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Executives

Mr. Gavin Bell - Vice President of Investor Relation.

Bill Nuti - President, Chief Executive Officer and Director.

Bob Fishman - Interim Chief Financial Officer.

Analysts

Matt Summerville - KeyBanc Capital Markets.

Katy Huberty – Morgan Stanley.

Kartik Mehta - FTN Midwest.

Reik Read - Robert W. Baird & Company.

Gil Luria - Wedbush Securities.

NCR Corporation (NCR) Q4 2007 Earnings Call January 30, 2008 10:00 AM ET

Operator

Good morning and welcome to the NCR Corporation Fourth Quarter Earnings Call. At this time all participants are in a listen-only mode. (Operator Instructions). Today’s conference is being recorded, if you have any objections please disconnect at this time. And I will now turn the call over to your host, Mr. Gavin Bell. Thank you.

Mr. Gavin Bell – Vice President of Investor Relation

Thanks Dave and good morning everyone. And thank you for joining us for our 2007 fourth quarter earnings call. Bill Nuti, NCR’s Chairman and CEO will lead our conference call this morning. After Bill’s opening remarks, Bob Fishman will provide comments on NCR’s total company financial results, and our guidance for the full year.

Our discussion today includes forecast 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 material. 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 a reported and forecast GAAP results and other information concerning such measures are included in our earnings release, and are also available on the investor page of NCR’s website. A replay of this conference call will be available later today on NCR’s website, NCR.com.

For those listening to the replay of this call, please keep in mind that the information discussed is as of January 30, 2008, and NCR assumes no obligation to update or revise the information included in this conference call, whether a result of new information or future results. I will now turn the call over to Bill.

Bill Nuti - President and Chief Executive Officer

Thank you, Gavin and good morning to all of you and thank you for joining us. Today I am also pleased to welcome Tony Massetti to NCR. Tony has now officially been on board for two full days, and so, Bob and I will be handling today’s discussion and Q&A. That said, Tony will be a very active participant in our future investor communications, of course.

NCR had a very good fourth quarter. Strong revenue growth continued in each of our main business units as we entered our first full quarter as the new NCR. For the remainder of my comments, I will be comparing NCR’s results from continuing operations versus the prior year. The results for prior periods will not include the impact of Teradata, making this an apples- to- apples comparison.

We had several highlights in the quarter including: financial self-service with 14 % revenue growth, retail store automation which grew 28 %, and customer services which once again delivered its best quarter ever in terms of revenue growth and NPOI.

This was a very good end of year for NCR, and I would like to share with you, some of the details from each of our major business units. Let’s start out with Financial Self Service. Our Financial Self Service team had a strong quarter, delivering revenue of $537 million which was

14 % higher than ATM revenues in the fourth quarter of 2006. Revenue growth in this segment was aided by 5 points of currency translation. We delivered strong growth in the EMEA region, while the Americas also increased versus the prior year.

Q4 non-pension operating income was $79 million, compared to the $84 million in Q4 2006. Operating margin declined to 15% in the fourth quarter of 2007, from 18% in Q4 2006. The decline in margin was as mentioned in the Q3 earnings call, primarily driven by geographic deal mix and slightly lower professional services revenue. Expenses increased from the prior year due to higher revenues, the impact of foreign exchange, and a conscious increase in investment and research and development, and sales in targeted high growth areas.

The majority of all transaction and transition activities related to the manufacturing realignment are complete. Our ability to support our strong revenue growth in the fourth quarter is evidence that our manufacturing strategy is working and able to scale with demand.

Regarding check 21, in the quarter we had improved orders and revenue related to this solution. The fact that consumer usage is up, is a solid outward sign of the benefits of this solution. We are hearing from our customers that envelope-free deposit automation is being well received by consumers and driving substantial productivity gains for banks who deploy it.

Additionally, in November, JP Morgan Chase issued a press release stating that they will multi-check ATMs from NCR, Chase’s primary ATM supplier. We will also be providing them with backofficed software to process check images end-to-end.

Now let me turn to Retail Store Automation. For the second quarter in a row, this segment grew revenues in excess of 25%, as continued strong growth in assisted point of sale solutions was bolstered by double digit Self Service sales growth.

In the quarter, Retail Store Automation revenue of $331 million was 28% greater than the $258 million of revenue achieved in Q4 2006. NPOI of $22 million matched the Q4 2006 amount. While both self service and assisted point of sale revenues grew at over 20% in the quarter, point-of-sale sales actually grew at a faster rate than self service which impacted our profit margin year-to-year.

Operating income was also impacted by the write-off of approximately $5 million of RFID assets. Expenses increased in the quarter due to higher revenue, the impact of FX and increased investments in sales, marketing and research and development related to our Self Service growth initiatives.

We had several impressive wins for our Self Service Solution segment in the quarter. In the Americas, Super Value committed to our fast lane self-checkout solution, and in Australia, one of their largest retailers, Woolworths had a fast lane self-checkout rollout in the quarter as well.

In 2007, approximately 30% of Retail Store Automation revenues came from Self Service. This was slightly less than the one-third targeted, due to much better expected growth in assisted point-of sale revenues in the second half of the fiscal year, driven largely by the successes of our new RP 80 XRT point-of-sale solution. For the year, our Self Service Solutions grew 20%.

Our Customer Services team continues to execute their multi-year profit improvement plan and delivered very solid results in the quarter. They are well on their way towards achieving the

9 % NPOI margin goal by 2010 that we discussed with you during our analyst day in December.

Customer Services delivered $42 million of operating income, which compared to $24 million in Q4 of 2006. The profit improvement was primarily due to productivity improvements and higher revenues. Customer Services revenue was up 9%, led by 15% growth in ATM maintenance. Additionally, maintenance for Retail Store Automation solutions grew 10% in the quarter. I am particularly pleased that our customer satisfaction levels increased in conjunction with this solid growth performance.

Overall, NCR had a successful close to 2007. When you compare full year 2007 to full year 2006, we grew total revenues 8% with 3 percentage points of FX benefit. ATM revenues grew by 15%, Retail Store Automation’s growth was 13%, and Customer Service revenues were up by 7%. We also increased NPOI margins across each of these 3 businesses in the year, with the largest margin increase coming from our Customer Services division which went from a 5% NPOI margin in 2006, to a 7% margin in 2007.

Now I will turn the call over to Bob who will discuss our financial results in greater detail. Bob?

Bob Fishman - Interim Chief Financial Officer

Okay, thanks Bill. NCR’s total revenue from continuing operations of $1.5 billion dollars grew 13% versus Q4 2006. This includes a 5 point benefit from currency translation. We report a GAAP net income of $86 million dollars, or $0.47 per share from continuing operations. This compares with $95 million dollars, or $0.52 per share from continuing operations in Q4 2006.

NCR’s continuing ops did have some special items in the quarter. $0.02 per diluted share related to our manufacturing realignment project, $0.02 per share related to additional legal expenses for the Fox River environmental matter, and $0.01 per share related to our realignment activities in Japan. Excluding these items, non-GAAP diluted EPS from continuing operations was $0.52 per share achieved in Q4 2006.

We had pension expense of $9 million from continuing operations in the quarter, which compared to $28 million in the fourth quarter of 2006.

To 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 Q4 gross margin was 24.1% up 70 basis points from the 23.4% in the fourth quarter of 2006. Driven primarily by productivity improvements in customer service. NCR’s expenses were up $36 million dollars versus Q4 06, in large part due to the higher revenue in the quarter and the impact of foreign exchange.

Spending also increased for research and development in our financial Self-Service and Retail Store Automation divisions as we prepare for a busy year of new product introductions in 2008. Selling expense was also higher as we invest in targeted Self-Service growth head count.

Total company non-pension operating income from continuing operations of $140 million increased 12% from Q4 ‘06. NPOI margin was 9% of revenue in the quarter.

Below the operating income line, other expense of $3 million compared to $1 million of other income in Q4 of ‘06. The decrease was primarily driven by $7 million of Fox River costs, offset somewhat by higher interest income. The effective tax rate in the fourth quarter was 29%. If you exclude the impact of Special Items, our full-year tax rate in 2007 was 26%.

Turning to the balance sheet. We ended the quarter with $952 million of cash. Our short and long-term debt is at $308 million. During the quarter we repurchased about 4.2 million shares, and that leaves approximately $485 million dollars of board authorization available for future share repurchases at the start of 2008. In terms of option activity, approximately 390,000 options were exercised in the quarter.

Moving to the cash flow statement and please keep in mind that these metrics only relate to continuing operations. In the fourth quarter, NCR generated $59 million of cash from operating activities versus generating a $115 million in Q4 of 06. After using $34 million for capital expenditures, we generated $25 million of free cash flow, which compares to $57 million of free cash flow in Q4 of ‘06. We had $31 million of cash payments related to the manufacturing in Japan realignments in Q4 2007 that impacted the year-over-year comparison for the quarter.

For 2007 full year, we generated $151 million of cash from operations, versus a $190 million in 2006. After $112 million of capital expenditures, we generated $39 million of free cash flow in 2007, which compares to $46 million of free cash flow in 2006. The 2007 amounts for cash from operations and free cash flow include $55 million of cash payments related to the manufacturing in Japan realignments.

As a reminder, NCR defines free cash flow as cash flow from operations, less capital expenditures for property plant and equipment, and additions to capitalized software.

As mentioned during the Q3 earnings call, free cash flow and cash flow from operations has been impacted by higher working capital balances this year. While some of this increase is revenue and FX related we must execute better, and improve our accounts receivable collection and inventory turns in 2008. Appreciation from continuing operations in 2007 was a $110 million. Overtime, we do expect cap ex and depreciation to run at approximately at

a one-to-one ratio.

I would now like to provide guidance for full year 2008. We expect to grow revenues 3 to 5% and to achieve earnings of a $1.48 to a $1.55 per share. We expect pension expense to be around $40 million in 2008 and our tax rate is expected to be around 25%. We also expect free cash flow to be around $200 million in 2008.

I would now like to turn the call back over to Bill for some closing comments.

William R. Nuti – President and Chief Executive Officer

Thank you, Bob. I know many of you might be wondering what NCR is seeing ahead of us in 2008. I would like to take a moment to share with you some of my observations from our recent 2008 global sales kickoff meeting held earlier this month in Dallas.

Since NCR has moved into an industry-focused global sales model, we had our first global sales meeting in many years. And let me tell you this, our sales force is jazzed up. They are excited to be able to sell our full suite of NCR Self-Service solutions, and also equally excited about our goal to grow in new industry segments. And the movement to Self-Service is clearly a world-wide phenomenon.

Globally, consumers are more rapidly turning to Self-Service channels as their primary channel, while businesses continue to deploy this technology for improvements and productivity, and cost. For NCR, this is the first time that both consumer expectations and business productivity are evenly matched as key decision criteria. For businesses, it helps them better serve their customers, build loyalty, and operate more efficiently. We are able to help businesses in both good times and in lean times.

Subsequent to our global sales meeting, I attended the National Retail Federation Show in New York City, where my meetings with dozens of customers reinforced my views. While the challenging retail environment is certainly forcing retail executives to scrutinize investment priorities, NCR’s portfolio of solutions led to very productive discussions with our customers. The independent market research firm, AMR, in fact, observed that targeted technology investments related to consumer experience and store productivity were a priority for the 18,000 people walking the floor at NRF.

As we look ahead in 2008, we are cautiously optimistic about both our core growth industries, financial and retail, as well as our emerging growth industry segments. In financial services and retail, we’re looking for global industry growth in the low- to-mid single digit range. We are targeting share gains as we penetrate adjacent Self Service technology segments, and strengthen our global presence and sales coverage. We are looking for higher global industry growth rates in emerging growth industry segments, although off of a much smaller base. We either hold or are building market leading positions in travel and hospitality, health care, gaming and entertainment, and government and public sector verticals.

Based on the combination of industry growth, and our continually strengthening market position, we are confident that we can meet the three-year business plan that we outlined for you at our analyst meeting in December. Namely, 5% revenue growth and incremental earnings per share of between $0.65 and $0.90 by 2010 versus 2007.

At our analyst day in December, Alan Chow, our head of Product Development, mentioned to you that in 2008 NCR would have our biggest set of product introductions since our spinoff from AT&T. And we got off to a great start in January. Last week, we publicly announced our new ATM kiosk product line, branded as NCR Self Serve. This is our first major new ATM product line in over a decade.

From an internal standpoint, this ATM kiosk was very well designed. Utilizing design from manufacturing methodologies, we have increased the usage of common components across the product line and improved the design to allow for a 10 to 15% reduction in labor hours to assemble and test this new ATM versus its predecessor. We also effectively designed this new ATM kiosk line for serviceability. For example, there is advanced self-healing technology which enables the ATM to recover from certain error conditions on its own, as well as improved access to the interior of the device when our customer engineers have to provide break-fixed service. All of this helps to increase ability for our customer, as well as their total cost, lower their total cost of ownership. The new product also provides benefits to the banks that buy the Solution. For example, the enhanced serviceability aspects will also increase platform availability. It also scores high marks in terms of usability, manageability, security, and environmental responsibility. We are very excited about this new product line and really look forward to rolling it out over the coming year.

In addition, to the new line of ATM kiosks, Malcom Collins and his Global Sales Team will be focused on selling the entire range of NCR Solutions. Clearly, as the Self-Service phenomenon branches out into additional industries, such as retail, travel, and hospitality, healthcare, entertainment and public sector, NCR will be there to meet our customer’s requirements.

In closing, as you know, our business has historically been seasonal with the highest EPS occurring in the second half of the year. This trend is expected to continue in 2008, as we will likely see opportunities from higher margin geographies, and product mix drive the greatest benefits in the back half of this year.

In 2008, we are going to continue to focus our energy on revenue growth and our operational initiatives and productivity improvements. We have opportunities to further increase our productivity, make NCR simpler to do business with, and to further improve our balance sheet with better focus on working capital items. With that, operator, we are now ready to take questions.

Question-and-Answer Session

Operator

And I have our first question here from Mr. Reik Read. You may now ask your question.

Reik Read

Hey, good morning.

Bill Nuti

Good morning Reich.

Reik Read

Bill, can you talk a little bit more about the product rollouts, the new ATM kiosk. When will you start to bring that out and show it to customers, what is the certification requirements, and will that rollout differ by geography?

Bill Nuti

We expect certification for the most part, Reich, in general on a global basis to be done by end of the second quarter. As you know, certification depending upon where you are in the world, can take varying amounts of time. So I would say on a general basis, expect us to be done by the second quarter. Interestingly, we have already taken our first orders for this, so we have seen some good demand for it. But I expect the impact of this new product to be felt more so in the second half of this year and of course in 2009.

Reik Read

Okay, and then you also mentioned some retail products that are coming out, and you kind of pointed out that the retail a little challenged when you look at a lot of the statistics out of the bar-coding world which I would argue, you follow reasonably well your business. You know, they are not doing well. Can you talk a little bit about what the interest level is in these new products? Is that driving it or are there some other factors too, like leases coming due, anything like that, that seems to be driving your strength?

Bill Nuti

You know, our phenomenal growth in retail last year was largely driven by product innovations and new products coming out, particularly the 80 XRT. I can report to you that we have several new products coming out this year as well that were funded in 2007, that we are very excited about. You know, I can only hope today sitting here and not knowing what the future holds, that we can have equal success with some of these new products. We do have a new point of sale product coming out in the second quarter. We also have several new peripherals coming out in terms of bioptic scanners that are designed for manufacturability and serviceability that are pretty exciting, that have significantly higher performance, and of course, our two-sided thermal printing technology which is just beginning to show some very positive signs in terms of customer traction. And all of these platforms got a lot of attention at NRF.

Beyond point of sale, we are pretty excited about our new Self-Service products as well. Beyond Self-Checkout, where we have a new product coming out this year as well, in the Self-Checkout domain, we also have several new applications coming out for kiosks. Applications for customer services returns which will help automate returns in retail stores and drive higher productivity, lower costs, lesser lines and improved satisfaction. We have some new applications coming out for assisted sales and this is the first time in a long time I can say that we are beginning to see some killer applications for kiosks and retail and that was pretty much the sentiment of our customers and retail customers that showed up at NRF this year. So I am encouraged by our performance in retail. I am encouraged by some of the new platforms we have coming out, and I am equally encouraged by the interest level, or the increased interest level I saw at NRF relative to Self-Service applications.

Reik Read

Okay. And then, just on the RFID side, it looks like you said that write-down occurred in retail. Can you talk about what that was related to, and with that write-down does that basically get you out of the RFID business in total?

Bill Nuti

The first, I will let Bob and I tag team, but Bob will give you some of the particulars on the write-down for the company, but I would tell you that, generally in RFID, I still think and feel pretty strongly about the potential for the technology longer term. I do think like a lot of hyped technology as it was a few years back, it’s going to take longer to incubate in the market. We are not out of the RFID business by any means, and we will continue to support solutions in this base on an end-to-end basis. So I also want to make that clear as well.

Bob, a little bit of detail.

Bob Fishman

My general comment, in terms of this business, we sell acid in inventory tracking software and services, and the RFID market has not taken off as expected and we are to be honest, a little bit below our business plan. The prudent action was to take the write-down of the assets, and that’s primarily goodwill. We’re going to scale back our RFID spending until we see an upswing in the RFID market, and that is really the logic behind the write-down in the quarter.

Reik Read

And I take it that these applications are largely focused on the compliance mandates.

Bill Nuti

Indeed.

Reik Read

Okay, great. Bill thanks so much.

Bill Nuti

Thank you Reik

Operator

(Operator instructions)

Our next question is from Mr. Kartik Mehta with FTN Midwest. You may now ask your question.

Kartik Mehta

Good morning.

Bill Nuti

Good morning Kartik.

Kartik Mehta

How are you Bill? Uh, I wanted to ask you a little about the ATM margins. You talked about geographic mix or deal mix having an impact. And, I just wanted to better understand, is it strictly just geographic mix, or are there a couple of geographies where pricing is aggressive, and that had an impact as well on margins?

Bill Nuti

The two main factors, one of which we discussed on the Q3 call at length, which is of course geography mix, revenue mix. We hit the nail on the head then, and that’s exactly what occurred in Q4. There was, as we expected, far more of an international mix, more emerging market mix in the quarter, than the Americas. Now I can report that the Americas did pick up in Q4 which is a positive sign as far as I am concerned, but that was off of a relatively low base. The other impact was in professional services revenue which was slightly down and as you know, in that space when your revenue is down and you’re carrying the cost it goes right to the bottom line there. And so, that was one dimension of the margin. The second of course was expense, as we also discussed in Q3, we consciously torqued up the spending on product development, and research and development, and now you know more of the reason why. Part of it was the announcement of our new ATM product family, Self-Serve of which we were funding throughout the year. Another piece of it was funding Oakcheck and our SCPM product which is now out in the market and has been introduced. And another chunk of the expense increase was associated with additional revenue, higher revenue than expected, as well as foreign exchange. So, those were the factors that led to the 15% margin in the quarter and a little bit ahead of where we expect it in Q4, but fairly close.

Kartik Mehta

Bill, you talked about the Americas, I am assuming that it also includes Latin America and some of the other markets. So as far as the U.S. market is concerned, did that also pick up in the fourth quarter?

Bill Nuti

It did, yes, we saw high single digit growth in the fourth quarter in the Americas.

Kartik Mehta

On the cash flow side, I think you discussed maybe improving accounts receivable, inventory turnover. I am assuming the inventory is, as you transition to your new outsourcing, that probably played an impact on inventory, if that’s accurate. And second, on the accounts receivable, is it just -- you need to pay a little bit more attention to it, and there were so many things going on that maybe the focus was not on that as other issues there.

Bill Nuti

Three main factors on inventories; one of course, was higher than expected revenues and the need to carry more inventory. One other factor was Foreign Exchange and the mix there. And, the other factor was the manufacturing realignment which caused us to have duplicate inventories being carried in our factories. That being said Kartik, we need to execute better in inventory management and we can make a relatively good excuse that the spinoff took our eye off that ball a little bit, but I can assure you that we are going to focus significantly on inventory management this year and we’re going to do a much better job.

On the receivable side, I would say two factors are mainly there. One of course is the fact that we were very focused on a successful spinoff and similar to inventory we took our eye off the ball a little bit, but again a little bit more on the execution front there than I would say on the inventory side, and Tony Mesetti who is in the room with us today and I have had a lot of discussion about this and you should expect, and our investors should expect to see us really focus on this in 2008 and do a much better job on the AR side and in general, working capital.

Kartik Mehta

Great Bill, just one last question. For your 2008 guidance, have you anticipated any FX contribution or share buyback?

Bill Nuti

I'm sorry. What was that question again?

Kartik Mehta

I'm sorry. For 2008 EPS guidance and revenue growth guidance, will the revenue growth include any FX contribution and have you included any share buyback in that guidance as well?

Bill Nuti

That's organic growth about 3 to 5%. So it doesn't include any potential FX benefit to the top line, and yes, the guidance does include some share buyback in the mix.

Kartik Mehta

Does that -- I mean, some as in 50 million or some as in 150 million?

Bill Nuti

It will really depend upon the stock price throughout the subsequent four quarters. The lower the stock price the more aggressive will be in terms of buyback throughout the year. So depending upon how it plays out during the year, it could dramatically increase the buyback or slowdown a bit. That being said, we’re fairly dedicated to a systemic buyback each quarter regardless of the stock price in the range of $75 to $100.

Bob Fishman

I will mention that we repurchased 4.2 million shares in Q4 and in January alone we've repurchased 2.8 million shares.

Kartik Mehta

Thank you very much.

Bill Nuti

Thanks Kartik.

Operator

And our next question is from Ms. Katy Huberty with Morgan Stanley. You may now ask your question.

Katy Huberty

Good morning. Going back to cash flow, given this isn't the first time you've discussed the need to focus on working capital and the manufacturing transition is behind you. Is it fair to assume that we'll see better metrics in the March quarter?

Bill Nuti

I think that’s fair Katie. I think what is fair is that you're going to see us focus on it internally and report back to you on it each quarter with an eye towards a little bit more detail on what we're doing about it. So, for what it's worth, be confident that it's a top of mind issue for 2008 for myself and the team here including Tony.

Katy Huberty

And then quickly Bill, can you go into a little more detail on where you saw strength in the traditional retail business and whether the pipeline and the conversations you had at NRF suggested that could continue in the near term.

Bill Nuti

The strength this past year was very balanced Katy. It was both in the traditional assisted point of sale space, terminals, cash registers, peripherals, as well as in the self-service base largely driven by our self-checkout platforms around the world which are gaining momentum as we speak. The general trend in 2007 from a customer point of view in terms of upgrading was really driven by the desire to increase productivity at the front-end of their stores. Of course, the more throughput in a retail store the less likely it is that they will need to increase their capital spending to build out new stores in a local areas or otherwise in particular, and frankly it's productivity/cost improvement if you can speed up the checkout process at the front-end. Our new platforms are with our question at least today unparalleled in the market in terms of performance, innovation, and DFX design for manufacturability, serviceability, quality, and cost. And we saw -- that was a big driver last year. We flat out have a better mousetrap. And, that's what our customers were telling us and the big wins that we had last year were all driven by this need to increase the front-end throughput productivity and alleviate some of the cost pressures that they were faced with.

At NRF, I heard that that was going to be a continuing trend in 2008, as well as our focus on Self-Service. I met with about 35 customers at NRF and I think I asked each one of them kind of what were the top-of-mind three items that they were interested in at NRFs and self-service was within the top three for the vast majority for obvious reasons, both from a consumer acceptance point of view and productivity point of view, but also digital signage where we have products and we're excited about that space as well, and point of sale. I was pleased to hear point of sale was still a top-of-mind item because of some of the age of some of those platforms out there.

Katy Huberty

Thanks. I appreciate it.

Bill Nuti

Thank you.

Operator

And you next question here is from Mr. Matt Summerville with KeyBanc. You may now ask your question.

Matt Summerville

Good morning. Several questions. First, Bill, did I understand you right that the way to think about the buyback, the quarterly anticipated minimum would fall in a range of 75 to 100 and then you could flex that up if the stock price is low, is that the right way to think about it?

Bill Nuti

That is the right way to think about it and it will depend upon to some degree the stock price, but you're thinking about it exactly right Matt. We're going to regardless of price buy somewhere between 75 and 100 million a quarter back, and as the year flows if the stock price is lower we will buyback at more aggressive rates.

Matt Summerville

And then, just can you talk more about what you're seeing or walking into the year with in terms of backlog within the ATM and retail side of the business. How does that compared to last year? And what are you seeing in terms of current ordered tempo in the two businesses?

Bill Nuti

Backlog is up year-on-year coming into the year in the mid to mid single digits range year-on-year, that's positive for us. Trend vise in the ATM space, clearly deposit automation as we've been talking about the last year. I think timing vise we hit it about bang on. We thought Q407 was going to be production pilots, and 2008 was going to be a year of rollout. I still believe that to be the case. I think companies like JP Morgan Chase is making a significant commitment that they have to deposit automation should help move other competitors in the market. In retail, the trend towards self-service will continue in 2008. New applications will be developed along the self-service dimensions as well beyond self checkout, but I think you'll see in that space – and self-service beyond those two core markets Matt, will continue at a very healthy growth clip in travel and hospitality, in healthcare, and we are starting to see some positive signs in entertainment. For example, our recent acquisition that we made of touch automation, where it's essentially a DVD vending device where you can sell shrink-wrapped for at least NCR solutions, shrink-wrapped DVDs, and do digital download. And, it's not just for retail.

I don't think you will find these platforms in a supermarket or just a retailer. I think you will find them in airports before you board a plane. We’ll be able to download music, movies, games, books, and all sorts of digital content, or rent a DVD and drop it off at the far end when you land, to a pen drive, to a flash card, to your PC, to your phone. I think you will see it in universities. I think you will see it in education centers and in schools. We think you will see it in retailers and also gaming as well, and then public sector as well. We are hearing from our customers that self-service trends are improving. So, beyond our growth markets of financial and retail we’re going to continue to pursue these other spaces with the products we have today, I think we are relatively well positioned, as well as some of this recent acquisition that we made and some that we hope to make this year.

Matt Summerville

How do you see, I guess, based on the customer conversations you're having, deposit automation playing out in the U.S in 2008 compared to 2007. And then, I guess when we think about your Americas business, do you anticipate similar growth in '08 to what you’ve experienced in the fourth quarter?

Bill Nuti

In terms of deposit automation in the U.S, it’s certainly -- I haven't changed my opinion, I still remain cautiously optimistic even in light of the subprime credit issues in the U.S economy that banks will move forward. And I think its, it really, they are a point that where I don't know if they have a choice to move forward or not, because their competitors, particularly the large banks are moving forward aggressively. The second thing I'd say is there's a clear cut productivity gain, productivity advantage to deploying deposit. We're hearing from our customers who've deployed it in the thousands of units already. They have been pleasantly surprised that even their lower end or higher end or upper end expectations on productivity and consumer acceptance were blown right through the roof. And so, it will help them, not just to remain competitive. It will also help them to drive our cost at the branch, and also help them from a consumer traction perspective with a consumer base that's expecting this service to be delivered.

I think that will eventually leak into the mid-sized banks, the community banks market place. I expect to see that more towards the latter half of 2008, not at the front end. I think the large banks will drive them in that direction. It will be far less complex for the mid sized banks to deploy in that timeframe. And my point of view relative to the installed base turnover hasn't changed. I still think it’s a 40, 40, 20, ‘08, ‘09, 10.

Matt Summerville

Okay great. And then just a question on ATM margins in the fourth quarter, did the -- I think it was in the high 14s range. Should that operating margin include or exclude the manufacturing realignment. The 79 million of reported operating profit that you mentioned in your prepared remarks?

Bob Fishman

That excludes the manufacturing realignment. We've not put that in the BU results.

Matt Summerville

Okay, that’s what I would have thought. Alright, as far as the retail business, the growth you saw on the point of sales side I think in the third quarter, Bill you attribute to that to maybe a couple of larger size rollouts. Does that the case again in the fourth quarter or was it more board? And then, does that momentum continue at all in the 2008 or those contracts kind of done at this point?

Bill Nuti

Q4 is a replica of Q3, in that regard Matt, these are still very large wins that we secured primarily with the 80 XRT platform that rolled out both in Q3 continued in Q4. I expect those rollouts to continue in 2008 in earnest and certainly here in Q1. We have continued to see good interest on the platform and while I'd love to sit here today and claim that we could have another year like that we had in 2007. It's going to depend upon the success of these platforms from an order rate perspective in Q1, Q2.

Matt Summerville

Okay. And then, can you comment similar to how you did in the U.S with respect to ATM's? What your thoughts are on EMEA and Asia-Pac for 2008?

Bill Nuti

I expect the U.S market for NCR to grow in 2008 on a year-over-year basis. And I expect the international markets to continue to be vibrant in terms of opportunity. I don't think they’re going to grow as aggressively as we saw in 2007 today. But I think they're going to be, it's going be a solid growth environment for that space as we go out into the 2008 timeframe.

Matt Summerville

Then going forward, when you report next quarter, I would assume you're going to report on the geographic data. And I guess I'm wondering what we can expect as far as data points regarding the individual product lines, i.e. retail, ATM's and then service. Are we going to get data on that as well or just by geography?

Bill Nuti

Yeah. Certainly we’re going to report externally on a geographic basis, but I want to assure you and give you as much confidence as I can give on this call. Our goal is to continue to be very transparent and report on how the industries are doing and give you a lot of color about what's driving success in each one of our industry segments. So, we are going to do our best in terms of working towards that goal of external reporting, where it's not just geographic but we give you some color about how the industries are performing on a global basis.

Bob Fishman

I would agree with that, the move from the old BU model was necessitated by this growth opportunities in the self-service market place, and we’re currently finalizing our segment reporting and we’ll report under the new structure at the end of Q1. But there will be regional reporting, and then we will continue to provide information around industries and the growth areas. So, we heard the message loud and clear as part of analyst day. We want to be as transparent as possible allow you to follow the markets that you've been following over the last couple of years. So I think what we provide in Q1 will meet the requirements.

Matt Summerville

Okay. And then just last question. Bill, can you sort of talk about the context of what you're seeing in your business? What you're expectations are based on your backlog order activity and how that really lines up with your guidance or doesn't?

Bill Nuti

Yeah. Obviously we talked a little bit about backlog earlier and I mentioned that backlog was up in the mid single digits year-on-year coming into the year. The current outlook -- I would say Matt, the metrics that we follow you know on a day-in, day-out basis haven't materially changed. They're relatively positive, whether we're looking at order rates or we're looking at revenue outlooks or write-down to the bottom line. So, we are of course, cautiously optimistic about the year relative to these current metrics. We're also cognizant of the same thing you are and everybody is which is that we're maintaining our fingers on the pulse of what's happening economically here in the U.S and globally.

And the only thing I can't report to you is that, we’re seeing that right now impacting in the company's business. So I would expect us to come out of the shoot here in Q1 as we typically do every year Matt. I don't see many changes from a seasonality point of view in terms of the performance of the company.

Matt Summerville

Okay, great. Thanks.

Bill Nuti

Thanks.

Operator

And our next question here is from Mr. Gil Luria with Wedbush. You may now ask your question.

Gil Luria

Thank you. First of all to clarify, you said you'd finish the transition at the manufacturing. So that mean all your, the facilities that you had in the Americas are now shutdown and you're entirely out sourcing in the Americas?

Bill Nuti

That’s true.

Bob Fishman

That’s correct.

Gil Luria

So now that this initiative is complete, what's the next step in terms of cost cutting and increasing productivity? What are the next big initiatives that can give you some of those gains over the next few years?

Bill Nuti

The focus in the factories now Gil is about productivity improvements and efficiencies largely led by Lean Six Sigma Implementation in the factories. So how do we get more efficient and more productive in these low cost areas? Supplier collaboration is another big piece. How do we continue to build a supplier base around our plants that are more efficient more productive to help us to drive out cost. The constant focus on absorptions and driving greater absorptions in the factories and more efficient way of manufacturing throughout the quarter, which also is going to be driven by the continued focus on linearity on a revenue basis and shipment linearity inside the company as a key metric as well.

From another angle, we have, I think a good amount of process improvement work that needs to be done in the company. And I can spend a good couple of hours with you taking you through the various mega processes in our company that cost too much, take too much time and make us less simple to do business with. But 2008 will be the year where we get very focussed on process improvement to drive greater productivity from an enterprise point of view globally, as well as greater efficiencies on the year. So, I would tell you that the foot is still firmly on the brake with regards to expense management cost management, but this is the year where we kick off, and to me it’s a muti-year effort, a lot of initiatives in terms of productivity and d efficiency.

Gil Luria

Got it. And in terms of your new product, I want to clarify the bulk checkability. Is that possible on your previous line of ATM products or is that possible only with the new line of ATMs?

Bill Nuti

It's possible on both. The new line of ATMs, the 20 family and the 30 family, all have the ability to deploy a bulk check today. In fact, bulk check is not only in pilot, it's going into production this quarter. And I would also tell you that, you can upgrade the personas line of ATM. The previous family of ATMs as well. That upgrade will be available towards the middle part of this year for customers who have those products. So we will be in a position where you know after the second quarter of 2008, any and all ATMs out there in the market, most f them will be able to be upgradeable to bulk check.

Gil Luria

Which line did JPM or J.P. Morgan buy?

Bill Nuti

I am sorry.

Gil Luria

J.P. Morgan. Is that the new line of ATM that they are buying from you now?

Bill Nuti

No. It's both the new line as well as upgrades to current ATMs in the base.

Gil Luria

So how does hat these products are almost in the market. Can we assume -- and this is, you said, I think the largest upgrade in a while. Can we assume that R&D expenses can start to fade down from this point?

Bill Nuti

We are looking at all of our expenses, Gil, that’s another very good point. We consciously spiked up the investment in R&D last year to get these new products up, by the way we will have over 30 new products coming out in 2008, 30, and we are obviously excited by that, but you can expect us to just start to flatten out our expense in R&D this year as we focused more on product launch success and product transition success. That being said, there are whole host of growth opportunities out there in self service and some of these new industries and if we find an opportunity to invest, given, based on how well the company performs, we will do that.

Gil Luria

Got it. A couple of more questions. You seem to be, I think that over the last few months you have gone from a position of wanting to do the buybacks over two years. Now it sounds like you may be able to utilize that all over year. Does that reduce your inclination to do acquisition? Does that change at all your position that you become a little more open to doing smaller and medium sized acquisitions?

Bob Fishman

Absolutely not. No. That's the beauty of the strength of this company's balance sheet and our cash position. We not only can buyback more aggressively given some of the challenges in the equity markets, but we can also afford to make a whole host of new acquisitions and frankly, during times like this, companies also can become little bit cheaper to buy. So we are excited by some of the potential opportunities we have to make these smaller to medium size acquisitions in a way.

Gil Luria

One last question. You seem to have a larger than usual contribution from the payment, imaging and other line. What happened in that line? I imagine, it's other than may be the larger contribution there. Could you elaborate what that was?

Bill Nuti

It was timing, more of a timing of transactions that gave us the benefit in payment. I was very disappointed in the payments performance in 2007. Let me be very frank with you. We had a good Q4, but that's only simply because we didn't execute very well in Qs 1, 2, and 3 and some of the timing of larger transactions came to fruition in Q4. We have to do a better job in payments in 2008 in general.

Gil Luria

Got it. Thank you very much.

Bill Nuti

Thank you. And, operator, we have time for one more question.

Operator

Our last question will be from Mr. Reik Read-Robert with W. Baird & Company. You may now ask your question.

Reik Read

Hi Bill, I just want to follow up on the product gross margin. When I look at them, both year-over-year and sequentially they were down, can you talk about the dynamic there? I assume some of that is the manufacturing realignment cost, but can you talk about other factors that might have caused that.

Bill Nuti

Yeah. I think you hit the nail on the head, there we. You are looking at obviously the GAAP reported, so you have a number of one time cost, primarily the NextGen cost, included in there the manufacturing realignment. So, again when you strip those out, you actually see product gross margins improving year-on-year in our businesses.

Reik Read

But unless, I did the math, still roughly flat sequentially and usually fourth quarter a little bit better. Is there another factor in there that accounts for that?

Bob Fishman

A little of the mix that Bill talked to you about obviously impacts the product gross margin.

Reik Read

Okay

Bob Fishman

So you have that in Q4.

Reik Read

Okay. Great. Thank you guys.

Bill Nuti

Great. Thank you, Reik, and I want to thank everybody for being on the call today. We look forward to circling back to you after Q1. Take care.

Operator

Thank you for joining today's conference call. All participants may disconnect their line at this time. Thank you, and have a nice day.

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Source: NCR Corporation Q4 2007 Earnings Call Transcript.
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