special charge for the anticipated cost of involuntary terminations and other employee costs. We expect NCR's FAS 112 expense for 2007, excluding the special charge, to be approximately $77 million.

Additionally, we booked about $2 million of legal and other costs associated with the anticipated Spin-off of Teradata. There will be additional separation related charges with the majority of these one-time costs occurring in the second and third quarters, with the total expected to be more than $50 million.

Moving on to our guidance for full year 2007, we're increasing our guidance slightly for the full year for both revenue and EPS based on a good first quarter, a solid backlog of orders and overall activity.

Total revenue growth is now expected to be 3% to 4% in 2007. Teradata Data Warehouse revenue is expected to be up 7% to 9%. We've increased our expectation for Financial Self-Service revenue growth to 3% to 4%, and we're lowering our target for Retail Store Automation revenue to 4% to 5%. However, the revenue mix should continue to improve with more self-service content.

And we're increasing our Customer Services revenue growth to 2% to 3%. Including the continued investments we're are making to position NCR for future growth, our NPOI margin expectations for the year are Teradata Data Warehousing in the 22% to 23% range, Financial Self-Service around 14%.

Retail Store Automation is expected to deliver 5%, and we anticipate the NPOI margin for customer services to be 6%, excluding the special charges related to the manufacturing realignment and the costs related to the Teradata Spin-off, we expect non-GAAP EPS of $2.50 to $2.60 per share. I know that many of you have questions regarding the details of the proposed Spin-off of the Teradata business.

Net net, things are on track, and I can provide some color on a few of the details this morning. At the end of March, we applied to the IRS for a private letter ruling that the distribution qualifies as a tax-free reorganization for U.S. federal income tax purposes.

We plan on making the initial filing of the Form 10, which provides information regarding the Spin-off of Teradata with the FCC later this quarter. And we continue to expect the Spin-off to be completed in the third quarter of 2007. As mentioned earlier, one time costs associated with the spin are currently expected to be at least $50 million.

Pension should largely be an NCR item. Teradata will only have pension expense for its active employees in the international markets that still have open pension plans. The Fox River matter is expected to remain with NCR. Information on the capital structures will be provided in our Form 10 filings with the SEC.

We do envision that since the liabilities just discussed as well as the existing debt will remain with NCR, the majority of the cash will also remain with NCR, while I can't share exact estimates of the future tax rates for each company, Teradata should have a higher tax rate than the new NCR given the higher U.S. percentage of the business.

2007 and long-term operating margin targets for Teradata and the NCR business units will be provided by each management team once they gain a better idea of the incremental infrastructure costs, and how those costs will be allocated between Teradata and the NCR business units. These operating margin targets will also include the expected growth opportunities driven by the separation.

Before, I turn the call back over to Bill, I'd like to make a few closing comments. It's been my privilege to be the CFO of NCR for the past three years. A lot of hard work from a lot of good people in NCR have contributed to NCR's success. It's also been good getting to know many of you, both in the analyst and investor community, during my time as NCR's CFO. I wish you all the best.

Now let me turn the call back over to Bill.

Bill Nuti

Thank you, Pete. And before moving on, I'd like to personally thank you, Pete, for your years of leadership and significant contributions to NCR's success. You have been a tremendous resource for the company and for me, and I want to wish you the best of luck in Seattle.

To sum up, we are off to a good start in 2007. And we are committed to completing our manufacturing realignment in an efficient and fair manner. And to accomplishing a successful spin-off of Teradata later this year.

However, regardless of whether we are one company or two. Our initiatives for success remain consistent. First, we want to drive profitable growth in the self-service and enterprise analytics markets; next, we must strengthen our competitive position by improving our cost structure. These improvements will largely be driven through the phase 2 operational improvements that we have previously discussed. And by continuing our focus on maintaining a lean organization.

And finally, we are committed to being a customer-focused company that continues to align our people and resources, to provide our customers with the solutions and services they demand. Now as it relates to the timeline for the strategic separation, we will most likely make our initial filing of Teradata's Form-10 in May.

However, as is typically the case for these types of filings, Teradata's filing will then be amended with relevant information in the following weeks. As we move toward the completion of the separation. As we get closer to the Teradata spin-off, we will be hitting the road to help you gain a better understanding of how each company will look in terms of profitability and capital structure.

However, until we file our amendments to the Form-10. We will not have much in the way of new information; earlier this month we submitted a private letter-ruling request with the IRS requesting tax free treatment for the spin. And we expect to hear back from them in a timely fashion. Before we move on to the Q&A.

Let me give you an update on our CFO search; we commenced the CFO search in February in conjunction with the upcoming strategic separation of Teradata from NCR, we have simply expanded this search to include CFOs for both companies. The interest has been excellent, and we are considering both internal and external candidates.

Now, let me turn the call over to the operator for Q&A. Operator?

Questions-and-Answer Session

Operator

(Operator Instructions) Reik Read, you may ask your question, and please state your company name.

Reik Read - Robert W. Baird & Company

Hello.

Bill Nuti

Go ahead Reik. We can hear you.

Reik Read - Robert W. Baird & Company

Can you guys talk a little bit about the retail space? Bill you talked about the weakness you have seen there. It seems like it is an incremental step function down, and can you break it up between Teradata, point-of-sale, and the self-service area?

Bill Nuti

Sure I'll hit point-of-sale first and then Teradata; on the point-of-sale side. We typically in the first quarter are rolling out several large assisted point-of-sale opportunities with major customers. And we simply didn't have them in the first quarter.

We also were anticipating one large customer to close in Q4, and begin rollouts in Q1; we did end up closing that opportunity in Q1. It was with the Federated Department Store group for an extremely large rollout of point-of-sale. We'll begin that now in Q2 versus Q1, so the timing of major rollouts did impact us negatively in Q1.

On the Teradata side, it is simply a difficult compare as you well know; Teradata's retail business has traditionally been an engine of growth for us and a major driver. As we have expanded into new industries and have had success into new industries as well. It is certainly going to be a lower percentage of the business.

But we had some one time large transactions in the first quarter of last year that simply didn't repeat themselves in the first quarter of this year, so I would say it is a bit of a lumpiness that we saw that impacted us in the Teradata space. I don't know Pete, if you have any other...

Pete Bocian

No, I think the retail the backlog is very strong, that said, the move out of when the rollout started caused us to be a little more cautious on the volume potential for the year. Self-service activity in retail is strong and. I would call it, held its own in the first quarter. The decline was all in the traditional point-of-sale space, that's really the way I look at it.

Reik Read - Robert W. Baird & Company

So, it sounds like there was customer specific issues that you are citing there. But you guys have also, you lowered the guidance a little bit and Bill in your commentary. You identified some key issues. Can you talk a little about more broadly is there something in the marketplace. Or is there something that NCR has to do specifically to get that moving?

Bill Nuti

Yeah. I just to the last point, I think we are, as we discussed before as well, we certainly are working towards going down market more effectively in the retail space beyond the tier one customer base, certainly when a smaller number of your customers drives a great majority of your revenue. When you have one or two deals potentially fall out in a given quarter. You can end up where we did in Q1 on the assisted side.

As Pete mentioned, however we continue to see good traction in the self-service portion of the retail business, in terms of anything endemic in the space. I don't think that that's the case today. And we continue to keep a close eye on it.

Reik Read - Robert W. Baird & Company

Okay, and then just on the Teradata side. Can you talk about the factors behind the mix changes there and the expectations for mix, and how that might affect margins in the next couple of quarters?

Pete Bocian

What we tried to do in release was sequence, call it the relative size of the three factors; I think the first data point that we probably didn't talk about a lot last year was when we had a very low revenue quarter in Data Warehouse last year. We actually had a very strong mix; and to get above 20% margins with $326 million of revenue was a very, very strong mix.

So when you look at the number 1 driver. It was really the mix in the quarter; we expect that there will be other quarters that have a more favorable mix. Net, net the guidance for the year didn't change. Then the second one is, we had already baked into the plan the continued investment in demand creation. And I quantified that in the script as kind of a $9 million number.

And then the smaller piece was the legal reserve for a 2002 item, which was much smaller; so look at that as the kind of a three factors that impacted Q1; the mix we fully expect to normalize over time. Both from a software content and a relative hardware mix.

The demand creation was baked into the plan of record, and the initial guidance and then the smaller China component. We expect to recover from.

Reik Read - Robert W. Baird & Company

So, I guess what I am hearing you say Pete, is that is no real, we shouldn't expect any real change in mix from here. It's reasonably stable and then with respect to investments. Maybe a similar story is that you are not going to see a step function increase.

It is continued investment that you planned on for those areas, is that correct and then also. Can you just tell us what the China legal issue is, and how quickly that can be put to bed?

Pete Bocian

Yeah. I think the way to look at it is the mix, large deals drive different mix in different quarters, we don't expect that to be a full year impact. And I reinforce the guidance around the NPOI targets; the demand creation is upticking, but it is the plan of record to continue to invest.

And then this is just a 2002 item where we had to take, we had an initial reserve and we had to adjust the reserve. So it's not material enough to go into any more detail than that.

Reik Read - Robert W. Baird & Company

Okay, great, thank you, guys.

Pete Bocian

Thanks, Reik.

Operator

Matt Summerville. You may ask your question, and please state your company name.

Matt Summerville - KeyBanc Capital Markets

Hey. It's Matt with Key, in terms of the duplicative costs you have with Scotland running and Budapest running. When do you think those costs come to an end, and Bill? Could you rank order or at least give us a sense of how the downward trajectory looks. And it would obviously be very helpful if you could quantify what that cost was in the first quarter.

Bill Nuti

As you mentioned, in the first quarter we had two factories full-out up and running as we were making this transition, and managing our way through it; I do expect, that we will get some slight benefit in Q2. As in Q2, we are now more so moving the headcount out and the transition is in midstream, most of the benefit.

Matt, will come in Qs 3 and 4 in this year, and I don't think we've provided any numbers today. But we are comfortable that in Qs 3 and 4 we should see the vast majority of that benefit from these most recent actions we took in January.

Matt Summerville - KeyBanc Capital Markets

Okay, and then based on what your, again just sticking with ATMs based on what your customers are telling you. Can you sort of talk about Europe and Asia how orders, backlog trends are there, and with Europe both Western and Eastern?

And then in the U.S., how you see the trajectory of Check 21 as well? What are you seeing among big banks, regionals, etcetera?

Bill Nuti

Yeah. Very strong International both order book and revenue, it continued in Q1. As we, in the Americas, the Americas continue to be weak. As we go forward, and by the way on the Americas side, when you look at the weakness in Q1 as well. I would cite that similar to retail but only in the financial sense, we had several deployments underway with large customers to roll out what was in the backlog in the quarter.

And so it did impact us to some extent this lack of, well, a timing issue in Q1 in the Americas. That being said as we go forward, we are looking towards deposit automation to continue to mature. We have several thousand units in the United States today that are Check 21, I should say intelligent deposit enabled.

Several pilots are now moving deeply into production, I don't expect there to be a material impact on the company in the Americas in 2007. I still expect however, that we'll see consistent maturation of these pilots and other customers moving in the direction of deposit automation. And I still continue to think 2008, will be a stronger year with respect to deposit automation upgrades as well as 2009.

Matt Summerville - KeyBanc Capital Markets

Okay, and then, you mentioned on Customer Services, kind of the two keys are continuing to get the mix of business right, do you see that revenue trend on the ATM line continuing at that sort of rate, one? And then going forward what are the other cost opportunities in that business?

Bill Nuti

Yes. So, just a couple of comments on the success we have had in services and in our annuity file value. We've, over the last few years we have seen a rate of growth decline in that space. So, we are playing catch up in many regards, so the year over year compares are favorable.

As we move forward, I do expect us to continue to work hard to drive greater annuity success and I won't give you a forecast right now, we don't have that crystal ball. But we are working hard to drive share on the services side.

And frankly our services delivery is improving, so the quality of what we deliver to customers is improving. And therefore, I think we have a good opportunity to continue with some of the successes we have, but we don't have a forecast for you now Matt.

Pete Bocian

Yeah, Matt, the only thing I would add is in the 2 to 3% revised guidance clearly the NCR content is going to lead the rest of the revenue portfolio. And Self-Service is going to lead all the NCR content.

So without saying it's going to be like the 10%. We just did its going to be the best performer based on, certainly getting more volume helps like we did in Q1, but think of it that way that's got the potential to grow the best. And then we have upticked the year for customer services, a piece of it related to the NCR content.

Matt Summerville - KeyBanc Capital Markets

Okay. And then, just lastly on Teradata, I assume, was that $9 million all Teradata related that net increase in demand creation?

Bill Nuti

Yes, it was Matt.

Matt Summerville - KeyBanc Capital Markets

And then is that kind of the rate you expect on a quarterly basis. So, should we be thinking about somewhere in the neighborhood of $35 to $40 million of net extra spend this year in that division versus 2006?

Pete Bocian

Yeah, we are continuing to invest it's baked into the Op margins. We continue to get strong gross margins from the business, and we believe we can balance the revenue growth with the gross margin potential and deliver the 22, 23 and still invest for the future. And $9 million is what we did in Q1.

Matt Summerville - KeyBanc Capital Markets

Okay, that's all I have. Congratulations, Pete.

Pete Bocian

Thank you Matt.

Operator

Richard Farmer you may ask your question. And please state your company name.

Richard Farmer - Merrill Lynch

Richard Farmer, Merrill Lynch. Just a few questions first, a follow up on the Teradata pipeline and the enterprise spending environment. I think you indicated that there wasn't really a weakness in enterprise demand like some of the other companies like IBM and Sun talked about in March. And this was more of a kind of customer-specific, Teradata-specific pipeline trend that got you to your revenue in the March quarter, but could I just clarify that that's the correct interpretation?

Bill Nuti

Yes, Richard, the activity level in Teradata also continues to improve, so we're, I'm encouraged with what we call our funnel. And we've described in the past on this call as our funnel, which is a review of future potential opportunity that has continued to improve.

We had good traction in the first quarter with regard to new customer wins, and so, I think looking out both Pete and I remain relatively encouraged with the pipeline, sales activity and potential new customer wins for the rest of the year.

Pete Bocian

And Richard, I would say the 10% growth we had in the quarter was pretty much in line, so there weren't a lot of puts and takes around the revenue story in total for Teradata in Q1.

Bill Nuti

Yeah. And on the macro environment, just to answer this question. Richard, on the macro environment in terms of the U.S., I'm out of the forecast business on the economy. So, I'm going to leave that to those economists out there in the market.

Richard Farmer - Merrill Lynch

Okay, Thanks. Switching to the ATM business, I am just trying to understand, obviously very strong growth 20% in the quarter. The revenue guidance that you provided for the year is only slightly higher and why wouldn't that strengthen the revenue continue into the full year?

Bill Nuti

Yeah, Richard, I think it's too early right now. We did have favorable timing of large transactions in the International markets come in and play, in that Q1 success. And I agree with strong revenue growth, just too early right now, to call the ball for the rest of the year.

Richard Farmer - Merrill Lynch

Okay, thanks. And Pete you made some comments on capital structure, I wonder if you might elaborate a little, you talked about no share repurchase and maintaining flexibility for the capital structure for each of the entities.

Would you consider a recapitalization similar to I guess the debt finance share buyback that IBM announced? Or could you elaborate a little on your plans for capital structure?

Bill Nuti

Yeah, I will take that Richard. First of all to maintain maximum flexibility as we go through the separation process. We really are focused on building two strong balance sheets and two strong capital structures for these two new companies.

So, we are likely to maintain a more conservative posture until the spin-off. However, that being said, everything is really on the table subsequent to the spin in terms of what these two companies need to do to achieve the very best shareholder value.

And we are really working through those strategic plans as we speak. But, would we consider a recap? Yes. But there are a variety of other things that we would consider as well to drive shareholder value.

Richard Farmer - Merrill Lynch

Okay, one final one, please. Just on ATM pricing trends and your expectations there going forward, any comments you may provide? Thank you.

Bill Nuti

Relative pricing stability would be my macro comment around the world. I would say we did see some more aggressiveness in the Americas market over the last few months, but nothing of substance.

And certainly the internationally emerging markets continue to be more price-aggressive, the India's, the China's, and to some extent the Eastern Europe's.

Pete Bocian

Yeah, Richard, the way I look at it as less of an in-market year on year pricing. It's much more of a mix. So clearly as we talked about before, there are certain markets where the profit potential and let's call it the overall functionality of the ATM can give us a better opportunity to get higher margins.

So, I would call it more of a mix, which is why we talked about the Americas and other markets, more than it is a year on year pricing aggressiveness for that market.

Richard Farmer - Merrill Lynch

Thanks very much.

Pete Bocian

Thank you.

Operator

Katie Huberty, you may ask your question and please state your company name.

Katie Huberty - Morgan Stanley

Katie Huberty from Morgan Stanley. Bill, you mentioned deposit automation uptake as a factor in Western Europe's strength. Are we actually seeing a faster adoption rate in Europe versus the U.S. or is that strength just relative to expectations?

Bill Nuti

No, we have seen a faster adoption with regard to deposit automation in Europe. Now it is different than Check 21 in the United States. It is important that you understand the difference by country there.

I won't get into the specifics except to say actually, Katie, our largest deposit automation customer in the world is in Europe and they have been further ahead. The implementation of which is different by country and slightly different or very different in most circumstances to Check 21 in the United States.

Katie Huberty - Morgan Stanley

Okay. And then just quickly on Teradata, could we see the revenue mix start to shift back towards software as soon as the June quarter? Is that something you are just looking for over the next two or three quarters?

Pete Bocian

Yeah, I think it is just different deals have different mix depending on where the customer is and what additional slices of capacity they need. So, we had a great mix in 2006 first quarter.

We had a less favorable mix in first quarter of 2007. I expect it to normalize through the year and not be a full year factor as we go forward.

Bill Nuti

Katie, this is Bill. The way I would view it is more of a quarterly thing. There's really nothing new here. There's no dynamic that should change or affect the mix from normalizing throughout the rest of the year.

Katie Huberty - Morgan Stanley

Great, thanks.

Operator

Gil Luria, you may ask your question, and please state your company name.

Gil Luria - Wedbush Morgan Securities

Wedbush. Just one question today. When you talk about handing off production to Selectron in the U.S., are you referring in the first stage to them taking over production in your existing plants? Or what is the timeline for them moving production to their own plant?

Bill Nuti

Yeah. We bit to answer the last question first, because it is an important precursor. These are their plants and they are already up and running. We have been working with them for several months now to get them prepared to kickoff.

And really what we are looking at, Gil, is a transition that is starting in Q3. We're being very careful about our transition here, despite the fact that they are experts in manufacturing.

In one instance, for one product line, which has already been launched through Selectron in the company and not in the Financial Services based FastLanes. We've also have experienced extremely high quality off of the end of the line and some additional cost savings.

So we have been encouraged with our FastLane product line going through Selectron. We continue to work with them on the ATM side. The transition starts in Q3.

Gil Luria - Wedbush Morgan Securities

Thank you.

Operator

We have time for one more question. Matt Summerville. You may ask your question and please state your company name.

Matt Summerville - KeyBanc Capital Markets

And just to follow up here on, Pete, I think it was you that mentioned you anticipate $50 million of expenses related to the separation. Can you talk about what that encompasses?

Pete Bocian

Yeah, those are characterized as one time costs associated with developing, executing the transaction of creating two public companies. That would include investment banker costs, external counsel.

We have some expertise from organizations that have been involved in spins before as far as developing our shared services, G&A, blueprint. Setting up tax entities in each country has a cost to it. We have defined where Teradata is going to have a legal entity going forward.

Then we've got to go execute establishing those legal entities. So it's really the tax investment banking, legal council, and some element of internal knowledge of how to do, what to look for and how to effectively execute a spin-off.

Matt Summerville - KeyBanc Capital Markets

Okay. Then assuming the companies, which are together for the full year for my model, what is the depreciation, amortization, and CapEx?

Pete Bocian

Yeah, just assuming starting the year and finishing the year in the same state, the expenditures is $175 million.

Matt Summerville - KeyBanc Capital Markets

Okay.

Pete Bocian

As you know, that is PP&E and capitalized software, no service parts in that number. And the D&A number is $165 million.

Matt Summerville - KeyBanc Capital Markets

Okay. Thank you.

Bill Nuti

Thank you, Matt and I wanted to just take an opportunity to thank everybody for being, I am sorry we had allotted less time for this particular call. It was a little bit short. But I appreciate you all being on the call and we will look forward to speaking to you again in July.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: NCR Q1 2007 Earnings Call Transcript
This Transcript
All Transcripts