NCR Voyix Corp (VYX) 2002 Q3 法說會逐字稿

Good morning and welcome to the NCR Investor Relations Conference Call.

All participants will be in listen-only mode until the question answer session.

At the request of NCR this call is being recorded, if any one has any objections you may disconnect now.

At this time I would like to introduce you to your host for today's call Mr. Gregg Swearingen Vice President of Investor Relations.

Sir, you may begin.

Thank you, Matthew.

Good morning everyone.

Thank you for joining us as we discuss NCR's operating and financial results for third 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 financial performance.

Mark Hurd NCR's President and COO will also be available to answer your questions after our prepared remarks.

A replay of today's conference call will be available on NCR's website.

I want to remind you that our remarks and responses do include forward-looking statements.

These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to vary materially.

These risks factors are descried in NCR's SEC filing as well as in our annual report for stockholders.

I'll now turn the call over to Lars.

Thank you Greg and good morning and thank you for joining us as we provide our commentary on the third quarter or so.

I'm pleased with NCR's overall third quarter results, which were in line with guidance.

We exceed close-to-flat operating income versus the third quarter of last year, even though we saw a 5% decrease in revenue and had less pension income.

Nevertheless, it's clear that our businesses are being impacted by economic and competitive pressures in the United States as well as international.

Even though we would like to say things are improving, we have not really seen signs or sustained increased capital spending.

Given this environment and the result that we have seen from other software companies in this quarter.

I'm especially pleased with Teradata's achievement of 14% revenue growth and improved operating profit as the business continues to gain market share.

I think that this is impressive and continues to demonstrate, that our customers are realizing the real business value from this strategic solution.

Within our recent and financial group, the adverse economic conditions have been more sharply felt particularly on the retail store automation and high availability third party services.

In order to accelerate the rate of improvement in retail and the financial groups operating results, last month the board and I made a decision to name Mark Hurd, President and Chief Operating Officer of NCR.

We have made some progress since the beginning of the year in retail and financial group.

I believe there is still tremendous opportunity to take market share, try better gross margins, and aggressively control expense and cost through improved process control.

Mark is the right person for this job given his accomplishments in the Teradata division.

Together with Earl and myself, the three of us will be focused on building a world-class sales force, gaining market share in our core businesses, and on processes to drive cost and expenses out of our operations.

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

The Teradata Data Warehousing business once again delivered strong revenue growth and generated significant operating incoming improvement year-over-year.

This demonstrates that companies are continuing to install and upgrade, enterprise-wide data warehouses due to their strategic nature and Teradata's ability to deliver tangible business value.

As I have said before, Teradata Data warehousing makes the cut when companies are prioritizing capital spending projects.

As an indication, over the appeal of Teradata, we had about 3000 attendees at the recent Teradata Partner User Group Conference in Las Vegas where we announced the release of Teradata 7.0.

This new release of Teradata database software further extends our technological lead over other data warehouse offerings in the market place.

The Teradata data warehouse platform is clearly the acknowledged performance standard set apart from competition by superior technical that delivers significant business value.

In fact, technology industry consultant [Gartner] group once again recognized that Teradata database as best in class for data warehousing in its 2002 application server evaluation model report solidly after following both IBM and Oracle.

However, the best endorsement of Teradata business value used a number of new customers who invest in our technology even in the various challenging economic environment.

For the past couple of years we have been adding 100+ new customers per year.

With virtually no [inaudible].

Year-to-date and in the third quarter of 2002, we maintained this same run rate.

Many of these new customers came from new industry verticals such as insurance and financial, where we had wins at the London stock exchange, Capital One, and Blue Cross Blue Shield of North Carolina.

New customers in other verticals included Fleming Foods, one of the largest food wholesalers in the United States, Taiwan Semiconductor manufacturing company, and the US distance information systems agency.

We continue to see new customers install data warehouses as these enterprise wide systems enable companies to identify and focus on data intensive areas of opportunity for operational and property improvement, whether that be customers, products, or distribution channels.

Additionally, existing customers are upgrading their warehouses as the volume of their data grows and queries become more sophisticated.

We are very pleased with Teradata performance and its technological leadership.

As expected, financial sales service revenue declined 3% compared to the year ago period.

Adjusted for currency, revenue was down 7%.

We realized continued double-digit growth in the Asia-Pacific region led by impressive growth in China and India.

We are extremely pleased with our performance in this region, both in the third quarter and for the last two quarters.

Although, Europe is still our biggest region, the Asia-Pacific region is gaining ground.

Production at our Beijing plant is ramping up significantly, driven both by domestic and export production.

Additionally, in the quarter we won more than 60% of the so-called total central buy in China including contracts worth $28 million at China Construction Bank and $20 million at Bank of China.

Central buy is the process used by large banks in China to centralize the purchasing for all of their members banks located in various provinces.

Our ATM channel management center in India has seen strong growth.

This state of the art facility utilizes the latest computerized tools and 24 by 7 operations, providing a complete service solutions to customers in India, who prefer to outsource the management or their ATM networks.

In its first eight months of operation, this center has several customers and manages hundreds of ATM's.

Moreover, these capabilities strongly position us to serve this growing market place.

We also saw significant growth in the America's this quarter driven by major roll out with several top tier banks in the United States.

Additionally, the 7/11 [VCom] roll out is on track to have 250 units installed by the end of the year as we expected.

We planned to install the remaining 750 units by midyear 2003.

Growth in the Asia-Pacific and the America's region was offset by adverse economic condition in Europe, which have resulted in a more competitive environment.

The European market is clearly down as a result of both capital spending constraint and last year's Euro conversion.

Now I'd like to talk a little bit about our retail store commission business, which hurt again in the third quarter.

Revenue in this business was down 13% year-over-year, as retail has continued to limit their capital spending.

The softness in the market for traditional point to sell equipment is a result of the economic weakness, which came on the heals of the post Y2K slow down.

Although, the overall market remains very challenging we are actually seeing more activity than a year ago.

The retail industry has experienced a down turn for several years now leading to pent up demand, driven by the absolute need to replace very old equipment.

There is a limit to how long you can defer replacements.

As an example of this increased activity, we have begun to install our newly redesigned point to sale terminal in the Home Depot US stores.

Additionally the Home Depot has selected NCR as its self-checkout partner.

And as a result we will install our fast lane self-checkout systems in more than half of its US and Canadian locations.

We expect installations to be complete by midyear 2003.

In terms of one of our newer solutions electronic shelf labels or ESL's.

In the quarter we were pleased to announce that [Safeway] UK will become the first UK retailer to deploy NCR's ESL solution, installing this system in 50 of its stores.

We now have seven major chains installing or piloting this technology.

Turning to our customer service maintenance business, we saw good results for maintenance revenue related to NCR's core businesses with a revenue growth of 16% in data warehousing and 6% in retail store automation.

However, the market environment for third party contract remains very challenging as evidenced by the results of our other segments.

Earl will provide more color on other in his comment.

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

Thank you Lars.

Good morning everyone.

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

This schedule identified prior period special items which you can compare our result on an apple-to-apple basis.

However, period items for the third quarter were $40 million expense to increase environmental reserves, $19 million in goodwill amortization expense and 3 million acquisition related integration charges.

In the remainder of my comments, I will compare our performance to last year's Q3 results excluding these special items and the affects of goodwill.

Total revenues for the quarter was down 5% compared to the year ago quarter down 7% when adjusted for currency fluctuations.

Other than retail store automation each of our solutions net revenue guidance with Teradata Data Warehousing delivering strong growth for the quarter.

With regard to gross margin, overall gross margins were up 4/10th of a point a year ago period.

Margins improved due to a higher contribution of Data Warehousing revenue and a favorable mix within Data Warehousing.

Product gross margin increased a full point to 34.7%, while services gross margins decreased half a point to 22.5%.

We continue to see positive results from our expense reduction activity that began in early 2001.

Even though we reduced operating expenses $12 million compared to the third quarter of 2001 and more than $80 million year-to-date.

We are taking several additional actions to lower expenses significantly in 2003.

In particular we are targeting profits improvement to drive simplification, standardization, globalization, and consistency across the organization.

After moving from a country centric business model this is the next step.

Detailed plans are being finalized and we will provide a periodic update.

As we have described the last few quarters on a year-over-year basis R&D spending decreased as a result of actions taken throughout 2001.

We are now using more industry standard components, which reduces the need of internal R&D.

Further more we consolidated our facilities to better leverage our infrastructure within the R&D space.

However, as I previously indicated even with these actions we continue to spend more than 10% of Data Warehousing revenue on R&D as well as spend strategically in each of our businesses.

Included with an operating income of $53 million in the quarter Data Warehousing once again benefited from favorable mix and a sharp focus on expense management.

Financial self-service margins were affected by the economic climate in Europe.

However, we did see substantial sequential improvement.

We expect to see continued pressure on gross margins in our Self Service business, as a result of more aggressive competitive pricing behavior, particularly in Europe.

Therefore, our demands for cost reductions within this business are higher today than they were a year ago.

On the year-over-year basis retail store automations operating income was adversely effected by lower volume and less profitable mix.

For example, in the third quarter of 2001, we had significant revenue from our self-checkout solutions.

Now, I would like to spend a few minutes discussing on other segment.

In this segment, which includes our high availability networking offering as well as exited businesses, revenue declined 39% compared to the prior year period.

This decline was driven by continued difficulties in the telecom and networking sectors as well as the anticipated decline from exiting businesses.

Additionally, a portion of this decline was due to revenue in the prior year quarter for a onetime project we completed for [Sky] in Mexico.

Maintenance revenue and other declined 15% in the third quarter compared to prior year.

Growth in high availability maintenance revenue was offset by declining revenues from maintenance in exited businesses.

We expect the decline of revenues associated with these exited businesses to impact our results through the end of 2004.

In the ongoing high-availability services business, we believe we can profitably grow revenue and drive utilization by delivering IT infrastructure services in multi-vendor environments for NCR's industry customers, select enterprise businesses and OEM partners.

An example of this would be the $40 million deal we announced during the quarter with [Amadeus], a leading global distribution system and technology provider serving travel and tourism industries worldwide.

We will provide [Amadeus] with help desk operations, remote monitoring, maintenance, installation, and asset tracking for its IT infrastructure.

This deal with [Amadeus] illustrates what we are doing to arrest the profitability challenges in our service business.

We must stabilize revenue in this space through growth in our high availability services as well as organic growth in our core service offerings.

This will be a key driver in improving both overall service margins as well as profitability in our other segment.

Looking now at the impact of pension income.

Included in the third quarter results was $19 million, $9 million less pension benefit than the $28 million included in the third quarter of 2001.

Looking to our expectations for 2003 pension income, we will not provide a precise estimate until after the end of the year when we will have information regarding actual returns for 2002 and more actuarial data to use in calculating the other kinds of assumptions.

However, given the year-to-date performance of the equity markets and potential changes to our assumptions we do not expect positive pension income in 2003.

Within the details of the actuarial announces the pension effect there are several interdependent nonlinear factors that enforce performance including actual returns of 2002, expected rate of returns for 2003 and several factors related to pension liability.

For us this is further complicated given that we have pension plans in many countries around the world.

The operational efficiency actions I mentioned earlier will not entirely offset this decline in pension performance in 2003.

Looking briefly at cash flow we do not expect to make cash contributions to our US pension plans for the next couple of years.

Regarding non-US pension plans we currently made cash contributions of roughly $60 million per year to these plans.

We expect modest increases to these cash contributions.

However, we will be able to generate positive free cash flow in 2003, including the effect of these increases.

At yearend we expect to take noncash charge directly to retain earnings for additional minimum liabilities associated with pension plan.

The actual amount of the charge will depend on the actual returns for 2002.

However, this will not have any cash flow implications, affect that cabinet or otherwise impact the operations in the company due to our low debt to capital ratio.

Turning now to other expense, we had $15 million of other expense in the third quarter, which is more than anticipated.

This increase was principally due to exit cost related to the disposition of a non-strategic business and currency translation impact in Latin America.

Also in the third quarter NCR favorably result outstanding tax refund plans, previously requested from the US and French governments.

Because these taxes had been expensed in previous quarters these refunds are considered tax benefits in our reported third quarter income.

The refunds total $15 million resulted in a $3 million net tax benefit.

Excluding the effect of these refunds our effective tax rate for the quarter was 30%.

The weighted average number of fully diluted shares outstanding at the end of the quarter increased to 99.6 million versus 97.2 million shares for the year ago quarter.

Moving to the cash flow statement, Q3 is typically a difficult quarter due to the seasonal fluctuations in receivables and inventory balances.

Even so I am not satisfied with our receivables balance.

We are working to improve this position by year end.

The trends in the quarter are partially attributable to companies delaying payments, as well as our discontinuation of factoring receivables.

Even though we will be challenged to get the breakeven free cash flow for 2002, we have made significant progress.

We have improved free cash flow by $70 million through the first nine months of 2002 by more aggressively managing every line of the cash flow statement, especially severance payments and capital spending.

We expect to deliver positive free cash flow in 2003.

Now I would like to provide our fourth quarter guidance.

Given the competitive environment and capital spending constraints NCR's fourth quarter revenue is expected to be down 0-5%.

We expect data warehousing revenue to be up 5-10% with financial self-service revenue roughly flat.

Retail store automation revenue is expected to increase 5-10%. [Media] revenue is expected to be up 0-5% year-over-year with payment in imaging revenue declining about 10%, excluding the impact of the sale of our item processing outsourcing business late last year.

Other will be down approximately 30%.

We expect operating income for the fourth quarter to be in the $100-115 million range.

This will translate into an EPS range of 70-80 cents per share for the fourth quarter or $1.41-1.51 for the year.

I will now turn the call back to Lars.

Thanks Earl.

Before we move into our q-and-a session, I would like to shift gears for a moment and talk about what Mark, Earl and I have been working on with respect to our strategy to improve the profitability of NCR.

We are focused on accelerating the successful execution of NCR's current operating strategy in each of our business units.

We have not changed our strategy and this is all about execution.

We are taking a three pronged approach to growing the company and improving profitability.

First of all building a world class sales organization, gaining market share in our core businesses and focusing on operational processes to get the cost side of the equation right, including both product cost and our expense structure.

On the revenue side, Mark Hurd's appointment as CEO put a strong sales oriented leader in-charge of our retail and financial businesses.

We believe that there is significant share to be won in these businesses.

We will also continue to remove infrastructure cost and reengineer processes as are alluded to in this comment and re-deploy some of that expense into the man creation and technology.

Not only will we drive more productivity from our base expenses but this model will be more scalable.

We believe that success in these three areas: building a world class sales organization, leading to the man creation gaining market share in our core businesses and pursuing aggressive process control to re-deploy cost and create scalability will make our business units more competitive creating a stronger company and driving both top and bottom line.

Operator, we are now ready to take questions.

At this time, if you would like to ask a question press "*" "1" on your touch tone phone.

If you would like to withdraw a question, press "*" "2".

Once again to ask question press"*" then "1".

Our first question comes from Rebecca [Rumble] of Morgan Stanley.

Good morning and thank you very much.

Actually two questions, first one I want to make sure that I interpreted some of your comments about 2003 appropriately.

And I guess just to lay it out, at this point if I look at all the given takes in the economic environment what have you, you know, it seems as though this growth, you know, will be partially offset by a relatively flat environment, some of them in more mature markets that you compete.

And I believe you said that you do not expect the operational efficiencies that you are gunning for to -- be fully realized because of the pension and tax.

I look at and I know this is overly simplistic, but are we talking and thinking about earnings that could actually be flat to down next year given this tough environment and given the changes in the pension or did I misinterpret that?

Hi Rebecca, this is Lars.

Hi Lars, how are you.

First of all we didn't give you any guidance for 2003.

I mean we will do that after the fourth quarter, but what Earl actually did he gave you some guidance on pension and said that we don't expect to have positive contribution from pension during next year, and he also said that the process reengineering that the three of us are working very hard on right now will clearly give us benefits, but it will not totally offset the decline in pension.

That was what we said.

And then on the pension improvements per se, you talked about giving us periodic updates.

Would that be something that will just be continued and be focused on improving the infrastructures, or should we expect additional restructurings and potentially some charges in the next quarter or so in order to realize those process improvements in the next 12-18 months?

Yeah, it's a good question Rebecca.

It is little bit early for us to have answer on it.

We will have a momentum right on this Company in the last 6-7 weeks that I am so encouraged by because the three of us are working round the clock to get to those process improvement reengineering and I am not excluding the possibility, but I am not ready yet to articulate if and so what and how big and when.

And then last year promises, this was asked on...

Okay...

On the fourth quarter guidance's that relates to the retail store solutions, if you could just walk me through some of your comfort level, what have you in terms of seeing, what looks to me a little bit of strengthening sequentially in the overall health of the business, I know the comparisons are a little bit easier.

But how much feasibility do you have, what are your customers telling you?

Anything that you can provide us a little bit more comfort with given health of the environment is will be really helpful.

Yeah -- yeah we have been delighted to hear that.

I -- I am excited to -- to give a little bit of color, and I don't see a fundamental improvement of the capital spending in the retail store at the [mention] but we do see more activity if we compare to a year ago; both in terms of actually some orders we have gained but also the final and if -- I think just driven more by, you know, you can only defer so long.

The equipment are 10-12 years old, you have to replace them, and -- and I -- I think that sort of, part of the -- the driver that we see some -- some improved -- improvement in the environment.

Great, thank you so much.

Thank you Rebecca.

Our next question comes from Steve [Molanovitch] of Merrill.

Good morning.

Good morning Steve.

Could you comment a bit more in the 4th quarter data warehousing guidance, 5-10% up year-over-year, which is less than we were previously looking for -- that business is almost, kind of, bucked the capital spending trend, you've talked about.

Yeah.

That was a very high priority and yet it looks like it is taking a bit of -- of a hit here.

And also could you comment on the loss at Home Depot to IBM because that's the place where you even got the PLS toughened and you didn't get the data warehousing deal?

Hi Steve it's Mark.

Let me take those two questions; first, I think , we are really pleased with -- with q3.

I will make that statement again.

It's -- it's a really encouraging quarter for us on both the growth and the bottom line, and -- and its just may be one of the best results made in the technology sector this -- this quarter.

In Q4 we have a range of outcomes Steve, you know, I -- I have given here what I is prudent guidance the dynamics in the market place.

But there are range of outcomes and the range of outcomes could go to the positive that would be probably closer to what you have modeled, but, you know, let's see what happens.

I've given you what I think is prudent guidance based on what I am seeing in market place right now.

But I will say it's similar to Lars' statement -- the activity level remains high.

In addition to Home Depot, I think your Home Depot question, I am disappointed by that too and I think you said it right we just got in a very significant transaction with them on POS side.

That was very aggressive transaction.

I will tell you that it was not a competitive transaction at Home Depot.

That's the last statement on the competitor transaction on the data warehouse side.

So, I will leave it to you to interpret that.

Also, there is comment about the other having a negative impact on maintenance through '04.

Can you size that at all -- or is that couple of points of growth, you know, that you are loosing each year that you have to make up for elsewhere?

Yeah.

Steve, that's absolutely the point.

We -- It's important for us to drive incremental revenue growth on our core solutions and in the high availability states in our IT infrastructure space in -- in services in order to offset the impact of some of the decline and some of the business we did with services business -- underlying product business which we got out of years ago and so that -- we will obviously maintained that business for as long as we can and we don't want it to go away but we recognized that it will and that was the plan you can recall.

Well [Steve] I want to give a little more color on that because I think there is two separate point you need to keep in mind.

One is that Earl's statement I think which was the, we will be feeling effects of those exit of business on and absolute level through the end of 2004.

I will give you another way think of it though is that we are really focused on the intersection of when we can grow our organic solutions beyond what the impacted of the exited businesses and we're in range where, you know, we hope to be able to cross that intersection long before the end of 2004.

So Reik this is not too dissimilar to the way you should have thought of our exiting the PCELS business -- entry-level server business several years ago on the product side.

It's the exact same kind of, kind of approach in.

It will depend how well we do in the growth in our core organic maintenance business, but, you know, there is light at the end of tunnel here in terms of our ability to kind of cross those axis.

Finally, Is there an EPS impact from currency in the quarter and also anything going on in term of hedging gains or losses and what do you expect the fourth quarter currency impact to be?

For the most parts [Steve] we try hard to offset the -- offset the currency impact with some hedging that we are doing.

I don't believe there was a positive impact from currency in the quarter in terms of net impact on earnings as I look at it and as I look at the fourth quarter, my expectation is we probably got about the same kind of support we got this quarter about 2 points on our currency given the movements primarily the euro versus the dollar.

Thank you.

Thank you.

Thank you.

Our next question comes from Jim Brown of J.P. Morgan.

Hi.

First of all a clarification on the income tax issue, the tax refund.

There are two numbers given out $15 million related to refunds of previously paid taxes and then the net tax benefit of $3 million.

So what is going on above the pre-tax line and what's going on below the -- on tax line?

Sorry.

I wasn't on clear that, Jim.

Let me -- Let me try to help you a little bit with that.

The $15 million refund that we have recorded in the quarter was a couple of separate items that in the proper accounting for all that we had to record, specifically in the quarter as a reduction in tax expense that was - that's the appropriate way to do it.

The requirements, that's why we disclosed it.

At the same time we had a normal tax provision that we provided in the quarter which was 30% of our income before taxes and so its those two factors offsetting that gets to...

I see

The net $3 million.

Great.

Thanks and also your comments on the pension -- not having pension income.

That would imply that you are at least $76 million of pension income if I annualize.

The third quarter will be going away and you do not expect to fully offset that with operational gains and I think when you are taking about operational gains, you are talking about cost reductions and so the question is, Is the magnitude of the cost reductions close to that $76 million?

I know you said it would not offset but that still sounds like an awfully big number.

Jim this is Lars.

They are trying to make me give you some guidance for the next year and I understand that.

I will give you a little bit of color.

Clearly, the process of re-engineering will save us a significant amount of money.

Some of that money I would like to invest in the sale side and the R&D side and that's a decision that Mark and Earl and I had to take.

We haven't yet totally finalized the kind of saving we will see for next year.

I think Mark and I have a pretty good opinion of what it should be.

We need to finalize that in the coming 3 or 4 weeks.

We need [to get down] to make a decision how much of that will be used to offset the $74 million pension and as we have done that we will give you the correct guidance on the January call.

Okay.

But we are talking about a significant amount of money.

What would be the time frame beon this?

On what.

On realizing the benefits of savings.

I am talking about realizing benefits next year.

That will be, I think, also benefits to be realized the year after depending upon how quickly we can implement the new processes.

Okay thanks

Our next question comes Kartik Mehta of Midwest research.

Good morning.

A couple of questions for you Lars.

First of all, data warehousing, excellent results.

Would that imply that the break-even level is coming down?

Or would that imply that the incremental margin on the revenue is higher?

Kartik it's Mark If I could I will take the question.

I think with the -- All I think you are seeing in this business is much of what we are talking about for all NCR.

I mean right you know well we went after re-engineering the processes in the business.

That's not been a one-time event.

We just continued to push on the non R&D sales process cost, where the process cost in the business they continue to come down.

That's kind of one big point.

And as Earl mentioned, it's not because we are cutting our core R&D or cutting our quarter-to-quarter demand creation capability.

In some ways, I don't want to make this a negative, but it shows you the positive opportunity that we have.

I mean not just internally but the whole company to align the processes and I would tell you in addition, you wouldn't be seeing the kind of growth that we are mailing in.

There is a direct interrelationship to the simplification of the process and the bureaucracy and the ability to go to the market place and execute from a growth perspective.

So that's part of it.

In addition to it, it's focusing on additional little things.

We have talked about aligning our services business in a way that it's optimized for [inaudible] business.

That's happened and it continues to improve the results.

So it's -- additionally you had favorable mix.

This was a very-very positive software mix for us in the quarter as Earl mentioned on the mix side as well.

It's no one factor.

It's a continuation of the aligning of processes that's continued to show up in improved expense management or continuing to focus on R&D and sales.

It's a favorable mix affected by the investments we made in the software solutions.

It's the growth, which certainly has helped us in the ability to optimize the services piece of the business as well.

Question on the ATM side.

You obviously said you had some fairly positive results of Asia Pacific.

I know your not giving guidance for '03 but as you look at the market for Asia Pacific I imagine it is particularly China and India for '03, would you expect the same growth rate to be able to continue?

This is Lars, Kartik.

I don't see any change in Asia Pacific market behavior so right now I would guess it will continue but I'll be probably in a better position to comment on that in January.

Right.

Just one last question on the balance sheet.

The cash declined from June 30th to September 30th about a 110 million.

I know you bought some shares back.

I believe about 22 million.

I'm wondering can you explain maybe what the other difference would be?

Well, overall in the quarter, Kartik.

Obviously we did as you said we did buy $22 million worth of stock back but in addition to that in the quarter we had negative pre-cash flow.

It is one of the metrics that I worry about it is what I commented on in the calls that I was disappointed with.

In the quarter particularly the one issue that I am most concerned about is where our receivables balances are and there are some specific actions we're taking.

I'm confident that we're going to be able to improve the overall performance by the end of the year.

But, you know, certainly we saw an impact of that in the quarter.

If you recall last quarter we were probably a bit ahead of where we thought we were going to be on a cash flow basis in the second quarter.

Part of that reason was what happened payables in the quarter and certainly we saw some of that flip back a little bit in the third quarter as I look at the numbers and then as is pretty normal we built inventory this quarter and that's what we usually expected.

We built [inaudible] we're building to our largest quarter revenue in the fourth quarter.

So it's [not --], obviously it's not something I am pleased with.

But it is not something that I am particularly surprised by and I think it's something that's entirely manageable.

[This with the] inventory gains again are more seasonal than anything else in your opinion.

Yeah.

Inventories about 5%.

I mean its pretty -- it's very much seasonal in terms of [what we are building] for the fourth quarter.

Thank you very much.

Thank you Kartik.

Our next question comes from Matt Somerville of McDonnell Investments.

Hi, Matt.

I have a few questions.

First Mark if you could talk I have a couple of questions on Teradata.

I guess that the top line outlook that you put us on it is a little more cautious than what was talked about in the second quarter.

And I'd like to get your thoughts on to what extent you feel or don't feel that you'll see a normal kind of spending situation of all those people, you know, are looking at their budgets, noticing that they haven't spent the money, you know, do you see executives releasing those funds I guess, or do you see that they would be pushing out end of '03.

Is that a source of some of the caution?

Well, its has been a source of caution for the last six to seven quarters.

I don't think there is a dramatic change.

Let me try to give you a little bit more grounding from our perspective.

I will give you some perspective.

The record revenue in the history of Teradata is 288 million.

So I just want to make sure we have a color on that because, you know, with the outlook we give you we are talking about a technology business that in the ballpark of showing record performance in the history of its business.

So not to take exceptions your point on the guidance.

You know there is a range of outcomes here, Matt, that it is the best way I can describe it and you know there is some transactions that might hit in Q4 or they might hit in Q1 and that has more to do with the guidance than any other factor, so let me separate that from the environment.

I see the environment as roughly the same as I have seen it over the past two, three, four quarters, which is very, very cautious.

You know recommendations coming to make capital expenditures it gets sent back multiple times for a look at it again, look at it harder, look at it even harder.

Show me the ROI, show me the business impact, show me how quick I am going to get the return.

So I don't see it worse than say was a few quarters ago but it is a very cautious spending environment there out there right now and I think the data warehouse stuff as Lars mentioned does because of its ROI nature, does to get to the top of the list of things that people do spend money when they do spend it.

A recurring theme I guess over the last couple of quarters in Teradata there has been an improvement in the overall product mix, can you talk about that a little bit?

Is that sustainable?

Is that more of the norm today?

Though it has been a pretty consistent [Matt], I mean it is you know the software mix has continued to [incline] as well as the services mix in the customer services side which is benefiting from, you know, from our growth, and we are able to leverage that as it relates to the infrastructure that we leverage on the customer services side.

So I think that trends are going to continue along those lines clearly we have done a lot of reengineering and we are reaping the benefits of that as well so, you know, I don't have any change for you know in kind of the direction of the business.

The only thing I would tell you to [Earl's] the points that I thought you made very well on those comments was, we have had several quarters of favorable mix.

Favorable not just in terms of software but also the different components that go into the warehouses that we sell so you know there are variables in terms of the outcome. [They] are total revenue, they are the mix of the products that are within it not just software mix so there is some variability in there but overall trends I think have been pretty steady over the past several quarters and [as you --] I think you should expect those to continue.

Is there anything you can say in terms of trends that Teradata, in terms of geographic, are you seeing the same sorts of trends around the world?

Well, I can tell you lots of stuff about trends in Teradata, I am not sure how long it will take on the call [on it --] on that.

We don't particularly give a lot of detail but by geography, but it is a similar prudent spending environment globally.

This is not unique to the U.S., its around the globe.

The market does as we've talked before; tend to behave both by industry as well as geography.

So you have to look at it by market segment being not even retail or food and drug, general merchandise, wireless industry as well as look at it by geography.

And the trends, there are some differences in trends but the differences are not just geographic they are by industry as well.

And Earl, just a quick follow up on some of the negatives that impacted other expense this quarter.

Well, do you expect the hits from the Latin American currency to continue or is that more of a third quarter event.

No, I think the above the kind of a run rate that we have been seeing is much more of a third quarter event in my view, having [inaudible] the three guidance that we've kind of said, yes, ok, fine, these are the events in the third quarter and I think we are doing quite well.

Among other things, we are doing some things to help ourselves not have future problems and the business [and] reference that we [sold more] will help our other segments as we may [inaudible].

But its something that we did in the third quarter and then I think in general that's way above than what is expected as a normal run rate.

Lars Nyberg;: Hey Matt, I would give you a little bit - give you just a little bit more color to the industry stuff as opposed to the geographic stuff.

I think it is noteworthy that, you know, the calm industry was more stable for us than it had been over the past several quarters.

That industry has begun to flatten out in terms of its growth rate globally and we had an excellent quarter outside the core industries that you would typically think about as being successful in as we talked before.

Lars mentioned our success in financial and insurance.

The insurance manufacturing growth rates in the - if you look at it by industry segment who were key contributors to us in Q3.

Thank you, that is - is well Earl.

Thank you for the color on the [pension] that was helpful.

Next question comes from Jay Stevens of [Buckingham] Research.

Yes, thank you.

Firstly, I do have to say this thank you Earl for the complete financial release.

This is the only company I cover that gives P&L, cash flow and balance sheet.

That's all very helpful.

But I do have a couple of questions.

On the process side the emphasis on improving processes next year, it strikes me on looking at the P&L that we currently have for the last few quarters that your focus is on cost of goods more so than on SG&A.

I am assuming that from the comments you've made that R&D wants to go up, not lower.

So is that correct that you see the opportunities on the cost of goods side more so than on the SG&A side?

Yeah, Jay, this is Mark.

No, I wouldn't say that would be the correct assumption.

I think that you are correct in the view that we are, you know -- it's just the things we want to be good at in this company.

We want to be great at the ability to build innovative technology solutions, at selling them and servicing them.

Those are the things we want to be great at; that's where we want our money to be.

So, we are going to focus on getting every other process that surrounds those capabilities to the most nimble, agile lowest level that need to be, and that's what we have got focus on.

That's opportunity for us in G&A and that opportunity in my opinion, Jay, is significant; and we will go work on that.

Okay.

It also relates to us getting those processes, not only down in terms of the expense but also [aligning] to supporting us to go [grow].

So, these two things are interrelated.

At the same time, there are continual opportunities for us to lower our cost-to-goods sold.

So we will continue to focus on [cogs]; that's an ongoing focus.

We had some pretty -- some decent success there, but we will continue to focus in that area because I think there is even opportunity in there as well.

So, don't think of this -- I don't want anybody on the call to think that this is the one-trick kind of game.

This is pushing on two lines at the same time, and I will promise you these two lines are interrelated.

The more nimble and agile you get your infrastructure and G&A that supports the business, the better your opportunity to focus on gaining share and growing, and we will do both of those the same time -- at the same time as we continue to [align] our cost-to-goods sold.

Mark, I have some more questions for Earl, but in the case of what you just said, we do get an SG&A lined out as a percent of revenue.

Can you put any color on what portion of that is G&A and what portion is S?

Jay, those aren't numbers that we break out specifically.

I will just reiterate some of what Mark's comments are.

We do think that there is opportunity within our G&A space to reduce the numbers at a measurable level, and so will impact that overall, but we have not broken that up separately.

Okay, my other question relates to tax rate assumptions for Q4 and '03.

Should we continue to use a 30% assumption for Q4 and all of '03?

Jay, obviously, we haven't given guidance yet on '03, so I won't respond to that part of the question, but as to the fourth quarter results, we have an obligation to find out what we expect our annual tax rate is, and that's the normal rate that we are booking; we've booked that at 30%.

There are some opportunities that we are pursuing to make that better in that space, but at the same time there are some risks that we probably have around other expenses that I'll look at it, but I think, you know, it's fairly well balanced in the outlook that we've given to you.

But at the moment, certainly 30% is the expected rate that we have for as an annualized tax rate.

Okay, so in your guidance for Q4, you are essentially using the 30% tax rate prior to anything that happens later on in the quarter?

Yes, and essentially balance and I think that's got a balance of risks and opportunities in the numbers.

Okay and not knowing anything different or whatever;

I'll just use 30% in my forecast for '03 until you say some thing official?

Yes, that's fine.

We are not giving any guidance in [inaudible].

Thanks very much.

Thanks Jay.

Thank you.

Our next question comes from [Harold Glycer] of [Metropolitan West].

Hi thanks.

First just a clarification from Earl and then a question for Mark.

The clarification.

Did you say that for Q4 in your guidance continued pension income roughly in the $19 million range for this year?

Yes, that's roughly correct, and we have done about $13 million from what it was in the year-ago period.

But I bet it will be about $19 million.

We will end up the year I expect with about $74 million of pension income in aggregate.

Okay.

And then, Mark just -- in your opportunities for the parts of the business other than Data Warehouse which you are now in control of, it seems to me that you had a particularly unique advantage in your management of Data Warehouse and that is a unique superior product, which you come to the other parts of the business maybe not with that extent of a competitive advantage.

How do you overcome that in terms of creating better operating companies in the other parts of the business without that same advantage?

Well, I mean I'll touch point on -- I am glad that you feel so good about Teradata technology.

So that's great;

I do agree with that.

We got a great position there.

I actually tell you that if you look at our product line up today and I've been four weeks through all the operations of the company now, and I think our product lineup is in one of the best positions ever.

We have done a lot of work on the R&D side, if you look across retail, self-service, we've got some pretty strong position.

Now if you look at Teradata with that, unique value proposition that you've described.

While the relative growth rates of that business have been superb compared to the, you know, the very difficult IT environment out there the companies are reporting now, I still think these are businesses that can generate growth, I think they are businesses which can generate more - I think we gain more share, and I think we can generate growth.

So I believe that you can do it by doing exactly what I've described.

The formula is, we are going to focus on gaining share and growing in our top line, and I think that's doable, [Harold].

I think, at the same time, we have to get our business in a position not just in Teradata but across the whole company where we are as nimble as we can possibly be, as agile as we can possibly be in the cost and infrastructure that surrounds those businesses.

And I have been in this company for a long time, and I think that there are great opportunities to execute what I just described.

Even in, you know, selling something like [POS] terminal?

Even in selling something like a POS terminal.

As well as a self checkup device in electronic shelf labels, and I think over time, and I won't get into a big strategy review to you here, we will continue to move towards the mix that's towards the solutions mix.

You will continue to see us move in that direction for I think it gives us a much better opportunity to leverage our core competencies and solve problems for customers.

And it's that's where the real opportunity is.

Even in the context of those markets you have described.

I think that it is a positive impact on our customers perceive us, and our overall mix of the business.

So, listen, I think that the opportunities in all these businesses, I am actually pretty happy with my view of where the businesses are today.

I think we get a better job of executing what's in front of us.

Thanks a lot.

Your next question comes from Reik Read of Robert Baird & Company.

Hi, good morning.

Earl, can you take a second and talk about the other line item again and tell us how much was embedded in there with the [exit] cost and how much of that is all one-time?

In other expense, you mean?

Yes, sorry.

I think, Reik, what we normally expected is that we will have $5 or 6 million of run rate expense on [that line].

So that held rather than the one [punch]?

Yes, [inaudible] in general, that's the [possible] right number that we are expecting and we are having the incremental piece, is the piece that takes us up there [Reik].

It's roughly right.

That's great.

You also in your comments had indicated there was some pent up demand in the retail side.

Can you guys talk a little bit more about that and give us some idea of expectation in terms of when that might come back?

And also, if you can focus a little bit on the self-checkout side, any incremental wins beyond Home Depot and are you gaining share?

Well as I said in my comments, there are clearly some bigger chains that are looking at their equipment, [upon their] sale equipment and are concluding we can't defer the replacement much longer, may be not at all, we have to do something.

And therefore, I said that we have -- we see an activity that is somewhat higher than last year.

But I also cautioned you saying I don't see a recovery of the retail segment and an increased capital spending.

I see in higher activity because some of these - specific customers can simply not defer the replacement of the old equipment any longer.

Some of those customers we have won and we have a funnel, where we have a couple of more of those customers that we hope to win.

And therefore, I think, we will see a slightly better environment to operate in than we have seen in the last 4-8 quarters.

The self-checkout activity -- extremely pleased with the Home Depot when we believe the home depot is the clear market maker.

There is no doubt in my mind that the acceptance, both in the -- on the side of the consumer as well as on the side of the -- our customers, the retailers, for this technology is there.

There is no discussion.

Having said that the self-checkout suffers from the same capital spending environment that traditional point of sale equipment does.

So as that improves, I think, we will see some more activity also in self-checkout

But no incremental wins to speak off?

No I think there is a lot in play there.

I think that the -- you asked a question about market share, I would say the more important metric right now is customer share of rollouts.

So I think, you know, the Home Depot was the one big decision of a big customer to rollout in the quarter; we've won it.

I think that's probably the more relevant metric as you go forward over the next few quarters.

As, you know, the customers that buy -- tend to buy from one company when they do rollout.

So what we are intensely focused on is winning each customer as they rollout, so at this point I think market share.

Because one deal is going to shift the market share pretty significantly in a new product like that.

The bigger issue is winning the customers one at a time, as they make the important decisions.

But Mark, I mean, I guess I am interpreting what you're saying is that you feel that you are beginning to win that war?

Yep.

Absolutely.

Sure do.

But, you know, the test will be showing up quarter after quarter with the win.

And all I am telling you is that's the way to track it and that's the way we'll be reporting it to you.

And I think it's opposed to, you know, trying to give you some market share number that swings on, you know, one dealer to.

So...

No, that's fine.

I understand what you are saying.

But yeah, we were very -- we're very pleased with our new release.

The new release of FastLane has been real well accepted, it's doing real well on the pilots I think the issue for us is not just a competitive one; it's a capital spending one.

So as people move in to saying, we're going deploy this technology.

We feel real good about our chances to be the big player in this game.

But, you know, we got to get about the job with winning it customer by customer and narrowing the deals.

And then the last question from me on the ATM side.

Can you talk a little bit more about pricing; you mentioned that the price pressure mostly was occurring in Europe.

How much price pressure are you seeing now and how much you expect in the future?

It is Lars.

Yeah, we have seen price pressure in Europe.

And will it continue?

Yeah, we have at least right now -- assume that we will have price pressure going forward, which has redoubled our efforts on taking down the cost of those products which come back again to these process of reengineering.

I think there are great opportunities.

I am actually pretty optimistic on the plans that we have for next year in terms of cost reduction for our products in general, and certainly in the ATM space.

So that's the best color, I can give you.

Sure, Lars, do you have a number in terms of how much price pressure you are seeing at this point?

No.

I don't have a number.

Okay, thanks.

See you.

Our last question is [inaudible].

I think we must have ran out of time.

Thanks for joining us this morning.

Thanks very much.

This concludes today's conference call.

All parties please disconnect at this time.