NCR Voyix Corp (VYX) 2002 Q2 法說會逐字稿

Good day and welcome to the NCR Investor Relations conference call.

All participants will be able to listen only until the question and answer session of the call.

At the request of NCR, this call is being recorded.

If there are any objections, you may disconnect.

I would like to introduce our host for today, Mr. Gregg Swearingen.

Sir, you may begin.

Thank you,

.

Good morning.

Thank you for joining us as we discuss NCR's operating and financial results for the second quarter of 2002.

Lars Nyberg, our Chairman and CEO, will lead today's discussion with Earl Shanks, Senior Vice President and CFO, providing comments regarding our operating and financial performance.

A Q&A session will follow our prepared remarks.

A replay of today's conference call is also available at NCR's Web site.

Our remarks and responses may include forward-looking statements.

These forward-looking 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 SEC filing as well as our annual report to stockholders.

I will now turn the call over to Lars.

Good morning and thank you for joining us as we provide our commentary on the second quarter results.

In light of the tough environment, I am satisfied with NCR's overall second quarter results.

Teradata's impressive performance leaves no doubt that we are winning and gaining market share.

Moreover, our continuing investment in technology is widening Teradata's already considerable technology lead.

It is obvious from our results that our customers recognize our technology and services as best in class.

Regarding our

financial group, the absence of an uptick in capital spending is clearly having an impact, particularly in retail store,

and customer services.

However, we achieved some important successes in the quarter.

For example, we won a significant self-checkout

in retail store

.

With international self-service order activity was strong, including the large order for our convenience banking ATM's and we achieved double-digit revenue growth in the

specific region further enhancing our market position.

I would now like to briefly discuss the performance of each of our businesses.

Our Teradata warehousing business achieved another quarter of excellent results.

Solution revenue of 255 million was at the high end of our expectations and realized in an environment where many other software companies continue to report significant revenue declines.

Including service maintenance, data warehousing and revenue grew three percent compared to prior year.

Both new and existing customers see data warehousing as a strategic and mission critical investment, especially in this environment.

New customers are investing in this technology, while existing customers are upgrading at a very challenging time.

Teradata clearly makes the cut when executives are prioritizing capital spending.

Related to new customers, we achieved a solid performance with new additions at the pace consistent with our average levels over the past two years.

Our new customers in the second quarter span a broad range of industries.

For example, we achieved further penetration in the insurance and financial sectors with new customers such as

Health Care;

Insurance Holding -- that's the European insurance company.

Navy Federal Credit Union, Central Finance -- that's the Japanese bank.

A well-known US brokerage house and a major South East Asian bank.

Although capital spending is still an issue, Teradata saw growth from the retail and telecom sector versus the second quarter of last year.

New retail customers included

, supermarkets,

Grocery Company, Progressive Enterprises -- that's a grocery operation with about 25 percent of the New Zealand market, and

, and

.

And we saw new Telco data warehouse installations at

Mexico,

,

, and a lot of the major mobile phone companies in Japan.

We also continue to add foreign governments to our list of customers with the signing of Australian Customs Office as well as multiple departments in other international governments.

Other new customers in the quarter included E-Bay, Pan American Beverages -- Columbian manufacturer -- and the

Research Institute.

In the past we have seen primarily larger companies invest in Data Warehousing.

It is exciting that we are seeing

at more moderate sized companies.

This again confirms Data Warehousing being viewed as a strategic investment.

We continue to be very focused on capturing new customers because we know we do not lose existing customers as demonstrated by the upgrade activity within our results.

We have also seen significant expansions at several existing customers who have chosen to standardize from multi-vendor platforms to Teradata for their entire enterprise data warehousing strategy.

made that essential decision in the second quarter.

Teradata realized its third consecutive quarter of meaningful operating profit and will continue to do so in the remaining quarters of 2002.

Financial Self Service revenue was down two percent quarter over quarter.

On a fixed exchange rate basis, revenue was down five percent.

Softness in the Americas and in

regions offset significant growth in the Asia Pacific market.

We are encouraged by the order activity in our self-service business during the second quarter, especially from banks in China and India.

However, market competitiveness in all regions is impacting both ATM product and services margins.

The European market in general has become more challenging.

The vast majority of European banks upgraded or replaced self-service equipment in preparation for the Euro conversion last year.

So, we expect the year-over-year growth to be somewhat soft.

Now, we are in addition seeing specific weakness in Germany and Spain as the economies of those countries have deteriorated.

And as a result, demand in Europe has declined more than we anticipated.

We continue to expect that operating margins will improve throughout the course of the year as we increase revenue.

Focusing on new orders, we are especially pleased that 7-Eleven placed a sizeable order for our convenience banking ATM technology, known as Vcom, during the quarter. 7-Eleven plans to equip 1,000 of its US stores with our Web enabled and multi-tasked Vcom units.

This is the first phase of 7-Eleven's national Vcom launch with a roll-out plan to begin sometime in September of this year.

Installations of the 1,000 units should be completed by the second quarter of 2003.

7-Eleven's deployment is one example of the value of this technology and further demonstrates the breadth of opportunities in the full function ATM market.

This is especially important as other retail and financial institutions are evaluating NCR technology and services to create customized solutions for their individual environments.

Our retail store automation business saw a revenue decline of 22 percent compared to the second quarter of last year.

Retailers are continuing to delay purchases of the traditional point-of-sale equipment and prioritizing every capital dollar.

The retail market has been void of major roll-outs for the past three quarters.

Although orders were down from the prior year quarter, a number of retailers are actively discussing significant point-of-sale investments.

That changed from just one quarter ago.

We have seen some wins driven by our recently introduced lower cost terminal line at Burger King, Applebees, and Defense Commissary Agency.

Since the hospitality area represents a real market growth area, these wins are very important.

We have also been awarded a major point-of-sale roll-out at a top European food chain.

We are very pleased to announced that the Home Depot has notified us that we have been selected as their partner in a major store automation project which includes point-of-sale terminals, self checkout systems and services.

We cannot yet provide the specifics of this deal as we are in the process of finalizing the contract.

Our self checkout win at the Home Depot gives us greater confidence that we do continue to win this space as does the activity we see at other accounts worldwide.

We continue to have active discussions with major retailers about our electronic self-label solution and we still expect to see a significant order this year.

Even though the market has strong interest in this technology, it is clear that the deployment is being delayed by the capital spending environment.

As we progress through 2002, we continue to expect increasing store automation revenues due to the recent and anticipated point-of-sale order activity along with additional key self checkout wins that we are pursuing.

Retail operating margins in the second quarter were still significantly below what they need to be; however, we are encouraged by the sequential improvement over the first quarter, which was driven both by increased volume and a continuing focus on our cost structure in this business.

Turning to our Customer Services Maintenance Business, Data Warehousing maintenance revenue continues to increase as we add new customers, therefore growing

base.

Retail store automation maintenance revenue growth is driven by several initiatives designed to improve the capture rate of new opportunities and yield high customer retention rates.

Financial Self Service maintenance revenue was flat in the quarter; however, we are seeing very good response from our outsourcing offerings such incident management and currency management in all regions.

We have also just released a more competitive and simplified maintenance offer for ATM's, which we believe will drive additional sales growth.

In other, which includes

revenue from our high availability networking offerings as well as from

businesses, we saw revenue down 41 percent compared to the prior year period.

High availability

revenue continues to be impacted by weakness in the telecom and networking industries and the European market.

Although we now have very limited

revenues from

businesses, we still report negative year-over-year comparisons against 2001.

As a result of the soft market for products, we continue to see declines and pricing pressure in the maintenance of telecom and networking systems.

At the same time, we are seeing an increased interest to out source the management and support of customers IT infrastructure to reduce cost and risk.

We are one of the few companies having the capability to provide those services on a global basis.

And after capital expenditure returns, we will be very well positioned.

I would now like to turn the call over to Earl to discuss our operating and financial results in more details.

Thank you, Lars.

Good morning, everyone.

In order to discuss the company's second quarter results on a comparable basis, I would like to direct your attention to the second schedule included in our earnings release.

This schedule identifies one time items excluded from prior period results.

Prior period items for the second quarter were $19 million in goodwill amortization and a $2 million acquisition related integration charge.

For the remainder of my comments, I will compare our performance to last year's Q2 results, excluding special items and the effects of goodwill.

Total revenue for the quarter was down eight percent year-over-year.

A slightly better result than the 10 percent decline we suggested last quarter.

Each of our businesses generally met revenue guidance with Teradata delivering very strong results at the high end of the range.

Overall, gross margins were down 1.8 points from last year's second quarter.

A higher mix of data warehousing revenue helped improve product gross margins almost a point to 36.9 percent.

Service gross margin was down 4.7 points to 20.7 percent of revenue.

Contributing to this decline were lower services revenue and a higher mix of lower margin retail store automation maintenance revenue.

Declines in maintenance revenue coupled with pricing pressure and some contract renegotiations are requiring that we work to take out costs faster than we had planned.

While we have made some progress, we need to further reduce our costs of services in order to offset these revenue issues.

We have identified areas where more work is necessary and are concentrating our efforts there.

We have made infrastructure improvements, but these improvements are being offset by lower revenues, price erosion and increases in the services scope customers are requiring.

Moving to expenses we continue to see positive results from our expense reduction activities that began in early 2001.

We reduced expenses $38 million from the level incurred in the second quarter of 2001.

We managed for lower expenses in each of our businesses, but saw the largest decreases in data warehousing, retail store automation and

businesses.

R&D spending decreased as a result of actions taken throughout 2001, including the continued movement towards utilization of industry standard components, the consolidation of R&D facilities and the leveraging of our R&D infrastructure.

However, we continue to spend more than 10 percent of data warehousing revenue on R&D as well as spending strategically in each of our other businesses.

In accordance with the adoption of Statement of Financial Accounting Standards No. 142 regarding goodwill and other intangible assets and as previously discussed in the company's 2002 first quarter earnings release, NCR has employed the transitional goodwill impairment tests to assess impairment of its goodwill assets.

As a result, the company reported a non-cash, net of tax goodwill impairment charge of $348 million as a cumulative effect of accounting change retroactive to January 1st, 2002.

This charge primarily relates to goodwill associated with our other business segments, which includes the 4Front acquisition.

In addition, impairment of goodwill related to acquisitions within the retail store automation and Systemedia business segments is included in the charge, which is reflected in NCR's year-to-date financial statements.

For the quarter, operating income of $51 million was driven by a strong performance by our Teradata Data Warehousing business.

Teradata realized operating income of $32 million in the quarter.

Its third consecutive quarter of meaningful operating profit.

Many variables effect data warehousing profitability both in solution and in our maintenance business.

In the second quarter we had a favorable mix of higher markets, hard work and software revenue.

Additionally, we are continuing to improve our expense structure and reduce costs unrelated to demand creation.

Data warehousing margins are also improving through a reduced cost of maintenance.

We are moving more incidents to remote resolution.

Our engineering quality continues to improve, which reduces the number of services costs.

Additionally, we are seeing organic maintenance revenue growth as Teradata's customer base expands, which increases utilization rates.

As a result of all of these actions, we are confident Teradata will continue to generate meaningful profits in the remaining quarters of 2002.

Each quarter we pro-actively look at all of our accounting and financial procedures as well as focus on each balance sheet item.

As an example, in reviewing our current levels of inventory this quarter we concluded that our inventory valuation in aggregate continues to be appropriate.

In this analysis we also examined inventory valuation by business and determined that some estimates within business unit results needed to be adjusted.

As a result of this review, within data warehousing we revised estimates in the quarter to more appropriately reflect inventory valuation.

This adjustment had a positive impact in the quarter of approximately $6 million.

Excluding this adjustment, Data Warehousing operating income would have been approximately $26 million.

Still an impressive achievement given the capital spending environment.

Moving now to Financial Self Service -- operating income was up sequentially, but down compared to last year's second quarter.

Self Service operating margins in the quarter were impacted by lower volume, combined with year-over-year price erosion in excess of cost reductions within both the solution and services.

On the services side this is partially a function of increased spending to enhance service levels.

In addition, profitability was impacted by a portion of the pension income decline that I will discuss in a few moments.

With respect to inventory valuation for Financial Self Service, we also made an adjustment in the quarter.

This adjustment related to inventory valuations of hardware in our Beijing factory.

For the quarter this adjustment had a negative impact on Financial Self Service results of $4 million.

Excluding this revision, Financial Self Service operating income would have been approximately $39 million.

I mention these items -- both for Data Warehousing and Financial Self Service -- to give you more clarity as to the actual operating performance of each business unit this quarter.

Our Financial Self Service solution has seen some challenges, but we are encouraged by the traction gained for our full function ATM's, growth in the Asia Pacific region and order activity.

And as Lars mentioned earlier, we expect to see Financial Self Service operating margins return to higher levels as we improve service margins, make further progress in product cost reduction and begin to see more revenue from full function ATM's and our expanded service offerings.

Within our retail store automation business, operating margins continue to track below prior year due primarily to lower volume.

Operating margins will improve throughout the second half of 2002 as we better leverage our cost structure with increased sales from our newly refreshed point-of-sale terminal line and expand the mix the newer solutions, particularly our self checkout technology.

We are maintaining our committment from the first quarter conference call to deliver breakeven profitability for the last three quarters of 2002 in aggregate.

As we are seeing pricing pressure become more material, we continue to be strongly focused on reducing our product costs.

Aggressive cost reductions are underway across all retail products and suppliers.

Furthermore, we are evaluating further cost and expense actions in our marketing, logistics and delivery, engineering and support organizations.

Moving now to Other -- given that revenue from high availability services has been negatively impacted by the economy, we continue to have under absorbed fixed costs.

In this segment, the decline in services margins I discussed earlier are clearly

.

With increased revenue for managed services, continued service cost reductions and a more favorable economy, Other profitability will improve.

Looking now at the impact of pension income -- included in second quarter results we had a $19 million benefit from pension, down $14 million from $33 million of pension benefit in the second quarter of 2001.

to expense we had $6 million in the quarter and consider this to be the run rate going forward.

Our effective tax rate for the quarter was 30 percent.

The weighted average number of fully diluted shares outstanding at the end of the quarter increased 100.5 million versus 100.3 million shares for the year ago quarter.

Now I would like to briefly discuss a matter which did not materially impact our operating results for the quarter, but warrants discussion none-the-less.

During the quarter we identified a number of accounting errors all contained within one non-integrated international subsidiary that is related to our worldwide customer services business.

We determined that the management of the subsidiary had acted in a manner inconsistent with NCR's accounting policies,

fully recognized their expenses for several quarters.

These unrecognized expenses were not material to the operating performance of any of NCR's previous quarterly results.

However, in order to properly account for this issue, we have included a charge of approximately $10 million in our recorded results for the second quarter for these previously unrecognized expenses.

Since this subsidiary is part of worldwide customer services, the effect of this charge have negatively impacted the profitability of each of our business segments for the quarter and impacted our services margins.

We have thoroughly investigated this matter and have taken immediate action to remedy the situation.

The person responsible for this understatement of expense is no longer with the company.

We have tightened controls within our finance and accounting procedures, for these non-integrated subsidiaries, and are continuing to take further actions as appropriate.

These non-integrated subsidiaries exist from acquisition related activity.

We account for these subsidiaries individually and then consolidate their results into NCR's corporate systems.

We have finished a detailed review of each of these non-integrated subsidiaries and are pleased to report that there are no other such issues.

This charge individually and in conjunction with other non-recurring items was not material to the reported results.

Therefore, the reported numbers -- including these items -- properly represent NCR's operating performance for the second quarter.

Moving now to the cashflow statement for the quarter.

We are very pleased to have generated approximately $40 million year-over-year of free cash flow improvement.

Our focus on receiveables, inventory levels, capital spending and severance payments has helped us deliver positive free cash flow for the first six months of the year.

A significant improvement from the prior year.

Now I would like to update our full year guidance and provide our initial third quarter guidance.

Although we have not seen signs of increased capital spending, based upon our sales funnel, order backlog, prior year comparisons, we expect a seasonal increase in revenue in the second half of the year.

This should result in NCR's full year revenue to be down approximately five percent.

For the year, Data Warehousing is still expected to up 10 percent with Financial Self Service revenue down zero to five percent.

Retail Store Automation Revenue is expected to decline five to 10 percent.

Systemedia revenue is expected to be up zero to five percent year-over-year with payment and imaging revenue declining 20 percent due in part to the sale of our item processing outsourcing business last year.

And Other revenue is expected to decline 35 percent.

Given the unpredictability of the global capital spending environments and margin pressure resulting from a more competitive environment we now expect operating income to be in the $250 to $300 million range.

This would translate into an EPS range of $1.60 to $2.00.

Our initial guidance for the third quarter is as follows: we expect total NCR revenue to be down zero to five percent.

By solution, Teradata Data Warehousing revenue should be up 10 to 20 percent from the third quarter of 2001.

Financial Self Service and Retail Store Automation revenues are expected to be down zero to five percent and five to 10 percent respectively.

Systemdia revenue will be up zero to five percent with Payment and Imaging and Other revenues declining 25 to 30 percent each.

Third quarter operating income and earnings per share are expected to be in the range of $50 to $65 million and 30 to 40 cents respectively.

I will now turn the call back to Lars.

Thank you, Earl.

We believe that the economy is turning, but we also believe that capital spending will lag economic improvement.

This lag will continue to significanlty impact our Financial Self Service, Retail Store Automation and customer service business.

We don't expect to see capital spending improvement this year.

We have to work harder for the deals we win and continue to drive our costs and expand at every level possible.

We are confident that when capital spending improves, we will be excellently positioned due to our new lower cost Retail Store Automation offerings including point-of-sale, self checkout,

self labels and our strong Financial Self Service position in the Asian Pacific and the

regions.

In closing, let me reiterate that we are very happy with Teradata's operating results in the second quarter and the momentum Teradata technology has in the marketplace.

Companies have determined that Data Warehousing is a strategic investment that is mission critical to improve efficiencies and profitability.

For the last three quarters we have seen Teradata deliver very impressive results relative to the market.

More importantly, Teradata has made its

to being a significant contributor to our operating income.

Operator, we are now ready to take your questions.

Thank you.

If you would like to ask a question, please press star one.

You will be announced prior to asking your question.

To withdraw your question, please press star two.

Once again, to ask a question, press star one now.

Our first question comes from

of

.

Good morning.

Good morning,

.

A bunch of quickies.

First of all, could you give the headcount number in the quarter and where you think that's heading?

Number two, you took on some debt in the quarter.

Could you describe why you did that and what you might use it for?

Number three, could you describe currency impact in the quarter and going forward?

I assume it should be swinging fairly positive for you.

And number four, could you just review for us what the pension benefit was last year and what you expect it to be for full year 2002 and even 03 if you have some sense of that?

Headcount for the quarter at the end of the quarter was 30,400 employees.

That's versus 30,300 last quarter.

, for the other questions you asked the debt numbers.

Our debt at the end of the quarter is $306 million.

We raised $300 million in an offering that we closed in June and we used about $100 million of that to pay off the existing short-term debt that was outstanding.

So, that was the movement on debt.

In terms of currency, we had about a one point favorable impact on total revenue in the quarter.

As we noted, the largest business segment impact was in Self Service, which was about a three point favorable impact.

And I would agree with you that given current rates we'd expect to see favorable impacts going forward probably in roughly the same range as we saw in the second quarter.

And lastly, with respect to pension benefits, again, the quarter impact -- last year we had $33 million of benefit in the quarter.

This year we had $19 million of benefit in the quarter.

So, $14 million change.

On the full year, we had $124 million of benefit for the year last year.

What we've said is that we expect about $74 million of benefit this year.

And as to next year, I think it's a little hard to tell yet at this stage.

I mean, one of the key impacts on that will be what the performance is in the balance of the year.

And as -- I'm sure you know as well as I do -- the market volatility makes that pretty hard to predict at this point.

And where are we in terms of the share repurchase?

And might you accelerate that here?

Well, we bought about $25 million worth of stock back in the second quarter.

You'll see that on the cash flow statement if you've got a chance to look through that.

That really is part of our offset program that we're running against the employee share purchase programs and the employee option programs.

That's largely catching us up on a year-to-date basis in terms of where we're at on a year-to-date basis.

And, you know, there is certainly some expectation on my part that we'll continue that program going forward so there will be some level of purchase of that program kind of through the balance of the year.

But you're saying that's just kind of offsetting what you're doing with employee programs?

That would be my current expectation, yes.

And then what's left in the authorization?

There's about $180 million left in the authorization for over and above the offset program.

And the offset program is essentially

to the amount of whatever the employees purchase.

Thank you.

Our next question comes from

of Salomon Smith Barney.

Thanks, guys.

A couple of questions this morning.

It looks like we're tracking on an operating margin basis about 500 basis points below last year's levels in Financial Self Service.

Can you help us understand where we might be seeing the variation?

Whether a chunk of that is Europe, a chunk of that is volume and a chunk of that is pricing?

And then looking at Data Warehousing, we're hearing more about government penetration.

Can you talk about the opportunity that exists there?

And then lastly, on the cost of services side, it looks like we're in the high 70's range.

You need revenue growth to get back to the mid-70's or can you do that through cost savings and that type of activity?

Let me do --

, this is Earl.

OK.

Let me start with a couple of those and then I'm sure Lars will finish on the government piece.

With respect to Self Service there are really a couple of things that impacted it.

Certainly, volume in the quarter had an impact and it's probably a little more than shows on the pace of the numbers because of the positive currency impact on the quarter.

I think you can, therefore, interpolate that our action will -- unit volume is down a little more than the revenue volume.

So that certainly had an impact.

There is, as I noted, it's a pretty competitive environment and in the quarter we saw more price impact than we were able to take out in cost reductions.

There are some active programs to address that going forward so I feel better about our ability to improve margins relative to that issue going forward.

There is certainly a pension impact in the quarter like there was -- like there was last quarter so that certainly has an impact.

And then the inventory impact that I noted of about $4 million has an impact on where the recorded margins are.

It's really those four things, I think, that best explain where it's at.

OK.

And on the pricing competition -- are you seeing that in all geographies or is that more prevalent in the US and Europe?

This is Lars.

I think the pricing pressure clearly is tied to where the market is the slowest.

And clearly, in the

, as I commented on, because of the Euro conversion.

But also, the slowness in Spain and Germany, that drives fairly aggressive pricing.

Lesser so in Asia Pacific.

And

, if I could come back to you cost of services question -- obviously, additional revenue in services is going to help margins in that space significantly.

But in addition to that, we are very focused on what we can do in the infrastructure space.

We have made some progress in that space and I feel pretty good about it in terms of we're making progress.

We clearly need to make more.

In addition, I reference that there are some specific areas we need to attack within services, which is primarily on a geographic basis.

There are a few geographies that we can look at around the globe and look at our service costs in those geographies and know that we have to attack those to better improve margins.

So, I think a combination of volume, further effort on the infrastructure side and the targeted geographic cost reduction in services will help the drive improvement in this phase.

Let me comment on the government.

As you heard me note, we won a big order in Australian Provence Organization.

And this segment for Teradata is growing and growing importantly segment for us.

Clearly, we have talked on the calls about homeland security, which is a real opportunity.

But there are lots of opportunities outside of the homeland security down here.

There are -- there's a difference, I would say, in the government.

The selling cycles are somewhat longer.

And their systems are more complex to transform into an effective, efficient data warehousing IT infrastructure.

But that just tells you they need it even more than the normal companies.

And we are having real success here.

OK.

And then just lastly to clarify the accounting points that you made, Earl.

Can you tell us over what quarters you realized that there were issues that have been corrected with this $10 million charge?

Well,

, we identified the issue this quarter and dealt with it this quarter.

As you look back to when it happened, it was actually over several quarters extending back into a period in 2000.

So, it's been going on for awhile.

I am extremely disappointed that we did not identify it before this quarter.

But our systems did identify it this quarter and as we identified it, we obviously, you know, addressed it in total.

OK.

Thank you, guys.

Thank you.

Our next question comes from

of Midwest Research.

Morning.

Morning.

Just a few questions for you.

Now you've had two good quarters of Data Warehouse -- data warehousing results especially in a tough market.

As you look at the market, what would you say would be the technology lead you have against your competitors?

OK.

In terms of years?

Yes, yes.

I understand.

Yes, we don't -- we count our lead in years not in months.

Actually, it's the third consecutive quarter of excellent results.

As you might remember, we had a nice profit in the fourth quarter and equally so in the first and then in the second quarter.

If you go back a year, industry analysts have been saying that Teradata has typically a two year lead on competition.

And I think they changed that about half a year ago or something, decided we have now a three year lead.

And my point is, we are investing in technology and feel pretty confident that we are extending this lead and will continue to extend this lead.

And that is very important.

Because as we have discussed on these calls so many times, the key to success in this business is capturing the new customers, because once a customer of Teradata, they never leave us.

And we talked about maybe there's at least 3,000 customers out there who will be the majority of the business.

And with our win rate -- and again, even in this quarter we had a win rate, you know, as I said on an average equal to the last two years in a very difficult environment.

So, I am extremely encouraged.

And it is clearly driven by our technology lead and the confidence that we think that our customers and prospects have that we will not only maintain that lead, but we'll actually extend the lead. meta: So, based on -- if you believe that there is a three year lead, does that allow you to continue to get premium pricing when you are in direct competition?

We don't get premium pricing.

We price this -- first of all, there's a total cost of ownership.

When we talk to customers about costs or pricing, it's all about total cost of ownership.

That includes everything.

It includes the license fees, the hardware, the professional services, the whole maintenance.

And we are clearly positioning us in respect to total cost of ownership, on par with our main competitor.

And because we have a three year lead and have a better offer and clearly can do things he can't do, we win.

And that has been our strategy for several years and we'll continue that strategy.

As technology evolved, particularly hardware technology evolves, what happens is that we offer our customer either a lower a cost or the same cost and a higher performance.

That's the nature of the business.

So, what you have seen in the past six, eight quarters as we enhance our offering or come with new releases is that basically the cost stays the same and the performance improves dramatically.

And again, I can just reiterate, our strategy has been to be on par with our main competitor for total cost of ownership and then win because we have a better offer.

And an unrelated question, but a question for all of the segments: how is the pension income allocated among the segments, Earl?

So that we can get a sense of what maybe the real margins within this business -- could you maybe elaborate a little bit on that?

Well, obviously, the pensions impact all of the segments because the pension income is related to the employment in each of the segments.

So, we've gone through, actually, in a fair amount of detail both by employment and geography, because pension impact is impacted by where people are around the globe and what the plans are around the globe.

So, we've gone into pretty detailed analysis to try to say, which businesses is it in fact affecting?

It's primarily driven by -- at least the easiest way to describe it this morning -- it's primarily driven by headcount.

You know, obviously, because I called out specifically the piece in Self Service.

Self Service gets a meaningful piece that's got, obviously, a pretty substantial headcount in terms of where the geographic mix is of where the income comes from.

That certainly has some impact in that space.

But there is an impact in each of the business units.

OK.

So, in essence, the easiest way to look at it is to just look at the headcount by segments and that would probably get us there?

That's a fair way to think about it.

Well, thank you very much.

Thank you.

Our next question comes from

of Buckingham Research.

Yes, thank you.

Earl, I have just a couple of questions on geography.

Could you give us a little color on revenue by geography in this quarter?

And then secondly, over in Japan a deal was announced between NCR and

.

I take it to be a marketing arrangement.

Could you say a little bit more about what you and

are planning for in Japan?

And that's

when I say that.

Hi,

, this is Lars.

Yes, Lars?

That

is more of a third party IT-IS -- you know, we provide services to a third party like

and others and this arrangement is part of that condition that we have to have a significant portion of our service business being high availability service for other people's technology.

That's what it is.

It's not something big or important in that sense.

And

, relative to the revenue by region I'll refer you back to talk to Gregg separately to take you through some general numbers.

Obviously, we talked about in the call, pretty positive revenue in the Self Service station Asia Pac.

And in general, we've seen Asia Pac as pretty strong as a region.

You know, that implies that some of the other reasons are a little weaker.

And certainly, Lars also called out specifically in his comments our concerns in the

space.

So that gives you a little color in terms of where the pieces are at.

But Gregg will go back after the call and address it in more detail with you.

The reason I asked was that when IBM reported, they gave some pretty precise guidance for currency translation benefits in the next quarter -- in the September quarter -- in writing.

And you, I thought, had a similar profile to IBM for revenues meaning in Japan and Europe and I thought that you might also experience more of a benefit than you suggested a little bit earlier in the quarter.

That's where I was headed with that one.

Well, I do expect -- given where currency rates are at the moment -- that we will get a benefit.

You know, again, my view on currency rates is that I don't spend a lot of time trying to forecast currency rates.

It's not what I think our core competencies are.

You know, but obviously, we are clearly getting a benefit around that one.

OK, thank you.

Thank you,

.

Our next question comes from

of Lazard LLC.

Good morning.

Hi,

. breathanew: Two questions regarding Teradata.

You seem to have a better software mix.

And you seem to be moving better into the mid-market as well.

Does that mean that your Windows and Unix version of Teradata are already getting good response in the marketplace?

And in the software mix, what are you selling, exactly?

It is true that we have seen a favorable mix in Teradata for a couple of quarters.

I actually write that more on the account of good execution than anything else.

Yes, I also am very encouraged that we move into more mid-sized companies.

I don't think the technology is the issue at all,

.

It's mostly our normal offerings.

But the encouraging thing is that now also mid-sized companies see the necessity to have these capabilities to be able to effectively compete in the marketplace.

We've always been saying, as you know, that we think there's about 3,000 customers that we should be focused on.

I'm just wondering if we might not have to redefine that to a bigger number than 3,000, which would be very encouraging.

And then that will -- our investment in partnerships that we've talked about before, which are progressing very well, would clearly help us to address the more mid-sized companies.

When you win a deal against some of the others or when the others "upgrade" -- in quotes -- to Teradata, is that mostly from Oracle base or IBM base at this point in time?

It's both, actually.

The data

conservation, which is a big driver of our business, is mostly Oracle.

But I also mentioned that we had -- this quarter we had one customer that we don't define as a new customer, because Verizon Wireline is a customer of ours.

But they took the decision in the quarter to standardize an entire enterprise-wide data warehouse technology on Teradata.

We don't classify that as a new customer.

That's very important.

In those cases it's mostly IBM that we compete with.

Thank you.

Thank you.

Our next call comes from

of Matador Capital.

Good morning.

A couple of questions: one, the question earlier somebody asked about the incremental debt that you raised in the second quarter.

I'm not sure that we got the answer he was looking for, which was, you know, basically you guys raised an incremental $200 million of liquidity at a time when it doesn't really appear like you necessarily need it.

And I'd be interested to know what you guys expect to use the incremental proceeds for, especially since you all sounded somewhat decidedly unenthusiastic about stepping up the stock repurchase.

I think the answer is pretty clear about why we did this.

Really, a couple of reasons in terms of

the debt.

First and foremost, I believe in the importance of flexibility and that the company have flexibility around future options.

Raising additional debt, providing additional capital in the process by itself does that for us.

It also, however, allowed us to access public debt markets, which is not something that NCR had done for more than 10 years.

We didn't have a debt rating before that.

And so, to the extent that there are future opportunities with which we are presented, raising the debt at this time, in our view, allowed us to provide the opportunity in the future to raise money in the public debt markets as well.

So those are really the drivers for us doing it.

And just a followup on the statement about the repurchase.

Again, it didn't sound like you guys were going to step up your repurchase despite the stock price being under 30 bucks.

I just want to make sure I'm clear in hearing you guys on that because that's an opportunity that's being presented today as opposed to a, you know, future unknown opportunity.

But it sounds like if we heard you correctly, you guys are not going to step up the repurchase activity despite the fact that the stock is where it is trading at about four and a half times cash flow.

And despite the fact that you have 180 million authorized above and beyond the offset provision.

Are we hearing you correctly on that?

This is Lars.

First of all, I think what Earl described was what we did in the second quarter.

And we have a program and we intend to continue to purchase stock back the way he described.

What you are asking is another thing.

And I think we are continuously judging how we should spend the capital because amongst other things, this debt raising.

We have flexibility to invest our money in different areas and I don't think that we are in the position today to tell you what we intend to do with that money.

We continue to evaluate how we want to spend our cash and clearly, purchasing back stock is one of the options.

And I agree with you.

When stock levels are where they are it becomes even more attractive to buyback stock compared to other alternatives.

Right.

And final question: I understand that it's hard to answer a previous question about what the impact from tension might be in 03 given the vagaries of the market.

But I guess another way to ask it, perhaps, would be are you guys considering lower the rate of return assumption for 03 consistent with what many other companies are doing?

I think your current rate of return assumption is nine or nine and a half.

Have you guys given some thought -- I mean, irrespective of what the market's going to do in the second half it seems like maybe that would be the prudent thing to do and just curious as to where you guys are at in your thinking on that.

Thanks.

We look pretty carefully every year at our assumptions that are built into the pension plan.

And as part of looking at those we looked at a long-term expectation around market performance.

And certainly one of the factors that we use to judge that is our actual, long-term performance.

Our actual performance over three years, five years and the period beyond that is in excess of our assumptions.

Obviously, the actual performance of the last year or two is not in excess of the assumption.

We will when we get to the end of this year as well look at that again and consider where the performance history is versus where the assumption are.

And we'll make sure that we have taken a longer term view around that one.

These aren't number that in my view are appropriate that we significantly ratchet up and down one year to the next.

I think that's the wrong way to look at it so I don't do that.

But we will absolutely look at it based on the facts that exist at the end of the year and then consider where we go from there.

Thanks.

Our next question comes from

of McDonnell Investment.

Hey, good morning, guys.

Hi,

.

Hey, a couple of things on ATM's first.

With respect to the distribution of how the business evolved throughout the quarter.

Obviously, Europe was down.

Since you don't play all that significantly in Latin America, intuitively it looks like your US business was down.

I was hoping maybe, Lars, you could help me understand what's going on in the marketplace in terms of some of the dynamics here.

OK.

I think first of all the European market is down.

It's down because of the Euro conversion, but also the people in Germany and Spain are slowing down because of the economy.

I think that has been or is the position of the whole industry saying the same thing.

You need to understand that Europe and Middle East Africa is our biggest region historically.

And therefore, in a way, we get hurt more than others.

To offset that we are very strong in Asia Pacific and that market is growing and we are continuing to gain market share.

So you have really the market in

being sort of down, the market in Asia Pacific being up.

And one we are hurt by and one we are benefitting from and America is somewhere in-between.

That's how I would characterize it.

OK.

Can you speak a little bit more about the dynamics in the US market in the second quarter and how you would characterize the outlook there for the back half?

Well, the US market has in the last -- do you remember a couple of years ago we had the off premises boom?

After that it's more of a replacement market.

What I do see, though, is opportunities in the outsourcing space.

And obviously we are extremely pleased with the Vcom launch by 7-Eleven that we call the convenience banking.

So, there are real opportunities in the Americas.

Not so much in the traditional ATM, but in ATM's that does much, much more than dispensing cash and the whole outsourcing concept.

I also think that we as a company have an opportunity in the service space and the maintenance space.

We have changed -- I think we talked about that on the last call -- we have changed the way we manage that.

We are integrating the sales force to sell not only product, but also the service.

So, I'm not that pessimistic about the -- we should realize compared to Asia Pacific.

You know, the numbers are -- how many ATM's have we installed in the US as an industry?

Primarily in people we have 1,150 ATM's installed in this country.

If we go to India and China it's sort of 25 per million people or less than 10 in India.

The opportunity in those countries are enormous.

Oh, sure.

No, I certainly would not argue against that.

Secondly, in ATM's, how do you see the profitability improvement evolving in the back half of the year against a forecast of negative comparisons?

I mean, how much improvement can we get and then let's start there and build on OK, how do we get this back to a 15 percent EBIT business?

I think Earl gave you four reasons why we had the results we had in this quarter.

Sure, yes, yes.

I'm looking out into the back half of the year and then longer term beyond that.

I understand that.

But my point was one of those was pricing pressure beyond the cost reductions that we have achieved.

Maybe that is a point or two points on the margin.

I think we have to be realistic to believe that the pricing pressure will continue, but there's a big chunk of influences on the second quarter that I think won't be there.

We will have higher revenues which certainly will help our margins going up.

And it puts a lot of pressure, of course, on us to continue our cost reduction, which we have been fairly successful with in the last couple of years.

And we have some plans to make sure that we accelerate the cost reduction of our product which will put us in a decent position to be able to combat the pricing reduction.

Other than the modest inventory adjustment, there was a negative 4 million hit, I think.

Yes.

What else do you not envision recurring in the third quarter in ATM's?

You mentioned several items.

You were talking about the third quarter.

You were talking about the longer term, you said.

Oh, OK.

I think we will have a higher volume longer term than we had in the second quarter.

So that's

. somerville: OK.

Earl, with respect to the accounting issue.

Can you talk to me and help us understand about the mechanics involved in discovering that?

And to what extent you've replicated those mechanics in the other areas of your business to ensure that there is not anything else of this nature out there?

Yes, I'd be happy to,

.

Let me go back to how I described this.

I described this as a non-integrated unit.

We don't have very many of those.

There's a handful of those.

So, we've gone back specifically with respect to the non-integrated units and assessed them individually to make sure we don't have any other similar problems today.

We have also, then -- and obviously in this particular case -- changed out an individual.

We have also then, gone back and changed some internal processes and internal expectations around ongoing reviews of those units so that we feel much better about our ability to catch something like this were it to happen again much, much quicker and at much, much lower levels just in terms of internal processes we will change and have changed within the finance community to make sure that happens.

So, it's really going after both of those.

But this is a pretty isolated situation in terms of how it fits into the company because this doesn't -- the fact pattern around this one doesn't match the fact patterns in general as we manage, you know, the vast bulk of the company.

OK.

And I'm sorry if you already explained this.

Can you define again a non-integrated unit, please?

Yes, it's included in our consolidated results.

But in general, most of the organization -- the finance community at NCR and most of the organizations are included through a fairly extensive shared service network where we've got shared services and everything for all the accounting for all the diverse businesses are done through shared services.

There are a few -- a handful of these -- where their accounting for them is not included in the shared services.

And that's why we describe it as non-integrated into standard financial processes within NCR.

OK, thanks, guys.

Thank you.

Our last question comes from

of Blum Capital.

Hi.

I was wondering if you could just comment on having three good quarters out of Teradata and the outlook for third and fourth quarter looking pretty positive -- is there a point at which where you would try to either monetize that or distribute that to shareholders so that we can get some value out of that instead of keeping it trapped in a, I guess, four and a half times EBITDA business?

So, that's kind of the frame of the question.

Is there a certain point where you feel you need a certain number of quarters of profitability and then a decent outlook before you decide to do something with that?

Thanks.

, this is Lars.

I have said very consistently that this issue is an issue that is totally going to be dominated by creating consistent and substantial shareholder value.

That's the only thing that matters in this phase.

Having said that, I've also said I don't think the time is right to discuss the issue yet.

Because we need to have, first of all, profitability.

Now we have profitability.

There is one key, though, to the whole business model of Teradata that is absolutely vital to make this business the most profitable business.

You know, we talked about 15 plus percent operating income and that is growing.

We need to have growth.

I mean, I am very happy with growing three percent in the second quarter compared to competition.

But to make the business more profitable, I have to have real growth on the top line and not 10 percent or we talk about higher growth numbers than that.

And you need to be sure that you have that going forward for a number of quarters and you have a track record of it for a number of quarters before I think it's appropriate to have the discussion you're talking about.

At the point that that is the situation and we are convinced that we will create substantial, sustainable shareholder value by doing either thing, we will do that.

No hesitation.

But right now, the benefit we have of Teradata's profitability comes out of having lowered the breakeven point last year.

We've basically had a very small growth of Teradata in the first and second quarter, which I'm very happy with relatively spoken to competition.

But in absolute terms it's not enough.

Yes, we do see growth in the second half because we still believe we're going to be at 10 percent growth for the year.

Partly, that's driven by easier comparisons in the third and the fourth quarter.

So, I think it's a bit premature to have this discussion.

Thanks.

Thank you.

That concludes our call today.

If you have any other questions, please feel free to give me a call, Gregg Swearingen, at 937-445-4700.

Thanks for joining us.