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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 2007third quarter earnings call. Bill Nuti, NCR’s Chairman and CEO, will lead ourconference call this morning. After Bill’s opening remarks, Bob Fishman, NCR’sInterim CFO, will provide comments on NCR’s total company financial results andour guidance for the full year.

Our discussion today includes forecasts and otherinformation that are considered forward-looking statements. While thesestatements reflect our current outlook, they are subject to a number of risksand uncertainties that could cause actual results to vary materially. Theserisk factors are described in NCR’s periodic filings with the SEC and ourannual report to stockholders.

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

A replay of this conference call will be availablelater 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 informationincluded in the conference call, whether as a result of new information orfuture results.

I’ll now turn the call over to Bill.

Bill Nuti

Thank you, Tom, and good morning. Thank you all of usfor joining us. Overall I’m very pleased with our third quarter in terms ofboth revenue and earnings growth. The third quarter was especially busy for usconsidering all of the effort put into the successful separation of Teradatafrom NCR. I would like to congratulate Mike Koehler and his team on impressiveQ3 business results and wish the entire Teradata team the best as they moveforward as an independent company.

For the remainder of my comments I will be comparingNCR’s results from continuing operations versus the prior year. Net/net, it’san 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 interms of revenue growth and NPOI. In fact, each of our three core businessesdelivered NPOI margin expansion in the quarter.

Clearly this was a good quarter for NCR and I wouldlike to share with you some of the details for each of our major businesslines. 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 of2006. Revenue growth in this segment was aided by four points of currencytranslation and favourable timing of certain transactions.

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

Q3 non-pension operating income was $56 million, whichfavourably 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 helpedsubstantially by a favourable geographic mix with strong performance year overyear in our western Europe and China markets. However, on a year-to-date basiswe have experienced some unfavourable geographic mix shifts in our ATMbusiness. This trend is expected to continue into the fourth quarter wherewe’ll see a higher mix of our volume coming from major rollouts in some of ourmore price sensitive markets. This trends, combined with an unplanned butconscious increase in R&D and sales investments will apply some pressure onour full-year margin guidance.

In Europe our manufacturing restructuring plan remainson track. The majority of ATM production for this region is now beingmanufactured in Budapest. Already this year, 600 jobs have been created at ourBudapest facility and we plan to continue to grow there by adding an additional150 employees by the end of 2007.

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

In the US we are now seeing a larger number offinancial institutions begin to deploy Cheque 21 capable ATMs or start the RFPprocess to determine their future providers. Current intelligent depositmachines 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 imagingpilots to a broader rollout during the next two years.

Now let me turn to retail store automation. After aslow start to 2007 we managed to drive significant revenue growth in the thirdquarter as we saw strong 25+% growth for both our self-service and ourtraditional point-of-sale solutions. Our larger than expected traditionpoint-of-sale growth was aided by favourable timing of large transactions thatwere won in prior periods.

In the quarter, retail store automation revenue of $278million 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 automationNPOI in Q3 2006. And the margin improved to 7%. Margin expansion was driven byvolume growth and an increased mix of revenues from self-service solutionsoffset 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 largeorders this year for our retail solutions. In the third quarter we were able torecognize some of the benefit of those orders. Additionally, we have hadsuccess 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. Westill expect approximately one-third of our retail store automations 2007revenues to come from the self-service category.

Our customer services team continues to execute theirmulti-year profit improvement plan and delivered very solid results in thequarter. The business delivered $34 million of operating income, which comparedto $27 million in Q3 of 2006. The profit improvement was primarily due tohigher revenues and productivity improvements. Customer services revenue was up9% lead by 14% growth in ATM maintenance revenues as we have continued to havesuccess in winning back service contracts for NCR solutions that we had notsecured in prior periods.

Over the last several years we have seen an improvementin our services attached rates for NCR advocated solutions. Additionally, wehave 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 dealwith National Australia Bank. This deal includes over 1,300 ATMs and acomprehensive managed services contract that covers a wide array ofinstallation services, hardware and software support, first and second linemaintenance, incident management, help desk support, and more. NCR is uniquelypositioned to execute on these kind of maintenance and managed services offersand we look forward to working with NAB for many years to come.

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

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

Bob Fishman

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

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

We have pension expense of $12 million from continuingoperations in the quarter which compared to $27 million in the third quarter of2006 from continuing ops.

Analyze NCR’s operational performance without theeffect of the special items and pension expense please see the supplementalfinancial schedule on the investor page of our website. That reconciles GAAP tonon-GAAP results.

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

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

NCR’s expenses were up $14 million versus Q3 of lastyear, 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 fromcontinuing operations of $99 million increased 32% from Q3 ’06. NPOI margin was8% of revenue this quarter.

Below the operating income line other income of $12million favourably compared to $2 million of other income in Q3 of ’06. Thisincrease 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 inJapan, which increased the effective tax rate by six percentage points. Theeffective tax rate excluding special items for the full year is expected to be25%.

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

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

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

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

Year to date, we’ve generated $92 million of cash fromour 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 firstthree quarters of 2007, which favourably compared to $11 million of cash use inthe same time period in ’06. The year-to-date 2007 amounts for cash fromoperations and free cash flow include $24 million of cash payments related tothe manufacturing realignment.

NCR defines free cash flow as cash flow from operationsless capital expenditures for property, plant, and equipment, and additions tocapitalized software. Year to date we have experienced some challengesregarding working capital. A portion of the increase can be explained by higherinventory levels necessitated by our revenue growth across our core BUs. Ourmanufacturing realignment has resulted in some temporary redundancy and FXmovements have impacted our working capital position. Regardless of theseitems, we believe we can execute better and there is room for improvement.

Depreciation is also going to be lower as a result ofthe spin. We now expect about $110 million of depreciation from continuingoperations in 2007 and over time we do expect capex and depreciation to run ata 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 be5% to 6%. Due to a strong first nine months of the year we are increasing ourexpectation for financial self-service revenue growth from 5% to 7% to 9% to11%. Retail store automation is now expected to grow revenue by 7% to 8% versusour prior guidance of 4% to 5%. And finally, we expect customer servicesrevenue 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, webelieve that retail store operation will have 5% margins and customer serviceswill have 6% NPOI margins. Financial self-service will have 12% to 13% NPOImargins in 2007. As previously mentioned, a reduction in our ATM margins isdriven by an unfavourable mix of geographic revenues in the fourth quarter andincreased investment primarily R&D and sales.

We have been providing pension expense guidance for2007 of $65 million and that number included Teradata. NCR now expects pensionexpense from continuing operations to be around $40 million for 2007.

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

Including $0.45 of special charges associated with themanufacturing realignment, the second quarter tax adjustment, the restructuringof our Japanese customer services business, a portion of spinoff expenses thatbenefited 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 priornon-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 forsome closing comments.

Bill Nuti

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

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

As it relates to our go-forward strategy, NCR has formany years been the leader in providing solutions to financial and retailbusinesses worldwide that optimize the way in which they interact with theircustomers. That will not change.

Whether our success was drive by traditionalpoint-of-sales solutions, ATMs, self-service kiosks, or our newer internet ormobility based self-service software solutions, we will continue to innovateand lead as we help our clients in our core industry segments interact withtheir customers today and tomorrow.

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

Meanwhile, we will continue to remain focused onbuilding a lasting and sustainable cost structure that is intended to driveoperating leverage and extend our competitive advantage.

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

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

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

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

Overall we have made significant progress in the firstthree quarters of the year and we have a lot to be proud of. However, we stillhave to execute and deliver good results in the fourth quarter as well as positionNCR to make further progress in 2008.

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

Question-and-AnswerSession

Operator

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

Katy Huberty –Morgan Stanley

Yes, hi. I just want to follow up on your commentaround being at an appropriate debt level. Have you actually taken a step backpost the spin and ranked potential investments in the core business to decidewhether, you know, it would make sense to take on debt to either accelerategrowth in the core business or to buy back stock? Or is that decision processstill 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 uponmarket conditions, the performance of the company, and our risk assessment interms 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-backsignificantly. I think that was the right first step. But we’ll always take alook at our capital structure each and every quarter again and balance it withwhat we think the right thing to do for the shareholder is.

Katy Huberty –Morgan Stanley

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

Bill Nuti

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

Katy Huberty –Morgan Stanley

Okay. Great.

Bill Nuti

Thanks.

Operator

Kartik Mehta from FTN Midwest, you may ask yourquestion.

Kartik Mehta –FTN Midwest

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

Bill Nuti

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

Relative to our performance, thank you for thecomments. I would say that the markets where we are having success istraditionally where we have had very good market share. So we, in theinternational 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 areexecuting somewhat better in those markets, but we are benefitted by our marketshare position.

Kartik Mehta –FTN Midwest

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

Bill Nuti

It’s a little worse than it was a year ago. I can’tcontribute it today to the sub-prime issues because I personally haven’t seenany impact of sub-prime on capital spending for ATMs and I meet with, gosh, Ispend 40% to 45% of my time with customers. That doesn’t mean we won’t see thatin the next quarter or two, but I haven’t seen it yet. I would say that in theUS, after the significant increase in US revenues in the early part of thisdecade due to all of the regulatory related activities that drove replacementcycles, 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 EMVissues and the upgrades related to security and some of the other issues we, alot of our customers decided that if they were going to go in and touch the ATMthey were going to replace it and/or do some other things. So we had a greatgrowth, as did our whole industry, in the early part of this decade and I thinkwhat we’re now faced with over the last few years is just a matter ofabsorption of that and I think that’s been the primary issue.

Kartik Mehta –FTN Midwest

And Bill, I think in the beginning, in your openingremarks you had indicated about growing the retail business or the self-servicebusiness and you gave some industries that you’d like to have some growth. Thesolutions for those industries, are those solutions that NCR already has or arethose solutions you will have to out and acquire to meet the demands or meetthe 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 alreadybegun to do. In entertainment and gaming it will be a combination of technologywe have today – for example in gaming institutions like ticket-in/ticket-outmachines versus in entertainment where we see opportunities to potentially makesome acquisitions. But they’ll be smaller in nature, very small in nature.

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

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

Kartik Mehta –FTN Midwest

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

Bill Nuti

I think we can do both and grow the company over thelong term, I would say, Kartik. You know, we’re going to be very balanced interms 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 itemwith the board of directors of this company. They are rigorous in their resolvethat we need to be able to balance both and I would say that if you look outover the next two years I wouldn’t be surprised to see us again make somesmaller acquisitions where we have to fill gaps relative to technologysolutions we can take into these new industry segments and potentially amedium-sized one or two to fill out the overall portfolio. But I don’t see anylarge 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 yourquestion.

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 sentencebroke 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 thethird quarter was point-of-sale versus self-service? Can you give a little moregranularity on that?

Bill Nuti

Sure. Both were over 25% in the quarter. So if you dothe 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 andmost of that was the timing of large transactions that we booked in priorperiods 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’veobviously begun to roll out federated as well as several other customers. Andalso the self-service was up over 25% as well in the quarter. So both sides ofthe retail business performed well.

Matt Summerville– Keybanc Capital Markets

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

Bill Nuti

The majority, and it dwarfs the other businesses, wasself-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, andactually you know, maybe let’s look at both ATMs in retail around the additionsyou’re making to the sales force. Retail it looks like it’s specifically targetedat 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 youryear-over-year spend up maybe characterized in a similar fashion to how youguys would characterize Teradata as height and level of investment around that?

Bill Nuti

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

In the self-service base it’s mainly in Europe and inAsia where we’re bringing on the additional head counts. Some small head countadditions in the US, but it’s really more of a geographic increase to saleshead 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 expectself-service will be up somewhere between $8 to $10 million in selling expensefor the year.

Matt Summerville– Keybanc Capital Markets

And then, when you say self-service, are you justtalking 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 thingI want to point out is we have torqued up the investment in research and developmentas well in financial self-service so we can adequately bring product to marketvery quickly, such as bulk cheque.

Matt Summerville– Keybanc Capital Markets

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

Bill Nuti

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

Matt Summerville– Keybanc Capital Markets

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

Bob Fishman

I’ve got that number now, Matt. I expect retail to beup 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 ofthe 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 bedown again this year for us. It’s been an across the board, both high-end banksand also the mid-range and community banks.

Matt Summerville– Keybanc Capital Markets

Okay. When you look at, I guess, the customer servicesbusiness, help me understand why you’re holding the line on margins at 6% yearto date? You’re obviously higher than that. That being question number one. Andthen number two within CS as well, a little more specifics around what you didin 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 formof investment in automation to drive our productivity levels higher. We’rebeginning the asymptote in terms of how much productivity we can get out of ahuman being and in order to get to the next level there may be some investmentrequired. We’re looking at that, but we’re going to be very gated in terms ofwhere we make our investments. For example, if today we’re making investmentsin R&D and sales for financial self-service and in retail, before I go offand make further investments in other BUs we’re going to have to make sure thatwe see that returning the investment we expected, spin that down a little bitand then focus our attentions in CS.

The second question, Matt, was on what? I’m sorry. Imissed 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 reductionin workforce there based on productivity. We really don’t need the body count wehave there to do the job at hand. Very difficult, of course, with the labourlaws, as you know, to reduce head count in Japan, but we’ve had success in thatregard in this particular quarter and that was the result, the result of thatwas 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 toSelectron, are you manufacturing, is Selectron totally taking over America’srelated manufacturing at this point? And then, where are you with the migrationof capacities Scotland. And then the marginal uplift from both of thoseactivities, 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 forthe Americas. And in terms of Europe, we have fully transitioned onDundee-Budapest and Budapest is at volume ramp. Frankly, Budapest is going toproduce as many ATMs in the best year Dundee ever had at half the number oflabour 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 wellfor you this year. Can you highlight three or four countries that havecontributed the most to the volume growth there?

Bill Nuti

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

Gil Luria –Wedbush Securities

Then on your retail, I think you reaffirmed the goal ofhaving 33% come from self-service this year. Can you tell us what thatpercentage 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-serviceand 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 significantlydifferent. The self-service business has approximately double-digit margins,low double-digit margins around, I would use 10, and I would say the assistedbusiness is in the low single-digits.

Gil Luria –Wedbush Securities

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

Bill Nuti

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

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

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

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 becauseagain we have a fairly large real estate expense profile in the company andwe’re looking at how we can actually consolidate in the new NCR first aroundwhere we already are. And I can’t tell you to date what I expect those expensesto be in 2008, ‘09, and ‘10. We’ve got a lot of work going on here and overtime 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 askyour question.

Reik Read –Robert W. Baird & Company

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

Bill Nuti

My sense is, if I had to give you, and this is obviouslywithout having a crystal ball, this is kind of my sense today, is you’ll startto see significant deposit activity in 2008. And I would put it more probablyin the third and fourth quarters of 2008 rather than the first and secondbecause we are in a number of RFP cycles now and the speed at which thesedeposit machines can be upgraded or deployed I think will be what probablycauses most of the success in ’08 to come in the latter part of the year. But Iwould also expect that it would be broken down probably 40% ’08, 60% -- orprobably 40% ’08, 40% ’09, 20% ‘010, if I had to give you a guess in terms ofthe speed at which or the percentage of the base that will transition todeposit in the US.

Reik Read –Robert W. Baird & Company

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

Bill Nuti

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

Reik Read –Robert W. Baird & Company

Okay. And then going to the international markets youhad listed a series of geographies that were doing very, very well. And youcan’t break out the numbers. But can you give us a sense for what’s the driverbehind it? Is it just those are geographies with low penetration, it’s thatsimple, 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 thathave low penetration. As examples, you know, in China today I believe thenumber is there are approximately 400 to 500 ATMs per million people comparedto the US where we have about 1500 ATMs per million people. The second, I wouldsay major factor is a number of these emerging markets are experiencing solideconomic growth and experiencing expansion in terms of per capita income wherethe people are using cash more to tender. So those are the two, I think, majorfactors for growth in these markets.

Reik Read –Robert W. Baird & Company

Okay. And then just going back over to the retail sideof things, there are not too many hardware companies selling into thetraditional point-of-sale markets that are having any kind of success, and Iunderstand that self-service side of things is a little different, but thetraditional equipment that you guys have obviously doing well. Can you give ussome sense for why that’s the case and then can you talk a little bit about ifthe wins that you talked about today, what’s the mix of those in terms oftraditional 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 productand 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 termsof designing the product for manufacturability, serviceability, and a lowercost. It is definitely a very competitive market, however. So I don’t think onequarter a trend makes for the team. We have longer term trends we’d like tostack together to have some success. We did have favourable timing oftransactions this quarter, which helped that team, but it really is theplatform and the technology combined with our people that’s enabled us to havethis kind of success in the traditional platform.

In terms of the mix, the mix is still about a thirdself-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 thatare, Target and so on and so forth, that are buying new equipment. Are theybuying it in roughly that same proportion? A third, two-thirds?

Bill Nuti

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

Reik Read –Robert W. Baird & Company

And what are the customers that are upgrading theirtraditional point-of-sale systems, what are they telling you in terms of whythey’re doing it? Again, it seems like a pretty tough retail environment wherethose guys really aren’t, don’t seem that interested in doing upgrades. What isyour product bringing that gives them that efficiency that they say now’s thetime to do it.

Bill Nuti

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

Reik Read –Robert W. Baird & Company

Okay. Great. Thanks a lot, Bill.

Bill Nuti

Thank you.

Operator

Jeff Anderson from Shareholder Management, you may askyour question.

Jeff Anderson –Shareholder Management

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

Bill Nuti

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

Jeff Anderson –Shareholder Management

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

Bill Nuti

Right now we’re still very focused on our owntechnology as a means to go to market. That doesn’t mean that won’t change overtime as the dynamics in the market change. We always look at that. But we’revery comfortable with our product position today, particularly for banks bothon prem and off prem, and may have an opportunity to go down market moreefficiently as those machines move up from the value chain of just cashdispense to both cash dispense and deposit. But we’ve got a lot of work to doover the next few years to sort out whether or not that space offers us boththe opportunity for revenue growth and profit growth, which is more importantto 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 splitfrom Teradata, what is the nature of the relationship working together? Isthere something formal, more informal?

Bill Nuti

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

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 yourquestion.

Matt Summerville– Keybanc Capital Markets

With the tax rates, Bill, in customer service can youquote 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 nowprobably 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 thathigher. Depending upon where you are in the world, however, tax rates are quitedifferent. In some cases our distribution partners actually do the service forus, so we will not be able to attach, if you will, in terms of NCR service tothat. So it’s a very different picture in the world. I think we can improve abit more. We’re never going to get to 100% because we’re committed to ourchannel 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 ATMrelated services more recently, how much of that growth is driven from yourplacing a new machine or replacing an old one and you get that service contractversus service contracts with another provider expiring and you go back in andwin them?

Bill Nuti

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

Matt Summerville– Keybanc Capital Markets

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

Bob Fishman

In terms of the tax rate we had given earlier that thefull-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 pensionassumption?

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 youchange the assumption by?

Bob Fishman

Because it was again spin related we used the September30th date.

Matt Summerville– Keybanc Capital Markets

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

Bob Fishman

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

Matt Summerville– Keybanc Capital Markets

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

Bill Nuti

The answer is, I certainly hope so. And they’re notgoing to be embarrassed with low goals in 2008. We are seeing some upside intwo-sided thermal technology that is encouraging, Matt. We have a tremendousintellectual property position in two-sided thermal technology and two-sidedthermal technology is being embraced significantly today by a number ofretailers because of its, the cost savings associated with being able to printon two sides of a thermal receipt. Secondarily, the environmental benefits ofbuying two-sided thermal technology. Everything from saving on the number oftrees killed to the amount of oil used to truck paper. And then thirdly, forthe marketing benefits of two-sided thermal technology, where you can print thereceipt on the front end and in a customized real-time way communicate with acustomer on the back of that receipt whether it be with a coupon that you canprint or whether it be a marketing message that’s connected to, if you will, aback end that can in a real-time way drive some great CRM benefits. So we’re expectingand hoping in 2008 that we continue to make progress both with two-sidedthermal from an intellectual property monetization perspective as well as salesof printers and paper in the market and continuing the success we’ve had thisyear with our labels and rolls business in general and some of the productivityand cost-structure benefits we’ve gotten from working inside the business androlling 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 forjoining us on the call today. We look forward to seeing you, for those of youwho will be joining us, on December 6th in New York for analyst day.Thank you very much.

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Source: NCR Q3 2007 Earnings Call Transcript

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