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NCR Corporation (NYSE:NCR)

Q3 2007 Earnings Call

October 31, 2007 10:00 a.m. ET

Executives

Bill Nuti - President, CEO and Director

Bob Fishman - Interim CFO

Analysts

Matt Summerville - KeyBanc Capital Markets

Katy Huberty – Morgan Stanley

Kartik Mehta - FTN Midwest

Reik Read - Robert W. Baird & Company

Gil Luria - Wedbush Securities

Jeff Anderson – Shareholder Management

Presentation

Operator

(Operator Instructions) Mr. Malarky, you may begin.

Tom Malarky

Good morning and thanks for joining us for our 2007 third quarter earnings call. Bill Nuti, NCR’s Chairman and CEO, will lead our conference call this morning. After Bill’s opening remarks, Bob Fishman, NCR’s Interim CFO, will provide comments on NCR’s total company financial results and our guidance for the full year.

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 financial information, such as free cash flow and results excluding the impact of pension and other non-operational items. Reconciliation of non-GAAP financial results to our reported and forecasted GAAP results, and other information concerning such measures, are included in our earnings release and are also available on the investor page of NCR’s website.

A replay of this conference call will be available later today at NCR.com. For those of you listening to the replay of this call, please keep in mind that the information discussed is as of October 31st, 2007, and NCR assumes no obligation to update or revise the information included in the conference call, whether as a result of new information or future results.

I’ll now turn the call over to Bill.

Bill Nuti

Thank you, Tom, and good morning. Thank you all of us for joining us. Overall I’m very pleased with our third quarter in terms of both revenue and earnings growth. The third quarter was especially busy for us considering all of the effort put into the successful separation of Teradata from NCR. I would like to congratulate Mike Koehler and his team on impressive Q3 business results and wish the entire Teradata team the best as they move forward as an independent company.

For the remainder of my comments I will be comparing NCR’s results from continuing operations versus the prior year. Net/net, it’s an apples to apples comparison. We have several highlights in the quarter, including: financial self-service with 17% revenue growth; retail store automation, which grew 27%; and customer services, which delivered its best quarter ever in terms of revenue growth and NPOI. In fact, each of our three core businesses delivered NPOI margin expansion in the quarter.

Clearly this was a good quarter for NCR and I would like to share with you some of the details for each of our major business lines. Our financial self-service team had a good quarter delivering revenue of $407 million, which was 17% higher than ATM revenues in the third quarter of 2006. Revenue growth in this segment was aided by four points of currency translation and favourable timing of certain transactions.

We delivered strong growth in the Asia-Pacific and EMEA regions, however, the US remains a challenging market.

Q3 non-pension operating income was $56 million, which favourably compared to $43 million in Q3 2006. Operating margin improved to 14% in the third quarter of 2007 from 12% in Q3 2006.

Margin improvement in the third quarter was helped substantially by a favourable geographic mix with strong performance year over year in our western Europe and China markets. However, on a year-to-date basis we have experienced some unfavourable geographic mix shifts in our ATM business. This trend is expected to continue into the fourth quarter where we’ll see a higher mix of our volume coming from major rollouts in some of our more price sensitive markets. This trends, combined with an unplanned but conscious increase in R&D and sales investments will apply some pressure on our full-year margin guidance.

In Europe our manufacturing restructuring plan remains on track. The majority of ATM production for this region is now being manufactured in Budapest. Already this year, 600 jobs have been created at our Budapest facility and we plan to continue to grow there by adding an additional 150 employees by the end of 2007.

In the Americas our outsourcing initiative with Selectron has gone as planned. We are now in full production at Selectron and year-to-date Selectron has shipped over 2000 ATMs and well over 5000 Fast Lanes.

In the US we are now seeing a larger number of financial institutions begin to deploy Cheque 21 capable ATMs or start the RFP process to determine their future providers. Current intelligent deposit machines represent only a small portion of their overall ATM fleets today. However, we feel that this dynamic is set to change as they move from imaging pilots to a broader rollout during the next two years.

Now let me turn to retail store automation. After a slow start to 2007 we managed to drive significant revenue growth in the third quarter as we saw strong 25+% growth for both our self-service and our traditional point-of-sale solutions. Our larger than expected tradition point-of-sale growth was aided by favourable timing of large transactions that were won in prior periods.

In the quarter, retail store automation revenue of $278 million was 27% greater than the $219 million of revenue achieved in Q3 2006. NPOI of $20 million was $9 million more than the $11 million of retail store automation NPOI in Q3 2006. And the margin improved to 7%. Margin expansion was driven by volume growth and an increased mix of revenues from self-service solutions offset by some pricing pressure and increased investments in sales, marketing, and research and development related to our self-service initiatives.

As we mentioned in prior quarters, we won several large orders this year for our retail solutions. In the third quarter we were able to recognize some of the benefit of those orders. Additionally, we have had success in garnering business from many blue-chip customers around the globe. Specifically, we won business at Target, Safeway, and 7-Eleven in the Americas. In EMEA, Sainsburys and Asda were among our wins. And in Asia-Pacific Japan, HPCL, Malaysia Post, and Fujitaka all decided to implement NCR solutions. We still expect approximately one-third of our retail store automations 2007 revenues to come from the self-service category.

Our customer services team continues to execute their multi-year profit improvement plan and delivered very solid results in the quarter. The business delivered $34 million of operating income, which compared to $27 million in Q3 of 2006. The profit improvement was primarily due to higher revenues and productivity improvements. Customer services revenue was up 9% lead by 14% growth in ATM maintenance revenues as we have continued to have success in winning back service contracts for NCR solutions that we had not secured in prior periods.

Over the last several years we have seen an improvement in our services attached rates for NCR advocated solutions. Additionally, we have been successful in expanding our higher value service offers in our base. For example, in the third quarter we signed a seven-year, $100 million-plus deal with National Australia Bank. This deal includes over 1,300 ATMs and a comprehensive managed services contract that covers a wide array of installation services, hardware and software support, first and second line maintenance, incident management, help desk support, and more. NCR is uniquely positioned to execute on these kind of maintenance and managed services offers and we look forward to working with NAB for many years to come.

While we are pleased with the continued improvement our customer services team is making, we still have a lot of work to do. During the quarter we began a realignment initiative mostly centered around our customer services division in Japan. In fact, we took a $27 million charge in the quarter primarily related to severance and expect these actions to deliver an annualized $10 to $12 million of cost savings starting in 2008.

Now let me turn the call over to Bob Fishman, who will discuss our financial results in greater detail. Bob.

Bob Fishman

Thanks, Bill, and good morning. NCR’s total revenue from continuing operations of $1.3 billion grew 12% versus Q3 of last year. This includes a 3% benefit from currency translation. We reported GAAP net income of $33 million or $0.18 per share from continuing ops. This compares with $39 million or $0.21 per share from continuing operations in Q3 2006.

NCR’s continuing operations did have some special items in the quarter. First, as Bill just mentioned, we took a $27 million charge primarily related to the realignment of our Japanese customer services business. Second, there were $15 million of spin related expenses. And lastly, we had $7 million related to our manufacturing realignment. The net after-tax result was $39 million of special charges hitting our PNL or approximately $0.21 per share. Excluding these items, non-GAAP EPS from continuing operations was $0.39 per share, up 86% from $0.21 in Q3 2006.

We have pension expense of $12 million from continuing operations in the quarter which compared to $27 million in the third quarter of 2006 from continuing ops.

Analyze NCR’s operational performance without the effect of the special items and pension expense please see the supplemental financial schedule on the investor page of our website. That reconciles GAAP to non-GAAP results.

For the remainder of my comments during today’s call I will exclude the impact of the special items and pension expense.

Our Q3 gross margin was 23.1% of 60 basis points from the 22.5% in the third quarter of 2006. This was driven by improvements in financial self-service and customer services.

NCR’s expenses were up $14 million versus Q3 of last year, in large part due to increased expenditures in R&D in our financial, self-service, and retail store automation division.

Total company non-pension operating income from continuing operations of $99 million increased 32% from Q3 ’06. NPOI margin was 8% of revenue this quarter.

Below the operating income line other income of $12 million favourably compared to $2 million of other income in Q3 of ’06. This increase was primarily driven by higher levels of interest income.

The effective tax rate in the third quarter was 34%. This tax rate was higher than expected due to our realignment activities in Japan, which increased the effective tax rate by six percentage points. The effective tax rate excluding special items for the full year is expected to be 25%.

Turning now to the balance sheet. We ended the quarter with approximately $1 billion of cash. Our short and long term debt remains at $307 million.

During the quarter we did not repurchase any shares. As we previously announced, we were not repurchasing shares prior to the completion of the Teradata spinoff. However, we expect to resume our share repurchase activity later in Q4. That said, today we now have $583 million of board authorization available for future share repurchases. This includes $264 million of funds previously authorized by the board, an additional $215 million authorized today by the board of directors, and $69 million related to an anti-dilution program. We plan on pursuing a systematic approach to buying back shares during the next two years under this authorization.

Terms of option activity, approximately 179,000 options were exercised in the quarter.

Moving to the cash flow statement. Please keep in mind once again that these numbers only include continuing operations. In the third quarter, NCR generated $65 million of cash from operating activities versus generating $91 million in Q3 of ’06. After using $25 million for capital expenditures we generated $40 million free cash flow, which compares to $57 million of free cash flow in Q3 of last year. We had $10 million of cash payments relating to the manufacturing realignment that impacted the year-over-year comparison for the quarter.

Year to date, we’ve generated $92 million of cash from our operations versus $75 million in the first three quarters of 2006. After $78 million of capex, we generated $14 million of free cash flow in the first three quarters of 2007, which favourably compared to $11 million of cash use in the same time period in ’06. The year-to-date 2007 amounts for cash from operations and free cash flow include $24 million of cash payments related to the manufacturing realignment.

NCR defines free cash flow as cash flow from operations less capital expenditures for property, plant, and equipment, and additions to capitalized software. Year to date we have experienced some challenges regarding working capital. A portion of the increase can be explained by higher inventory levels necessitated by our revenue growth across our core BUs. Our manufacturing realignment has resulted in some temporary redundancy and FX movements have impacted our working capital position. Regardless of these items, we believe we can execute better and there is room for improvement.

Depreciation is also going to be lower as a result of the spin. We now expect about $110 million of depreciation from continuing operations in 2007 and over time we do expect capex and depreciation to run at a one-to-one ratio.

Now I would like to update our full-year 2007 guidance. We view total company revenue growth, which no longer includes Teradata, to be 5% to 6%. Due to a strong first nine months of the year we are increasing our expectation for financial self-service revenue growth from 5% to 7% to 9% to 11%. Retail store automation is now expected to grow revenue by 7% to 8% versus our prior guidance of 4% to 5%. And finally, we expect customer services revenue to be up 4% to 5% versus our prior guidance of 3% to 4% revenue growth.

As it relates to 2007 non-pension operating margins, we believe that retail store operation will have 5% margins and customer services will have 6% NPOI margins. Financial self-service will have 12% to 13% NPOI margins in 2007. As previously mentioned, a reduction in our ATM margins is driven by an unfavourable mix of geographic revenues in the fourth quarter and increased investment primarily R&D and sales.

We have been providing pension expense guidance for 2007 of $65 million and that number included Teradata. NCR now expects pension expense from continuing operations to be around $40 million for 2007.

The reduction in pension expense guidance is driven by several items, but the major item was a re-measurement of our pension assumption that was necessitated by the spin. One of the major changes from our original set of assumptions was a rising yield curve. This lead to a higher discount rate, which in turn helped to lower our 2007 pension expense guidance.

Including $0.45 of special charges associated with the manufacturing realignment, the second quarter tax adjustment, the restructuring of our Japanese customer services business, a portion of spinoff expenses that benefited NCR, and the Fox River matter, we expect full-year 2007 GAAP EPS of $0.75 to $0.80 per share. Excluding these items, we are increasing our prior non-GAAP earnings guidance by $0.05 to $1.20 to $1.25 per share in 2007.

Now I’d like to turn the call back over to Bill for some closing comments.

Bill Nuti

Thank you, Bob. With the spinoff complete we can sharpen our focus on the implementation of NCR’s long-term vision and business strategy. Essentially we have three key levers to improve shareholder value. They are: one, profitable revenue growth; two, building a sustainable cost structure and productivity growth; and three, capital structures strategy.

Profitable revenue growth is about the implementation of our business strategy. Building a sustainable cost structure and increasing productivity requires us to continue our initiatives to reduce our cost of goods sold while getting more focused on increasing productivity in every function. And capital structure strategy is about optimizing return on capital while funding well thought out strategic decisions.

As it relates to our go-forward strategy, NCR has for many years been the leader in providing solutions to financial and retail businesses worldwide that optimize the way in which they interact with their customers. That will not change.

Whether our success was drive by traditional point-of-sales solutions, ATMs, self-service kiosks, or our newer internet or mobility based self-service software solutions, we will continue to innovate and lead as we help our clients in our core industry segments interact with their customers today and tomorrow.

However, our market leadership and core businesses hold out the opportunity to achieve profitable revenue growth in the future. We have the opportunity to leverage our strong roots in the retail and financial industries by increasing our market share and wallet share in those industries while taking NCR’s core self-service solutions into other industry segments. For example, NCR has opportunities to grow by tapping into markets like travel and entertainment, hospitality and gaming, health care, and public sector. These opportunities are also global in scope as the use of self-service technology is a world-wide phenomenon.

Meanwhile, we will continue to remain focused on building a lasting and sustainable cost structure that is intended to drive operating leverage and extend our competitive advantage.

Finally, we can improve our capital structure. One aspect of improving our capital structure is our commitment to our just approved share repurchase program. As Bob mentioned to you, we now have $583 million with which we can systemically buy back our shares during the next few years. The buy-back can commence in early December, after the analyst day.

The reason why we’re waiting to buy back shares until analyst day is simple. During our analyst day on December the 6th we will provide you with some long-term guidance for NCR. As such, from a governance standpoint, it is prudent to wait until then to resume our share buy-back.

Regarding some other capital structure items, currently we do not have plans to start paying a dividend and we believe that for now our balance sheet has an appropriate amount of debt.

Before we open up the call to questions I want to let you know that I look forward to discussing the NCR business strategy with you in greater depth on December the 6th when my leadership team and I will be hosting an analyst day at the New York Stock Exchange. You will be able to participate in this event via webcast or in person by registering with us. Please contact Tom Malarky in Investor Relations for more details and a registration form.

Overall we have made significant progress in the first three quarters of the year and we have a lot to be proud of. However, we still have to execute and deliver good results in the fourth quarter as well as position NCR to make further progress in 2008.

With that, Operator, we’re ready to take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Katy Huberty from Morgan Stanley, you may ask a question.

Katy Huberty – Morgan Stanley

Yes, hi. I just want to follow up on your comment around being at an appropriate debt level. Have you actually taken a step back post the spin and ranked potential investments in the core business to decide whether, you know, it would make sense to take on debt to either accelerate growth in the core business or to buy back stock? Or is that decision process still in front of you?

Bill Nuti

It’s always in front of us, Katy. I think we, you know, we look at our capital structure strategy every quarter and depending upon market conditions, the performance of the company, and our risk assessment in terms of our balance sheet, we do look at it. I’m really pleased, you know, obviously today with the announcement that we’ve increased our share buy-back significantly. I think that was the right first step. But we’ll always take a look at our capital structure each and every quarter again and balance it with what we think the right thing to do for the shareholder is.

Katy Huberty – Morgan Stanley

And have you also given renewed thought to whether there are synergies between your two main segments in retail and financial self-service, just given the self-service component in both?

Bill Nuti

Yeah, we have, and on December the 6th we’ll, hopefully you’re going to come to the analyst day. We’re going to give you a thorough review of our strategy and I think it will be clear in terms of what fits within the context of the new NCR in general. But the short answer to your question is yes.

Katy Huberty – Morgan Stanley

Okay. Great.

Bill Nuti

Thanks.

Operator

Kartik Mehta from FTN Midwest, you may ask your question.

Kartik Mehta – FTN Midwest

Good morning, Bill. I wanted to ask you a little bit about ATM business. Two things that you said that I wanted to get a little bit more clarity and understanding on. You obviously had an amazing quarter on the ATM side and it sounds like the growth was international. I just wanted to understand maybe what is driving the growth or is it that you’re just growing better than the market because you’ve done a really good job at executing on those markets? That’s my first question and then I thought I’d give you the second question, which was on the US market.

Bill Nuti

Okay. I’ll start with the US market. The US market is weak, Kartik. It remains weak. It has been weak for the last 18 months to two years. We’re hopeful that with deposit automation we’ll see a pickup over the next few years.

Relative to our performance, thank you for the comments. I would say that the markets where we are having success is traditionally where we have had very good market share. So we, in the international markets of Europe and Asia the company, particularly in Europe, has had a very good market share position for many years. I do think we are executing somewhat better in those markets, but we are benefitted by our market share position.

Kartik Mehta – FTN Midwest

So is the US market becoming more challenging because of the sub-prime issues or is it about the same as it was about a year ago, do you think, at this point in time?

Bill Nuti

It’s a little worse than it was a year ago. I can’t contribute it today to the sub-prime issues because I personally haven’t seen any impact of sub-prime on capital spending for ATMs and I meet with, gosh, I spend 40% to 45% of my time with customers. That doesn’t mean we won’t see that in the next quarter or two, but I haven’t seen it yet. I would say that in the US, after the significant increase in US revenues in the early part of this decade due to all of the regulatory related activities that drove replacement cycles, what we’re seeing is a bit of a lag from that point in time.

A few years back when we had to deal with the EMV issues and the upgrades related to security and some of the other issues we, a lot of our customers decided that if they were going to go in and touch the ATM they were going to replace it and/or do some other things. So we had a great growth, as did our whole industry, in the early part of this decade and I think what we’re now faced with over the last few years is just a matter of absorption of that and I think that’s been the primary issue.

Kartik Mehta – FTN Midwest

And Bill, I think in the beginning, in your opening remarks you had indicated about growing the retail business or the self-service business and you gave some industries that you’d like to have some growth. The solutions for those industries, are those solutions that NCR already has or are those solutions you will have to out and acquire to meet the demands or meet the needs of those industries?

Bill Nuti

In travel and hospitality we have most of what we need. It will be a matter of investing in sales head count, which we have already begun to do. In entertainment and gaming it will be a combination of technology we have today – for example in gaming institutions like ticket-in/ticket-out machines versus in entertainment where we see opportunities to potentially make some acquisitions. But they’ll be smaller in nature, very small in nature.

In the health care segment, with Galvanon we have most of what we need today, but again similar to travel and hospitality, it’s about building a go-to-market and a sales force. And in public sector, again it’s more or less technology that we have available today.

Overall I would say, Kartik, we will be looking at some increased MNA activity, largely for smaller companies to help fill out our solution portfolio to take to some of these new markets.

Kartik Mehta – FTN Midwest

And then my last question, Bill, basically to follow on, how do you right now view acquisitions versus buy back? I guess my question is more from a sense that the opportunities that are presented to you, how big they are, versus the cash that’s on the balance sheet. Do you believe that you can do both and grow the company or do you have to make a choice at this point in time?

Bill Nuti

I think we can do both and grow the company over the long term, I would say, Kartik. You know, we’re going to be very balanced in terms of (a) making sure that we are giving back to the shareholder, and (b) making sure that we can fund our strategic plan. That is a top of mind item with the board of directors of this company. They are rigorous in their resolve that we need to be able to balance both and I would say that if you look out over the next two years I wouldn’t be surprised to see us again make some smaller acquisitions where we have to fill gaps relative to technology solutions we can take into these new industry segments and potentially a medium-sized one or two to fill out the overall portfolio. But I don’t see any large significant acquisitions on the horizon.

Kartik Mehta – FTN Midwest

Thank you very much. Appreciate it.

Bill Nuti

Yeah, thank you.

Operator

Matt Summerville from Keybanc, you may ask your question.

Matt Summerville – Keybanc Capital Markets

-- this quarter was point-of-sale versus self-service –

Bill Nuti

Matt? I’m sorry to interrupt you. Your first sentence broke up. If you could start over that’d be great.

Matt Summerville – Keybanc Capital Markets

Yeah, sorry. Can you hear me now?

Bill Nuti

We can, yes.

Matt Summerville – Keybanc Capital Markets

Okay. Within retail, how much of the growth in the third quarter was point-of-sale versus self-service? Can you give a little more granularity on that?

Bill Nuti

Sure. Both were over 25% in the quarter. So if you do the math and we grew 27% you can probably figure it out. But it was a very, very good quarter for the traditional cash register/point-of-sale business and most of that was the timing of large transactions that we booked in prior periods or were in backlog in prior periods that are now beginning to deploy. For example, you heard a quarter or two ago our win at Federated. We’ve obviously begun to roll out federated as well as several other customers. And also the self-service was up over 25% as well in the quarter. So both sides of the retail business performed well.

Matt Summerville – Keybanc Capital Markets

Within self-service, is the majority of the rollout activity still on self-checkout or can you talk a little bit more about where you’re at in the other verticals? Or applications may be a better word.

Bill Nuti

The majority, and it dwarfs the other businesses, was self-checkout, Matt.

Matt Summerville – Keybanc Capital Markets

Okay.

Bill Nuti

We’ve got to change that.

Matt Summerville – Keybanc Capital Markets

Let’s see. When you look at the ATM business, and actually you know, maybe let’s look at both ATMs in retail around the additions you’re making to the sales force. Retail it looks like it’s specifically targeted at self-service. What are you targeting in the ATM business? Is it geographies? Is it different price points in the market? And then how much is your year-over-year spend up maybe characterized in a similar fashion to how you guys would characterize Teradata as height and level of investment around that?

Bill Nuti

I’ll give the year-over-year spend question to Bob, but in terms of where we’re putting our sales resources, in retail it’s mainly in travel and health care right now as we are beginning to build larger work forces there. And they’re quite small today, so it’s, they’re both nascent teams and we’ve got a long way to go, but we have begun to hire more sales people overseas, in Europe and in Asia, for travel and health care.

In the self-service base it’s mainly in Europe and in Asia where we’re bringing on the additional head counts. Some small head count additions in the US, but it’s really more of a geographic increase to sales head count in some of these markets that are showing high growth.

Matt Summerville – Keybanc Capital Markets

Okay.

Bob Fishman

Yeah, I think in terms of the numbers, Matt, I expect self-service will be up somewhere between $8 to $10 million in selling expense for the year.

Matt Summerville – Keybanc Capital Markets

And then, when you say self-service, are you just talking retail or are you talking ATMs in there, too?

Bob Fishman

I’m sorry, that’s the ATM business.

Matt Summerville – Keybanc Capital Markets

And then how much in retail?

Bill Nuti

As he’s getting the data for you, Matt, the other thing I want to point out is we have torqued up the investment in research and development as well in financial self-service so we can adequately bring product to market very quickly, such as bulk cheque.

Matt Summerville – Keybanc Capital Markets

Yeah, that was my next question around the R&D spend. Obviously you just mentioned bulk cheque. Where are you with that?

Bill Nuti

We’re on schedule. We are in pilot with a number of customers this quarter and we will be in manufacturing ramp in Q1.

Matt Summerville – Keybanc Capital Markets

Okay. With respect, maybe while Bob’s getting that number –

Bob Fishman

I’ve got that number now, Matt. I expect retail to be up about $4 to $5 million in selling expense.

Matt Summerville – Keybanc Capital Markets

Great. Would you expect similar increases in ’08?

Bill Nuti

No.

Matt Summerville – Keybanc Capital Markets

Okay. All right. ATMs US, where are you seeing most of the softness? With nationals or community banks?

Bill Nuti

I would say in the US it’s really across the board, Matt. You know, I think the US market was down last year for us, it might be down again this year for us. It’s been an across the board, both high-end banks and also the mid-range and community banks.

Matt Summerville – Keybanc Capital Markets

Okay. When you look at, I guess, the customer services business, help me understand why you’re holding the line on margins at 6% year to date? You’re obviously higher than that. That being question number one. And then number two within CS as well, a little more specifics around what you did in Japan.

Bill Nuti

Yeah, on CS we’re holding the line on margin, Matt, simply because I think in that business we’re going to have to make some form of investment in automation to drive our productivity levels higher. We’re beginning the asymptote in terms of how much productivity we can get out of a human being and in order to get to the next level there may be some investment required. We’re looking at that, but we’re going to be very gated in terms of where we make our investments. For example, if today we’re making investments in R&D and sales for financial self-service and in retail, before I go off and make further investments in other BUs we’re going to have to make sure that we see that returning the investment we expected, spin that down a little bit and then focus our attentions in CS.

The second question, Matt, was on what? I’m sorry. I missed the second one.

Matt Summerville – Keybanc Capital Markets

Let’s see. I think you pretty much answered it.

Bill Nuti

About Japan, Matt.

Matt Summerville – Keybanc Capital Markets

Oh, yeah. I’m sorry. Japan. That’s right.

Bill Nuti

Okay. On Japan we have essentially, it was a reduction in workforce there based on productivity. We really don’t need the body count we have there to do the job at hand. Very difficult, of course, with the labour laws, as you know, to reduce head count in Japan, but we’ve had success in that regard in this particular quarter and that was the result, the result of that was the $27 million charge we had in the quarter. We expect to get about $10 to $12 million of cost savings starting in ’08 on that.

Matt Summerville – Keybanc Capital Markets

Okay. Back to ATMs, in terms of the migration to Selectron, are you manufacturing, is Selectron totally taking over America’s related manufacturing at this point? And then, where are you with the migration of capacities Scotland. And then the marginal uplift from both of those activities, is that 2008? Do we start to see some of that in Q4?

Bill Nuti

In terms of Selectron, they’re fully up and running for the Americas. And in terms of Europe, we have fully transitioned on Dundee-Budapest and Budapest is at volume ramp. Frankly, Budapest is going to produce as many ATMs in the best year Dundee ever had at half the number of labour count.

Matt Summerville – Keybanc Capital Markets

Okay. I’ll get back in cue. Thanks, Bill.

Operator

Gil Luria from Wedbush.

Gil Luria – Wedbush Securities

Yes, thank you. The growth in ATMs has accelerated well for you this year. Can you highlight three or four countries that have contributed the most to the volume growth there?

Bill Nuti

Yeah, what I will do, Gil, because we don’t give the country data, is I’ll give you regional data. Easter Europe, China, Middle East, Africa, and India are really where we’re seeing the most significant growth. We have had a little bit of growth in Western Europe and, as I said earlier, the US is down. It’s a challenged market.

Gil Luria – Wedbush Securities

Then on your retail, I think you reaffirmed the goal of having 33% come from self-service this year. Can you tell us what that percentage has been year-to-date?

Bill Nuti

It’s approximately a third.

Gil Luria – Wedbush Securities

It has been approximately a third to date.

Bill Nuti

Yes.

Gil Luria – Wedbush Securities

And what’s the margin differential between self-service and attended? Is it 10 percentage points? Is it somewhere around that?

Bill Nuti

No, it’s not 10 in terms of operating margin, but it is significantly different. The self-service business has approximately double-digit margins, low double-digit margins around, I would use 10, and I would say the assisted business is in the low single-digits.

Gil Luria – Wedbush Securities

Okay. And then one more question. It came out in the New York Times that you guys are considering or have decided to open executive offices in the World Trade Centre. Could you talk a little bit about what the benefits of that and what are the incremental costs that you may add by doing that?

Bill Nuti

Sure. First of all, it’s part of a larger real estate strategy for the company. We over the last several years have reduced our real estate position significantly. We’re not going to be torquing up our investment in real estate, but we are a virtual company. We’re going to be embracing virtual in this company going forward. Embracing it means that we have to provide our employees with better technology over time so that we can communicate more effectively. But we also need to have some positions in large markets where they are centered around our customers and an ease of use to get our customers in to see us and to spend more time with us.

New York is going to be an office space for us that allows us to be in the epicenter of where most of our large customers are today. It is also in an area where we have several hundred employees located that are currently virtual, some of which we get a benefit from, some of which we don’t.

I’d say, lastly, what we expect for us is also to continue to build out our centers of excellence model for the company over the next many years. So Dayton, New York, and Atlanta in the US will be very much connected. They will be very much on line with each other and we’re going to have both technology and the ability to communicate as efficiently as we do today.

Gil Luria – Wedbush Securities

Thank you.

Bill Nuti

By the way, the incremental costs, Matt, I’m sorry, Gil, on this is about $3 million, but it’s hard to say it’s incremental because again we have a fairly large real estate expense profile in the company and we’re looking at how we can actually consolidate in the new NCR first around where we already are. And I can’t tell you to date what I expect those expenses to be in 2008, ‘09, and ‘10. We’ve got a lot of work going on here and over time if it becomes a matter that we need to communicate to you we will.

Gil Luria – Wedbush Securities

Thank you.

Operator

Reik Read from Robert Baird and Company, you may ask your question.

Reik Read – Robert W. Baird & Company

Thank you. Bill, you had talked about deposit automation activity is increasing with the RFPs, but it does seem, as you’ve suggested, it’s a weak market, the banks are probably in no position to spend additional capital, maybe they’re not reducing, but they’re being pretty cautious about it. So can you give us a thought for how this will kind of progress over the course of the next year? I know it’s a multi-year opportunity, but when do you think it will really start to kick in?

Bill Nuti

My sense is, if I had to give you, and this is obviously without having a crystal ball, this is kind of my sense today, is you’ll start to see significant deposit activity in 2008. And I would put it more probably in the third and fourth quarters of 2008 rather than the first and second because we are in a number of RFP cycles now and the speed at which these deposit machines can be upgraded or deployed I think will be what probably causes most of the success in ’08 to come in the latter part of the year. But I would also expect that it would be broken down probably 40% ’08, 60% -- or probably 40% ’08, 40% ’09, 20% ‘010, if I had to give you a guess in terms of the speed at which or the percentage of the base that will transition to deposit in the US.

Reik Read – Robert W. Baird & Company

And what are the gating factors that the banks are talking about? I mean, do they still have back office items that they need to fix or is this just a matter of them getting comfortable and testing the equipment?

Bill Nuti

Today it’s more a matter of just getting comfortable and testing the equipment and having consumers that are trained to use this new process and this device. I think we’re pretty much through most of the challenges that the banks were facing relative to back office preparation and now it’s a matter of testing the equipment, it’s a matter of getting consumers and other third parties such as CITs and CMSs, that would be cashing in transit companies and cash management companies, trained and beginning to deploy.

Reik Read – Robert W. Baird & Company

Okay. And then going to the international markets you had listed a series of geographies that were doing very, very well. And you can’t break out the numbers. But can you give us a sense for what’s the driver behind it? Is it just those are geographies with low penetration, it’s that simple, or are there other things that are kind of kicking in there as well?

Bill Nuti

It really is as simple as these are geographies that have low penetration. As examples, you know, in China today I believe the number is there are approximately 400 to 500 ATMs per million people compared to the US where we have about 1500 ATMs per million people. The second, I would say major factor is a number of these emerging markets are experiencing solid economic growth and experiencing expansion in terms of per capita income where the people are using cash more to tender. So those are the two, I think, major factors for growth in these markets.

Reik Read – Robert W. Baird & Company

Okay. And then just going back over to the retail side of things, there are not too many hardware companies selling into the traditional point-of-sale markets that are having any kind of success, and I understand that self-service side of things is a little different, but the traditional equipment that you guys have obviously doing well. Can you give us some sense for why that’s the case and then can you talk a little bit about if the wins that you talked about today, what’s the mix of those in terms of traditional point-of-sale and then self-service.

Bill Nuti

Yeah, I think the main reason we’re having success, besides having very good people and a good sales force, is we upgrade product and great innovation at NCR. We did come out this year with a new product line, the RP80XRT. It is well ahead of the competition in terms of its capabilities, from a hardware platform perspective. And where we’ve done a great job in terms of designing the product for manufacturability, serviceability, and a lower cost. It is definitely a very competitive market, however. So I don’t think one quarter a trend makes for the team. We have longer term trends we’d like to stack together to have some success. We did have favourable timing of transactions this quarter, which helped that team, but it really is the platform and the technology combined with our people that’s enabled us to have this kind of success in the traditional platform.

In terms of the mix, the mix is still about a third self-service to about two-thirds assisted, as we though it would be this year, Reik.

Reik Read – Robert W. Baird & Company

But that’s in the new business that you’re selling. That’s what I was going for.

Bill Nuti

Oh, I’m sorry. You mean the new markets? Travel?

Reik Read – Robert W. Baird & Company

No, I mean, you had listed a series of customers that are, Target and so on and so forth, that are buying new equipment. Are they buying it in roughly that same proportion? A third, two-thirds?

Bill Nuti

Oh, I got you. I’m sorry. Some of them are completely wins along the lines of point-of-service technology, like traditional point-of-sale. Like, Target would fall into that category. Some of them are buying both solutions from us, both traditional and self-service. It’s the advantage of having both for us because when customers talk to us they really talk to us about the front end and you have to be a leader in both traditional point-of-sale and self-service to offer an end-to-end solution at the front end. So it’s a mix in terms of the customers I referenced today whether they be traditional point-of-sale or a mix, Reik.

Reik Read – Robert W. Baird & Company

And what are the customers that are upgrading their traditional point-of-sale systems, what are they telling you in terms of why they’re doing it? Again, it seems like a pretty tough retail environment where those guys really aren’t, don’t seem that interested in doing upgrades. What is your product bringing that gives them that efficiency that they say now’s the time to do it.

Bill Nuti

Speed and productivity at check out, which equals a great deal of money for a retailer. The thickness of point-of-sale applications has grown immeasurably over the last several years. Meaning, the application, just like your PC slows down when you have, in your applications and the number of applications you put on it get very thick, the same thing has happened relatively speaking to a point-of-sale terminal. So when that terminal slows down so does the front end of a store. Lines get longer, you get less productivity out of the front end, customer satisfaction can wane on you, and you can lose market share. So what we’re seeing today in many of the wins that we’ve had is retailers dealing with that issue. Really the application’s growing so much over the last few years they need a more powerful point-of-sale device in the assisted sense so that they can deal with that. And then that in and of itself drives a great return on investment for productivity improvements.

Reik Read – Robert W. Baird & Company

Okay. Great. Thanks a lot, Bill.

Bill Nuti

Thank you.

Operator

Jeff Anderson from Shareholder Management, you may ask your question.

Jeff Anderson – Shareholder Management

Hi. I was wondering if you could talk a little bit about the competitive environment, in particular D Bolt, and then on the international side do you see any new players or particularly out of China emerging markets who might be trying to get into the market?

Bill Nuti

Yeah, it would be the overall competitive environment remains very competitive. D Bolt is a super competitor for us. We enjoy competing with them day in and day out. Wincor as well. Mainly in the international markets for Wincor. Certainly in the lower end ATM segments there’s a whole bunch of companies. Triton, Tranex, and Hyosung. And then certainly in China there are Chinese-based competitors such as DT, part of the Guangdong Radio Group, that we are competing with. So the competitive environment itself, Jeff, has remained highly competitive. I wouldn’t say it’s any more competitive today than it was yesterday, but certainly it is a very competitive environment globally today.

Jeff Anderson – Shareholder Management

Is it the type of environment where when it says acquisitions there might be opportunities to rollout players because of footprint or are you still focused on your technology or oriented – editions.

Bill Nuti

Right now we’re still very focused on our own technology as a means to go to market. That doesn’t mean that won’t change over time as the dynamics in the market change. We always look at that. But we’re very comfortable with our product position today, particularly for banks both on prem and off prem, and may have an opportunity to go down market more efficiently as those machines move up from the value chain of just cash dispense to both cash dispense and deposit. But we’ve got a lot of work to do over the next few years to sort out whether or not that space offers us both the opportunity for revenue growth and profit growth, which is more important to us to the extent that we look at that market more aggressively.

Jeff Anderson – Shareholder Management

Great. And then last question, now that you’ve split from Teradata, what is the nature of the relationship working together? Is there something formal, more informal?

Bill Nuti

Yeah, there is a strategic alliance that we’ve set up with Teradata. We’re working at least in terms of our customers similarly to the way we’ve always worked with our customers because we were two separate entities in NCR. Not a lot has changed, with the exception of the fact that we’ve moved from a BU model to now a strategic alliance model. So we are with other strategic alliance partners working closely to benefit our customers together.

Jeff Anderson – Shareholder Management

Great. Thank you.

Bill Nuti

Thank you. Operator, we’ll take our last question.

Operator

Matt Summerville from Keybanc, you may ask your question.

Matt Summerville – Keybanc Capital Markets

With the tax rates, Bill, in customer service can you quote some figures kind of where they bottom and where they’re at now?

Bill Nuti

A few years back they were in the low 60s. They’re now probably in the mid-80s, Matt.

Matt Summerville – Keybanc Capital Markets

Can you still drive that higher?

Bill Nuti

No question. We are continuing to work to drive that higher. Depending upon where you are in the world, however, tax rates are quite different. In some cases our distribution partners actually do the service for us, so we will not be able to attach, if you will, in terms of NCR service to that. So it’s a very different picture in the world. I think we can improve a bit more. We’re never going to get to 100% because we’re committed to our channel partners, but certainly we could get up into the early, the low 90s.

Matt Summerville – Keybanc Capital Markets

Okay. When you look at the growth you’ve seen in ATM related services more recently, how much of that growth is driven from your placing a new machine or replacing an old one and you get that service contract versus service contracts with another provider expiring and you go back in and win them?

Bill Nuti

Yeah, we’ve had good success with win backs versus competitive service providers over the course of this year, but the vast majority of it is our sales team executing better. When we sell hardware we’re selling service.

Matt Summerville – Keybanc Capital Markets

Okay. Just kind of a housekeeping question. Excluding all the one-time, or any potential one-time items in the fourth quarter what tax rate should we be using? And then what was the measurement date you used on the discount rate and how much did you change the assumption?

Bob Fishman

In terms of the tax rate we had given earlier that the full-year rate excluding special items would be around 25%. If you do the math, that would equate to a rate of approximately 28% in Q4.

Matt Summerville – Keybanc Capital Markets

Okay

Bob Fishman

And what was the question again on the pension assumption?

Matt Summerville – Keybanc Capital Markets

Yes.

Bob Fishman

What was the question there? I’m sorry.

Matt Summerville – Keybanc Capital Markets

What measurement date was used and how much did you change the assumption by?

Bob Fishman

Because it was again spin related we used the September 30th date.

Matt Summerville – Keybanc Capital Markets

Okay. So that’s the only reason you did it, because most companies don’t change the –

Bob Fishman

No, no, no. That’s exactly why. We were obligated to make that calculation.

Matt Summerville – Keybanc Capital Markets

Perfect. That’s what I want to understand then. Just a last question on Systemedia, Bill. Is this business going to be able to sustain profitability going forward? How are you thinking about that piece of NCR?

Bill Nuti

The answer is, I certainly hope so. And they’re not going to be embarrassed with low goals in 2008. We are seeing some upside in two-sided thermal technology that is encouraging, Matt. We have a tremendous intellectual property position in two-sided thermal technology and two-sided thermal technology is being embraced significantly today by a number of retailers because of its, the cost savings associated with being able to print on two sides of a thermal receipt. Secondarily, the environmental benefits of buying two-sided thermal technology. Everything from saving on the number of trees killed to the amount of oil used to truck paper. And then thirdly, for the marketing benefits of two-sided thermal technology, where you can print the receipt on the front end and in a customized real-time way communicate with a customer on the back of that receipt whether it be with a coupon that you can print or whether it be a marketing message that’s connected to, if you will, a back end that can in a real-time way drive some great CRM benefits. So we’re expecting and hoping in 2008 that we continue to make progress both with two-sided thermal from an intellectual property monetization perspective as well as sales of printers and paper in the market and continuing the success we’ve had this year with our labels and rolls business in general and some of the productivity and cost-structure benefits we’ve gotten from working inside the business and rolling up our sleeves.

Matt Summerville – Keybanc Capital Markets

Okay. I think that’s all I have. Thanks a lot.

Bill Nuti

Thank you, Matt, and I want to thank everybody for joining us on the call today. We look forward to seeing you, for those of you who will be joining us, on December 6th in New York for analyst day. Thank you very much.

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