NCR Corporation Q4 2005 Earnings Conference Call Transcript (NCR)

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NCR Corporation (NYSE:NCR)

Q4 2005 Earnings Conference Call

January 26th 2006, 10:00 AM

Executives

Gregg Swearingen, Vice President, Investor Relations

Bill Nuti, President and Chief Executive Officer

Peter Bocian, Chief Financial Officer

Analysts

Richard Farmer, Merrill Lynch

Matt Summerville, Keybanc Capital Markets Mcdonald

Reik Reed, Robert W Baird & Co., Inc.

Katy Huberty, Morgan Stanley Dean Witter

Operator

Welcome to the NCR investor relations conference call. Operator Instructions Now I will turn the meeting over to today's host, Mr. Gregg Swearingen, Vice President of Investor Relations. Sir, you may begin.

Gregg Swearingen, Vice President, Investor Relations

Thank you. And good morning. And thanks for joining us for our 2005 fourth quarter earnings call. Bill Nuti, NCR's CEO will lead off our conference call this morning. After Bill's opening remarks, Pete Bocian, NCR's CFO, will discuss our Q4 financial performance as well as our guidance for 2006.

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 reports 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. Reconciliations of the 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, which can be accessed at ncr.com. Those listening to the replay of this call, please keep in mind that the information discussed is as of January 26, 2006 and NCR assumes no obligation to update or revise the information included in this conference call, whether as a result of new information or future results. I will now like to turn the call over to Bill.

Bill Nuti, President and Chief Executive Officer

Thank you, Gregg. Good morning to all of you and thank you for joining us. This morning I will quickly highlight NCR's fourth quarter results, review the progress we've made in 2005 and give you some perspective on our plans for 2006. I first want to congratulate our employees for delivering stronger than expected results and significant earnings expansion in our fourth quarter. A few of the highlights include stronger than anticipated Teradata data warehousing revenue and profitability. Even with the negative effect of currency fluctuations, Teradata and financial self-service revenues were only slightly lower than the record Q4 2004 revenue levels. Adjusting for currency, both were up slightly.

Customer services saw meaningful improvement in profitability. And profitability in our retail store automation and financial self-service businesses was in line with our expectations. As a result, we achieved a 12% operating margin before the effect of pension expense. The bottom line is the positive earnings result for the fourth quarter of 2005 continues to demonstrate the success of our actions to expand earnings per share even without meaningful revenue growth. I'll now discuss each of our larger businesses beginning with our Teradata data warehousing business. Revenue of $408 million was down 1% from Teradata's revenue in the fourth quarter of 2004. Without 2 points of currency headwinds, revenue would have been up 1%.

Even more significant, Teradata generated a 22% operating margin, an increase of 5 percentage points from the 17% operating margin generated in Q4 2004. The profit improvement was enabled by a favorable revenue mix shift, lower costs and an increasing contribution from support services. For the year, Teradata grew 9% and delivered a 21% operating margin, a 5 percentage point improvement from full year 2004. The enterprise analytics market remained strong. We continued to, we see continued growth in our existing market verticals as well as opportunities in newer industry verticals. In Q4, we added several new customers, both in vertical industries where we have traditionally focused, such as in retail and communications, as well as in newer verticals. In 2006, we are making incremental investments to expand the reach of our Teradata sales force. Especially into the newer vertical markets that we are targeting such as; manufacturing in the capital markets area of the financial services sector, healthcare, insurance, and government.

In Q4, Teradata added several new customers around the world such as Argencard, the exclusive licensee of MasterCard in Argentina, Belgacom, international carrier services, Cabela's, U.S. sporting goods retailer, Logistic, Ermase Logistic a Germany based logistics and package delivery firm, Libbertad, a retailer in South America and Standard Bank of South Africa. And on Wall Street, we had a nice win in the capital markets area, another market that can benefit from the Teradata technology. Several customers also upgraded the size of their data warehouses and their analytics capabilities in the quarter such as Anheuser-Busch, Bank of America, DHL, EuroTel, a Czech mobile company, Harvard Pilgrim Health, T-Mobile USA and Union Pacific Railroad. Verticals that experienced strong growth in the quarter include insurance and manufacturing. Evidence that our investment in these newer vertical industries continues to show positive results. Congratulations to the Teradata team for a job well done.

Turning to financial self-service. Revenue in our ATM business was down 1% from the revenue quarter we delivered in Q4 2004. In constant currency dollars, ATM revenues were up 2% versus the same period last year. We remain focused on the profitability of our ATM business. In the fourth quarter we delivered 19% operating margin. We are relatively pleased with this result, as it demonstrates that we are successfully managing costs and price pressures in a highly competitive market. For the year, ATM revenues grew 1% from a very strong 2004. And despite a highly competitive pricing environment, financial self-service generated a 15% operating margin, due to our continued focus on pricing discipline, selling the value of our technology and solutions, and a constant focus on reducing cost. As you may recall from last quarter, we lowered revenue growth expectations for our ATM business, due to the delay in spending for Check 21 until the end of 2006 and then on into 2007.

In the U.S., the larger regional banks are still in pilot mode with our deposit automation technology or Check 21 modules. However, activity in the small to mid-sized banks is beginning to increase as they are able to more quickly develop the infrastructure to support image capture and transmission. Since their existing systems and infrastructure are not as complex as the larger retail banking institutions. As we move into late 2006 and into 2007, we believe that the market will gain ground as consumers embrace deposit automation and banks take advantage of the cost reduction opportunities. There are really no changes regarding regulatory-related revenue drivers. As we talked about during last quarter's conference call, about 65% to 70% of ATM's have been upgraded for Triple DES. We expect the remaining ATM's to be upgraded or replaced in 2006. Additionally, other security-related technologies, such as Smart Cards and other fraud inhibitors will drive upgrades over the next two to four years to further protect consumers and the financial institutions.

We did not see much change in the international markets last quarter. Parts of EMEA and Asia-Pacific continue to be very competitive environments. In EMEA, we continue to see strong growth in Eastern Europe and Middle East/Africa. In the more mature Western European countries, growth remains more challenging as regulatory upgrades are now about 80% complete. However, deposit automation is very strong in this region, especially for cash deposits from consumers and small merchants, which will drive new placements and upgrades in 2006. As of the end of the year, pricing remained very aggressive in India.

Expansion in China is still hampered by the increased regulatory scrutiny as banks go through the process to become publicly traded entities. In spite of these challenges, we are selling lots of ATM's, our manufacturing facilities continue to be very busy producing the volume of ATM's needed. On a relative basis, we don't expect much year over year growth in this business in 2006. However, the end of this year should be stronger as we expect spending for Check 21 to accelerate.

Now let me turn to retail store automation. Revenue of $258 million was down 4% from Q4 '04, slightly better than we had anticipated. However, despite the lower revenue, operating income improved 1 million compared to the fourth quarter of last year, for an operating margin of 7%. Largely due to an improved self-service mix. We continue to see strong demand for self-service technologies such as self-checkout and self-check-in. For the year roughly 20% of retail store automation revenue was from self-service. We expect about a third of our retail store automation revenues to come from self-service technologies by 2007. For the year, revenue in this business was down 1%, while operating margin improved to 4%. The retail industry remains very challenging, current technology spending remains focused on initiatives that reduce costs and increase competitiveness, such as self-service technology and services.

Customer services had a strong quarter as the division continued to successfully execute on its multiyear profit improvement initiatives. The business delivered $25 million of operating income, which compares to losing $7 million in Q4 2004. Revenue in customer services was down 6% as expected, while we changed the composition of our customer services revenue mix. Less from third-party maintenance, more related to our own technologies. Revenue from third-party maintenance was down 22% from Q4 2004. And revenue from the sale of third-party hardware was down 38%. Customer services meaningfully improved profitability from Q4 2004. Additionally, the division was benefited by about 6 million of year-end adjustments for a lower employee benefit costs. Even without the benefit of these year-end adjustments, Q4 operating margin was 4%. For the year, customer services improved operating margin 6 percentage points to 3% in 2005. Revenue declined 5%, again by design.

The customer services team has done a great job in turning around this business in terms of profitability, while focusing on service levels and customer satisfaction. While I congratulate them on their relative success, we all know we have a lot more work to do in this segment. That covers the quarterly results of our larger businesses, I will now turn the call over to Pete to provide further color on our financial results. Pete.

Peter Bocian, Chief Financial Officer

Thanks, Bill and good morning everyone. Overall, NCR delivered stronger than expected performance in Q4. Total revenue declined 4%, roughly in line with what we anticipated, despite stronger headwind from currency fluctuations. In Q4 we saw a 3% negative impact from currency versus the 1 to 2 points of currency headwind expected when we began the quarter. Reported operating income was 171 million versus 129 million in Q4 of '04, up about 33%. We reported Q4 EPS of $0.81, which included $0.11 of benefit from the favorable settlement of prior year tax audits, as well as more of the Company's profit coming from foreign countries, which have lower effective tax rates. Excluding the favorable settlements in 2005, the effective tax rate for the year was 21% versus the 22% anticipated. For 2006, we expect a 22% rate. Reported EPS was up 19% over Q4 of 2004. Without the benefit from the tax adjustments, Q4 EPS would have been $0.70, which is about a 40% improvement from the fourth quarter of 2004.

In the quarter, we have pension expense of $33 million, the same amount as in Q4 of last year. For the full year 2005, we had total pension expense of 150 million, including the 19 million of incremental pension expense related to the early retirement program offered in our customer services business in Q2. To analyze NCR's operational performance without the effect of pension and one-time items, 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'll exclude the impact of pension on our results.

Our Q4 gross margin was 31.8%, an improvement of 2.4 points from Q4 of 2004. Resulting from continued improvement in our customer services business, cost reductions and an improved revenue mix. For the year, gross margin of 30.2% improved 1.9 points compared to 2004. NCR's expenses were down 6% in the quarter. For the year, expenses were down 5%.

Total Company non-pension operating income, or NPOI, was 204 million versus 162 million in the fourth quarter of 2004. The Company achieved a 12% NPOI margin for the quarter and a 9% NPOI margin for the full year of 2005. Below the operating income line other expense was 4 million, roughly the same as in Q4 of '04, when you exclude the benefit of non-operating items reported in the fourth quarter of 2004.

Turning to the balance sheet. Despite better than expected asset returns on the Company's pension plan assets in 2005, long term interest rates declined globally. We therefore reduced the discount rates used to calculate pension liabilities, 25 to 75 basis points. For the U.S. pension plan specifically, we had a return on asset of about 9.5%, compared to our 8.5% assumption. At the same time, we had to lower the discount rate 25 basis points to 5.5%.

As a result of these discount rate changes, NCR was also required to record a $403 million pretax non-cash charge to stockholders' equity. For the additional minimum liabilities associated with the Company's defined benefit pension plans. This charge to the balance sheet, which was 269 million on an aftertax basis, does not have any effect on NCR's P&L, nor is it expected to affect the Company's cash flow or debt covenants. Or otherwise impact the business operations of the Company. As a final note on pension, in spite of a lower discount rate, the funded status did not change year on year due to the favorable global asset returns.

During the quarter, we repurchased approximately 3 million shares for $95 million. Significantly outpacing the 800,000 options that were exercised in Q4. For the year, we repurchased 12 million shares for $415 million. NCR ended the year with approximately 477 million authorized for share repurchases going forward. Options granted and still outstanding at the end of 2005 were about 6% of the outstanding shares, as compared to almost 17% in 2002.

Moving to the cash flow statement. In Q4 NCR generated 240 million of operating cash flow versus 195 million in Q4 of 2004. After using 68 million for capital expenditures, we generated 172 million of free cash flow in Q4 of '05, which compares to 124 million of free cash flow in Q4 of '04. For the year, we generated $608 million of cash from operations, about 40% more than the 436 million achieved in 2004. After deducting 241 million of capital expenditures, we delivered 367 million of free cash flow in 2005, twice the amount achieved in 2004 and well above our expectation of 280 to 300 million.

Going forward, we expect free cash flow generally to approximate net income. For 2006, we expect free cash flow of about 310 to 320 million, slightly below net income, reflecting some additional investments in CapEx above the 2005 levels. In 2006, we expect about 275 million of capital expenditures. We calculate free cash flow as cash flow from operations, less capital expenditures for property, plants, and equipment, reworkable service parts, and additions to capitalized software.

We feel good about our success in Q4 and our overall results for 2005. We continue to execute on our multiyear improvement plan and move the Company to an NPOI of 9% for the year, 3 points higher than in 2004. That said, we still have a lot of work to do. In 2006, we will continue to implement programs to streamline the organization. To further improve profitability and customer services, NCR has offered a second early retirement program to qualified customer service engineers in the U.S.

Depending on the level of participation, the Company could see up to a $20 million one-time non-cash increase in pension expense in the first quarter of 2006. At the end of March, we'll know better what the expense will look like. But assuming 50% of those eligible participate, we'd see a one-time increase of about 10 million in pension expense in the first quarter, which equates to about $0.04 to $0.05 of EPS. This one-time non-cash expense should result in annual cost savings of 3 to 4 million, beginning later in 2006.

I'll now discuss our guidance for full year 2006. Including 1 to 2 points of currency headwind, total revenue is expected to be roughly flat compared to 2005. However, the mix of our revenue should continue to improve to include a larger proportion of higher margin products and services. We expect Teradata data warehouse revenue to be up 5% to 7%. We expect financial self-service revenue to be roughly flat. Check 21 should drive growth in late 2006, with more significant growth in 2007. Retail store automation to be up 3% to 4%, with improving self-service content. And customer services should be down 3% to 4%, as there will be some continued planned attrition of third-party products and services.

We expect to make continued investments to position NCR for future growth. Our NPOI margin expectations for the year, excluding options expense, are; Teradata Data Warehousing in the 21 to 22% range. Assuming the pricing environment stabilizes or improves, financial self-service should deliver 15% to 16%. Retail store automation is expected to bring in 4% to 5%. And we anticipate the NPOI margin for customer services to be 4% to 4.5%. Pension expense is expected to be about 140 million in 2006, not including the one-time non-cash pension expense from the early retirement program in customer services.

As I previously mentioned, a lower interest rate environment required us to lower the discount rate for our pension plans. You may remember during our Q3 conference call, we said this would result in higher pension expense despite the actions we've taken to lower the service costs associated with our U.S. plan. Assuming stock option expense of about $0.10, we expect earnings per share of $1.85 to $1.90 per share.

Excluding option expense, 2006 earnings per share is expected to be in the $1.95 to $2.00 range. As we pointed out in our earnings release, we expect 2006 earnings expansion to be more prevalent later in the year. As a final point, we will be providing guidance on an annual basis going forward. Reflecting our belief that annual improvement is the most meaningful measure of the Company's performance. Let me turn the call back over to Bill for his closing thoughts.

Bill Nuti, President and Chief Executive Officer

Thank you, Pete. Once again, I would like to thank the NCR team, in particular our employees and my management team, for their hard work in 2005. For the year, we outperformed our revenue and profitability expectations in the Teradata business and achieved more than a $100 million profit improvement in customer services. We were challenged to deliver revenue growth in our ATM and retail store automation businesses but did a good job managing costs.

And our infrastructure groups, think G&A, made further progress in improving efficiency and reducing cost, which will give us greater flexibility in 2006 and beyond as we invest for future growth. Going forward, we are already in high gear, working key opportunities to improve our cost structure and productivity, specifically in the areas of supply chain, product development, manufacturing and customer services delivery. By managing our cost of goods sold, we'll have greater pricing flexibility, allowing NCR to expand our operating margin.

At the same time, as we continue to make systemic changes, that deliver lasting operational and productivity improvements, we will invest for future top-line growth, especially in our enterprise analytics and self-service businesses. We are also looking at opportunities in managed services and our customer services business and at the lower end point of sale product line for our retail businesses.

Enterprise analytics is a very attractive market for NCR. Teradata continues to be recognized as the undisputed technology leader in enterprise data warehousing. The market is large and continues to grow. Customers are loyal and increasing in number. The reasons for Teradata's success are found in its superior technology and the focus and passion of its people. To enable investors to increase their understanding of the Teradata technology and its competitive advantages, we are hosting an investor event on February 17 at our Rancho Bernardo R&D facility, which is located just north of San Diego.

The self-service market is another area of opportunity, which continues to expand beyond the financial ATM and retail markets to many new industries and applications. These include in retail, such as self-check out, money centers, food and deli ordering, self-shipping and cellular payments. In financial, including teller assisted self-service. In travel, tourism and entertainment industries, there are opportunities in airline and hotel check-in and checkout, car rental, media ticketing and gaming. In health care, patient management and workflow as well as pill dispensing. And in government, for citizens access.

We will naturally pursue growth opportunities in our other businesses such as in retail where traditional point of sale continues to be an important market for NCR. We have done an outstanding job servicing many of our tier 1 and tier 2 retail customers around the world with the very best hardware, software and professional services capabilities. However, I see an opportunity to go both down market and more extensively into new retail subsegments such as hospitality.

Managed services are another example of a growth opportunity for NCR. Going beyond the basic hardware maintenance of NCR and non-NCR systems, we intend to focus on the multiyear management and operational support of a client's IT infrastructure. A managed services engagement could also include systems integration, application development, help desk support, site preparation, project management, and management of service delivery and service performance reporting. We will make targeted investments to create end-to-end solutions that complement our existing service offerings.

But let me be clear, we are not talking about outsourcing contracts but rather extending our core service offerings. Our current customer services mix is heavily weighted towards maintenance on hardware. The managed services market is large and growing much faster than other IT segments and could lead to a more profitable operating model. With continued emphasis on cost efficiency, combined with a new focus on targeted growth in those areas I've briefly outlined, NCR will continue to deliver compelling earnings expansion. Now, let me turn the mic over to the operator for questions. Operator?

Questions-and-Answer Session

Operator

Thank you, sir. Operator Instructions Our first question comes from Richard Farmer of Merrill Lynch.

Q - Richard Farmer

Bill, you mentioned the investments in Teradata. I wonder if you might just elaborate a little bit more in how large in dollar terms you're planning on making those investments and over what time frame? And I guess when we should think about the growth picking up as a result of those? And also any color you can provide on what you are investing in. Is this mostly hiring new salespeople, are there technology investments? How should we understand the investments that you're making in Teradata? And I have a couple others, please.

A - Bill Nuti

Sure. First how large will depend upon how we perform each quarter throughout the year. We're going to gate our investments based on the performance of our Company and that of Teradata. But we are consciously going into the year, Richard, thinking it's very important for us to make investments in the areas of demand creation headcounts. It goes beyond just new salespeople on the street. We, our business model importantly understood is that we have industry consultants, we have technical consultants and we certainly have salespeople that work together towards a Teradata sale. So, that's one area where we're going to be making investments. R&D is the other area. I think, as you know, we have a fairly good technology lead today on our key competitors. But that's something that we need to continue to invest in to maintain that technology lead over time. And thirdly, there are just a few other areas in Teradata where we need to continue to invest in partnerships and otherwise. So, that would probably outline the areas for investment. Pete, any other comments?

A - Peter Bocian

Yes. Just Richard the way I think about it is; we've been successful over the last couple of years on kind of a 50 percentish Op margin flow through on the incremental revenue. As you look at the revenue guidance for the year, 5% to 7% with a 1 to 2 points of negative currency headwind, if you run the math on the 50 compared to the 21%, 22% NPOI margin expectations for the year, you can size the amount of incremental investment kind of in the 25 to 30 million range. That said, beneath the surface there are still a lot of efforts around costs per project hour in the R&D space, taking advantage of our global presence. So, we're working productivity improvement but then also you can say incrementally it's the size I just talked about relative to the pace we've been on. So, and we're also, to Bill's point, making sure we do it beginning of year. So that in their plan of record and which we'll track to is that we do make this investment, so that we're well positioned for 2007 and beyond by making the investment early in the year.

Q - Richard Farmer

Okay. Thank you. Pete, on the ATM guidance that you gave for margins, if I heard you right, I think you said that the 15% to 16% operating margins assume a stabilizing or improving ATM pricing environment. Have you seen evidence thus far given some of the statements that your competitors have made and new management of people will be at a different compensation plan for '06 there. Are you seeing evidence that your competitors are raising or stabilizing ATM prices now?

A - Peter Bocian

Yes. Let me do the front part of this and then I'll let Bill kind of talk about the market. We did 16% Op margins in 2004. I'd say in a very tough environment this year we delivered 15.2%, so on flat revenue. Not, I think we're being cautious around the environment going forward, therefore you see it in the revenue and you see it in the margin expectations. Maybe, Bill, you can talk a little bit about what we have seen or haven't seen in the marketplace.

A - Bill Nuti

Sure. Richard, we haven't seen any material change in behavior on the part of our competitors and the pricing environment. In fact, in some cases, particularly in Asia, it is actually gotten a bit worse in some countries. There have been a few instances, I would point to where I would say the pricing environment has stabilized somewhat but nothing meaningful yet. And I actually think it's a bit too early to tell but we keep a close eye on this and we'll continue to keep a close eye on it going forward. Our goal, Richard, is going to be still maintaining a focus on selling value in the market, maintaining our own profitability by selling our value in the market. And our teams have been doing a good job of that going forward. On our, internally, if you look at our house, what we need to continue to focus on, is really driving costs out in the areas particularly of supply chain and manufacturing, customer service delivery plant. And to a lesser extent, but equally as important, using our R&D dollars much more efficiently and productively. That, if we do those things well, we'll either unleash a bit of trapped margin that might be in those areas or be able to offset some of the pricing declines if they continue.

Q - Richard Farmer

Okay. Thank you. You also made the comment about sort of throughout the year ATM's would be weaker in the first half and then stronger in the second half, particularly if Check 21 begins to help, it sounds like towards the end of the year. How bad might we expect things to materialize in ATM revenue growth in the beginning of the year?

A - Bill Nuti

Our working assumption, Richard, is that going into the year, that the environment's going to be flat. I just don't have the visibility for the full year right now or comfort that the full year is going to be any better than that. Now, that being said, certainly we're building a plan and we're forging ahead as a group to drive growth. But we can't make that assumption going into the year. Q1 last year was 8% growth over Q1 the year before, so it's going to be a tough compare for us in Q1, there's no doubt about it. And so the start to the year will be challenging but we do expect throughout the year to see some improvement on a quarter over quarter basis.

Q - Richard Farmer

Okay. Thank you.

Operator

Our next question comes from Matt Summerville of Keybanc.

Q - Matt Summerville

A couple questions. First, can you talk a little bit about just overall demand trends in Teradata? As we move into 2006, how, what have you seen in terms of deal velocity or implementation velocity, average deal size in the overall breadth of the funnel?

A - Bill Nuti

I think, hi, Matt. I think the way to characterize this would be to talk about the fact that in Q4 we saw fair to good new customer velocity in Q4. At the front end of last year we had fewer newer accounts than I think we would have liked. But at the back end of last year, the velocity on new accounts improved. That will hopefully, we'll see that trend continue here in Q1. I would characterize the market in general as still a relatively healthy market on a global basis. I don't think there's any fundamental changes in opportunity in the space. And the Teradata team is just extremely focused on the same, pretty much the same plan we have been, which is growing our Teradata Data warehouse systems business across the global 1,200 and 3,000 landscape. Opportunities around the world, particularly outside of the U.S. is where we're focusing a lot of our energies today. But in general I characterize the market as being a good market on an ongoing basis into 2006.

Q - Matt Summerville

If you look at, just to get back to ATM pricing. I think you mentioned that it's, you don't yet have the visibility to make the call as to whether or not pricing, the pricing situation is getting, is more stable in the U.S. Is that an accurate characterization? And then based on early on in the year, a lot of big RFP's probably haven't gone out yet. When will you be able to more accurately judge whether in fact pricing's getting better?

A - Bill Nuti

I think what we owe you Matt is a quarterly update on what we're seeing. We have just received some RFP's from China, which is, I characterize it as a good sign in light of the fact that last year certainly was a challenging year for us in that area. In the U.S. the RFP's, as you pointed out, will be coming out over the forthcoming months. And right now our visibility on the pricing environment is about the same as it was last quarter in that we haven't seen any material changes from our competitors. We hope it's going to improve but we're not going to count on it here at NCR. We're going to continue with our plan. And as I talked about it earlier, it's about selling value. We think we have the best product in the market. We think we have the best sales organization in the market. We think we have the best customer services team in the market. So, we think we can put a compelling value opposition in front of our customers. We're going to continue to, on the back end in our own shop, do the best we can this year on taking out as much cost in the supply chain, R&D and customer services to give ourselves some room. And we're going to go in with a healthy paranoia that this year's going to be a challenging year on the pricing front and on the growth front. But certainly get out of the box as strong as we can and work as hard as we can to grow the business.

Q - Matt Summerville

As far as customer services, Pete, can you review what your deliberate revenue attrition was in 2005 and what you anticipate to be the deliberate revenue attrition in 2006?

A - Peter Bocian

Yes. We're concentrating on basically the third-party products when we talk about the attrition. We had, I think about 100 million year on year between '04 and '05 in terms of revenue, third-party revenue attrition and it was baked into our plan. And you can see from the profit improvement it did not, my view did not have a negative impact. There's probably, as you look at next year, we gave guidance of 3% to 4% down with 1 to 2 points of negative foreign exchange. So, the net on the third party is probably in the 30, 35 million range that could still attrit, we expect to still attrit in 2006. Again, against all that, revenue headwind we still expect to take margins up to 4% to 4.5% on our trajectory towards 5% to 7% in 2007.

Q - Matt Summerville

What has to happen in terms of that '07 target of 5 to 7; number one, either to get pulled forward into 2006 or number two for you to surpass that in 2007?

A - Peter Bocian

Well, right now we're focused on the 4% to 4.5% and laying the foundation for '07. As we've talked about before, customer services complex business in terms of the number of things you got to go execute, which is why oddly it's taken us until '05 to have the big significant improvement into what I call relative profitability. But we need to continue to work on the G&A cost structures, which feed customer services. We need to work on what I call the plumbing of customer services, which is; How much it costs per call? How many calls per engineer per day? Does the engineer have the right part when they go on-site to fix it the first time? And then we need to work on the demand creation side, which is the attach rate. So, all of the above need to come together. I think we've been probably more successful ahead of plan on the G&A side and on the customer services plumbing side, which probably has reduced our reliance on the revenue picture to get to the 5 to 7. That said, we're aggressive on all three fronts. And we'll update you the beginning of next year on what we think '07's going to look like.

A - Bill Nuti

And the only thing I would add to that, Matt, is; as we're doing all of this and we're going to be as aggressive as we can be, we need to make sure the impact on customer satisfaction is something we measure. Because it is a key competitive advantage for NCR, it needs to continue to be the key competitive advantage. So, as we work towards this multidimensional and cost improvement plan in WCS, and believe me there's a lot of work going there. And I think if you talk to Jerry, Jerry feels good about his CS improvement. And we all feel good about the CS improvement, frankly. We've just got to make sure we keep a keen eye on how our customers feel we're doing there as well.

Q - Matt Summerville

Going forward you mentioned a lot of things you're doing on the cost side. Should we, is there some of that that's going to fall through to the bottom line? Or are you kind of thinking that the magnitude of cost take out going forward basically is reinvested into incremental growth investments? And then do you anticipate accelerating the pace of buyback from 3 million shares to kind of, the rate you're on right now per quarter?

A - Peter Bocian

Yes. I think the way we look at the $350 million cost take out is ahead of plan. We will get the 350 and probably some more. But going forward, as we start looking at the supply chain manufacturing product development, it's going to end up more baked into the NPOI picture of each business. So we expect to talk to you more around the overall impact of the cost takeout versus the price versus the R&D versus the G&A and talk about the NPOI targets by business and how we take them forward. And so when we say that retail's going to improve from 3.5% to 4% to 5% next year, it's going to be a combination of pricing, a combination of cost, a combination of self-service mix, etc. And that's the way we'll talk through the business. So I think, first of all, you could take away that we delivered ahead of schedule relative to the cost takeout. We'll finish up the 350 and get beyond it this year. But the phase two will be more embedded in the NPOI components of our business. Your second question was around share repurchase.

Q - Matt Summerville

Yes, whether or not you're going to accelerate the 3 million shares a quarter kind of pace that you're on, given that you doubled the buyback authorization.

A - Peter Bocian

Yes. As we said when we got the authorization from the Board, which was the incremental 500 million last quarter, is we'll do this in a systematic fashion. So, we went and purchased 3 million shares in the quarter, used 75 millionish or so of our own cash. We'll be systematic in those purchases as we move forward. And that's what we've agreed with the Board.

Q - Matt Summerville

Okay. Thank you.

Operator

Our next question comes from Reik Reed of Robert Baird and Company.

Q - Reik Reed

Good morning. I just wanted to get back to the ATM pricing. Can you guys first, have you attempted to raise the prices yet in the market or had those conversations with your customers? And then, also, we've talked about you haven't seen any change in behavior from your competitors there. But are the banks going to be at this point in a mode where they're not going to be that accepting of price increases given the history plus they've just upgraded a lot of their equipment, there's no longer a real requirement out there? And would they be feeling free to push things back? If you could just talk about that with respect to pricing.

A - Bill Nuti

Yes. We haven't raised our prices Reik, on our side and we don't have an intention to going forward as we sit here today. The customer base, given that we haven't seen any tangible change on the part of our competitors, I don't have any data for you on how, in terms of how customers have reacted because we don't have any tangible evidence of that yet. As, I think it's intuitive, though, as you raised prices, certainly, in any market, customers will have a reaction. I just don't know right now what that reaction will be in the market and if it affords any further stability than we have seen in the past. So, given what I know today, I can only use intuition in that as you raise prices it certainly puts a little bit of pressure on you and I don't know what that's going to translate into for NCR.

A - Peter Bocian

Reik, my comments were around, considering we haven't seen the change and we assume today's environment continues, we're going to work the cost side and we're going to deliver between the 15% and 16% Op margins for the business.

Q - Reik Reed

Okay. And can you guys talk a little bit about, it's been, the last 18 to 24 months you've kind of reinvested in attacking the intermediate regional bank market. Can you just give us a progress report on, in terms of what kind of headway you're making in that marketplace?

A - Bill Nuti

Yes. I think in the U.S., in the community bank segment over the last few years given our investments there that the Company has done an outstanding job in gaining back share in that segment. I, a lot of that flushed through in 2004. And we had some success in 2005. Going forward, we're, we continued to actually invest more headcount in that segment and greater coverage in that particular area. But frankly, I think we still have more work to do there. It's only been about 18 months to 24 months of significant effort in that particular space. And although we've made good strides, I think there's more opportunity for us, not just in the area of selling ATM products and software but also in services. If you take a look at that market in particular, it's a wonderful market opportunity in the area of managed services. In larger banks of course where they have, they're able to in-house, they're able to do a lot of the work, community banks or mid-sized banks cannot do. We are looking towards managed services going forward in the, in that particular segment of banking as also a good opportunity for NCR.

Q - Reik Reed

And then just a quick question on the retail side of things. Bill, you had mentioned last quarter that you continued to see a fair bit of weakness in the retail environment, which we have seen for quite some time now. You guys are picking up that growth forecast now to 3% to 4% for the coming year. Can you just comment, have you seen a change in the marketplace? And can you tell us what that is, why it occurred and/or is this more related to some of the new product ramps you have going on?

A - Bill Nuti

Yes. In, when we talk about the retail automation solutions business here, it's important to remember it's both core POS and self-service. What we do see is the self-service side of that business picking up and growth there has been well into the double digits. In fact, I'll have Pete give you a little bit more color on that in a moment in terms of the self-service growth versus that of the core POS growth. I think in retail, as a segment of the market, I remain concerned about the market going into 2006 and the health of the market. In light of the fact that discretionary spending on the consumer side still has me a bit concerned. Clearly, there's less money in everyone's wallet year over year. And I think also retailers are a bit concerned about where the consumer goes. That being said, I do think that on a relative basis it won't be that much more of a challenging environment in 2006 than it was in 2005. But certainly not the kind of growth we saw in comps in 2003, 2000, particularly 2004 in that environment. Pete, why don't you give a little more color on self-service versus core POS?

A - Peter Bocian

Yes. If you break down $850 million of revenue in retail store automation, we are now above 20% in terms of the self-service content. Part of that's driven by our acquisitions, Kinetics, recent Galvanon, which we hope will impact in the future. We had double digit growth, more than double digit growth in 2005. So when you kind of think of retail declining 1% for the year, it really was double digit growth with a self-service component marching to over 20% and then the point of sale declining. So, really we'll start to talk about those separately because they are moving with different dimensions. The other interesting dynamic is we actually had a very good performance in Teradata in the retail space. So I think it, when you look at retail, it's not one umbrella. I think it's the relative technologies where they stand on the priority list in importance. So, we did pretty well in the self-service space of retail and also in the data warehouse space. I think the traditional POS was softer.

A - Bill Nuti

And the only thing I would just finish off with here, Reik, there is a very robust market in retail in tier three through six, if I use Microsoft nomenclature. Generally think about it as the SMB business, the small and medium segment. It is a market we have not traditionally played in. I don't think this will feature prominently at all in our 2006 picture. But it is market we are very interested in and hopefully the investments we make this year and we make, and we execute very well will position us well to be a more full-service provider of point of sale in all tiers of the retail market going into 2007 and beyond. So, we're hopeful that even though the secular market, the market secularly isn't growing, that we can go in and recapture some lost market share in tiers, in other tiers in that space in the future.

Q - Reik Reed

Great. Thank you guys for the comments.

Operator

Our next question comes from Katy Huberty of Morgan Stanley.

Q - Katy Huberty

Yes, thanks, guys. You walked through some of the seasonal trends for ATM's but I want to make sure that I understand the same for Teradata this year. Is there enough momentum to get back to mid-single-digit growth this quarter? Or should we expect similar accelerating revenue growth through the year given the tough compare in the first quarter and some of the investments that you're making for the new verticals?

A - Bill Nuti

I think Pete and I will probably tag team this because he has such a great understanding of the Company's history. But I'll just give you my points of view on Teradata. I would hope that we could achieve year-on-year growth this year in at least two to three out of the four quarters. There will be some tough compares. If you look at Q3, this past year we had an outstanding Q3. I think that's going to be a tough compare. Q1 is always a tough compare for us and a tough start. But I would think about Teradata in a more smooth fashion than I would think about that of FSD in terms of growth on a year on year basis. Pete, any other comments?

A - Peter Bocian

Well, a couple of points. One is that when we described the currency headwind of 1 to 2 for the year, it's going to be bigger in the first half and then normalize towards the Q4 kind of equilibrium type rate. So, there's going to be more currency headwind in Q1, which is going to change the optics of the numbers. I think part of the challenge with Teradata is you move one or two deals between quarters, and we've had that discussion before, percentages can change dramatically. So, we're focused on delivering the 5 to 7 for the year. Whether the whistle goes off at the end of March and one deal is in April versus March is not that important to us. That said, we're driving hard for consistency across quarters but as Bill said, there is some lumpiness there based on big deals. So it's the, it's our one business that is less annuity like of all our businesses in terms of the flow of revenue. So we're focused on the year. We will have some currency headwind in Q1. And then we're looking to drive consistency through the year as much as possible.

Q - Katy Huberty

Great. Thanks for the clarity. And just quickly, where will the increased CapEx investments go this year?

A - Peter Bocian

As you know, our CapEx is across three buckets capitalized software, reworkable service parts as well as PP&E and roughly a third each. We only spent 241 million. I've always said that somewhere in the 250 million range is the right thing for the Company. We only spent 240 so in '05 some of it slipped. So, you can look for an uptick in PP&E, some of the investments around equipment, some in the data warehouse space, some around real estate as we're doing some restructuring to optimize the cost structure. And then also capitalized software, again, in typically our self-service Teradata, or IT productivity space. But it's really just, I look at it as kind of a flow in between years at the noise level.

Q - Katy Huberty

Okay. Great. Thanks so much, guys.

Bill Nuti, President and Chief Executive Officer

Let me just wrap up the call today. I hope to see many of you in Rancho Bernardo in a few weeks time. Gregg and the team are putting together a really terrific agenda and schedule at Teradata's headquarters. So I look forward to seeing you there. I'll be there as well. And I just wanted to just briefly say thank you to all of you for joining us today and we'll be speaking to you in the April time frame. Take care.

Operator

Thank you for participating in today's teleconference and have a nice day.

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