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NCR Corp. (NYSE:NCR)

Q2 2008 Earnings Call

July 29 2008 8:00 am ET

Executives

Gavin Bell - IR

Bill Nuti - Chairman and CEO

Tony Massetti - CFO

Analysts

Reik Read - Robert W. Baird & Co.

Katie Huberty - Morgan Stanley

Matt Summerville - KeyBanc Capital Markets

Gil Luria - Wedbush Morgan Securities

Bennett Notman - Davenport & Company

Kartik Mehta - FTN Midwest

Operator

(Operator Instructions)

I will now turn the call over to Mr. Gavin Bell. Sir, you may begin.

Gavin Bell

Thanks, Laura. Good morning and thanks everyone for joining us for our second quarter 2008 earnings call. Bill Nuti, NCR's Chairman and CEO will lead our conference call this morning. After Bill's opening remarks, Tony Massetti, NCR' CFO will provide comments on NCR's total company financial results and our guidance for the full year.

Our discussion today includes forecasts and other information that are considered forward-looking statements. While these statements reflect our current outlook, they are subject to a number of risks and uncertainties that could cause actual results to vary materially.

These risk factors are described in NCR's periodic filings with the SEC and our annual report to stockholders. On today's call, we will also be discussing certain non-GAAP financial information such as free cash flow, and the results excluding the impact of pension and other items.

Reconciliations of non-GAAP financial results to our reported and forecasted GAAP results, and other information concerning such measures are included in our earnings 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 July 29, 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

Thank you, Gavin. Good morning everyone and thank you for joining us. NCR's strong second quarter results were broad-based geographically and reflect continued solid demand for our self-service solutions.

Even in a challenging global economy, consumers want to connect, interact and transact with businesses in new ways, and NCR is at the forefront of helping our customers meet that demand.

At the same time, we are striving to make the most of this opportunity by managing for profitable revenue growth, building a sustainable and leading cost structure, and improving our working capital position.

We have maintained our business momentum thus far in 2008 as evidenced by solid execution, strong revenue growth, margin expansion, and much improved cash flow. We remain focused on our key management priorities, and while we have significant work ahead of us, the progress we demonstrated in the first half of 2008 indicates that NCR continues on the right path.

For the remainder of my comments in the prepared statements, we will be comparing NCR's results from continuing operations versus the prior year. The results for prior periods do not include the impact of Teradata, making this an apples-to-apples comparison.

NCR delivered a very good second quarter, with year-over-year revenue growth of 13% and a 33% increase in non-GAAP income from operations. We achieved double-digit revenue growth in each of our three geographic segments, and 90 basis points of gross margin expansion in aggregate.

Our results by segment in the second quarter were as follows. Revenues in the Americas grew 11% to $578 million, which included 1 point of foreign currency translation benefit. Revenue from EMEA was up 16% to $513 million with an 8 point benefit from foreign currency, and revenue from Asia-Pacific-Japan was $241 million, up 10% from Q2 2007 which included a 9 point benefit from foreign currency.

In dollar terms, the majority of our growth in the quarter came from our financial services customers, with good results also generated in retail and our emerging growth industries. In banking, growth continues to be driven by emerging markets, market share gains and deposit automation.

We're seeing solid demand for our ATM kiosk solutions, both in the US and internationally. In the US, we expect Check 21 rollouts, and our new innovative NCR SelfServ family of ATM kiosks to continue to drive growth.

Among the financial services industry highlights from Q2 were the following: We continue to ramp up the deployment of our new SelfServ multi-check solution for ATM deposit automation at several leading US financial institutions, including JPMorgan Chase, where NCR was selected to provide an end-to-end deposit automation solution, including, ATM kiosks, maintenance services, Gasper monitoring software and ImageMark, back- office check processing software.

The rollout of NCR's SelfServ continues to progress successfully with orders from more than 120 customers around the globe year-to-date. NCR's SelfServ has already begun to be installed for major customers in the United States, Australia, Canada, China, and Spain.

Customer reception for the new product line has been extremely positive, and the ongoing international product road show continues to generate excitement and customer interest. In China, NCR has gained share through major accounts essentially by bids, and we continue to benefit from strong momentum in the emerging markets overall.

We also experienced solid results in the retail industry, driven primarily by our point-of-sale solutions. Retailers continue to invest in our solutions, because they increase productivity, reduce cost, and improve the customer experience.

There were several highlights in the quarter. The US Postal Service selected NCR as the exclusive provider of retail point-of-sale hardware for thousands of post offices across the United States. Under the three-year multi-million-dollar contract, the United States Postal Service will install NCR's comprehensive solution, beginning in the second half of 2008.

This upgrade will deliver improved operational efficiencies and streamlined customer service, and is supported by an NCR provided managed services contract, including help desk, project management and maintenance services.

NCR entered a strategic agreement with Unified Grocers, a large West Coast wholesaler. Utilizing this important indirect channel partner will broaden our ability to provide NCR point-of-sale and fast plan solutions to the independent grocery marketplace.

Leading United Kingdom food retailer Sainsbury's, together with NCR, won the 2008 European Retail Solutions, Best Green IT Initiative award for its move to install NCR's innovative two-sided thermal receipt printing technology.

Last year, Sainsbury's became the first European retailer to begin using the new printers which use over 40% less paper. By the end of 2008, consumers will be receiving two sided receipts from 7,000 check outs at Sainsbury's throughout the United Kingdom.

In addition, we remain encouraged with the overall revenue trends in our emerging industries, which we identify as travel and hospitality, healthcare, gaming and entertainment, and government and public sector. The combination of productivity gains, cost reduction, and increased consumer demand for self-service channels are fueling our opportunity to become the global leader in providing solutions to meet this demand.

In the second quarter, for example, our healthcare related revenues grew significantly. Although we are still looking at small revenue compares in our emerging industries relative to our established financial and retail industries, we see great opportunities ahead.

Just a few examples of our various opportunities include, in the quarter: NCR extended its self-service portfolio further into the hospitality market with the unveiling of the new NCR XpressPort kiosk, a sophisticated modular, hotel check-in kiosk, designed to meet consumer demand for self-service in a high touch environment.

The NCR XpressPort kiosk is part of the NCR Xpress Hotel self-service solution, which allows guests to perform a number of tasks, including hotel check-in and check out, print room keys, locate and modify reservations, and view and print messages.

In the healthcare space, Siemens Healthcare and NCR announced an agreement to offer NCR MediKiosk Solutions to the Siemens customer base in North America. This self-service check in solution allows patients to identify themselves upon arrival at the facility, view and confirm demographic and insurance information, electronically sign consent documents, and make co-payments.

Healthcare organizations will now be able to streamline the patient registration process, shorten wait times and significantly reduce administrative costs.

Also in healthcare, Tenet Healthcare Corporation will now offer patients system wide, the convenience of paying hospital bills online. Tenet, which operates 53 hospitals in 12 states, deployed, NCR Online Bill Pay software, following a successful pilot implementation earlier this year.

NCR Online Bill Pay software is an automated bill payment application that enables patients to enquire about the status of their accounts, and pay outstanding balances via a secure web-based platform.

And in the gaming and entertainment industry, we recently announced a licensing agreement with e-Play to expand customer's options for delivery of digital entertainment, a move that adds bare-disc technology to NCR's existing global self-service technology portfolio.

Consumers can now rent, buy, sell, and trade movies through kiosks featuring innovative bare-disc technology, a new platform that allows bare movie or game disc's to be vended and returned without the need for cases or sleeves.

NCR is beginning to engage several opportunities in the growing DVD rental market in the United States and other major countries. Over the next several quarters, we will update you on our progress and hope to announce other customer wins. Our goal is to become the global market share leader in this segment, and our product line up, with the additions of Touch Automation, e-Play and Ambient is unmatched in the market.

Whether it's growing these emerging categories or furthering our market leadership in established product solutions like ATM's, we can't make the most of our many opportunities if with we do not execute on our planned operational improvements.

In the quarter, we continued to make progress towards building a sustainable, leading cost structure. A cost structure characterized as industries best practice, providing both a competitive advantage and financial flexibility.

As part of that commitment, we commenced a set of internal initiatives to further increase our productivity, make us more responsive, and to position NCR as a company that is simpler to do business with. These actions will also contribute to making NCR more customer-focused and market driven.

As we communicated to you during our Analyst Day presentation last December, we have targeted approximately $150 million to $200 million in cost savings in the three year period 2008 to 2010, of which, approximately half should drop to the bottom line, and the other half be reinvested into the business for strategic reasons.

Our new industry- focused model has provided significantly good opportunities to improve both our business processes and, most importantly, our ability to better serve our customers.

As part of this ongoing initiative, we took the action in the quarter to increase our efficiencies, resulting in a charge of $32 million pretax or $0.14 per diluted share. We will now continue to focus on creating efficiencies throughout the organization, and by doing so, expect to achieve our margin objectives over the next three years.

Now I'll turn the call over to Tony, who will discuss our financial results in greater detail. Tony?

Tony Massetti

Thanks, Bill. NCR's total revenue from continuing operations of $1.33 billion grew 13% versus Q2 2007. This includes a five-point benefit from currency translation. We reported GAAP income from continuing operations of $45 million or $0.26 per diluted share. This compares with $51 million or $0.28 per share in Q2 2007. NCR's results from continuing operations did have special items in those quarters.

The most significant were; we began our organizational realignment initiative that Bill just mentioned. This amounted to $32 million pre-tax or $0.14 per diluted share in Q2 2008.

And in Q2 of 2007, NCRs continuing operations had three special items. First, an $11 million pretax benefit related to updating our estimates for our ATM manufacturing realignment. Second, an $11 million net tax adjustment related to prior periods and, third, we took a $7 million net charge associated with the Fox River environmental matter.

Excluding these items, non-GAAP diluted earnings per share from continuing operations grew 29% to $0.40 per share in Q2 2008, versus $0.31 per share in the prior year. We had pension expense of $7 million from continuing operations in the quarter compared to $8 million of pension expense from continuing operations in the second quarter of 2007.

To analyze NCR's operational performance without the effect of special items and pension expense, please see the supplemental financial schedule included in our earnings press release that reconciles our GAAP to non-GAAP results. For the remainder of my comments during today's call, I will exclude the impact of the special items and pension expense.

Our Q2 gross margin was 23.3%, up 90 basis points from the 22.4% achieved in the second quarter of 2007, driven primarily by the realization of benefits from our manufacturing realignment, and continued emphasis on cost reduction initiatives. NCR's operating expenses were up $22 million versus Q2 2007; primarily due to higher SG&A and R&D expenses.

Total company non-GAAP income from operations of $101 million increased 33% from Q2, 2007. Non-GAAP operating income was 7.6% of revenue in the quarter.

Below the operating income line, we had zero other income in Q2 2008 compared to $8 million of other income in the second quarter of last year. The tax rate in the second quarter was 28%.

Turning to the balance sheet; we ended the quarter with $754 million of cash, our short and long-term debt was $309 million. During the quarter we repurchased approximately 5 million shares of our common stock for $127 million, and this leaves approximately $195 million of Board authorization available for future repurchases as of the beginning of third quarter 2008.

And to give you an update of our share repurchase activity since the close of the second quarter, we have repurchased 1.4 million shares of our common stock for $36 million from the start of July through yesterday. This leaves approximately $159 million of Board authorization remaining as of today.

Moving to the cash flow statement, in second quarter NCR generated $69 million of cash from operating activities, versus using $16 million of cash in the prior year period.

After investing $36 million in capital expenditures, we generated $33 million of free cash flow compared to negative $35 million of free cash flow in the second quarter 2007.

NCR defines free cash flow as cash from operations less capital expenditures for property, plant, equipment, and additions to capitalized software. As we mentioned on our Q1 earnings call, we are focused on better management of accounts receivable and inventory. In the second quarter of 2008, we improved in both areas.

During Q2, 2008 our accounts receivable balance declined $57 million and our inventory balance declined $17 million.

While we are very pleased with our second quarter operating and financial performance, and the solid momentum we are experiencing across the board, we continue to be somewhat cautious for the balance of the year due to the broader, macroeconomic environment and more difficult financial comparisons given NCR's strong performance in the second half of 2007.

That being said, based on our strong start to 2008, and our current outlook for the second half, we are increasing our full year guidance as follows: We now expect full year revenue growth of 6% to 8%, up from the previous guidance range of 5% to 7 % growth.

We are increasing our non-GAAP earnings guidance to a range of $1.62 to $1.67 per diluted share, up from the previous guidance range of $1.52 to $1.57 per diluted share.

We forecast pension expense of approximately $40 million in 2008. Full year tax rate is expected to be 25%. We also expect free cash flow to be $200 million to $225 million in 2008, excluding the cash payments associated with our organizational realignment activities.

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

Bill Nuti

Thank you, Tony. Overall, the first half of 2008 has been a highly productive one for NCR. Revenue growth, margin improvement, earnings, and cash flow have been strong, and we are optimizing the use of our capital structure to improve shareholder value.

Those achievements show up in the results we are reporting, but what is most exciting for us is the energy and activity inside the company that is helping to create them.

NCR has been an innovative company throughout its history, but we just might be in the most innovative period in our almost 125 years. We have talked today about our new ATM platform, SelfServ, about our ImageMark check processing technology, our kiosk innovations for multiple new verticals that NCR has never reached before. Our two-sided thermal paper that saves customers money, and has a positive environmental impact, and there are many, many more.

These innovations give NCR a platform it hasn't had in a long time, a multi-dimensional platform for profitable revenue growth.

We are already beginning to demonstrate it in the first half of this year. At the same time, I can safely apply the term innovation to how we are rethinking our business practices within the company. Process innovation to drive efficiencies are an ongoing focus as we find ways to reduce manufacturing and servicing costs.

Innovative process improvements, whether through better product life cycle management, design for manufacturing and design for serviceability and innovation for continuous improvement through organizational design, business process improvements, and business process outsourcing.

In short, we are attacking a self-service market with tremendous potential, at the same time, that we are reengineering the way we do business. This creates significant opportunity for our shareholders.

Our job is to stay sharply focused on executing and operationalizing our business strategy, delivering profitable market and wallet share gains in our traditional industries, and breakthrough growth in new industries. Remaining focused on building a sustainable leading cost structure, and evolving to a more externally-focused culture that is customer, market, competition, and consumer-driven.

With that, operator, we're ready to take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions).

Our first question comes from Reik Read. Your line is open. Please state your company name sir.

Reik Read - Robert W. Baird & Co.

Hey, good morning. Just a quick question on the retail side of things, Bill, as part of your comments in the press release. You talked a lot about financial institutions. Does that suggest that retail came back down to the market levels?

And then, can you also talk about the pipeline, you've got the win at the Postal Service. Does that mean that things kind of come back, or how should we be looking at that market versus some of the large opportunities that you have?

Bill Nuti

Yes. Retail did Reik come down to more of the market kind of growth. We did grow faster than the market, and faster than our peer group in the quarter that I could see so far, particularly the larger players in the marketplace. But, think about it in the single-digits in terms of growth, lower single-digits in terms of growth, so secular growth. I would say that we are also now dealing with tougher compares. Retail had had a spectacular.

Bill Nuti

Hello?

Operator

Our next question comes from Katie Huberty. Your line is open.

Katie Huberty - Morgan Stanley

Yeah, thanks. Good morning, can you hear me?

Bill Nuti

Operator?

Operator

Sir, you may go ahead. We have a question from Katie Huberty of Morgan Stanley.

Katie Huberty - Morgan Stanley

Hi, can you guys hear me?

Bill Nuti

We can finally hear you, Katie. We had a little trouble on our end.

Katie Huberty - Morgan Stanley

Okay, perfect. Just following up on the first question. Why did the Americas gross margin decrease sequentially if the relative strength was in higher margin financial self-service?

Bill Nuti

Yes, it decreased sequentially because of mix, Katie. Higher mix of deposit automation in large banks, and also retail point-of-sale was a significant proportion of the revenue in the US.

Katie Huberty - Morgan Stanley

Okay, perfect. And Tony, you did a great job reducing inventory and receivables this quarter, but free cash flow still tracked below net income, and based on your guidance, it sounds like that will be the case for the year. So, is there more you can do on the cash flow front?

Tony Massetti

I think we did a pretty good job in the quarter, Katie, as you pointed out on AR and inventory. Our AR performance improved $57 million sequentially. We're down below $1 billion AR for the first time in a long time. Our DSO performance in the quarter improved 13 days sequentially and 10 days year-to-year. So that improved AR as well as the $17 million reduction in inventory drove better cash flow performance.

We went through the numbers in a script on a year-on-year basis. We generated $69 million of cash from operating activities versus using 16 last year, so we think we've made good progress.

Clearly, we have more work to do on the AR front, as we've talked in the past. We should see gradual sequential improvements in our DSO performance, and that's still the plan there, as well as, more work to do on the services parts inventory side.

I think inventory there has peaked. We should see that come down in the next several quarters. So, we expect to continue to see improved free cash flow.

Katie Huberty - Morgan Stanley

So, it's fair to assume that by 2009 we'll see free cash flow above net income again?

Bill Nuti

A little early to say Katie. That would certainly be the goal at this point.

Katie Huberty - Morgan Stanley

Okay. And then just lastly, what do you plan to do with the $300 million of debt that comes due in the next year?

Tony Massetti

I'm sorry, say it again, Katie?

Katie Huberty - Morgan Stanley

It looks like $300 million of debt was reclassified as short-term. Do you plan to refinance that when it comes due?

Tony Massetti

Yes, we do. It's due in about a year. So, better accounting is to re-classify that as short-term. We do plan to refinance. We're evaluating what the right capital structure is for NCR at this point. I would expect it would be at similar levels as it is today which is the 309.

Katie Huberty - Morgan Stanley

Is there a minimum level of cash that you'd like to hold on the balance sheet?

Tony Massetti

You know, I think anywhere from $200 million to $400 million of cash, Katie, at the current debt level.

Katie Huberty - Morgan Stanley

Okay, perfect. Thanks so much. Good quarter.

Bill Nuti

Thanks.

Operator

Thank you. Again, we'll bring up Reik Read. Your line has been rejoined, sir.

Reik Read - Robert W. Baird & Co.

Thanks. Bill, I'm sorry. You just got cut-off in mid stream. So I am going to back and ask the same question. Just talk about the retail side of things and coming back down to market, and a little commentary on the pipeline, and some of the new products that are out there.

Bill Nuti

Yes. Sorry about that, Reik.

Reik Read - Robert W. Baird & Co.

Yes. No worry.

Bill Nuti

What I was saying was; it was a brilliant answer. You should have listened to it. It was great on our end, Reik. What I was basically saying was that, retail has, for us, is now growing at about the secular rate. We did grow faster than some of our large industry peers that we've announced already this quarter. So, low single digit growth on a global basis, again, some pretty tough compares.

We are going to have some tough compares for the next year at least. But we have a solid backlog. And while the growth may not be as high in the retail space, and that's not such a negative thing for NCR given the margin implications, it is still a robust opportunity for us and we have fairly significant business coming in the pipeline for 2009 in the point-of-sale deals we've already won, like the postal service and other large retailers that we've won over the last year.

Reik Read - Robert W. Baird & Co.

And Bill, can you talk about, are the international opportunities starting to get larger and then also, from that, you touched in your comments about expanding channel opportunities. There's got to be a lot of Tier 1 or Tier 2 and Tier 3 retailers that you can't reach very effectively with your direct model. How do you plan to attack those folks?

Bill Nuti

One, we are going to go down market indirect. For example, the Unified Grocers deal I announced today is a channel opportunity for point-of-sale, and also, for self check out. You will continue to see us work with the likes of the ScanSource's and the Ingram Micro's to grow out our footprint relative to Tier 2 and below.

In the international market, we are seeing a bit more activity around the Tier 1. We traditionally had a great go-to-market in the US on Tier 1. We've got to build that out in the international markets. And, you should expect over the next year to two for us to strengthen our indirect capabilities and begin to penetrate that Tier 2 through 6 retail market space.

Reik Read - Robert W. Baird & Co.

And then just last question. You talked about from a mix perspective, retail being tough, but you've done some things to try to improve margins. Are those largely done at this point, and it's a function of volume? Or are there some other things that you can do? And can you give us just an idea, if I look out two or three years, how much you can gain from a margin perspective in retail?

Tony Massetti

Sure, Reik. I'll just give you some overall color on gross margin and then Bill can add specifically, on retail. So gross margins improved 90 bps year-to-year on a quarter and 120 bps sequentially. So, as we said in the script, the increase was driven primarily by realization of benefits from the manufacturing realignment last year and continuing emphasis on cost reduction initiatives.

If I'd look at it on a non-GAAP basis excluding special items and pension expense, both product and services gross margins improved year-on-year in the quarter. So, it was across all our products and all parts of the business. So I think we've got good momentum there. And we expect to see, again, gradual sequential improvements in gross margin over time.

Bill Nuti

And with all of the initiatives we have going on today, Reik, I would be disappointed if we weren't able to improve the margin and meet or exceed the goals we gave you last December.

Reik Read - Robert W. Baird & Co.

Okay. Thanks, guys.

Bill Nuti

Thanks.

Operator

Our next question is from Matt Summerville. Your line is open and please state your company name.

Matt Summerville - KeyBanc Capital Markets

Good morning. You've had $13 million of pension expense year-to-date. How are you going to have $40 million for the full year? And I guess how should I model the $27 million Q3 versus Q4, if in fact that's the right number?

Tony Massetti

Yeah. That's a good question. I think the $40 million is probably on the high side. It is a bit conservative. You could think between $35 and $40 for the full year, and split it, rock the balance roughly Q3 and Q4.

Matt Summerville - KeyBanc Capital Markets

Okay. As we move into the back half of the year, Bill, can you talk about what kind of expense leverage we should see? And then, specifically in the second quarter, was there anything unusual in that R&D number, that's the highest quarterly number I think I've seen in a long time.

Tony Massetti

Yes. We have more new products coming out in '08 than at any time in the history of NCR. But, just a little color overall on our expense performance. So, expense increased year-to-year to $22 million in the quarter, SG&A increased $17 million and R&D increased $5 million . But as a percentage of revenue, we declined year-to-year and sequentially. So, overall, we were down 180 basis points year-on-year as a percentage of revenue in the quarter.

So, we are seeing leverage, and we expect to continue to see some leverage over the next several quarters, particularly in our G&A, our infrastructure spend. As part of the cost initiative, we talked about at Analyst Day. We are going to continue to invest in sales and R&D, but not at the same rate as revenue growth. So the leverage will be in our G&A expenses.

Matt Summerville - KeyBanc Capital Markets

With respect to the second quarter, can you comment on order activity in the two product centered businesses, ATMs and retail, and then how your overall backlog looks both sequentially and year-over-year for NCR overall?

Tony Massetti

Orders were up low double-digit in the quarter. A very solid quarter for us in terms of order growth. Backlog was flattish to up a million or two in the quarter, nothing to talk about but backlog was very strong on a year-on-year basis coming into Q3. The funnel, or what I'd call the front log in the past Matt,, that's where you look at your forecast or your funnel and then you look at your order flow, and then you look at your backlog, it still remains very positive.

Matt Summerville - KeyBanc Capital Markets

Okay, great. And then Bill, can you also give a little more color on just ATMs and retail, and what you're seeing by the three major regions that you're now reporting and how we should think about the back half of the year? You've had pretty anemic growth year-to-date in Asia, specifically, can you comment on that and then what you see going forward?

Bill Nuti

Yes. I'll start with the Americas and ATMs and then go to retail. Strong ATM activity in the US, particularly driven by deposit automation in the large banks. National banks, mid-sized banks are still relatively muted in terms of growth. There is certainly activity there. We've seen more deposit activity in that space, but not at the same pace as we have in large banks.

Retail remains very strong in the US. The retail point-of-sale business because of the wins we have piled up the last few years, and those we've most recently won in this space have created a solid opportunity for the business going into 2009.

Europe is driven largely by emerging markets on the ATM side. Western Europe is slower. In the point-of-sale space, we have work to do in Europe compared to the US marketplace. It's not as robust business nor do we execute as well. However, over time, the opportunity there is pretty significant if we can continue to do the work we have been doing. I'm encouraged there, and certainly, the channel will participate more so, as we build our channel capability out over the course of next few years.

Asia-Pacific. Matt, the issue with Asia-Pacific is we do not sell ATMs in Japan and Korea, two of the largest markets in the world by GDP standards and certainly in terms of the use of ATM. So, we don't have the same level of capability in Asia-Pacific as we do in the other theaters around the ATM space. However, China continues to be strong for us as well as India. South-East Asia is doing okay. I would like to see more activity in South-East Asia on the ATM front.

Point-of-sale is a different story. Most of our point-of-sale solutions really only play in Japan rather than the rest of Asia, because we don't have a low end platform as yet to participate in those markets and/or a channel to participate in those markets, but over time, that's certainly a wonderful opportunity for us that we intend to exploit.

Matt Summerville - KeyBanc Capital Markets

That's very helpful color. You talked earlier about the year-over-year gross margin decline in the Americas region. Conversely, you had almost 400 basis points of improvement in EMEA and somewhere north of 100 in APJ. Can you talk about what's driving that? Is that mix related as well or is this more of the benefit from the cost take out in EMEA for example, specifically relocating to Hungary?

Bill Nuti

Both. It's both a combination of price and mix, as well as the cost take out. Matt, I couldn't give you a percentage of what impact prices and mix has over the cost take out, but I'd say it's both.

Matt Summerville - KeyBanc Capital Markets

To your point on pricing, what have you actually seen in terms of pricing for the company overall?

Bill Nuti

In the mature markets pricing is stable and moderate.

Tony Massetti

Mid single-digits.

Bill Nuti

Mid single-digits. In the emerging markets, it's still high single-digits. It's more of a price sensitive market. Everybody is going for the emerging market business out there.

Tony Massetti

Mid single year-on-year.

Matt Summerville - KeyBanc Capital Markets

Okay. If you look at what you're trying to do in retail, moving into some of the lower tiers, Bill, how do you think about what service model you bring to that equation?

Bill Nuti

We bring two different capabilities to that equation, Matt. One is we can be a wholesaler for our channel partners. So, they can resell our branded service to a low-end or mid-sized retailer, and we can deliver on their behalf. It's a wonderful opportunity for our partners both today and of the future to be able to offer services they cannot afford or, frankly, do not have the capability of offering today in that space.

They can also do their own service, and in essence, if they do their own service on those customers, they in essence pay us for diagnostic fees and for parts in that type of a model. So, very similar to what you see in the marketplace in high-tech today.

Matt Summerville - KeyBanc Capital Markets

Based on what you see in your overall backlog. Bill, are there any other and since we've been talking about point-of-sale and retail, are there any other big deals that you're able to cite or any other big wins that you're able to talk about that will benefit the second half of '08 into '09? And then against the 20% plus comps that you have in retail, do you believe based on what you're seeing right now in the business, you can grow on top of that?]

Bill Nuti

I think growth on top of the comps we have is going to be somewhat difficult in the second half of the year and going into '09. I'm less concerned with that, Matt, because of the margin implications of that business.

So while I'd like to show up with a big growth number, I'm happy with what we have in the pipeline today. I think we have got good opportunities in the pipeline, plenty of wonderful opportunities that will enable us to sustain or exceed the growth that we had on a comp rate basis in those tough quarters.

So, relatively speaking, the forecast is good and there is still a bunch of big customers out there looking to upgrade. Secondarily, I'd say if we get the channel going in the right direction that's a net positive, and then thirdly, relative to growth, it's more about profitability from my perspective than growth in that segment going forward.

Matt Summerville - KeyBanc Capital Markets

So suffice is to say, is the profitability of your current backlog in retail better than what it would have been six months ago?

Bill Nuti

I would say same.

Matt Summerville - KeyBanc Capital Markets

Okay.

Bill Nuti

Same because it's still largely the big customers, Matt, these are $50 million, $100 million deals that rollout over three years that are still in the backlog. Next year, for example, in 2009, as we look at the backlog, where we sit today, we probably have 5,000 to 10,000 more point-of-sale units that will be shipped in 2009 that we know are going to be shipped in 2008.

Matt Summerville - KeyBanc Capital Markets

That color is very helpful. Just a couple of more questions, and then I'll hop off. The 6% to 8% revenue growth guidance, can you remind me, does that include foreign currency? I don't think it does, but I wanted to double-check. And then, is there anything of size out there that you've won thus far as far as licensing the 2ST technology?

Bill Nuti

On the full year guidance, Matt, we assumed about a 2% to 3% foreign currency help.

Matt Summerville - KeyBanc Capital Markets

Okay.

Bill Nuti

On the 2ST, now this is an interesting one, Matt. I'm starting to get very bullish around the potential for 2ST. We did sign a license in the prior quarter, a company by the name of SATO in Japan. We've now signed and I don't have the exact numbers, but probably five or six licensees are signed up, large paper manufacturers like Koehler, and Appleton and Kanzaki in Japan.

A couple of printer manufacturers like Toshiba, Tech and also SATO. We're working on a few others. The big news on 2ST is that the maturity of the solution is getting better monthly.

Clearly the win that we had at Sainsbury's in the UK was significant, and for us, 2ST or for our customers, it's not just about the cost savings in terms of using less paper. And I would argue in an environment where commodity prices are increasing including paper that becomes more and more of a high beta for our customers to take a look at in terms of cost savings.

But what you have is, the ability with 2ST to also, I think, participate in the whole environmental focus that our customers are beginning to bring to bear in terms of corporate social responsibility. And then thirdly, the ability to do online real-time marketing. Our receipt paper, because it's two-sided, you can print real-time and offer to that individual at point-of-sale or wherever you are, you could be in an airport, because our two sided thermal paper also does airport receipts.

You can print online real-time promotions as opposed to buying these preprinted two sided receipts that you buy today, so what happens if you're 50% through the promotion and you still have 50% more paper with the promotion printed on the back?

It's less flexibility for the retailer, so this technology is getting more and more play. We're beginning to build a pipeline, and certainly, both on the IP licensing front, but also on the printer front. We'll see where it leads us, but I'm encouraged.

Matt Summerville - KeyBanc Capital Markets

Great. Thanks a lot, guys.

Bill Nuti

Thank you.

Operator

Okay. The next question comes from Gil Luria. Your line is open and please state your company name.

Gil Luria - Wedbush Morgan Securities

Thank you. First question is about the actions you took in the quarter. Would you mind giving us a little bit more detail about where they were taken, was it a lot of severed headcount, kind of order of magnitude around that? And then what are the implications in terms of the timing of the savings, 150-200 goal over the next three years? Does that mean that they will be mostly in '09 and 2010, or are we going to start capturing some of that this year?

Tony Massetti

I'll start off, Gil, and then Bill could provide some color. So this was a global realignment. So it was as much outside the US as here in the States. It's an initiative to reduce the redundancies and process efficiencies, a lot of which came out of the move to a functional model from the BU model in early 2008, and this will enable us to become more customer-focused and market-driven as we've discussed before.

The goal is to reduce spending by $150 to $200 million over the next two to three years, and minimal has been realized to this point. Most of that will be in 2009 and 2010 as you said. And again half of that savings will be realized through improved net income and the other half will be invested in growth programs specifically sales and R&D.

Gil Luria - Wedbush Morgan Securities

Got it. And then in terms of DSOs, it looks like, depending on how you calculate, it looks like the DSO levels were as low as they've been in almost three years. But Tony, we've talked in the past about the fact, that at QLogic, you had DSOs in the 40s. Is there anything inherently different about NCR's business? How you do business? The terms that you provide to your customers that prevent you from having that as a long term goal?

Tony Massetti

No, I don't think so Gil. The good news is, there's nothing structural here that needs to be addressed to achieve much better DSO performance. As I mentioned, we improved 13 days sequentially, which is a significant progress in the quarter. I think in the 40s is a very reasonable goal for the company over time. And that's what we're driving toward.

Gil Luria - Wedbush Morgan Securities

Great. Thank you.

Tony Massetti

You're welcome.

Operator

Our next question comes from Bennett Notman. Your line is open and please state your company name.

Bennett Notman - Davenport & Company

Davenport & Company. Good morning. Most of my questions have already been asked but a couple of things. Could you just talk to what extent the newer verticals are driving the R&D spend? And then also to the extent, which of the verticals you are focusing your R&D and your sales efforts most aggressively? And when you think we might see some traction and see that start to drive some of the sales lines?

Bill Nuti

First of all. Welcome to the call, Bennett and secondly your question's a good one because we are spending more in the new verticals. There's no doubt, a portion of the increase in R&D is to fund the innovation for the new vertical markets. The new vertical markets that have the most significant upside short-term, meaning over the next year to 18 months for the company, where we are investing more money in, is first entertainment, and of course you've seen us roll up three companies in the last six months in entertainment, and we continue to work towards bringing to market the most wholesome set of products and services for everything from DVD rental to digital download technology in a kiosk form to also buy, sell, trade or enabling a buy, sell, trade model for both movies and games.

And for retail, footprints, to help them to dramatically reduce shrink and to build a multi-channel capability so that you can go into a retailer, and buy movies and games without having to have windows and doors that are locked, be locked and to do so from your phone, from home on the internet, or also while in the store, using a fairly innovative and contemporary kiosk technology that will allow you to play trailers and buy in an intelligent way. And then also make sure you have the right accessories that can be self-served to you, whether it's the movies or games that you are buying.

So entertainment is one of those areas. Gaming would be another. We are finding opportunities in gaming. And frankly, we're working with a few large gaming companies right now on opportunities that we hope to get closed here in the next several quarters.

Travel and hospitality also feature prominently. Our success in travel being the number one market share leader for travel check-in kiosks in the United States. We hope to extend that lead in the international markets.

And then there are a whole host of other applications that are coming in the boarding area and certainly hospitality, which we talked about today in terms of some of the new products like the Xpress Port kiosks.

Healthcare, by the way ,grew 71% year-on-year for us. Now on a low number, but very healthy growth; healthcare is a huge opportunity for NCR.

This one has great, great potential. We grew 75% in the US, 71% globally. By the way, entertainment and gaming grew 51% year-on-year. And the troubled market because of the airline industry is travel, but certainly outside the US, it's solid. And so I would say, in order of priority: entertainment and gaming, healthcare, travel and hospitality, and then of course public and government sector.

Bennett Notman - Davenport & Company

And as these businesses ramp, where do you expect those product lines to fall on your margin spectrum?

Bill Nuti

The good news with most of these products is that they are software related generally. Certainly, they sit on top of hardware platforms, but these are much higher margin products than a traditional NCR product line. So we would hope over time, as we grow our market share and become a leader in this space that margins will expand accordingly.

At first, margins will be good. They won't be as terrific as they will in the future because we're inserting in the market. But you can expect over time, these are software kinds of margin businesses, and quite good businesses, double digit margins.

Bennett Notman - Davenport & Company

Alright, great. Thank you.

Bill Nuti

Thank you.

Operator

Our next question comes from Kartik Mehta. Your line is open and please state your company name.

Kartik Mehta - FTN Midwest

FTN Midwest. Good morning. Bill, I had a question on a statement you made on pricing. I'm just trying to figure out, when you talked about pricing for the overall company, would you be able to give a little bit more granularity as to whether you're seeing pricing pressure, either in retail or ATM or both?

Bill Nuti

Pricing pressure in retail is about the same. It's always a tough market. I wouldn't say there is any changes relative to pricing in retail. In financial services, I wouldn't say there are any changes either. I still would tell you that pricing in the mature markets, US, Western Europe, etc., are, as Tony said, mid single digits, down year-on-year but relatively moderate.

And then pricing in the international emerging markets continues to be a price sensitive market in the high single-digits.

Kartik Mehta - FTN Midwest

And on the retail side of things, you talked about a really strong backlog, and I'm trying to figure out, how secure is that backlog or how sensitive could that be to the economy? Are these orders already in place and they are fairly secure, or is there some amount of sensitivity based on the economy?

Bill Nuti

Well, I think there's always sensitivity based on the economy. You can't count on your backlog until it transitions into revenue. That being said, we can see the backlog. We have an appreciation for what our customers want to rollout, but it certainly is something that can change, based on economic circumstances.

Kartik Mehta - FTN Midwest

And I guess, I just wanted your thoughts, Bill, on the retail market. You've talked about NCR growing back maybe more secularly for the retail, at least for the second half and I'm trying to figure out, as you have spoken to your customers, have you seen a change in spending patterns? Obviously NCR is doing well because you're executing well, and I'm trying to just figure out, for the overall industry has there been any change from your customers?

Bill Nuti

Let me give you a more general answer to that. Certainly, capital spending is under more pressure quarter-to-quarter sequentially, and certainly, year-on-year, that's a given. But giving you a three-month to three-month view, I'd say capital spending is under pressure. I find that where capital spending is under pressure more is in technology areas that customers feel they can sweat the assets more than they can in other areas.

There's still a healthy focus on spending capital if it's going to do one of two things. One reduce your cost, and if it's a short-term ROI, it gets a higher priority than others, and then secondly for the customer experience. And in most of those cases, for NCR, they're married.

For example, when you do a point-of-sale upgrade at the front end, you're not only increase the speed of throughput at the front end, meaning reducing the time it takes to check out, but you're also making customers happy because they're spending less time inline, and that's what self-check out does. And of course self-check out continues to do well for us because it has that impact, but there is another aspect of self-check out that's becoming more and more interesting.

Kartik, there are new consumers, digital natives, this whole population of people born 1980 and after, that were surrounded by technology and whose primary channels are digital immigrants, our alternative channels. They prefer self-check out.

They go to that channel option first because that's their natural proclivity. So, it's interesting what's going on in the market and how both productivity and customer experience are still driving spending, but in general, they is certainly, in the retail space, a more focus on how they're spending their money and they're looking at assets that they can sweat now more than they did three months ago.

Kartik Mehta - FTN Midwest

Thanks, Bill and just one last question. Tony, was there a EPS benefit to your FX or was it primarily just revenue?

Tony Massetti

Very slight benefit to operating margins, Kartik. As you might expect, there are many moving parts in gross margin and expense when it comes to FX, but the gross margin percentage was just a slight benefit.

Kartik Mehta - FTN Midwest

Thank you very much.

Tony Massetti

You're welcome.

Bill Nuti

Thanks, Kartik.

Operator

Our final question today comes from Matt Summerville. Your line is open, sir.

Matt Summerville - KeyBanc Capital Markets

Just a question on buyback. I think, Tony, you said you're down to about $150 million on that authorization. Assuming you continue at a pretty similar pace to either what you've done or what you've guided to in the past. I guess, Bill, would you be opposed to going back to the Board this year and reloading that authorization? How are you thinking about that?

Tony Massetti

Sure, Matt. Including the July repurchase of about 1.4 million shares or $36 million, we have approximately $159 million of share buyback authorization remaining as of today. And at the current share price we will continue to buyback shares, so we're in the market. It's at the Board's discretion whether to authorize a follow on buyback plan, but Bill and I will discuss with the Board as we near the end of this authorization.

Bill Nuti

You're kidding me?

Operator

And we have no further questions.

Bill Nuti

Okay. Alright, thank you, operator. I appreciate everybody being on the call today and look forward to talking to you during the next quarterly conference call. Take care.

Operator

That does conclude today's conference. Thank you all for participating.

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Source: NCR Corp. Q2 2008 Earnings Call Transcript

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