NCR Voyix Corp (VYX) 2003 Q1 法說會逐字稿

Good morning and thank you for standing by.

Welcome to the NCR investor relations conference call.

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

This conference is being recorded.

If you have any objections, you may disconnect at this time.

I would now like to introduce one of your speakers for today, Mr. Gregg Swearingen, Vice President of investor relations.

Sir, you may begin.

Thank you, Jennifer.

Good morning, thank you for joining us as we discuss NCR's operating and financial results for the first quarter of 2003.

Mark Hurd, NCR's CEO and President, will lead the discussion on our operating results, as well as provide an update on NCR's progress and its reengineering initiatives.

Earl Shanks, NCR's CFO, will then discuss our financial performance.

Following the prepared remarks, we will host a Q&A session.

I would like to remind everyone that our remarks and responses include predictions, estimates or other information that could be considered forward-looking statements.

While these forward-looking statements represent our best current judgment on what the future holds, they are subject to a number of risks and uncertainties that could cause actual results to vary materially.

These risk factors are described in NCR's latest periodic filings with the SEC, as well as in our annual report to stockholders.

I would also like to point out that certain non-GAAP financial information regarding NCR's operating results, excluding pension, as well as free cash flow will be discussed on today's call.

Reconciliations of the differences between the GAAP and non-GAAP financial measures are included in NCR's first quarter earnings release and are also available on the investor page on the web site at www.NCR.com.

Later today, a replay of the conference call will also be available on the web site.

At this point I would like to turn the call over to Mark.

Good morning, and thanks for joining us.

We're pleased that NCR's first quarter results exceeded our expectations.

Several of our businesses, Teradata, financial self-service and customer services achieved growth in the quarter, better than, or at the high end of our guidance range, with Teradata also receiving very strong operating results.

Retail delivered revenue below our guidance range, but improved operating performance versus the prior year period.

The effects of the revenue mix as well as the positive impact from currency our focus on reduced spending - primarily in G&A enabled us to outperform our expectations. (inaudible) favorable revenue mix and reduced G&A spending are the six key drivers we talked a bit about in January and I'm going to review them a bit for you.

Revenue performance in Teradata and in financial self-services.

Revenue performance in operating margin improvement in customer services, operating margin improvement in retail store automation and cost and expense initiatives for all of NCR.

Throughout our discussion this morning, we will be providing updates on each of these key drivers.

I'd like to begin with a brief discussion with first quarter performance that was delivered by each of our businesses.

First, in Teradata, business saw 4% revenue decline in the quarter, including 11% growth in support services.

This achievement was significantly better than the 10% decline we'd anticipated, especially against the strong Q1 2002 comparison.

Our number of new customers in the quarter was up compared to the first quarter of 2002, and spanned a broad range of industries.

In Q1 of 2003 we drove year over year growth in the communications and government sectors, and I'm especially pleased with our new account performance in Europe, both in terms of the number of new accounts and the quality of those wins.

Teradata generated operating income for the quarter of 31 million, up almost 50% from the first quarter of 2002, reflecting a favorable mix of revenue, as well as cost and expense improvements.

In the quarter, we saw higher percentage of software and support services revenue, as well as improved hardware margins due to favorable storage mix.

These factors contributed to higher gross margins overall for Teradata.

In the quarter we had a higher percentage of software than we typically do.

This is not always the case.

Support services was about 20% of first quarter revenue, with remainder split evenly among hardware, software and professional services.

Even though a lower percentage of hardware revenue is the trend, there will be some variability each quarter.

During the quarter, Teradata continued to reduce G&A expenses while maintaining their level of R&D spending.

The G&A reduction further improved the operating leverage inherent in Teradata's financial model.

I'm pleased with the profitability performance in Q1 under the direction of their new management.

Turning to financial self service.

Revenue grew 10% from Q1 2002, at the high end of our guidance range.

Adjusted for currency revenue was up 2% for the quarter.

We had strong growth in the Americas region,driven by the continued VCom project at seven 11 and acceleration replacement related to windows-based software and advanced functionality of ATMs, and we gained market share in the quarter, and continued to gain strong backlog with significant growth in the Americas and near regions.

Operating income from the quarter was 9 million, an increase from the break-even operating performance from the prior year period, primarily as a result of higher revenue and expense reductions.

Going forward, our financial self-service business is poised to take advantage of the advanced function ATM and advanced functionality.

Banks are very interested in ATMs with deposit capability in order to eliminate the significant costs associated with check and cash deposits.

Several major U.S. and European banks are piloting or installing deposit-ready and windows-compatible ATMs.

These banks include Bank One in the U.S., Credit Agricaux (ph) in France, Caja (ph)Madrid in Spain, and Nationwide Building Society in the UK.

As more banks anticipate moving to advance function ATMs we now have over a hundred customers using our APTRA windows-based software.

In 2003, we expect continued momentum as we aggressively grow our applications business.

I'm pleased that during the quarter, we continued to gain market share, with revenue growth leading to improved profitability.

Our Retail Store Automation business realized double-digit growth for the first time since the first quarter of 2001.

Revenue was up 18% for the quarter, driven by a strong order backlog from 2002.

Enabled by the best product line we've offered in a number of years, this business continued to build backlog in the first quarter.

The Home Depot's installation of our Fastlane, self-check out systems, POS terminals, and peripherals is progressing well.

Feedback from the Home Depot customers has been very positive.

Additionally in the first quarter we saw wins at market maker accounts, such as point of sale wins in Germany, Japan and at long time NCR accounts such as Goody's and Ruby Tuesdays in the Americas and combined software services and product wins at a large Canadian grocery retailer and at Meyer in the Americas.

In the first quarter, this business saw an operating loss of 23 million, and an improvement from the 30 million dollar loss experienced in the year ago period.

Although the performance is still unacceptable, there are positive signs relating to the business.

We expect to see improved margins as the mixed shift movers to new products as the industry prepares for a long overdue upgrade cycle.

We're also working extremely hard on reducing the fixed cost structuring of the business.

We're streamlining infrastructure processes we will drive improved margins.

We've had a management change, appointing a new business leader who brings a very strong combination of operational expertise and domain knowledge as well as a proven ability to develop and operationalize the details of a business plan.

Turning to customer services business in the first quarter we achieved growth and maintenance revenue from Retail Store Automation, self-service and payment imaging.

Growth from core businesses offset a significant decline in maintenance revenue from exited business, resulting in overall growth of 4%, compared to the first quarter of 2002.

Currency increased revenue by 6 percentage points in Q1 of 2003.

Customer service operating margin was down 8 million in the quarter, the lower margin was a result of an adverse revenue mix in the quarter, including declines in higher margin revenue in exited businesses and the mix of services we provide to our core solutions.

This adverse revenue mix continued price erosions offset cost reductions from ongoing process improvement initiatives.

When you add it all up, this quarter was a good start as compared to our expectations.

We saw the effects of a better revenue mix, both within businesses and between businesses, currency and lower G&A spending.

This performance sets us up firmly on the path to reach our objectives for 2003.

I'll now turn the all over to Earl to provide thoughts on financial performance and thoughts on engineering efforts during the first quarter.

Earl?

Thank you, Mark.

Good morning, everyone.

In my comments this morning, I will address three major topics.

First quarter results compared to last year's Q1 results, including a discussion of pension, severance and other miscellaneous items.

Guidance for the second quarter, and I will provide an update on the progress we are making in our cost and expense reduction initiatives.

First, the first quarter results.

Total revenue for the quarter was down 1%, compared to the year ago quarter.

Foreign currency fluctuation increased 6 points in the quarter, somewhat more than anticipated when we provided guidance in January.

Strong revenue growth in Retail Store Automation and financial self-service offset expected decline in Teradata warehousing and a 20 million dollars decline in others.

With regard to gross margin and expenses, you have our reported results in front of you.

In a moment I will provide the details of the impact of year over year change in pension, after which I will discuss our results excluding these pension impacts.

We saw 44 million dollar negative year over year change in operating income, resulting from pension expense of 24 million in the first quarter of 2003, versus 20 million of pension income in the first quarter of 2002.

This equates to a 33 cents per share swing.

We will see a similar relationship in each quarter in 2003.

For the full year, NCR expects pension expense of 95 million dollars, compared to pension income of 74 million in 2002.

A year over year negative swing of 169 million dollars or $1.22 per share.

In the quarter this 44 million dollar swing impacted several components of income from operations, as reported on schedule A of our earnings release.

The greatest portion of this change impacted services costs, in the first quarter of 2003 the net change in pension impacted services cost from the year ago period by 25 million dollars.

The remainder of the year over year change in pension was 4 million dollars in product costs and 15 million dollars in expense.

For a supplemental financial schedule that summarizes the effects of pension on NCR's financial results, please see NCR's investor relations page on our web site.

Now, excluding the impact of pension in both quarters, overall gross margin would have been 26.0% in Q1 2003, compared to 26.8% in Q1 2002.

Product gross margin increased 1.2 points to 35.4%, while services gross margin decreased 2.4 points to 17.3%.

As Mark described earlier, services margins were down as a result of cost reductions being offset by an adverse revenue mix and continued price erosion.

Excluding the impacted of pension in both quarters, expenses decline 17 million dollars, or 5% on the first quarter of 2002, and decreased more than 1 point as a percent of revenue.

R&D was roughly flat in the quarter.

Expenses were down in each business unit as we continued to focus on reducing G&A.

I'd also like to point out that we had 21 million dollars of severance expense in the quarter, versus 19 million dollars in the year ago quarter, in line with our expectations.

We continue to expect roughly 85 million dollars of severance expense for the year, up from 75 million in 2002.

In addition to severance, we also incurred 9 million dollars of direct costs, related to our reengineering efforts during the quarter, which also impacted both gross margin and expense.

Examples of these reengineering costs included real estate consolidation and related accelerated depreciation.

Costs associated with reengineering our finance and administration process and costs incurred as we prepared to bring our ERP system on line, particularly as it relates to improving the quality of information in our services database.

Offsetting these incremental costs was the lower bonus accrual.

Since we lost money in Q!, the accrual was lower than the accrual in the first quarter of 2002, when we reported 9 million dollars of operating income.

As we improve our financial performance during the year, our bonus accruals will increase accordingly.

For the first quarter of 2003, the company reported an operating loss of 32 million dollars.

Excluding the effects of pension, our operating performance was slightly improved in the first quarter of 2002.

We were especially pleased that we were able to deliver results better than our original expectations.

More than half of our improvement versus expectations was due to a more favorable revenue mix as Mark noted, with lower expenses and operating income (inaudible) and currency comprising the balance.

Lower expenses and currency effects are fairly clear, but let me clarify the revenue mix point.

In the quarter we had more revenue than we expected in Teradata and financial self-services, which both generate better margins, and less revenue in Retail Store Automation, which typically has lower margins.

Therefore, an improved revenue mix.

Interest and other expense in the first quarter of 2003 was 5 million dollars, up from 3 million dollars in the prior year period.

A 6 million dollar benefit was included in other expense, as the payment related to the Lucent indemnification claim is expected to be less than the amount recorded in 2002.

Due to developments during the quarter, the company also added 7 million dollars to various legal and environmental reserves.

This represents several smaller charges in the quarter, the largest of which was less than 2 and a half# million dollars, and relates to an environmental site in which NCR is a minor participant.

Our effective tax rate for the quarter was 28%.

Due to our share repurchase activity, in Q1 2003, the weighted average number of basic shares outstanding at the end of the quarter decreased to 96 million, from 97.9 million shares a year ago.

During the quarter, we repurchased approximately 2.7 million shares, about 50 million dollars.

Moving to the cash flow statement, in the first quarter of 2003, we generated 102 million dollars of cash flow from operations, a 21 million dollar improvement over Q1 2002.

This resulted in free cash flow of 40 million dollars after expenditures for service parts, PB&E, and capitalized software.

This performance keeps us on track to achieving our previous expectations regarding cash flow.

Turning to our second quarter guidance, the second of the three items I mentioned when I began my comments.

Given the limited visibility for the remainder of the year, resulting from the continued economic uncertainty and capital spending constraints, we are cautious about the remainder of 2003.

One of the reasons we are cautious is the SARS situation in the Asia-Pacific region.

While this is a significant global health concern it has not impacted NCR's results at this point.

However, we are monitoring the situation very closely.

Given our presence in the Asia-Pacific marketplace, and we will provide updates as appropriate.

For the second quarter, NCR's revenue is expected to be down 0 to 2%.

We expect data warehousing revenue to be down 5% with financial self-service revenue roughly flat, Retail Store Automation revenue is expected to be up 8 to 10%.

Systemedia is expected to be flat year over year, with payment and imaging roughly flat as well.

Customer services revenue is expected to be up approximately 0 to 5% and finally, other will be down 20 to 25%.

Included within these expectations for the second quarter is a 4% favorable impact.

For the second quarter, we are comfortable with the current range of analyst earnings expectations of 0 to negative 10 cents per share for the second quarter, and 40 to 47 cents for the full year.

Finally, as a follow-up to our discussion last quarter, I would like to give you a update on our initiatives to lower our cost and expense by 250 million dollars by the end of 2004.

Specifically, to give you some idea how we are progressing against our 2003 target, I'd like to provide you with an update on each of seven key spending components.

First, supply chain and resale store automation, we have begun to see total supply chain management cost decline year over year from the implementation of our configurative order initiatives.

This initiative is beginning to drive efficiency gains.

Improved field inventory management processes and associated expense reductions.

Additionally, customer lead times associated with configure to order have been reduced from Q1 in 2002.

Second, supply chain financial self-service.

We are seeing good progress in moving staging back into the manufacturing plant.

This reflects significant progress in the closing of distribution centers, enabling one step directly from our regional manufacturing facilities, increased manufacturing volumes in region and improved manufacturing time have contributed to reduced inventory levels and increased percentages of finished products shipped directly to installation sites.

Next, in customer services delivery cost, we are in the process of implementing global procedures which will position us for continued cost reductions while improving our service to our customers.

For example, we have reduced our customer call centers from 75 in mid-2001 to less than 30 today.

And negotiated better terms and rates for suppliers, while making reductions in transportation and warehousing costs.

Additionally, we have also begun the implementation of a new process for dispatching our field engineers, which has contributed to improve customer service level performance and is driving further productivity increases in cost reductions.

However, we have a great deal of work to do to continue to offset the impact of exited businesses and continue price erosion.

As it relates to real estate, as a result of an issue that has begun last year, we have continued to reduce costs associated with real estate.

In the first quarter of 2003, we reduced our number of properties by 15, resulting in a decrease of total square footage of 633,000 square feet.

Additionally, we've begun the consolidation of real estate by moving to higher density and virtual offices.

We have also begun moving to more open floor plan, with no enclosed offices.

Those of us located in our Dayton headquarters facility are leading the migration to cubicles for this more efficient use of floor space.

We believe that this move will bring positive cultural changes long-term, providing for a more open and efficient dialogue between our team members.

Fifth, is our internal use of information technology.

We have begun work to replace all major applications in the company, migrating from country center applications to enterprise applications.

This transition provides significant improvement in support of global business model as well as reduced IT costs.

For example, our ERP implementation is on schedule with Asia-Pacific up and running and the Americas region on track to come on line first in Canada and then in the U.S. in August.

Additionally, we have completed the migration of over 30 instances of people soft into one enterprise people soft system.

As you would expect, we continue to migrate more information and applications to our Teradata enterprise data warehouse, which provides benefits to us, particularly in our customer services business and In streamlining our finance costs.

Moving to finance administration costs, a key priority is to streamline and standardize our internal reporting and information delivery processes.

In the quarter, we have simplified and reduced the number of financial reports that we produce, and introduced the newest self-service reporting tool.

One key to finance cost improvement is to leverage the (inaudible) implementation, including continuing to reduce costs in the transaction space through more effective shared services.

And finally, in terms of our HR infrastructure, several initiatives intended to reduce support costs have been successfully implemented as planned.

These initiatives include the people soft consolidation I mentioned earlier, as well as appropriate aligning resources of day-to-day activity based on complexity.

We've also centralized our staffing organization, which now controls worldwide recruitment spending.

HR infrastructure was one of the areas we expected to see cost reductions more quickly, and we have achieved these expectations.

Collectively these areas of focus across the business units and infrastructure groups have led to a net reduction of 500 employees since the beginning of the year.

We will provide further updates on the initiatives in future quarters as milestones are met.

I will now turn the call back to Mark

Thanks, Earl.

Regarding the six drivers I mentioned at the beginning of the call, by now, I hope you have a pretty good idea how we executed relative to the drivers in Q1, but let me try to summarize them for you.

First, in Teradata, we experienced a 4% revenue decline, including a 11% growth in support services, significantly better than 10% decline we'd anticipated, and on track for the year.

Financial self-service revenue grew 10% at the high end of guidance, led by strong growth in the Americas region.

We continued to gain market share, grow revenue and improve profitability, again, on track for the year.

In terms of revenue growth in our customer services segment, we achieved significant growth in maintenance revenue from our core solutions.

The growth offset lower revenue from exited businesses and third party contracts.

Resulted in a 4% revenue growth again better than expected, and on track for the year.

However, customer service operating margin was down 8 million due to declines in higher margin revenue from exited businesses, and continued price erosion.

We've got more work to do and we're aggressively attacking this area.

Retail Store Automation we saw an operating loss of 23 million, an unacceptable performance.

But still an improvement from the operating loss of 30 million in Q1 of last year.

We're seeing positive signs including the backlog expansion I mentioned earlier.

Expect to see improved margins in the revenue mix shift and streamline information processes.

We have more work to do here as well.

We're beginning to see traction in some of the cost and expense initiatives that you just heard some color on from Earl.

Before I wrap up and we move to Q&A, I want to make sure we're very clear on one point.

In terms of these expense reduction, we are highly focused on this and we are reducing overall headcount.

However, we are equally intent on demand creation and gaining share.

We will continue to invest R&D dollars to invest our technology and invest to improve the efficiency of, and add to our sales teams.

We are driving towards being fully staffed in terms of sales coverage in our key businesses.

As a result, we are taking overall headcount down, but the pressure is in G&A, with realignment where appropriate of incremental resources into sales and R&D.

Now, that being said, I want you to understand, this is not a new piece of data.

I'm not telling you we're backing off our overall cost reduction targets as we align to reach the long-term potential of the company.

I said at the start of the call, we're encouraged by the first quarter operating performance and the momentum the teams are building in reaching our longer term objectives.

However, we realize that favorable performance in just one quarter doesn't constitute a trend.

Hard work lies ahead of us to get NCR's overall financial performance where it needs to be.

This won't be a quick fix but the good news is the management team is aligned around again delivering the best value propositions to our customers, developing and expanding the best sales organization, and providing the best service in the market.

We know we have to excel in these areas in order to unlock NCR's growth potential, and we will be relentless in this pursuit.

Operator, we're ready to take any questions anyone might have.

Thank you.

At this time we're ready to begin the formal question-and-answer session.

If you would like to ask a question, please press star-1.

You will be announced prior to asking your question.

To withdraw your question, please press star-2.

Once again, to ask a question, please press star-1.

Our first question comes from Rebecca Runkle of Morgan Stanley.

Thanks.

Good morning, Mark and Earl.

Just a couple questions on retail store solutions.

First, would love to explore a little bit more where exactly you are in the Home Depot roll-out and also your commentary on share gains, provide a little bit more color there if you could.

Hi, Rebecca, it's Mark.

I can't give you a precise number on the Home Depot roll-out.

If I could I would.

It is on track, and that's probably the best I can give it to you.

We made a lot of progress in terms of the roll-out, but I can't give you a percentage number.

That's something that supposed to be rolling out throughout this entire year, correct?

Correct.

It started, actually, in Q4.

So in Q4 we were on track.

Q1 we're on track and yes, there is more to do through the rest of the year, Rebecca.

In terms of share gains, can you be any more specific -- are you talking about share gains in retail?

Actually, in the financial services business.

Earl, you want to hit any of that?

I think Rebecca, when you look at the numbers that are published by the two public participants in the self-service space, I think it's pretty clear, you look at the absolute numbers published out that, we gained share this quarter and you can go do this.

The quantitative analysis to come to that conclusion is pretty crisp I think both on an overall basis and obviously particularly on a product basis.

I think it's true not only in reported dollars, but we also think it's true in constant currency as we look at the numbers.

So we're pretty comfortable describing it that way and obviously feel pretty good about where we're at.

We gained share in the quarter, we gained share -- we look at it both in terms of product, as well as services and then we look at it overall, so I think when you look at all the publicly available numbers, this was a real good quarter for our self-service business.

I guess more specifically, I was trying to get at what drove that, maybe you could provide some color, be it geography or product or a shift in go-to market.

I'm not questioning that you gained market share but wanting to understand the dynamics behind it

Oh, okay.

I think the advance function stuff, the advanced function stuff is hot, as we described in the commentary.

There's also an upgrade cycle going on as people move into the ENT environment, as we described and the APTRA stuff.

This is the platform tool set that we're selling.

So when you look at the combination of the three, we've got a really, really cool value proposition right now that's pretty strong.

So you've got that dimension and then, as I mentioned in the color, we had real strong performance in Americas and real strong performance in AMEA, being Europe.

When you net it out, I think we had good performance in the quarter, we're pretty happy about it

And in terms of the ENT cycle, if I remember correctly, the last time we spoke you were looking at that as more of a back end-03-'04.

Is it happening quicker than you expected?

Pretty steady.

I think it's roughly on track with the commentary that you're referencing.

So I think again, it's pretty much steady as we expected.

And then just lastly, going back to retail store solutions and the revenues, I think originally you had talked about 25%-plus, revenue growth in the quarter year on year, obviously 18% is nothing to shake at, but what happened, if anything, provide some more color in terms of where the discrepancy was, considering the strong quarter

You're exactly right in your commentary.

Our guidance was 20 to 25, going to the quarter and to your point we delivered 18.

So yeah, we had strong backlog.

We had a couple of delays in a couple of rollouts that we'll revert back to in revenue in future quarters, and that was really about the whole story.

So the difference between the 18 and -- pick a number between 20 and 25, 4 or 5 million dollars, we had a couple of delays in a couple of places, neither of which I would describe as significant, but it makes up for the difference in the guidance range and the actual revenue that was delivered.

Perfect, thanks so much, Mark

Thanks, Rebecca.

Our next question comes from Kartik Mehta of Midwest Research.

Hi, how are you?

I'm pretty good, how are you?

Great, thank you.

I want to talk a little about data warehouse.

You had favorable mix, it seems like you're making real good progress there.

Was this quarter getting some more upgrade activities, as we see customers wanting to continue, wanting the data, and that's why the software services were up, or is it more related to just gaining new customers?

It's a good question in terms of how the mix laid out.

I'd say you give 85% of that really to the upgrade, if you will, or the previous customer environment, 15 to the new side of the business.

We had a good new account quarter, as I mentioned.

New accounts were up, year over year, and Kartik, we look at the new accounts both in terms of quantity and quality, and there was some really strong new account activity, particularly in Europe during the quarter.

The other piece of color I'd give you is software revenue as again, as I mentioned, very strong in the quarter.

Certainly in terms of any historical period it was one of the stronger quarters we've had.

That was driven a lot also by, if you remember, our release of V2 R5, which is the next release of the database, was released in Q3 and Q4.

It's a good product, brings a significant performance improvement and that drove part of it.

I think on the support services piece you described, I would not describe this in any way, shape or form as a blip;

I would describe it as a steady stream of performance.

If we went back I'd say even three years ago and as we separated the Teradata service business and really focused on it, we've been focused on how we bring our value proposition to market, and how we deal with our cost structure underneath it, and we've been working on all those dimensions and, you know, it shows up in the P&L as continued improved performance

What portion of the business now is software, Mark?

We've traditionally said that, you know, the market -- that the mix has roughly been 40% hardware, 30% professional services, 30% software, and in a quarter you'll see variability several points going either way.

For the sake of this quarter, the software mix was higher than the typical mix that you've seen.

Turning to the ATM portion, if you look at the currency impact, it was really positive.

Would that imply that you had a really strong quarter in Europe, and could you also talk about maybe some of the price competition and the overall competition in Europe on the ATM side.

Sure.

Let me start with the numbers.

Kartik, relative to the implication on mix of revenue, I think as a mix of revenue hasn't changed.

Europe has always been our biggest business in self-service.

When we see a quarter where there is a big movement between the dollar and the Euro, dollar and European currencies, then obviously we have more currency impact and see that because we had 8 points, the 6 points overall of the company and 8 points within self-service, this tell tells you the mix of self-service revenue for the company is not as great in Europe as the mix in self-service revenue for -our self-services revenue.

So I think that's the numbers explanation and doesn't tell you a different pattern than what we've seen in the past.

Kartik, I'd add back on some color, first I think that we look at it both in constant currency, as well as in any kind of local currency.

So we look to me like we performed quite well in both dimensions and we performed very well in the Americas, in addition to Europe in terms of overall growth, so I think both were quite strong.

There continues to be price competition, so, you know, I'm not sure we ever will be in a position where we don't, but we certainly do have price competition in Europe and we've got obviously three entrants in that market and obviously there's competition.

So that was still there in the quarter, Kartik.

Great, Mark.

Kind of a last question, you talk about a lot of the economic imaging stuff that's happening the world over.

Can you talk more specifically on the U.S. part of it, how those tests are going for you.

Yeah, I think there's high interest, I mean certainly the opportunity to take cash or take checks and bring them to a self-service technology, and then get an image of what it is you've left, or you've deposited, and walk away with that picture, is certainly a very attractive capability.

The pilots are progressing.

I've given you some color on places where those pilots are, and we feel good about them.

So there's really a couple dimensions to this, Kartik.

But one is the dimension of the actual capability today, there's also another issue which is the ability to, in the future, upgrade to that capability as it matures even further as a standard capability in the technology.

So, it's almost one of those things where the pilots are important to us, clearly, but also the ability to show the value of that and know that it's in the road map and know that you can upgrade to that capability when you make a current period purchase is a very important part of our value proposition.

Thanks, Mark.

Last kind of question, Earl, for you.

What percentage of revenues are coming from Asia-Pacific for the company overall, considering that is somewhat of a concern?

We're at about 10% in Asia-Pacific, and not including Japan within those numbers.

Would the largest segment with the ATM segment, in terms of mix if you look at all the segment?

Gras -- yeah, it's an important business for us in several segments.

ATM may be the largest of the segments but as you know we don't break down the details of segment by region, and I won't start doing it today either.

No, I wasn't asking for that.

I guess I was just asking for which businesses, if you just look -- have the heaviest Asia-Pacific exposure.

ATM and what other business?

Let me do it the other way.

I think the key businesses in Asia are the Teradata business and customer services, and we have lots of expose exposure relatively in retail and payment.

But Kartik, the point, you're right in our point, the ATM business is significant presence in Asia.

Teradata has actually gained a growing presence in Asia-Pacific.

Our Teradata business in China as we've talked about some of the big accounts there is very strong in China and been growing, as well as other parts of Asia-Pacific.

So it's an important region for us, and, you know, the good news is we've had some good success across a couple of our different businesses.

So relating back to this SARS discussion, which is I'm guessing where you're heading with it, clearly we're monitoring these events closely and hoping that we don't see any notable or material change in the flow of business.

Thank you very much.

Thanks, Kartik.

Our next question comes from Matt Summerville of McDonald Investments

Hey, good morning

Good morning, Matt.

A couple questions.

First, it sounds like, you know, you're pretty upbeat, Mark, on what you're seeing in North America in your ATM business, and that's what I want to focus a couple of questions on.

You know, if I heard you right, it sounds like you feel pretty confident that you're taking share there, and I was hoping that you could put that in the context of what's happening with the VCom roll-out.

Are you as confident that if you look outside of that that right now you are gaining share in the U.S.?

I think we're gaining share in the U.S, period.

Excluding VCom, including Vcom

And how would you peg the underlying market growth rate in the U.S. for the ATM business in 2003?

No consequential change.

Roughly flat, up slightly perhaps

Okay.

And, you know, one of the things that was talked about earlier in the week was a pretty significant new product launch by Diebold in the ATM space and I was wondering, if you could talk about how you feel that that could impact your ability to continue to gain share here in the back half of the year as that comes on line, and how, you know, you think that that could shape the competitive landscape.

Well, my view is that we should -- it sounds like they've got a new release and we're confident in our value proposition.

We've told you a lot about what we're going our advance function capability with APTRA, with our value prop and we think we've got a great value proposition, so I'm really focused on our self-service team and our Americas team to continue to perform at the levels I've described.

And then, a follow-up in retail, you talk about the backlog, I believe improving on a sequential basis is that correct, Mark?

Correct

Is that outside of Home Depot the backlog is continuing to improve?

Right, we got more orders than we shipped revenue.

So in the quarter we had, you know, good order performance, relative to the revenue performance.

But, you know, the market is still tough and I'm not up here raising a flag of victory here in every dimension in retail.

We lost 23 million dollars, so I'm not happy with losing 23 million dollars, and I think we have a lot more improvement to go, but to be specific about your question, we gained, we increased our backlog from the end of the year to the end of Q1.

Great, and then a follow-up to a comment you just made about losing 23 million bucks.

You know, when do you see the profitability, you know, turn from a red number to either a neutral or a black number?

Does that happen on a quarterly basis in 2003 for NCR?

You know, you're exactly right with your question, and it is the actual operational thing that we are focusing on, continually, I think, that we have a chance to significantly improve our operating performance in retail in 2003.

Whether that results in a black number, neutral number using your terminologies, or a red number of some type, I'm not ready to give you that exact time or that destination.

What I will tell you is that we will significantly improve operating performance in retail this year.

And that's going to get done.

Okay.

Great.

And then, Earl, you really went through a lot of detail on cost reduction plan from a qualitative standpoint.

Just in temperatures of the scorecard, I believe Mark threw out on the last quarter call a target of 50 to 60 million dollars in annualized savings that you expect to achieve this year.

I was hoping, perhaps, you could put a number around how far along that program you are, and what needs to happen for you to exceed that target.

I'll try to give you a little more color, Matt, just as we look at it.

Basically, the 50 to 60 million dollars of savings is spread throughout the year and we built a plan by quarter as to what we need to achieve.

When we look at the plan, we noted to you that we were a little bit ahead in terms of where we were on the plan in terms of cost reductions and I'm a little bit ahead of my time line on making the 50 to 60 million dollars for the year, in the first quarter.

But it's a fairly small distinction, doesn't change our overall view on the 50 to 60 million dollars, but I can look at it from a quantitative perspective and say, okay, I'm on track on a quantitative perspective to make the numbers as compared to the plan or, as I said, just a little bit ahead from a time line standpoint

Matt, I'm going to add more color because I think it's important you understand this.

What Earl talked about today covered a number of different functions across a number of different activities in the company, and we're going to get this job done.

We actually, the way we look at it is we look at it over the period of the eight quarters that we've described before, and we have actual targets by function, by quarter, by process, and we are nailing and integrating all those pieces as we go, which does lead to some variability a bit quarter by quarter.

We are really focused on the destination, and then making sure we apply speed to the destination, with the appropriate level of risk as we change the processes of the company.

We will make the number that you are describing, I am confident of.

Whether we beat the number or not, I'm not ready to tell you that, because I'm continuing to triangulate between the speed, between the risk and between getting the costs down.

So we're continuing to move in that direction.

Could that mean that we're a little bit better here or a little bit slower there?

The answer is yes.

So I'm not ready for you to bank what Earl says when we're a little ahead it's going to be ahead for the full year because we're continuing to triangulate that piece.

One more time, though, we will be relentless on getting this done

Great.

You know, I'm going to ask one follow-up and take another moment here.

The price erosion that you're talking about in the service business, that's a CS division, if you will, in terms of how you report; is there a specific product line that's perhaps a little worse than the other, you see more price erosion in the retail side, the ATM side of things as far as customer service?

I wouldn't pinpoint it, Matt, to a discrete region or a discrete product line.

I would tell you there's a general trend for every company, you might include NCR as one of those companies.

To continue to look at its cost structure to continue to look at all of its relationships, not just the price, so to speak, but even the service level you get for the price, and there's a constant effort to reevaluate these, so you know, you see even some more of these services, get reversed auctioned occasionally in some of these activities.

I think it's directly related, Matt, to the continuation of the pressure that you see across the industry and I don't think it's unique, though, to one product or to one region.

Okay, thanks a lot, guys

Thank you.

Our next question comes from Howard Glycer of Metropolitan West.

Thank you.

A couple of questions.

First, do you give out any details on backlog, either corporate-wise or by segment?

You said several times in the call not just for ATMs -- I'm sorry, (inaudible) but in other times you bill backlog.

Build backlog.

Can you quantify that?

We don't publish backlog number we try to give on quarter to quarter basis as far as the trend volumes around it, but that's where we (inaudible) as much as from a competitive standpoint we think it's the right answer

but you did say from a company wide standpoint, you ended the quarter with higher backlog than you begun the quarter, is that correct?

correct?

Or just are --

Let me make sure I give you color on what I said, Howard.

The retail division wound up with a higher backlog.

I think that was the color that we gave.

Okay.

Can you tell us if from a company wide transport --

I don't ever the number, I think it's roughly flat.

Roughly.

and then a couple of questions on cash flow.

Earl--

One more piece of color on backlog because I think it's important for you to understand where I'm trying to take the thing so you -- I'm not sure the backlog number would be a meaningful number to you if you went to historical comparisons.

Because I am very focused on improving cycle times in terms of our ability to deliver and be nimble and be reacting to the market.

When you look at our cost structure, much of our cost structure sits in the supply chain.

Historically, we've been slow, to be able to deliver when you look at intervals.

But that is a direct relationship to the backlog that you have to have as you move forward.

As you move forward, as you move forward, you should expect to see us be more nimble in that interval, and therefore be able to perform with less backlog in the context of a quarter.

So you didn't ask for that color but I wanted to give it to you in terms of how we're trying to move the company forward.

That's helpful.

And a couple of other questions.

Earl, on the payables, significant decline from end of the year to now.

Is that just a seasonal thing or is there something going on there?

It's largely seasonal, and we see the pattern pretty much every year.

If you look back year over year, though, you'll see against first quarter of last year we're a bit down from that.

As we look at it, it has much to do with the timing of purchases within the quarter, and while I'm not particularly pleased with the performance, it's not something that I'm severely concerned about.

It's just one of the things we're going to work.

If I look at cash flow in general, overall, I'm quite satisfied with the 40 million dollars of positive free cash flow in the quarter, but, you know, there are some spaces in there where we did better than others.

And payables is one of the space that we could improve our performance in.

Okay.

And then a follow-up, you kind of hit on what I want to ask next, and that is even with the decline in payables, you generated 40 million, brought back 50 million of stock.

Is that something we can analyze, or is there again a seasonal component to that, so I can't say you're going to do 160 million dollars for the year?

There's absolutely a seasonal component to free cash flow in general and the first quarter -- our strongest quarters are typically the first quarter and the last quarter.

And second quarter and third quarter are relatively weaker, certainly with the pattern we saw last year.

So I think the previous guidance we've given you around our expectations for free cash flow, it doesn't change in my view based on any data points I've seen after the first quarter.

Given you're net cash positive and pretty healthy in terms of generating free cash, what are you going to do with your liquidity?

Well, to your question, I don't think you can analyze -- you didn't ask this but I thought you were for a minute.

I don't think you can analyze the purchase of stock we did in the first quarter.

That was certainly, I would not expect at the end of the year we would have done four times that.

But we will continue to be active in the marketplace would be my expectation during the year.

So that will continue to be an option.

I believe that it is also important for us to have liquidity, to have flexibility for ups and downs in the marketplace for capital requirements and operating requirements through the business.

So we will continue also to maintain a reasonably high degree of liquidity with that in mind

But also, Howard, it's our favorite stock, so we have strong belief in it and we continue to make every investment decision around here in the context of buying back stock.

So if we were to look at an acquisition or an investment of some type, we compare it to 22 dollars a share for our own stock as of the last time I looked at it.

So, you know, it is something that it is in the forefront of our thought process as we make every capital decision and investment decision that we make.

So we're not going to go give up a annualized repurchase number, but it is certainly something that is near and dear to our thought process here

Great, thanks a lot

Thank you.

Our next question is from Reik Read of Robert Baird, Inc.

You guys talked about delays within the retail segment: So what extent do those delays in the first quarter actually end up add to go the second quarter backlog?

It's the old windy story that I'm not going to whine about.

There's deferral that, you know, in this environment continue to be a normal course of business, and, you know, to your point, it adds to Q2 and I'm sure there will be long sad story in Q2 about something that can get deferred in Q3.

I think we use those statements and while they're true and add color relative to our expectations, there's always some story here, and you have to try to factor it into the aggregate result for the quarter, but I would expect it to be minor kind of noise if you will, in the context of what we're talking to you about

You talked a little about coming in below your expectations, we've seen with other companies some weakness in the hospitality area, I know that's part of your retail segment: Is that the case for you and are there one or two others that are weaker than you expected?

I don't really have any, you know, great color to give you there.

I think that I gave you the backlog situation in retail, what happened in terms of Q1.

I always love to see the market to be stronger than it is, and I could give that you statement almost across every segment that we compete in, in terms of buying patterns.

Right now.

But I can't say that I saw any specific pattern in any unique -- in any specific segment that I'd want to point out to you to give you more comments than another.

Reik, if I can add to that.

We had provided in store automation guidance for the year that we'd be revenue growth of 10 to 15%, and we are not telling you today that we think that that relative range should change, just base on what happened in the first quarter.

So to your earlier question about will that therefore the backlog move from the first quarter to a later quarter, effectively, I suppose the answer to the question is yes, if you look at it through all the quarters, because we really expected our relative mix of revenue across the businesses will be about the same as we provided you a quarter ago for the full year, although obviously in this quarter we had some pluses and minuses around mix.

Okay, that's helpful.

And then, can you talk a little bit, Mark, about the opportunities to cut some costs in retail?

You guys historically have been, from a distribution standpoint, very direct-oriented.

Is there a thought process to increase the indirect portion to reduce some costs?

Well, I think that, again, when you build a distribution model, you've got to start with the buying points, you have to understand the value population and the best methodology to deliver that to each discrete market section you have.

We'll continue to try to mature that mapping and apply resources to get the most efficient cost, if you will, to the delivery of that value population to its buying points, and as I tried to give you color in my commentary, we are working very hard at the rigor of understanding the buyer, understanding the integration of the value proposition and the way and methodology by which we distribute our value proposition to that customer.

That could result in some mix change the way you've indicated.

But that will not be the way we think through it.

We will think through how we get our value proposition to the buying point in the most efficient way.

If that resulted in an indirect channel strategy, so be it.

Now, to your point in retail on the broader comment about cost...yes, I think there is significant cost reduction to do in retail.

I believe that we need more rigor around cost in -- and spending in retail and we will do that.

And then just one follow-up on the financial self-service side.

Can you just talk about what the banks, what you are seeing with the banks in terms of of their spending patterns.

Has there been a change from the prefers quarter, is it better or worse in

I can't give you a kind of a plus or a minus or a red or green on that.

I would -- my first reaction to your statement, based on what I've seen across the regions and across the segments, was roughly what we expected would be the way I would describe it to you.

Okay.

Great, thank you very much

Thank you.

Our next question comes from Jay Stevens of Buckingham Research

Yes, thank you.

Mark, I just have a couple of questions focused mostly on Teradata and could you give us some additional color on the vertical markets beyond the communications and government sectors that you mentioned?

And then secondly, we know that Oracle is focusing a lot on LINUX as an operating system, and I was wondering if you're involved in any of that relative to the version of union Ix that supports

to give you a little history of Teradata.

We had, oh, I don't know, probably eight or nine or ten years ago had Teradata on a thing called TOSS, Teradata Operating System.

Which was our own operating system.

So we moved out of the world of building our own operating system and moved to UNIX, as you know.

And then we've migrated from UNIX, to Windows, about three or four years ago and we now have a Windows platform that might be interesting for you to note is now up in the neighborhood of 30% of our mix of platforms that we're taking to market.

In addition, we have some Windows platforms that are now beginning to scale.

If you went back oh, probably three years ago, while there were some -- I think we had 10% of our customers in the first year moving to windows, the scale along -- in terms of the size of the systems were small.

So, I think that that's certainly an opportunity in terms of that platform.

Because of the work we've done and the way we port Teradata and the way we now with every on going release, we have been able to build the database release with almost total portability.

So our ability to move from operating environment to operating environment is very minor work.

So, for example, when you make a comment about LINUX, that's not a technology question for us, particularly.

It probably cost us something less than -- I won't give you a number but it would be very small relative to how you think of NCR, it's just a market decision.

At the point in time that LINUX, makes sense for us, we can move to LINUX.

Enough color on LINUX.

In the market segments, I'm not going down the segment thing in Teradata by region, by industry.

The only reason I brought up communications particularly, was we had had obviously lots of turmoil in the communications industries over the past three or four years, which has one of our segments and I thought it would be interesting color for you to know that it had grown in Q1.

Thanks, Mark

Thank you, Jay.

.

Our last question comes from Erick Brethenoux of Lazard, Frere

Good morning

Two questions.

One is on execution you mentioned plan to realign self-competences, retraining people, territory definitions, target metrics and those things.

I wonder how far along you are on the plan.

And the second question is with synergy.

You've been a target and you know that inside and out now.

Now that of a better look at the entire company, do you see some synergy that could finally happen between the POS and the ATM and Teradata divisions?

Interesting question.

I'll go with your first about the rigor you're describing in the sales process.

I think this is a target-rich environment for us.

And we have lots more rigor we need to put in our sales organization, and I could probably bore all of you on this call with a blizzard of details that we're doing in our sales organization.

But I have very high expectations of our sales force.

And I want our sales force to be the best sales force in the world.

This company invented sales back in John Patterson basically was the founder of sales when he and Thomas Watson started NCR.

This is our heritage and we will regain that capability.

We have pockets of excellence in our sales organization today.

But to your point, Eric, it starts with you have to understand who the customer is, who the buyer is, you need to understand your value population, you have to train people to execute, and running sales organization is all about discipline, clarity of mission, et cetera, et cetera and I won't bore you any more with my stuff on sales.

But I'm not as far along as I would like to be.

Building a sales organization takes time, it's about leadership, culture, et cetera -- and I'd say we're, you know, like on an eight-quarter drum beat, we're one quarter into the process and my am I happier -- I'm probably never happy, but I feel better than a quarter ago and not good enough.

In terms of synergy across our businesses, I would describe that I am very focused on getting each business to best understand its value proposition to its market.

Do I think there are some synergies?

Yes, I do.

Do thing there's a time we should be spending all our time on those now?

No.

I think there are some.

I think we can do a better job aligning some of our value propositions together.

I think we can get some SG&A leverage, particularly S. leverage in being selling as we move forward.

So that's kind of where we are with it at this point in time.

I could give you discrete examples but maybe that would be left for a better -- for a separate discussion.

Thank you.

Thank you, Eric..

I'd like to close up now.

And let me try to close with just a couple of points.

I think we shared with you our progress in realizing our strategies for trying to maximize the operating efficiencies and improving profitability across all of NCR's businesses.

I want to make sure I'm clear with you on this.

Within the company, there is nothing sacred to us, except our ethics and our mission.

Every other subject in this company is on the table.

This is a process that takes rigor, it requires attention to detail, and the motivation for not just me, but all of our people to deal with the difficulty difficult issues.

We know where we want to go, we know what we need to do to get there, and in the company today we are on the offensive to get this done.

I appreciate your time in spending time with us today, and certainly we'll be back to you at the end of Q2 with hopefully another installment of the story.