NCR Voyix Corp (VYX) 2002 Q4 法說會逐字稿

Good morning and thank you for holding for the NCR conference call.

To remind all parties today's conference will be recorded at the request of NCR.

Participants will be on a listen-only mode until the question and answer session of today's conference.

The first speaker is Mr. Gregg Swearingen.

Thank you.

Thank you.

Good morning everyone, and thanks for joining us as we discuss NCR's operating and financial results for the fourth quarter of 2002.

Lars Nyberg, our Chairman and CEO will lead today's discussion with brief comments regarding NCR's fourth quarter results as well as open a discussion of the opportunities NCR has identified to improve profitability.

Mark Hurd, President and COO, will provide more details regarding these initiatives.

Following our prepared remarks, Lars, Mark and Earl Shanks, CFO, will host a question and answer session.

I would like to remind everyone that our remarks and responses 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 risk factors are described in NCR’s S.E.C. filings as well as is in our annual report to the stock holders.

I would also like to point out that certain nonGAAP financial information regarding NCR’s operating results will be discussed on today's call.

Our reconciliation of the differences between the GAAP and nonGAAP measures is included in the fourth-quarters earnings release which is available on the investor page of NCR's web site, www.ncr.com.

A replay of this conference call will be also made available on in NCR's website later today.

I'd like to turn the call over to Lars.

Good morning, thank you for joining us as we provide our commentary and results for the fourth quarter in 2002.

There's no question that 2002 was a challenging year for everyone.

We were disappointed with NCR's 2002 performance given the Mixed results across the businesses.

Particularly in retail store automation and customer services.

We have made some improvement in these businesses’ structures and processes but our financial results have not shown this due to the revenue declines and adverse mix changes.

Despite continued challenge in Europe, NCR's financial self service business ended the year with a solid performance, and we continue to exceed strong financial results in Teradata data-warehousing as this business gains share and improvements profitability at a remarkable rate.

Teradata's business, hardware, software and services and the customers’ implementation of our solutions continue to be recognized for its leadership in the business intelligence market.

While I'm proud of many of the improvements we've made over the last few years, there is great opportunities ahead for NCR.

Both Mark and I will provide information on these opportunities later during the call.

Before we do that, I'd like to briefly discuss the performance of each of our businesses.

The Teradata Data Warehousing business outpaced the industry with revenue growth of 8% in the fourth quarter and 7% revenue growth for the year.

Further evidence of the continued recognition of Teradata's business value and return on investment advantages.

For the third year in a row, Teradata added about 100 new customers to its base in 2002.

Our new customers span a broad range of industries with significant year-over-year growth in the insurance, communications, government and retail sectors.

Teradata’s operating income for the quarter increased more than 160% from the fourth quarter of 2001 to $34m reflecting higher revenues as well as cost and expense improvements.

For the year the Data Warehousing business realized 112m of operating income, $165m increase from 2001.

This illustrates the Teradata solution’s strong and improving competitive position as well as the operating levels inherent in its financial model.

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

We are gaining share as we improve operating results.

Financial self service revenue grew 1% in the fourth quarter and declined 2% when prepared to the full year 2001.

Adjusted for currency, revenue down 3% for the quarter and 5% for the year.

Growth in the Americas and Pacific regions upset economic weakness and competitive pressures in the European marketplace for the quarter but not the full year.

Growth in the Americas region was driven by revenue related to 711’s purchase of our advanced function ATMs.

The beginning of upgrade cycles related to industry mandates and sales of our [inaudible] software as financial institutions begin the move from OS2 to the MT platform.

We realized continue growth in the Asia-Pacific region led by China and India.

To support growth in India, NCR has opened a new ATM manufacturing facility in India and we intend to the expand those operations in 2003.

Operating income for the quarter was 56m, a decrease from 9m from the prior year period.

The year-over-year comparison for financial self service was difficult in 2002 due to the stronger than normal operating margins due to the Euro conversion in 2001.

For the full year, operating income was [115]m down from 168m in 2001 as a result of lower revenue and competitive pressures in Europe.

Despite these challenges, financial self service based on our preliminary data gained Product market share .

Now I'd like to talk a little bit about retail store automation business which continued to trail expectations in the fourth quarter.

Although after six quarter declines, revenue increased 3% for the quarter.

Competitive pricing pressures and increase expense in our supply chain limited retail store's ability to drive the profit we expected.

In the fourth quarter, this business saw an operating loss of 1m down from an operating income of 11m in the year ago period.

For the year, retail store over operated loss of 57m compared to operating income of 10m in 2001.

These declines in operating income performance are due to a 14% revenue question decline and competitive pressures that drove lower margins.

However there are positive signs relating to this business.

We expect to harvest our R&D investment as the mix shifts to new product and the industry prepares for a long-overdo upgrade cycle.

Key wins in the second half of 2002 provide good momentum as we begin 2003.

These wins were enabled by the best product line we have offered in a number of years.

Our newly reassigned point of sale systems have begun to be installed by several major customers such as Home Depot and [Kohls Myer].

Turning to our customer services business, in the fourth quarter, we saw good growth in the maintenance revenues from financial self service, payment and imaging, and retail store automation.

However, lower revenues from exited businesses and a challenging market environment for third party maintenance resulted in revenue for customer service business to be down 7% compared to fourth quarter 2001.

For the year, customer service revenue was down 9%.

This is a partially a factor of lower installation-related services due to lower overall company revenues and also driven by declining [inaudible] value from exited businesses as well as softness in the third party maintenance market.

In 2002, we saw a more than $100m decline in maintenance revenues related to exited businesses.

We expect to see a decline of about half that magnitude in 2003.

Customer service operating margin was down $28m in the quarter and 133m for the year, as cost deductions were offset by lower revenues from exited businesses and pricing pressure.

As I mentioned at the question while I am disappointed with NCR’s mixed results in 2002, I am proud of the many improvements we have made over the last few years.

We have made improvements in our offerings and in reducing NCR's cost and expense structure but additional opportunities lie ahead.

We are focused on gaining market share in the core business by delivering technology led innovative solutions with lower cost, building a world-class sales force and driving cost and expense out of our structure. [inaudible] Mark Hurd is focused on improving the [sales] management and together with Earl, we are focused, all three of us on fundamentally changing our processes and support structure, driving efficiencies and reducing cost and expense.

Let me give you the best example how we have already accomplished all of these things in one of our businesses.

In the second quarter of 2001, Teradata data warehousing growth slowed dramatically.

With the prior four quarters, this business has been growing between 20% and 25% compared to the prior year period.

In Q2 of 2001, this growth slowed to 2%.

And given the economic environment, we did not expect the growth rate to improve throughout the year.

In 2000, the Data Warehousing business model was dependent upon consistent, significant growth.

When this growth was interrupted in 2001 by the economic slowdown, Mark knew that in spite of Teradata’s [strong] market position, he had to change processes and structure in order to drive out cost and expense.

He began to see movement in operating income as early as the fourth quarter of 2001.

By the third quarter of 2002, just four quarters later, Teradata Data Warehousing had achieved the profitability improvement of $64m versus the prior year period. 75% of that improvement was from the cost and expense reduction. 25% was from the revenue growth.

This continued in the fourth quarter with Teradata improving operating income more than 160% year-over-year.

In many ways the actions we are taking now for the rest of NCR’s businesses mirror the initiatives we took in the Teradata business in the third quarter 2001.

Our success in Teradata gives us the experience and the confidence that we can be successful in NCR's other businesses by lowering product costs, streamlining processes and reducing overhead expense.

Our guidance for 2003's revenue for NCR is flat.

We are not banking on marked improvement or expecting an up tic in IT capital spending levels.

Therefore we must execute the same essential realignment of cost and expense we did in Teradata.

We are spending too much money and our processes are too complicated.

As a result of these initiatives we expect 50m to 60m of cost savings in 2003.

In '04, we expect these efforts to deliver an incremental savings of at least $100m.

Ill turn the call over to Mark to discuss these operational initiatives.

Thanks, Lars, and good morning to everyone.

Before I get into some detail, I'd like to establish base lines for both the revenue growth and for improvement in profitability.

When I'm speaking about growth, I'm starting from a baseline of $5.6b.

In terms of profitability I'm talking about operating income that excludes pension of approximately $135m.

From these starting points there are two major opportunities for the company, growing our business and the reduction of cost and expense.

I'm going to start with cost.

As a company, we're spending too much money on infrastructure and our processes are too complicated.

We'll change both our front and back office processes and our support structure in order to drive costs and expense out of the business.

As Lars described, we've done this in part of our company, and now we will do it for the rest.

Let me start with some opportunities in terms of those cost reduction.

Now, we've talked to you before about product costs.

We are continuing to drive these initiatives in a number of ways including product design and [purchase] procurement.

But there's still much more to be achieved from these actions.

Let me give you a couple other examples where costs exist in the company and will be improved.

First, our supply chain.

It's expensive and slow with too much accompanying overhead.

As we've done in some of our businesses, we will shorten the time to the bill process, cut down the number of times we move the products.

We need to lower the inventory levels by finishing the units in the factory rather than shipping them to some intermediate staging area.

Whenever possible, we will ship the completed product directly to the customer's installation site.

As we improve in this area we will decrease our handling, freight, inventory and warehouse.

Secondly, in lowering our cost of service, the most improvement will come from the completion of the implementation of a global model.

For example we are continuing the consolidation of the call centers, standardization of the parts distribution model and standardizing and simplifying our service offers.

We're to appoint a new productivity model for the scheduling and dispatching of the customer engineers and embarking on a data standards initiative to support the worldwide reengineering effort.

Now this effort is already in process and will continue through its completion in 2003.

In addition to cost of product and services actions, we're also looking at our infrastructure groups.

Our back-office processes are still too costly and inefficient.

We have opportunity for significant improvement through less complex global processes that are deployed consistently.

We've already begun some of these changes and they will contribute to our financial performance as the year progresses.

However we will not see all of that benefit in 2003.

In a couple of minutes I'll give you specific numbers in this area.

Two examples of these infrastructure reduction initiatives include continuing decreases in real estate.

Now, since '97, we've reduced the number of facilities by more than 35%, and we've taken out over 4m square feet.

We will take out another 3m square feet of excess real estate through better utilization of the current space we've got and increasing the use of virtual offices and the sale of presently underutilized facilities.

Secondly we'll get additional leverage from the internal information technology function.

Now I spent the last four years in a lot of other companies' IT shops, and I will tell you we have a quality IT infrastructure.

We have got the right hardware, operating systems and software.

However we continue to make modifications at various levels of the organization that become costly and very cumbersome at the corporate level.

We will enforce standards, discipline around global standard applications.

One major component of this is to move to our new ERP system which is already being deployed by region.

The Asia-Pacific region is already up and running, the Americas mid this year and finish that deployment of ERP in early 2004.

In Europe the completion of this migration will not only help in the standardization of the processes, but give us further extension and leverage of our enterprise data warehouse and other global software applications.

Within the [F&A] organization, we've bench marked costs externally and we believe the opportunities exist to cut our costs by at least half.

We'll be changing processes across the company, these include the standardization and globalization of processes that, among others things, will require the ERP implementation that I previously referenced.

We have a road map in place and we have begun this transition.

Now the relationship between cost and expense and the growth we drive in the market is clear.

I believe these two things play together.

A simplified, rationalized cost structure allows us to more effectively compete in the marketplace.

Now, as I move from cost and expense initiatives into some comments about growth, let me take a moment to make a quick point about our product.

The products and solutions given by our R&D organizations is the best we've had around here in years.

We believe our offerings on par are better than our competitors in terms of features.

A couple of examples, I think most of you know in the fall of 2002, we released Teradata Warehouse 7.0 including Teradata Database 5.0 which is the first solution that truly integrates strategic and tactical decision making on the same platform.

Its offerings are unmatched in the marketplace today.

Our ATM solutions have several advantages in the areas of open system software, deposit automation functionality and network and systems management.

In retail, we have leading retail checkout systems in our new point of sale offerings are very competitive as evidenced by the recent wins at major retailers in the US and abroad.

These solutions coupled with reduced cost and expense structure I described provide compelling value propositions in each of our core businesses.

Where our products and features command a price premium, we intend to seize that opportunity.

We'll more effectively sell our value proposition, fueling growth.

I said at the beginning of my comments growth is very important.

However just to maintain flat revenue over the next two years, we have to make up a decline of approximately $150m of maintenance revenue from exited businesses.

I've told you some of the things we're doing to reduce cost and expense and provided you some color around our solution offerings.

That in essence is our value proposition.

Now, let me talk a little bit about how we translate that value proposition into growth.

We will drive a world class sales force to bring these solutions to market and we will drive that through energizing our sales organization.

We're focused on growing the company again, and to grow again we have to return back to basic blocking and tackling.

This includes the fundamentals of training, territory management, account planning, bid management, all of the things that are critical to driving a world-class sales organization.

We'll focus on improved sales training.

We'll become more effective at positioning our value prop with possession of potential customers against competition.

Additionally we’re focused on building account relationships and establishing sales territories.

Now speaking of territories.

We will be reviewing existing territories in terms of current offerings across all of our existing markets.

In some instances this means we'll actually expand [cell/sale] headcount.

For example, we recently announced a new community bank initiative where we will dedicate a sales team to target smaller banks and credit unions.

Every cell of our sales organization will be measured absolute growth and market share.

These are two separate metrics.

Relating back to the Teradata Lars gave earlier, we saw in 2001 significant decline in capital intentioned.

Teradata showed very little growth, as Lars described, 2%.

When you look at our existing -- our previous standards for Teradata, 2% wasn't very exciting, but the number bore out, we actually gained more share than in previous quarters so it's critical that we measure both of these metrics.

We place greater emphasis on effective sales management.

We’ll align the right resources against the best opportunities and ensure that our sales incentives are connected directly to company objectives.

Additionally we're working to simplify the complexity of our sales process such as order placement, eliminate all distraction caused by bureaucracy in sales administration.

We're removing every distraction that takes away from our salespeople’s ability and time to sell.

All making it easier for our salespeople to succeed in the marketplace.

We're well-positioned for growth across all regions.

Opportunities include the community bank example that I described earlier, continued self service expansion in the Asia-Pacific market.

Sustained Teradata data warehousing new customer acquisition and industry expansion.

Increased opportunities in retail store automation, self-checkout both domestic and international.

In material opportunities and customer services, we're growing our core maintenance base as you saw evidenced in the last quarters by the numbers you saw today.

But we can do more.

We're also pursuing incremental growth from third-party services.

Of course, all these things are not easy to accomplish, but we will get the job done as we did in Teradata.

These aren’t one-time actions.

We're going to keep pushing and working for significant continuous improvement.

Hard work lies ahead of us to get NCR's overall performance where it needs to be longer term, but we are also sharply focused on improving near-term results.

For 2003, we accomplished this by focusing on six drivers: Revenue new performance in Teradata, financial self service, and customer service, operating margin improvement and Retail Store Automation and customer services, and the cost initiatives that I have described.

Given the $50m to $60m of savings we expect in 2003, we can make the Street’s expectation for 2003's operating income even if we hit the low end of the revenue ranges we have provided for each business.

Additional savings will continue into 2004 as we reengineer processes and structures.

Ultimately, we anticipate these actions will provide $250m of net cost savings on an annualized basis as we exit 2004.

To summarize what I told you, we absolutely must and will take cost and expense out.

We are driving changes in the sales organization at all levels.

Together, these actions will improve our competitiveness and our market position.

With that, operator, we're ready to take any questions anyone might have.

Thank you.

At this time if you'd like to ask a question you may press star 1 on your touch tone phone.

Again, to ask a question please press star, then one.

Our first question comes from Richard Gardner of Salomon Smith Barney.

Thank you.

Just a couple of questions.

On Teradata, the guidance for Teradata revenue growth for 2003 at 0 to 5%, was a little bit below our expectations.

I'm wondering why you're expecting Teradata revenue growth to decline in '03 versus '02.

Maybe if you could give us our latest thoughts on the perennial question which is the potential Teradata spinout.

Thanks.

First let me talk about, Richard, the Teradata growth rate.

I think first let me start by reflecting on 2002.

When you looked at 2002, I think we're really pleased with how the business performed.

I think when you look at the growth rate in Q4 and the growth rate overall, I'll reflect back on the 2000, 2001 times.

We gained more share in 2002 when the stories get written than we have in any other year, so from that perspective, I think we're real pleased.

I think in terms of whether the number is going to be 0, 1, 2, 3, 4, 5, whatever other number, I think it's going to relate to how the marketplace and the economy behaves.

There's a ton of [rigors] as, you know, around capital expenditures right now.

We feel great about the competitive position.

We feel great about our market position.

So it's going to be a question more of what happens in the market than probably any other factor, and that's our best view of where we sit right now.

Shifting to your, quote, unquote, perennial question of the Teradata spinout, I think, you know, for us, the issue is more one of absolute growth in the Teradata business.

I mean, we've talked before about the business performing, and, you know, I'd argue when you look at the profitability numbers, the business has certainly performed in terms of the ability to deliver profit.

Certainly, when we look at spin out or anything like that, that has to be based on an overall view of what's good for the shareholder, long run, and the sustainability of that business in the marketplace as an entity.

I think there's another factor here is while we're gaining share and improving our market position, we don't have the absolute growth that we'd like to see in the business.

So that becomes a real key milestone as we evaluate decisions like that going forward.

Okay.

Could I ask a follow-up, please?

Just interested to get your thoughts on Dell's recent announcement regard entering the point of sail business.

I know commodization of that business has been an initiative but it seems like it might be stepping up a bit.

With respect to self-checkout, more than 25 customers have been evaluating this technology for over the year.

Is there anything that suggests '03 is going to be better substantially than '02 in terms of self-checkout, rollout and, you know, excluding, obviously, Home Depot in that analysis.

First of all, let's be clear that Dell has been in this retail store automation business quite some time, I would argue.

It's also a fact that clearly with their business in the PC, they can leverage a part of the offer, but there's a big portion of the offer that is not leverageble, we’re talking about a lot of professional services, scanners, software, and maintenance.

Although I have lot of respect for Dell obviously, and we are watching them, I don't think this is a major change in the competitive environment.

I actually think key solution to our store automation business is the market and the willingness for retailers to invest.

As I mentioned, in my comments, the order win rate in the second half was pretty good.

Our position was very well start in the year.

And, yes, I believe that there's no discussion that self-checkout has been adopted.

Whether it's going to be a substantially better they year than 2002, I think it's going to be determined about the willingness to do the capital investments that is required.

The retail industry needs to upgrade the infrastructure.

It's a long overdue.

To so I do expect that will have some impact also on the self-checkout.

Okay.

Thank you, gentlemen.

Our next question sops comes from Rebecca Runkle of Morgan Stanley.

Thank you.

Good morning.

I think in part a quick follow-up, Lars, to the conversation you were just having, and in particulars I look at some of the commentary for the first quarter and full-year revenue expectations.

Let me start with the retail store automation expectation force the first quarter, and I guess to the degree you can make us more comfortable with the backlog really coming through in the first quarter, that would be helpful, because I think it's no secret that retail had a very tough fourth quarter, and I'd imagine most retailers are more conservative given the fourth quarter.

So it's hard for me to get my arms around 28%, 25% growth in the first quarter.

If you can help me feel more comfortable that you that's a number you have clear visibility on that would be great.

I'll start, Rebecca.

We had strong performance in orders in both Q3 and Q4.

That performance gets realized in the kind of numbers you're seeing both in Q1 revenues performance as well as full-year revenue performance.

And then commensurate with that, if you can help tie together some of the when commentaries related to, again, some of the differences as I look at the numbers, particularly the payment and imaging segment with the down 25 and then flat for the full year, just put a little bit more color in terms of what is -- you know, what gives you confidence that revenue gains later in the year will offset the 25% decline in the first quarter.

Yeah, I think, Rebecca, you're looking at a relatively small cell that winds up with a big percentage movement in it based on really small -- I don't want to say small -- but numbers that really aren't huge when you get down to the swings and percentages.

So this is very much of a deal-driven business.

We're comfortable with our line of sight, the orders we've Had, the backlog levels we've had as it relates to full-year performance.

This is actually a pretty neat business.

It's got a pretty cool value proposition in the context of the software and services mix and the uniqueness of it in term of the ability to capture images.

And many similarities to Teradata in terms of return on investment and business models.

So these are more deals that -- you know, there is not a widget business.

You know who you're talking to, you know what the deal is the time line on the deal, et cetera, et cetera.

And I guess, lastly, just a little bit of qualitative commentary would be helpful, because I look at everything that's going on in the macro environment as well as what you talked about this morning.

There's certainly a tremendous amount of uncertainty.

And to the degree you can put some verbiage around how you're communicating to employees about what's going on within their various businesses, how you're going to keep them engaged and really working towards these improvements because they're obviously not things that are going to happen overnight but are going to take several quarters to unfold.

Any color you can provide there will be helpful.

Okay.

Rebecca.

This is Lars.

Coming back to what I said, I believe, in October when we announced the I appointment of Mark as President, I said we had in the prior year made progress in the rest of NCR outside of Teradata, but it wasn't enough.

I believe that we have made more progress in the last 90 days than we've made in the prior one and a half years.

Our plan for this year is basically fully based on the fact that we don't believe we will have an up tic in capital spending and, therefore, we are not banking on revenue growth.

We can achieve a significant improvement or underlying operating performance simply by getting cost and expense out and all those initiatives will have a significant positive impact in 2004.

I'm very confident we will achieve those numbers both for 2003 and 2004.

When it relates to employees.

Mark and I have seen 4,000 people in 90 days and communication over the web.

It's difficult in one way, but, you know, people are smart.

They know we have to change of the they know we have to reduce our expense because the processes are cumbersome.

And I think they are pleased to see that Mark and I and Earl are stepping out to say, okay, let's now do this, because it will make us more successful.

Even fit's painful and a lot of work, it will make it more successful.

That is what we have to accomplish.

I feel very energized, I feel confident that we will deliver these numbers.

I'll add a little color, Rebecca, cause I think it's a really insightful question about how our employee base reacts to this kind of thing.

And we've talked to the whole company, everybody, three times as well as the 4,000 Lars described as face-to-face dialog with Q and A. I think we're getting everybody energized.

Everyone wants to go win.

It is a competitive world out there.

It's a competitive economy, but we've got some great positions in the markets we're in.

And I can tell you, cost drives growth.

Putting yourself in a cost position that really allows you to get a market competitiveness is a greet thing.

While it's a tough message, it's energizing simultaneously.

And I'm confident we're going to get the people of NCR energized, exited and committed to driving this kind of improvement and performance.

Do you have any way to track how that's going as you play this forward three, six, nine months from now in terms of just formally measuring that -- you know, maybe there's not a formal way to measure it, but just continuing to track the topic, employment engagement, excitement, et cetera.

We don't have a formal survey once a week or something like that.

What we have – message board we have a lot of communication and, you know, Rebecca, if you talk to 4000 people, you get the message quite quickly what they think.

I don't think it's a big problem for Mark or me or Earl to feel the pulse of the organization.

I think that's quite easy, actually, and I get it from many sources, many channels.

And what Mark described here is exactly how I also feel about it.

We are getting [traction], tough message, but people like it because they want to be winners.

Thanks so much.

Thank you, Rebecca.

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

All right.

Could you talk about the Data Warehousing business in the fourth quarter, sequential improvement was excellent, yet the operating income did not reflect the sequential improvement of this business with huge contribution margins.

I guess the question is, did the expense level go up?

Were there accrued expenses, were expenses deferred?

Or did you just decide to pay higher bonuses?

Hi, Jim, it's Mark.

I don't even want to joke about that.

There were no higher bonuses.

Only related to volume, would there have been anything with higher bonuses, because when salespeople sell more, they get paid more.

But at the end of the day, it really was mixed.

So as we've talked before, there's several variables that affect Data Warehousing operating income performance within a range, and it has to do with disk mix as well as software mix that goes on in the quarter, and it was a little bit less favorable than what you saw in the preceding quarters of the mix itself.

But I'll reiterate again.

I was really pleased with the growth year point.

I mean, it was a good performance for us, significant new account quarter.

The mix was a little bit less that be what we expected, a little bit less than what we would have hoped in a favorable mix environment.

But when you compare to a roughly 6 to 8 quarter base basis, it reconciles and rationalizes its way out.

Could you talk about your thoughts on doing something strategic with the customer service business, particularly combining it with someone else's to eliminate costs?

This is Lars.

We are focused very much on the operational plan.

We think we can take significant costs out of the customer service overhead structure.

That is our prime focus.

That doesn't mean that if some opportunities would arise to structurally do something that would be better, we certainly will look for that but as I said, Mark particular got around to the business of very focused of getting the cost out, and growth -- continue to have go growth in the core solutions, self service, store automation, payment and imaging, Teradata.

I really believe that we have a chance to also be in the third-party maintenance business.

Now, that is a tough market right now.

We have an excellent offer, and I believe that we can gain market share .

And on top of that, we are taking costs out of that organization.

Okay.

And last question.

Could you talk about what the severance charges were in 2002 and what they might be in 2003?

I assume that the numbers that you're giving out are after those severance charges -- that is, you're including them as recurring items?

Yes, that is true.

This is Earl.

The numbers we're giving is after the severance expense we're incurring in the year and quarter.

The amount we had as expense for 2002 was about $75m, and the amount we expect for expense for 2003 is about $85m, in rough terms.

Okay, great.

Thanks.

Our next question comes from Matt Summerville of McDonald Investments.

Good morning.

Morning.

Couple of questions.

Looking out into 2003, I was hoping you could provide a little color with respect to the ATM business in terms of, you know, what you're expecting for the various regions in which you participate in terms of growth.

Is Europe going to have another down year next year, net of currency?

Do you know, do you expect similar growth in Asia?

And really dig a little bit deeper in terms of what you're seeing here in the United States.

Okay, Matt, this is Lars.

Maybe I'll start and maybe Mark will add something.

The thing I feel most sure about is the continued growth in Asia-Pacific.

We talk about that on several calls here.

The install base in China and India is significantly smaller in terms of number of ATMs compared to the United States.

The market over there is huge, hundreds of millions of people that are using cell phones that need ATMs.

So I expect this to continue to grow and to become even a more important piece of our business.

I think, in terms of the Americas, we saw a good growth in the fourth quarter in the Americas driven by the 7/11, obviously, but also the fact that the banks are moving from OS2 to MT.

The one I'm least sure or confident in is the European area.

I would expect it to recover from a very difficult year 2002, but as I said, I feel least comfortable about that.

Yeah, and I think that's the right color, Matt, that Lars gave you.

I think, in China and India, the opportunity is there for robust growth in 2000, 2003.

I think the U.S. is exactly what Lars described and the wild card will be Europe and exactly how Europe behaves.

And clearly, you know, in the consideration of the color we gave you earlier, we're not anticipating exciting growth in Europe this year, so -- but we'll still have to see how it pans out.

Okay.

Then just a follow-up.

You know, given the new structure and the goals that are being undertaken in the organization, I was wondering if you could provide color at the executive level, how incentive compensation will play out in '03 versus '02 and how the goals and objectives in which you've laid out pretty clearly here today, Mark, will play a play a role in that.

Sure, I will be glad to give you color on incentive compensation.

Lars can add some color on mine, if he'd like.

We're really getting everybody unified around making a non-pension operating performance result.

So whereas, you know, I think in the past, you looked at some metrics that -- I'll use the term and it's going to sound negative, of [siloed] metrics around units.

I think what's important for us to do this year is come together as a group get unified behind the cross business actions that we need to get done, because these actions cut across multiple areas of the company.

So it's important we're unified as a group.

From my team, I'm simplifying the metrics, getting them aligned around expectations that are aligned with the Street and the shareholders so we get about the job of getting this thing done, not just in a unique business or infrastructure group, but across the entire organization.

Okay.

And then, Earl, I was hoping you could provide some more detail around free cash flow.

You kind of put a stake in the ground of 50m to 100m, I believe, in the release and positive free cash in 2003 and based upon where you wrapped up 2002, can you, you know, articulate more specifically how you get there?

You know, what the working capital component is, what the improvement in profitability is versus, you know, for example, I believe you have a headwind on the severance side.

Can you talk more about that?

Sure, I'd be happen at this to, Matt.

We were very pleased with the cash flow outcome in 2002 as we got to the end of the year.

Certainly, in the fourth quarter, we did much better in AR collections than what we had dope in the third quarter.

But overall, the improvement year-over-year was very substantial in free cash flow, and we ended the year -- our rough numbers are about minus $12m in free cash flow for 22002.

That includes $70m impact terminating our factoring arrangement.

We had been factoring receivables in the beginning of 2002 we did not factor any receivables at the end of 2002.

So as I look at the guidance we've given you for free cash flow for 2003.

If you adjust for the factoring change, we're right in the middle of the guidance we've given you for 2003.

So I'm very comfortable we can get there based on what we've already accomplished in 2002.

As you look at the pieces of where that's going to come from, obviously, we've talked about 50 cents in net income or about $50m in net income.

Then incrementally the other key changes we're expecting change in modest improvement in our receivables and inventory management in 2003 and it will get us within the guidance range we provided to you.

Great.

Then lastly, Earl, if you can maybe comment in terms of what you're expecting for D & A and cap ex for 2003, also a quick update on mention share activities and what the current authorization is out there, and then I'll also just mention the reduction in the tax rate, please.

Sure.

D & A been will be just over $300m.

We will drive for, as we said at the beginning of this year, for capital expenditures at a number that's not more than 90% of that would be our expectation.

In terms of the authorization that we've got for the share repurchase, we continue to have $180m of authorization that's out there, plus an authorization to offset the existing plans we have for employees to purchase shares.

We would expect, at current prices, that we will be active in the marketplace in 2003.

And relative to the tax rate, Matt, as we said in the release, we're expecting a 28% rate in 2003.

We were very pleased to be more effective than we had anticipated in reducing both cash taxes which is our primary focus and also the result of that the effective tax rate in 2002 down to a number of 14% on an annual basis.

But that was primarily driven by planning that we had done during 2002 on a discrete basis to drive it down.

What we're driving to is a structural rate I'm more concerned about 28 is closer to where the structural rate is.

And just share repurchases, Earl, what you did in the fourth quarter.

We bought about $19m in the fourth quarter.

Our next question comes from Jay Stevens of Buckingham Research.

Thank you.

Could you put a little bit more color on the projection for Q1 with the loss of 45 to 50 cents in the release on the flat revenue forecast?

What's happening to costs and expenses, or is there some other weird stuff going on?

Can you help us a little bit on that Q1 call?

Sure.

This is Earl.

I will be happy to respond to that.

Obviously, the key driver on a year-over-year basis is the pension change, which is nearly $45m of operating income swing year-over-year.

So that has a very, very large impact.

As we look, though, at the other items that have an impact on it, we are getting some tailwind out of currency in the first quarter which helps the revenue line, but the actual volume is a bit lower.

The currency impact -- the positive impact in the quarter is probably in the 3% range, so that is the underlying revenue growth -- or the revenue decline is a little larger than it shows.

We're seeing, in the quarter, a mix shift between the businesses obviously with the Data Warehousing revenue expected to be down a little bit and store automation to be up.

That has a negative impact on the comparisons on a year-over-year basis.

And in addition, we do have some costs in the quarter that we're incurring that are related to some of the reengineering efforts which are incremental and still having an impact year-over-year as well.

Thank you, Earl.

A follow-up question on the tax rate guidance, because it's given as an annual number.

But with the loss in Q1 and my model shows a possible breakeven or loss in Q2, how should we interpret that 28%?

Should we use it on the profits in Q3 and 4, or put a little more color on that one, Earl.

Sure.

They are to compute an annual effective tax rate and apply it equally across the board to the profits and the losses.

So we would look at the tax benefit, essentially in the first quarter.

Okay.

And then we did have tax expense in the later quarters.

I was looking for a comment like that.

So thanks very much.

One last piece of color, Jay, to Earl's comment about some costs in Q1, those are what we would define as investments in the reengineering initiatives we've described.

Those are netted out as you go through the balance of the year.

So you've got a Q1 hurdle you jump over because you're making an investment.

But that nets out in the cost -- the net cost takeout that we described to you for the full year.

Just another thought, if you could put numbers on the market science for the Teradata warehousing sector.

In the commentary on gaining share, it would be helpful to compute what percent share you have on the base market size number that you're using.

I used to becoming the most off-quoted describer of market size in that business, and it's because it's a bit -- it's got the combination of the enterprise data warehouse market, the total data warehouse market, which includes all DI tools and the aggregate analytics market place.

So the enterprise data market what we can do is we'll get you a piece of paper that actually describes that, and I'll have Gregg get it out to everybody.

That marketplace is in the $3.5b, $4b marketplace.

It's tough times this year, as you can imagine in the aggregate marketplace where we're looking at numbers that probably, in total, was flat to down slightly during this year.

Yeah, but that piece of paper you mentioned, that would be great.

Yeah we ought to do that.

That would be very helpful.

Jay, we'll do that and try to make it public domain so the group can look at it.

Our next question comes from Kevin Richardson of Blume Capital .

A great job on providing expertise that's long overdue in getting the block and tackling on some businesses that needed it.

My question is more for Earl just on the free cash flow side of the equation.

The guidance of 50m to 100m in '03, is that after severance?

That is after severance.

That is after the, you know, $85m in severance expense and the impact on the company in total severance that I described earlier in the response to Jim.

And then I know '04 is a long ways off, but you alluded to an incremental of 100m in savings and that it would get to 250 annualize.

Are there any costs you would expect severance-wise there or is that cash flow that can drop to the bottom line?

As you say, Kevin, 2004 is a long ways off.

I want to be a little careful providing guidance at the beginning of 2003 for 2004, but I expect we will continue to have severance costs in 2004 directionally in the same range that we had.

And I'm not sure I want to go further than that at this point.

Great.

And then just finally on the buyback and accretive dilutive nature, given that you're forecasting free cash flow 50m to 100m and you have 180m authorized, and you mentioned it would be throughout '03, I'd just encourage you to be more aggressive sooner if you're truly going to feel comfort on your execution of this plan that Mark's laid out.

This is Lars.

I will repeat what Earl said before.

At current stock prices, we think this is a great buy, and we will buy stock.

I look forward to seeing the first quarter conference call and hopefully we'll see that you followed through.

The next question comes from Reik Read from Robert Baird and Company.

Going back to the ATM business, specifically talking about North America, can you provide us with a little bit of color in terms of what you're seeing out of banks with respect to capital spending trends?

Do you expect them to start improving throughout '03?

And then, also, talk about what the banks are interested in right now with respect to the new functionality.

Is it really being driven by, as you guys suggested, OS2 and maybe some of the [incryption] in some of the disability requirements out there.

Or is there some interest in the benefits that the new functionality equipment provides?

Can you give us a sense of what the banks are looking for?

This is Lars.

First of all, I think there is some interest in the more advanced ATMs, like the one we are installing at 7/11.

The other opportunities, of course, to web-enable the ATM, to be able to communicate with the consumer in a much more efficient way while the transactions happen; and, yes, moving from OS2 to MP is a driver of that opportunity and that capability.

Generally spoken, the financial institutions in the United States or in the Americas, in the last year, have been cautious with their capital spending.

I believe they will continue to be cautious, and as Mark said, I think we have two very important metrics in every business, particularly in the ATM business, and that is our growth rate, but the other one is our market share.

And it's imperative that [we hold] or gain market share in every cell.

So I don't want to speculate too much on how the market will grow.

I don't think it will get worse in 2003 than in 2002.

I'm not sure it will get significantly better in 2003.

So that's my guidance.

If Mark wants to add something.

I think the answer is we expect it to be roughly the same.

And when you look at the U.S. market, particularly, that's what our fourth-quarter forward-looking bids have shown us.

So that's kind of more of the same.

As I described to you, we're going to expand our footprint of that in the marketplace in the U.S.

Thirdly I described we've got some pretty neat stuff in addition to what you might think of as the core ATM.

I think deposit automation has a significant interest level amongst people in the marketplace.

We've done stuff in software with a product called atra which has a lot of interest among the banks so the R&D investments we've made over the past couple of years brings some capability to the ATM, drives some innovation, which really helps us from a market position perspective.

So you don't necessarily see these requirements that are out there as driving the banks to have to improve their cap ex on ATMs in '03, necessarily?

Well, some of them are driving investments.

There's no question about it.

I think both Mark and I want to be cautious, and that's why we made the plan we talk about.

For the company, now, banking on flat revenue.

When we started 2002, we, certainly, and I think a lot of other people thought the market would improve in the second half.

It didn't.

And we're not going to bank on that again.

So we bank on the flat revenue and the fairly significant improvement on the underlying margin will be driven by cost and expense reduction and efficiencies.

And if we get a little better environment, if the market grows, we intend to gain the market share.

We are not banking on that to deliver the earnings per share.

I think that's the way to think of it.

Think about the fact that we're going to go about the fundamentals of taking care of our business internally as it relates to cost and expense.

Secondly, imagine that we've got our self-service business unit focused on gaining share.

You can, then, play out the math as it relates to the economy and the marketplace.

So if that does behave in a way that's more spending, we'd expect to participate in that in terms of the market up tic.

But we haven't built the plan based on that hope that we will see a marketplace that's going to great growth for us as we gain shares.

So I think what we're trying to do is do a solid, prudent thing here, which is bank on us taking care of our business, put our business in a position to go gain share.

I've given you some examples of what we've done to do that.

But the plan itself that I just told you about doesn't bank on that having to occur to be able to achieve the numbers we've given.

You guys talked about share gains in Europe.

Can you give us a sense of how much share you gained, where it came from and why?

Was pricing involved there.

I think there's a misunderstanding.

I said based on preliminary data we believe we have gained product market share of the ATM business on a global basis.

That's what I said.

But the date is not finalized yet as you're aware of, so it's our current judgment.

Okay.

And the last question, Mark, for you, you talked about in your sales model some metrics of how you're going to grade people, absolute sales in market share.

Can you just spend a second and talk about how you guard against price discounting with respect to those metrics?

Would it be too hash to say if we see bad behavior we eliminate it?

We do a metric process where we just look at -- understand how you build a value proposition.

We go through a process to triangulate the value we bring to the market in terms of features and capabilities.

We balance that against the cost we bring to the marketplace.

Understanding those describes a price we should be able to charge given that.

That gives us an expected win rate and an expected gross margin rate.

When you triangulate those factors you then do a waterfall analysis against how you bring price to market.

So I can look at deals by volume, by strategic nature of the account, et cetera, et cetera, and then you just measure it.

And what you're looking for exception reporting to understand outliers against that price model relative to those other two things.

I'm sure I thoroughly confused you by telling you a lot of data in a very short period of time, but that's how you measure it.

And then we give strict guidelines at various levels that say here's the behavior parameters you can work within to go to market and win share.

So that's how it works.

It's pretty simple and strict, and, you know, we look for innovation from our sales organization, given on that moldel I've described to win every deal based on the parameters.

But there is exception reporting and you can't identify people that are discounting to --

Let me tell you what a zealot I am on the pricing thing.

At the leadership team meeting, we'll probably spend an hour and ten minutes on pricing, in our monthly staff meeting.

And pricing is an absolute art and discipline, and it relates to those other factors.

Pricing is not an isolated discipline.

It's a discipline as a result of several other factors that brings together multiple pieces.

So it is something that we're very, very focused on.

Our next question comes from Erick Brethenoux from Lazard Frere.

Thank you, hi, three questions quickly, the first one is on the backlog of the Retail Store Automation business for the first quarter.

I just wondered if you can comment on that a little bit.

Is that things, contracts you have signed put not yet recognized?

Is that people who have signed and build some thing but have not received them yet?

The second question has to do with the Data Warehousing business and cycles.

I wondered if the fourth quarter revenues were influenced by any upgrades or mostly new customers and what you are seeing in terms of upgrades.

Because I'm sure a lot of your customers are strained [inaudible].

And finally, a question for Mark, you've been in a little bit and I wonder if you could give us color on what you found out as you have experience with your operations.

This is Lars.

Let me start with the first one.

It relates to the same question Rebecca asked.

When we anticipate growth in the following quarter, in this case in Q1, that's not based on funnel.

That's based on a firm order backlog.

Our order backlog is significantly better when we ended this year to of 2003 compared to a year ago which was driven by an order activity in the third and fourth quarter of 2002.

Okay.

I’ll give you a little color on Data Warehousing.

I was pleased -- I think it was the first time in history we beat your revenue assumption.

So I was glad to see that, Erick.

But, secondly, I wish I could give you more color on it.

I think what you've got now is a series of different things going on.

I think you've got people that are expanding.

You've got people that are doing everything they can to put strict govern in.

So as I described to you earlier in our own IT organization about what gets done.

I'm not talking about any deal on new customers, but any deal itself is heavily scrutinized.

The new account activity, in Q4 was strong.

It was, again, above prior year in numbers.

I don't typically break out the new account revenue percentage verse total, but it was a similar behavioral pattern as you would have seen in previous quarters.

I'll transfer over to RFG.

I mean, I think this company has good people.

That would be my first comment.

I think we have good products.

I think we have good brand and good market positions in very important places.

So I think that there's a tremendous amount of strength in terms of intellectual horsepower, capability of the people, so forth.

I think we need to put them in a better position to win, and that's what I'm focused on.

Better position to win in terms of what we focus them on, how we align them, how we measure them and how we energize them.

And that's my job, and that's what I'm going to go do.

But I don't think there's any deficiency of capability or anything like that that maybe you could think is out there.

We've got great people and products and opportunity.

We have to tie the dots together, get them connected as a time and align it so we can go to the marketplace and kick some tail.

Thanks.

Our last question comes from David Petowitz of David J.Green.

Hi, guys.

Hi, David.

It's nice to hear that you guys have made a lot of progress in the last 90 days in terms of -- in terms of business operations.

I hope, though, from a big-picture perspective, you understand how frustrating it's been to be a shareholder during the year and a half of, perhaps, suboptimal progress being made.

And, you know, that notwithstanding the management change at the COO level, that ultimately, Lars, the buck stops there.

And you guys have a lot -- you have a lot of work to do, particularly with -- you know, with a GAAP earnings headwind due to the pension plan.

Now, you've told us that you have no intention, at this point, of doing anything strategically, and I just hope you understand the responsibility, you know, to start delivering some operating results.

And, you know, we understand how much you're relying on Mark.

Which really brings me to my question.

Mark, undoubtedly, you recognize how much you're being relied on.

You know, but we -- Teradata is still incredibly important to this company.

You've taken on all these other responsibilities.

How thinly stretched are you?

This is Lars.

Let me make one comment first, David.

I totally understand the frustration among our shareholders.

I certainly share the frustration personally, and I know that Mark shares it as well.

And you're right, the buck stops here.

I feel extremely good about what we did in September.

Clearly, I made a mistake earlier, and I think I corrected it as fast as I could.

And as I said, I feel really good about the progress that Mark, Earl, and I have made together in the last 90 days.

And we are absolutely focused on the right things and, yes, we have to deliver earnings improvement.

That’s what it's all about.

And I think the plan that we have, as Mark explained to you and others, is not banking on revenue growth.

It's really banking on us getting the cost and expense out of this organization.

I feel very confident we can deliver that.

And I also believe that, by doing this in 2003, it will generate a significant benefit to us in 2004.

The other component is growth, and as the market will improve, I am confident that we will grow because we will not lose market shares in any of our businesses.

I'll leave it to Mark to make some comments.

Yeah, David.

I appreciate the question.

First, let me go back on the Teradata piece.

I'm very proud of and very -- I don't know what the right word for it would be -- I've got a lot of faith in the people in Teradata.

It's a good group of people.

And sometimes, I'm taking credit for all of it.

This was a bunch of people that did the work.

What we did was in four years got incredibly focused on the hill we were trying to take.

And as a group, it was very hard to confuse the group on what the mission was whether it related to gaining share or R&D we had for the technology, the vision we had for the infrastructure, we wanted to surround it in terms of cost, expense and process, the ability to generator the sales force fundamentals to get on the attack and gain share and win deals, et cetera, et cetera, and that wasn't done by myself.

I still count on those people down there to do it today.

It wasn't down there in Q4 to the level that I was, and I think they executed admirably.

So I'm very pleased with them.

And I think that's the mission we've got to do in the whole company, David.

I'm energized about it and excited.

And I think we're up to the task.

I'm also a shareholder, so my personal skin's in the game with you, and time will tell.

We've told you the numbers and we need to go about the job of getting that knocked out.

Thank you very much.

Thank you for joining us this morning.

If you have further questions give me a call (937)445-4700, Gregg Swearingen.

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