NCR Voyix Corp (VYX) 2013 Q1 法說會逐字稿

Welcome and thank you for standing by.

At this time, all participants are in a listen-only mode until the question-and-answer session of the call.

(Operator Instructions).

Today's conference is being recorded.

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

Now, I would like to turn over the meeting to Tracy Krumme, Vice President of Investor Relations at NCR.

Thank you.

Good afternoon and thanks, everyone, for joining us on our first-quarter 2013 earnings call.

Bill Nuti, NCR's Chairman and Chief Executive Officer, will lead our conference call.

After Bill's opening remarks, Peter Leav, EVP and President Industry and Field Operations, will update you on progress with respect to certain key initiatives.

Bob Fishman, NCR's Chief Financial Officer, will then provide comments on our financial results.

Our discussion today includes forecasts and other information that are considered forward-looking statements.

While these statements reflect our current outlook, they are subject to a number of risks and uncertainties that could cause actual results to vary materially.

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

On today's call, Bill and Bob will be referring to a presentation posted on our website.

We will also be discussing certain non-GAAP financial information such as free cash flow and results excluding the impact of pension and other items.

Reconciliations of non-GAAP financial results to our reported and forecasted GAAP results and other information concerning such measures are included in our earnings press release and are also available on the Investor page of NCR's website.

A replay of this conference call will be available later today on NCR's website, NCR.com.

For those listening to the replay of this call, please keep in mind that the information discussed is as of April 30, 2013, and NCR assumes no obligation to update or revise this information included in this call whether as a result of new information, or further results.

And with that, I'd like to turn the call over to Bill.

Thank you Tracy.

Good afternoon to all of you.

I am on the key takeaways slide, Slide number 3. Let's start with revenue.

Revenue was up 13% as reported and 15% on an FX neutral basis.

The 2 point difference was largely the Japanese yen impact on us in the quarter.

And I would point to the fact that revenue was up significantly without Retalix.

Revenue was up 9% and 11% respectively without the Retalix impact.

So, a solid quarter for NCR.

Gross margin was a good story for us, up 120 basis points year-on-year.

Again, that was also up without the impact of Retalix in the quarter, so a solid year-over-year expansion of gross margin.

And we'll talk about why in a minute.

But NPOI is a big story for us.

This is the first time we've gone over 9% in a quarter, in a Q1.

And it's a great start to the year, not just the overall growth of NPOI year-on-year, but the margin we are now driving.

Software was the key contributor to gross margin expansion.

We are seeing solid software revenue growth across the Company in all lines of business, and in particular SaaS revenue, which had a great quarter.

And we are on track to achieve our guidance we gave you.

And remember, our software guidance is without Professional Services.

So we don't include that in that number.

That's software, SaaS, and software maintenance.

We did close Retalix in the quarter.

It was a solid close on February 6, and they had a good start to the year for NCR.

We did have one significant win we'll talk about on today's call.

We had several wins in the quarter, but one really important win for our Company, a great brand name in the organic grocer space.

And today, ahead of schedule, Bob and I are going to talk about our Phase III pension strategy.

I'll give you some insight in a moment on that, but we're excited essentially to talk about what we think is the last leg of our pension strategy here today on the call.

And lastly, key takeaways, we are raising guidance on the NPOI and non-GAAP EPS side of things.

We are keeping revenue guidance the same.

If you go to the line of business highlights chart, a couple of things I'll point to.

We had a good quarter in Financial Services despite some significant headwinds in the US on a year-over-year comparison basis.

We had great -- a great performance outside the US.

The US was weak, but in particular EMEA and China both performed well.

There was double-digit growth and, frankly, Brazil also had a very, very good quarter.

Operating margins were down slightly year-on-year.

We were and in investment mode in this line of business in Q1.

In particular, we are continuing to invest in services and R&D, in particular in the branch space.

We'll come to that in a moment.

But we talked about services last year quite a bit and we continue to invest there.

And we did have some market share gains in the all-important small and medium bank segment in the quarter.

Peter will talk more about branch, but we are seeing great activity in this new adjacent segment that we are focused on, and we are working with a number of customers there, so we'll hold off.

In a moment, Peter will talk about that, but it is a bright spot in the US that we think can have an impact on the Company in the second half of the year, and certainly going into 2014.

And look.

On an overall basis, it would be difficult to compare to last year's numbers in the US, given the regulatory upgrade cycle we were experiencing.

So, it was important to us that we did have a very solid quarter outside the US, and the team did a nice job overall.

Retail was the star performer for us this quarter.

They had a terrific quarter, up 41% year-on-year.

When you take Retalix out, it's still up 27% year-on-year, just a solid quarter in terms of operating income improvement.

This is a business I think we have permanently reinvented going forward for the last decade plus.

We've been driving operating income margins of low to mid single digits, and I don't think we will get there again.

I think we are going to be driving to high single-digit, low double-digit operating margins for the long-term.

Software played an important role in our success in this business in Q2, as did self checkout, which had an outstanding quarter for us in retail.

So, we are really pleased with the progress we've made.

Certainly, the Retalix acquisition helped us in the quarter, and we had significant wins, not just those we announced with Modell's and DSW, but also with a large US organic grocer.

And Peter, again, will give you more color on that.

Hospitality, good quarter overall, great gross margin expansion for the Company as well.

That was offset by investments we made, so higher expenses in the quarter.

In particular, they were all planned, in particular in sales, SaaS and R&D.

We are doing a nice job on the integration front as well, winning business in this space also.

And North America had a great quarter here.

The small and medium business was up, as you can see, 33% year-over-year.

And SaaS continues to really impress us with regard to the growth we're seeing in that space.

As expected, because of the partial loss of a contract late last year, the Emerging Industries were down year-on-year.

Operating margin was down as well.

But we did have great success in terms of travel on the revenue growth side, and continue to see traction in our SaaS-based mobile boarding pass application where we crossed the $3 million number in March.

So, a mixed story in emerging markets for us, or Emerging Industries.

Let's talk Retalix for the moment.

We talked about them being accretive to Q1.

On the next chart, you can see we did about $50 million in revenue, about $9 million in NPOI.

We kicked off the integration effort in the quarter.

We feel good about this acquisition, as good as we did Radiant in terms of fit and form and impact.

We do have a higher degree of confidence in synergy realization on the cost side here.

Early on, I think we will over-achieve our initial target for year one, and close in on our three-year target as per expected.

So the work we've done since the acquisition is giving us high confidence on the ability to do that.

And I would say that we have seen customers enthusiastically embrace this acquisition, and we are seeing as a result of that the funnel growing and also more business that we think we can drive this year and into 2014.

If you go to the next chart, let's talk pension, my favorite topic.

We had a very successful Phase I and Phase II but, today, Bob will take you through the detail of Phase III.

I'd like you to think about Phase III as a two-year program.

And our real focus here is to reduce the underfunded GAAP position we have to around $100 million by the end of that two-year period from what is just south of $500 million today, increase free cash flow.

And you can think about that net of interest about $50 million to $70 million per year.

Reduce our overall global liability.

Now, we reduced liability last year by about $0.5 billion or $700 million or so last year.

We'd like to get that down into the $1 billion or so, and with that comes out a whole bunch of dead-weight costs.

And there would be admin fees and PBGC fees and so on.

We also want to simplify NCR for all of you who are investing in us.

And you can think about all the transactions will talk to you today about as being NPV neutral or positive to -- for us as we analyze each and every opportunity.

But the goal is to put pension behind us completely, and Bob will give you a bit more color on that in a moment.

And so taking you to the summary chart before I hand it off to Peter, I'd say that it was a very, very good start to the year for us.

I'm pleased with, in particular, the diversification of our revenue stream by industry and by product and by geography.

I am particularly pleased with gross margin expansion, operating margins where we would like them to be for NPOI, and a good start for the year.

We did gain some share across a number of industries we do business in, and we are pleased with that.

And we are seeing early signs of increased interest and opportunity in the branch transformation space.

We are going to continue to invest.

The interesting thing about these results in our Company is we are simultaneously investing in a number of areas around NCR.

Hospitality we talked about, but services is another area.

Silver is another area.

We can go on.

But we are able to get to these results while also investing in the future, and that is a good sign for us.

And then Retalix went well in the quarter, a great start to the year.

And I am pleased with our balance in terms of dealing with both legacy issues as well as growth initiatives.

And pension Phase III is another example of our focus on eliminating enterprise risk and improving the valuation of our Company by eliminating this complex issue that we've been dealing with for many years.

With that, let me throw it over to Peter Leav.

Peter?

Thank you Bill.

As Bill mentioned, strong revenue growth in Retail and Hospitality and continued solid performance in Financial Services drove our first-quarter performance.

Our continued focus on being a world leader in consumer transaction technologies, combined with strong innovation, the rapidly increasing contribution of software and SaaS in our revenue mix, and consumers' undeniable appetite for technologies that make it convenient to transact with business anytime and anywhere are key factors driving our success.

Turning to our lines of business, Financial Services revenue was up 5% on an FX neutral basis in Q1, a good result against strong first quarter last year.

As we have signaled previously with the large US ADA and PCA upgrade cycle of the past two years winding down, we face some domestic headwinds in 2013, but we are seeing some strength in our international markets that has enabled us to start the year with solid revenue growth.

Particularly strong areas for us were EMEA and China where we had double-digit revenue growth year-over-year.

We continue to see momentum and customer commitments for our multichannel deposit solutions, including Intelligent Deposit and Scalable Deposit Module, or SDM.

In an effort to better serve customer segments and to create competitive differentiation in the market, Independent Bank Corporation in Michigan purchased our SDM enabled self-serve ATMs to begin its fleet migration from envelope deposit to Intelligent Deposit technology.

As digital and self service channels grow in importance, channel availability and a consistent consumer experience become more important.

NCR's APTRA software portfolio is extending its leadership to help financial institutions deliver consistent, high availability software enabled networks to consumers.

Central 1, serving 3 million members, is Canada's leading payments processor and trade association for credit unions.

They have selected NCR's APTRA passport remote deposit capture software solution to allow customers to remotely deposit checks anywhere and anytime using their mobile phone's camera as a scanner, a first for Canadian financial institutions.

This is exciting as recent changes by the Canadian Payments Association have opened the door to remote deposit in Canada.

And utilizing our technology, Central 1 is a leader in the rapid adoption and deployment of this solution.

More financial institutions are selecting NCR's multivendor APTRA Edge software to simplify operations, reduce costs, and provide consistent user experiences across a mixed vendor ATM hardware fleet.

Old National Bank in Indiana is one such customer who will deploy APTRA Edge as well as multiple elements of our APTRA software platform.

Old National Bank has grown through acquisition and, as a result, requires a software platform to simplify the migration of acquired multivendor ATMs into their network.

According to RBR's newly published research report on multivendor software, NCR has maintain its leadership position as the world's largest supplier of multivendor ATM middleware and applications.

This research was based on a study of 66 Financial Services organizations in 38 countries with deployments of more than 390,000 ATMs.

We are pleased to get this recognition.

The next big opportunity for NCR in the retail banking industry is branch transformation.

In previous conference calls and prior discussions in 2012, we said that new technology surrounding branch transformation would be an underlying driver for ongoing demand for our solutions and that branch information could ultimately be larger than the ATM business.

It is coming to fruition, and this is evidenced by our first-quarter high triple digit percentage growth in both branch transformation revenues and our interactive teller customer base.

We are working closely with our customers, such as Bank of America, Chase, and Wells Fargo, to innovate in this space.

Our solutions and services are designed to help banks improve operating expenses while enabling the expansion of physical distribution to where consumers live, work, and play.

As a result, our assisted service platforms, including APTRA Interactive Teller, are seeing continued momentum.

As you might have seen in the press earlier this month, Wells Fargo announced the opening of a new banking store in Washington, DC as a neighborhood bank format.

NCR partnered closely with Wells Fargo to provide branch and consumer experience design services for the new format.

This small store format, approximately 1000 square feet, will create up to 90% usable space through the elimination of paper and processes used in traditional branches and is supported by our new solutions such as Interactive Banking.

This new format will enable Wells Fargo to deliver great consumer experiences.

According to a recent Wall Street Journal article, the cost of these branches can be 40% to 50% below traditional branches.

The project with Wells is one of several examples around the globe of emerging branch transformation solutions with financial institutions.

We are excited by the level of interest and activity in this segment and we look forward to updating you on progress on future calls.

Turning to our Retail Solutions segment, we reported strong results with Retail revenues up 41% year-over-year.

These results include Retalix from February 6, the date of the closing of the acquisition, to quarter end.

Software growth during the quarter was strong, accounting for the significant profit margin expansion.

Including Retalix, software revenue was up 146% in the first quarter versus the prior year.

Excluding Retalix, software revenue grew 69% year-over-year.

Additionally, there was a strong growth in self checkout revenue, up 178% year-over-year, primarily due to the large-scale deployment of new self-serve checkout units in North America.

The acquisition of Retalix strengthens our retail software and services portfolio and bolsters our leadership position, providing software-led solutions to the retail industry.

Just recently, we were recognized by Gartner, who ranked Retalix and NCR number one and two, respectively, in leadership rankings for CRM vendors.

This reinforces the powerful story that we are able to tell existing and prospective customers about our commitments to innovation with leading software solutions.

Our next-generation Retalix 10 omni-commerce offering is the only retail platform that encapsulates all operational data and business logic within a single repository serving mission-critical retail applications.

Retalix 10 enables delivery of comprehensive, centrally managed retail offerings such that shoppers are presented with seamlessly consistent pricing, availability information, and promotions across whatever platform they are using.

We are pleased to announce the first major Retalix 10 win since Retalix joined the NCR family.

Known in the retail industry as America's first national certified organic grocer with stores in the US, Canada, and the UK, this well-known supermarket chain selected Retalix 10 after an extensive search.

Leveraging this unique software architecture, the platform will deliver mobile shopper, e-commerce and traditional in-store point-of-sale, creating a common user experience and brand value irrespective of the customer touch point.

Innovation that impacts businesses of all sizes is a priority for our Retail business.

NCR Silver is a good example.

NCR Silver offers small-business owners powerful marketing, analytic, and reporting tools that, in the past, have only been available to large brands.

In the first quarter, we expanded Silver's footprint, distribution channel, and value proposition to small-business customers.

We continue to add to Silver's capabilities, including integrating the product with social media and introducing an update, enabling business owners to utilize gift card programs and capture sales and loyalty gains.

Turning now to Hospitality, where we reported solid results, year-over-year first-quarter revenues increased 16%.

SaaS revenues grew 49% and our SaaS application sites were up 35%.

We continue to grow both domestically, evidenced by North America SMB revenue up 33% year-over-year, and internationally with notable success in Brazil and Europe.

Contributing to this expansion are a series of product innovations, improve value-added partnerships within our global accounts, and an expanded reseller network.

We are having success in our Hospitality hardware and software solutions with wins among the venue, restaurant, and theater operators.

At a time when technology and market forces are challenging our Hospitality customers to send stand out, we are delivering consumer engagement and mobility solutions that create exceptional consumer experiences.

We continue to invest in developing a high-margin portfolio of SaaS solutions, which provide restaurants the ability to operate more efficiently, manage a more profitable business, and better engage with their customers in real-time.

During the quarter, we announced a partnership with PayPal, and we are reaping the benefit through an early success with Jamba Juice.

By providing the ability to order ahead and pay from their smartphone or tablet, the customer can save valuable time by skipping the line, going directly to the pickup station where their order is ready.

We are seeing increased demand for our comprehensive enterprise restaurant technology solution, coupled with our suite of Professional Services.

Our SaaS-based Pulse real-time product which enables restaurant operators to receive valuable management reporting information via their mobile devices, has enjoyed the most rapid adoption among any of our prior Hospitality product releases.

We continue to aggressively integrate our mobile technologies with the release of NCR Aloha Mobile.

This innovative extension of our industry-leading Aloha solution brings the power of a robust point-of-sale directly to the guests in support of tableside ordering and payment.

Operators have stated publicly that they have seen an increase in sales and profits and improved overall guest satisfaction.

Our new offer appeals directly to the US SMB segment where the uptick in mobile product adoption is expected to approach 40% this year.

In our Emerging Industries business, revenues declined 15% due to an anticipated partial reduction in a contract with a large customer, as we talked about on the last earnings call.

Overall, however, we remain excited about our progress in our targeted verticals.

Air travel is a very active area for us.

We recently had wins in airports in Oman and China and a new contract with a leading Latin American airline for our TouchPort kiosks.

In March alone, NCR delivered a record 3 million mobile boarding passes.

The Technology and Telecom line of business continued to drive expansion through the introduction of new solutions, including its Telecom Storefront portfolio.

This solution helps wireless telecommunication providers transform their retail customer experience and realize next-generation productivity gains.

A top-tier wireless operator in India has already deployed the solution in five stores with 35 confirmed deployments in Q2.

We are also seeing good traction with important Latin American wireless providers.

In the first quarter, BlackBerry selected NCR to improve its cost position through our helpdesk services and end-user desktop support, including PCs, laptops and printers.

According to Doug Kozak, VP of Information Technology at BlackBerry, NCR was one of the few companies with the industry experience and infrastructure in place to get our initiative up and running cost-effectively in three months.

NCR services grew revenue 10% in Q1 and our attach rates continue to climb, in line with our strategy of being a leading global services organization.

In summary, the first quarter marked a solid start for the year.

We continued to execute across our core and emerging verticals, deploying innovative technologies and solutions that strengthen our customers' operating platforms while growing our software and services revenues.

In addition to innovation and initiatives that I've outlined in our business, we remain very focused on sales enablement throughout the organization, both within our and across our lines of business.

We aim to continue to increase our level of execution to drive revenue growth, gross margin expansion, and great experiences for our customers.

I will now turn the call over to Bob.

Okay, thanks Peter.

NCR's total reported revenue in the fourth quarter was $1.41 billion, up 13% versus Q1 2012, and up 15% on a constant currency basis.

We reported GAAP income from continuing operations of $62 million or $0.37 per diluted share.

This compares to a GAAP loss from continuing operations of $10 million, or a loss of $0.06 per diluted share in Q1 2012. (*)

NCR's results from continuing operations include special items in both periods.

Excluding pension and special items, non-GAAP diluted income per share was $0.54 per share in Q1 2013 versus $0.47 in Q1 2012.

To analyze NCR's operational performance without the effect of special items and pension expense, please see the supplemental financial schedule included in our earnings press release and the supplementary non-GAAP materials in the slides that Bill referred to earlier that reconcile our GAAP to non-GAAP results.

Excluding the impact of special items and pension expense, our Q1 2013 gross margin was 27.4% compared to 26.2% in the prior year period.

This 120 basis point increase was primarily driven by a favorable mix of revenue, including higher software revenues and a continued focus on cost improvement initiatives.

Operating expenses, excluding pension expense and special items, were approximately 18.3% of revenue in the first quarter of 2013, compared to 18.1% in the same period last year.

The Company continues to invest in sales and R&D while reducing our overall G&A expenses.

Non-GAAP income from operations, or NPOI, was $129 million in the first quarter, compared to $101 million in the prior-year period, an increase of 28%.

The first quarter of 2013 included a $13 million benefit from a change in the severance policy in the US.

Our US severance policy is no longer based on years of service.

So, going forward, expense will be recorded when probable and can be estimated rather than actuarially determined.

This change only applies to our US severance plan, so our international entities will continue to record severance under the previous methodology.

This is a good example of dealing with a legacy issue and simplifying our Company going forward.

The $13 million benefit in Q1 2013 will be offset by an estimated $7 million to $10 million of severance expense in the US for the remainder of the year.

First-quarter 2013 segment operating margins were as follows.

Financial Services decreased slightly to 8% versus 8.2% in the prior-year quarter as we continue to invest in R&D and our Services business.

Retail Solutions increased to 8.4% from 0.6% in the prior-year quarter, mainly due to a favorable mix of revenue, including more software and the inclusion of the Retalix business starting in February 2013.

Hospitality decreased to 16% from 16.8% in the first quarter of 2012, primarily due to investments in SaaS, sales, and R&D.

Emerging Industries decreased to 13.2% from 25.8% in the first quarter of 2012, primarily driven by the partial loss of a customer contract in our Telecom and Technology business, as previously discussed.

Other expense was $19 million in Q1 2013, which is mainly related to interest expense.

Income tax expense was $2 million in the first quarter of 2013 compared to a benefit of $21 million in Q1 2012.

Excluding the effect of pension and nonrecurring items, the first-quarter 2013 effective tax rate was 16% compared to 16% in Q1 2012.

The tax rate in the quarter benefited from the US extenders tax legislation that was signed into law in January.

NCR's full-year 2013 effective tax rate is expected to be 26%.

Turning to the balance sheet, cash on hand at March 31, 2013 was $483 million, down from $1.069 billion at December 31, 2012.

The decreasing cash was primarily attributable to the closing of the Retalix transaction in February.

Total debt was $2.09 billion at the end of Q1 2013, compared to $1.96 billion at the end of December 2012.

Moving to the cash flow statement, NCR had $21 million of cash generated in operating activities in Q1 2013 compared to $89 million in the prior-year period.

Free cash flow was a cash outflow of $23 million in Q1 2013, compared to a cash inflow of $49 million in the prior-year period.

The decrease was primarily due to a change in working capital in anticipation of higher revenue in later quarters.

NCR defines free cash flow as cash flow from operations and discontinued operations, less capital expenditures for property, plant, and equipment, and additions to capitalized software.

We continue to expect free cash flow for full year 2013 to be in the range of $200 million to $250 million, up from $146 million in 2012.

I'd like to conclude by discussing our 2013 full-year guidance and providing an update on Phase III of our pension strategy.

Full-year 2013 revenue growth expectations for our lines of business include services that are on a constant currency basis.

The revenue guidance by line of business has not changed from our previous guidance provided during the Q4 earnings call.

In Financial Services, we expect revenues to grow 2% to 4%.

In Hospitality, we expect revenues to increase 15% to 18%.

In Retail, we expect revenues to rise 22% to 25%.

Retail revenues are expected to grow 7% to 9%, excluding Retalix.

In our Emerging Industries line of business, we expect revenues to be up 3% to 5%.

In terms of total revenue, we are reaffirming our guidance of 9% to 11% growth on a constant-currency basis.

We are raising our full-year NPOI and non-GAAP EPS guidance.

Our new 2013 NPOI estimate is $700 million to $720 million, up from the previous $695 million to $710 million.

Our non-GAAP EPS guidance is now $2.70 to $2.80, up from the previous $2.65 to $2.75 EPS guidance.

And now for an update on Phase III of our pension strategy.

I've included three charts at the end of Bill's presentation that might be helpful -- Pages 9 to 11.

We are pleased to be able to share with you the announcement of Phase III of our pension strategy ahead our previous time line.

As mentioned on our Q4 earnings call, we have had excellent success with Phase I and Phase II of our pension strategy, which were completed in 2012.

I'm on Page 9 of the presentation.

In the US, over a three-year period, we shifted our asset mix to approximately 100% fixed income at year-end 2012.

We also had 65% of our international assets in fixed income at year-end 2012.

As part of Phase II, we contributed $600 million to the US pension plan which was financed through attractive capital market borrowings.

We also made a voluntary lump sum offer to certain deferred vested participants.

We achieved a number of significant benefits as a result of Phase I and Phase II of our pension strategy.

First, we significantly reduced the volatility of our plan by moving to fixed income and improving the underfunded status of the global plan by $878 million in 2012 from $1.346 billion to $468 million.

We achieved an NPV positive transaction with our lump sum offer and reduced ongoing administrative costs.

Finally, in Phase II, we increased free cash flow by eliminating the need to make required US planned contributions over the next five years and we reduced the overall pension liability by approximately $750 million in the US plan.

Phase III execution has begun and will continue over the next two years.

Phase III is designed to increase free cash flow and further reduce the underfunded status of our plans and overall pension liability.

We expect to achieve these benefits through economically attractive transactions that further reduce administrative costs and reduce balance sheet risk.

I am on Page 10 of the presentation.

There are many activities that we expect to be included in Phase III of our pension strategy and over that two-year horizon we could add to this list.

And we have already made progress on executing the Phase III pension strategy during the first quarter of 2013.

For example, we terminated our legacy US executive non-qualified retirement plan.

We also completed an early retirement offer through the US pension plan that to date has been accepted by approximately 400 US employees.

This will drive operational savings to the Company.

We plan future actions to include a lump sum offer to certain US deferred vested participants not included in the 2012 offer.

Subject to any necessary regulatory approval, we expect to begin a retiree lump sum offer for participants in the US qualified plan.

We also plan to pre-fund and/or wind up one or more of our international plans and to prefund the US plan to further reduce interest rates and funding risk.

Finally, as part of Phase III, we have implemented marked-to-market accounting effective January 1, 2013.

As a result, we have revised our prior-year GAAP results and included an additional schedule with our Q1 2013 earnings release.

That is Schedule E.

Let me talk a little about pension accounting.

The last page of the presentation, Page 11, shows the impact of the change in pension accounting methodology.

We had previously announced that we were considering a change in our pension accounting methodology to adopt marked-to-market accounting.

This change is being implemented effective this quarter.

Under marked-to-market accounting, differences in the value of pension assets and liabilities, resulting from changes in assumptions or market movements, will be reflected in expense during the current year, generally through an annual Q4 non-cash charge.

Under our historical practice, these differences were deferred and amortized into expense gradually over many years.

We believe that this change increases the transparency of our pension accounting for our investors.

We've recasted all prior periods to reflect this change.

This schedule shows how the various measures have changed for the last three years.

In general, the GAAP EPS changed due to the elimination of the amortization of historical actuarial losses.

Additionally, in 2012, GAAP EPS improved based on the positive impact of the lump sum offer to certain US deferred vested participants.

In 2011, GAAP EPS decreased, mainly due to lower discount rates.

And in 2010, GAAP EPS improved due to the reduction in amortization previously mentioned.

As you can see from the schedule, there was no impact to NPOI or non-GAAP EPS from the change. (**)

Now, let me summarize some of the financials around Phase III back on Page 10.

Phase III of the strategy will be financed primarily through a debt-for-debt exchange using some combination of free cash flow, revolver and long-term debt to reduce the pension liabilities and improve the underfunded position.

We will also use pension plan assets to execute on some of the initiatives.

We expect the capital requirements to be approximately $300 million to $400 million over the next two years and, as I mentioned, primarily debt-for-debt.

We anticipate that Phase III of our pension strategy will drive meaningful benefits over the next two years.

Under marked-to-market, we expect our GAAP pension expense will be reduced to a run rate basis of approximately $20 million in 2013, down from $292 million in 2012.

This 2013 run rate excludes the impact of any one-time actions as well as the impact of changes in assumptions and market movements.

We expect the underfunded status will improve from $468 million at the beginning of 2013 to approximately $100 million by the end of 2014.

We expect pension liability to decrease by at least $1 billion over the next two years, and expect free cash flow improvement of approximately $50 million to $70 million by 2015 due to the reduction of pension contributions net of interest costs for funding.

And finally, we expect a significant reduction in volatility, funding risk, and administrative costs.

While we are proud of our accomplishments in Phase I and II, we believe the work that we will do in the next two years will have an even more meaningful benefit.

We will continue to seek to reduce volatility, derisk the Company's balance sheet and make NCR a simpler business to understand.

The execution of Phase III will allow us to put pension behind us, and ultimately resolve for good our most significant legacy issue.

And with that, I'll open up the call for questions.

Operator, you can open up the call for questions now.

(Operator Instructions).

Katy Huberty, Morgan Stanley.

Thanks.

Can you talk a bit more about the investments you're making in R&D and Services in the Financial Services industry, just given that that was a drag on margins the last couple quarters?

Is that legacy investments, or is that investments ahead of the branch automation opportunity?

It's the latter.

We are making investments largely in branch transformation, as well as software.

And the services investments we started back in Q3 of 2012.

They will continue on through the remainder of this year but become incrementally less as Q2, 3 and 4 unfold.

Okay.

So as the branch automation revenue comes through, which it sounds like could be as early as the back half of the year, you would expect margins to expand again.

And is that the right timing?

That is.

I would say that 2014 will be an important year for branch transformation.

Think about this year.

Around $80 million to $100 million of branch transformation revenue, which by the way was a lot more than we originally anticipated coming into the year.

So meaningful, but in the grand scheme of things, small in comparison to the total.

But that is a more margin-rich environment because there's more software involved in that selling process, an ultimate solution, and there's more services.

Okay.

Then just a quick follow-up for Bob, just to be clear on the guidance, the higher NPOI and EPS guidance includes that $13 million benefit from severance changes, but then you would expect that to be partially offset by higher severance of $7 million to $10 million as you go through the year.

Is that the right way to think about the changes?

Yes, that's exactly the right way to think of it.

The benefit of $13 million in Q1 is offset by the $7 million to $10 million that will flow through the remainder of the year.

Okay, great.

Thank you so much.

Paul Coster, JPMorgan.

Yes, thank you for taking my question.

It feels like you are moving into different segments of your traditional markets within which your competitive landscape is changing.

Can you just talk a little bit about both in the Retail segment and Financial Services segment in particular who you've now run up against and whether you perceive yourself as the aggressor or the defender in that competition?

I think the overall comment you make is something that is important for people to understand.

This is a very different NCR than just a few years ago in so many ways, it's difficult to describe on a quarterly analyst call.

But we are very a different company, and we do have a different go-to-market and set of products by industry now than we have had just in the recent past.

If you think about Financial Services, we are still quite well-positioned there.

We're the number one market share leader in hardware for ATMs, and software for multivendor ATM software for services in terms of services attach and our Services business.

So we are quite well-positioned in the legacy space.

And the positive aspect of branch transformation is it's a net new space for NCR.

Other competitors occupy it today but with older technology that will be replaced.

So, we feel very good about this segment of the market, this adjacency.

And it should be noted we have been working with several customers now for a long period of time on innovation in this space, large customers as well as medium-size customers.

So we feel good about the space overall, and we really feel excited about software and SaaS going down-market to mid tier and smaller banks on a global basis.

So overall, that is an exciting industry with the exception of the difficult compares in the first half of '13 versus '12.

Retail, we've gone from being a hardware company to being, in my estimation, and I don't mean this to sound with hyperbole here, but one of the most if not the most important technology company to retailers in the world.

And these are our customers telling us this, not us wanting to believe that.

But it is a competitive environment.

You have IBM, who sold their business to Toshiba Tech who is obviously a key competitor, Fujitsu, and other competitors now in the software space.

But we do have a unique end-to-end solution that is quite powerful in terms of hardware, software, and services today, and the advantage of having Retalix 10 as an omni-channel omni-commerce platform, given the state that that is in, is unique.

So we feel good about our position.

We think we are the aggressor in those two markets.

Clearly, Hospitality, we are the aggressor and have a great position in the US, and we need to prove that internationally where we're number two.

And that's really our goal, is to take this wonderful and powerful solution we have, but again it's software intensive, out to the international markets and then down-market effectively.

In the other spaces, travel is going well.

T&T has -- we have work to do there.

I won't comment much on those two.

They're smaller in nature.

But I will say that we continue to be excited about NCR Small Business and Silver.

Lots of work needs be done there, but it's a new market opportunity for us.

We now have well over 1100 customers and growing quickly by the day.

And that is a new segment that we feel we are well-positioned for overall.

So we're quite diverse.

We have many different competitors across the board.

We are now software-led, if you will, in those markets.

And yes, there are more competitors we are dealing with, but we feel like we are in a great position.

A quick follow-up, thank you by the way.

Bob, the guidance for the remainder of the year has been raised a little bit, by not much more than you've beaten by here, and well, my sense is you're being very conservative.

What's your response to that?

Again, some of the beat, just to clarify, in Q1 was based on the benefit of the severance change, and that's going to be offset with severance through the balance of the year.

So, we did increase the NPOI guidance by $10 million at the top end, so we view that as pretty significant.

Again, from my perspective, Q1 provided some more clarity into the balance of the year, which was good, and we were glad to be able to up the guidance.

Thank you.

Meghna Ladha, Susquehanna.

Thanks for taking my question and congratulations on a good quarter.

In Financial Services, you came in above our estimates despite our (inaudible).

How should we think about growth in this segment in the next few quarters?

Yes, I think you should think about growth in Q2 -- Q2 is going to be a challenging quarter for us in terms of growth, again, because it's the most difficult quarter we are facing in terms of compares year-on-year, particularly in the US.

And then the back half of the year should incrementally improve as a result of compares that will get easier as the quarters go by.

Improvement in branch transformation, revenues, and improvement in services.

So I would think that, again, we've always anticipated in our outlook that the first half of the year will be more difficult than the back half of the year.

Again, because of comparisons, the US base mainly would begin to ease a bit.

So, I think the back half is going to be a better half for NCR, and it'll help us to achieve our guidance of 2% to 4% growth.

Okay.

The next question was regarding FCPA.

I didn't see it in the press release, but can you provide us with an update as to where we are with respect to the FCPA?

Thank you.

Yes, sure.

I'd say there's nothing new to report in Q1, and we continue to work with the authorities to work through these issues to resolution.

Ian Zaffino, Oppenheimer.

Great, thank you.

I know you indicated that, in Financial Services, the US was down.

Can you give us an order of magnitude how much that was down and maybe how much non-US was up?

North America revenues were down around the midteens.

I think it was around 15% in North America.

And the rest of the world made up the difference for us.

I don't know the exact number, because we break it down by region, but I can tell you that EMEA had solid growth for us.

I know they were up I think 12% year-on-year.

And included in there we had some great performances in certain countries, in Western Europe in particular, year-on-year.

China had a great quarter for us, and Brazil.

So they were really the key factors in what made up the difference between the US being down a bit.

Okay.

And then on the self checkout, you also alluded to triple digit growth.

Ex-ing out your biggest contract, what was the rest of the business sort of up?

I don't know the answer to that.

It was solid.

When we take out that one big contract, it was still a solid quarter for us.

And we anticipate that that will continue, perhaps not at a 178% pace, although we would like that year-on-year, but we don't expect that in the forthcoming quarters.

We do expect to have a great Q2, Q3 and Q4 in that space.

Okay.

Then the final question would be I know you guys have always been very good as far as giving forward-looking -- not guidance, but really forward-looking plans.

You discussed and laid out very well Phase I, Phase II, Phase III of the pension.

You're pretty much done with Phase III of the pension.

You talked about the increase of free cash flow.

You've talked about some spending or some investments you're going to do.

But what's beyond that as you look to maybe -- are we looking for another acquisition?

Are we looking to return cash to shareholders?

How do we get our minds around that?

Thanks.

Right now, one thing I think we have done well, and we are disciplined in this way, is that we kind of have a great balance of focus here on legacy issues and growth initiatives.

Right now, we are digesting Retalix and integrating that.

We are finishing the integration of Radiant.

And I want to make sure we do those both well.

And by the way, in doing them well, we will continue to grow our gross margins because of the growth we're seeing in software and SaaS.

So I feel good about expansion of margin as a result of what we have done so far vis-a-vis growth initiatives.

We're really focused on legacy initiatives for at least the remainder of this year, meaning we want to get pension Phase III right.

There's a lot of work and effort -- Bob and I spent hours per week on this making sure it's done properly as you -- many tens of people at NCR.

We are also dealing with other legacy issues that you may not see but do impact us, like the US severance changes, so you are aware.

As you well know, we traditionally have used FAS 112 as an accounting mechanism for severance accounting in the US.

It's an old ANTT legacy vestage of the past, and now we are moving away from that in the US.

Each of our businesses will now pay for severance in the quarter that they take it.

That's very different than what was in the past.

You think FAS 112 to amortize the cost of that severance over a seven-year period.

So there are lots of those little -- they are not so little, but legacy issues we are getting behind us.

We are turning into rapidly a technology company.

And putting these legacy issues behind us culturally and otherwise helps us to achieve that goal.

And so we're going to spend our time doing that the remainder of this year, and see where we are going into 2014.

We have put ourselves in the position of achieving our aspirational targets.

So, we feel very good about the future of this Company and the ability to continue to grow revenues and gross margin and operating margin even if we stopped with growth initiatives at the end of this year.

We probably won't going into '14, but I think we feel good about that.

And then we'll make determinations.

And we look at this every quarter.

I do with the Board as to how do we use our capital going forward?

And it's everything.

Everything is always on the table.

Buybacks, dividends, acquisitions, legacy issues like pension, we look at everything and examine what's in the best interest of the shareholder, and then we make a decision.

All right, thank you very much.

Matt Summerville, KeyBanc.

Just a couple of questions.

First, in the Retail business, can you talk about what you expect your mix of self checkout versus point-of-sale revenue to look like in '13 versus '12?

I'm trying to understand more about how we should be thinking about that mix shift.

As you remember, going back many years, we used to think about it 70/30.

I don't know what that is today, but I can tell you it's not 70/30 anymore.

It's higher.

Let us come back to you through Tracy and Bob and answer that question for you specifically.

But --

I think it's an interesting question because, historically, we would have had that at our fingertips.

But now that we move more towards software services as a big piece, self checkout, point-of-sale, it's almost like we still like self checkout because it drives those margins.

But the whole business, the whole Retail business, has become more services and software.

We'll get you that answer.

We just don't have it right now.

Sounds good.

Then Bill, can you maybe talk more about ATM demand more focused on emerging markets?

You hit on the US.

I'd like to maybe just touch on Eastern Europe, Russia.

You mentioned China being strong.

And sort of what your game plan is, or your next move in Brazil as the Bradesco shift has fully anniversaried a quarter or two ago?

Yes, I'll have Peter weigh in here as well, but my high-level perspective for you is quite simple.

We continue to expect ATM demand in the emerging markets to be mid single-digit to high single-digit kind of growth over the medium term while we expect, in more mature markets like Western Europe, the US and Japan, demand to be flat to down over the medium term.

The mix of that will continue to look like, from my point of view, a traditional ATM business.

Put branch aside for the moment and just look at that as a space in the low single digits to maybe medium single digits.

When you have acquisition -- I'm sorry, when you have upgrade cycles like Windows 7 or when you have upgrade cycles like EMV, you might get a nonsecular pop for a short period of time, but that market wants to grow secularly around 3% when you put it all together going forward.

What will be the adjunct to that will be branch opportunities in software and services in terms of growth over that time frame, which will help us grow faster than that market.

So, that gives you a little bit of color.

For NCR, again, we had a superb quarter in countries in Europe, the Middle East in particular, Brazil and China.

It's Peter.

I'll just make a few additional comments related to those areas where we see significant opportunities for growth, and certain countries that continue to do real well across Eastern Europe, Turkey being notable.

As Bill mentioned, Middle East/Africa continues to do very, very well and we continue to do very well there.

You heard about China and Brazil, but India also is still very much a key component of the growth plan for ATMs and our growth plan within it, albeit models may be different but that market is still moving forward and something that we have invested in and will continue to stay focused on and working to gain share in those areas.

Additionally, not only is it a cash dispense discussion but many of these markets are moving towards deposit.

And we know that that leads to accretive margins.

We know that leads to a change in behavior, and then that also ultimately leads to a broadened discussion regarding branch and services that grow with it.

So, we are very bullish, and we continue to be.

And obviously, financial is a very broad-based business.

Both direct and through partnerships, we are in 180 countries and that's something that's served us very well and obviously helped our balance in Q1.

Then just lastly real quick, Bob, can you give, in absolute dollars, what the old severance expense number for the full year was in the P&L and now what it is post-moving away from FAS 112?

I just want to make sure I got this right.

Which year are you referring to?

I'm looking at 2013.

Pre-the move away from FAS 112, what would your severance expense have looked like, so if you are still amortizing it, versus the go-forward expenses incurred?

I'm trying to understand the total change here.

I'd say it probably would've been between $150 million, $170 million.

So if we hadn't made that change, that's what you'd be looking at.

Then what are we looking at now for the full year?

On a run rate, you're looking at $20 million.

And then we have included in the reconciliation that our forecast for pension expense this year, including the two activities that we started in Q1, which is the termination of the retirement executive plan and the ERO, the early retirement offer, that will take that $20 million run rate up to $35 million for this year.

And that's outlined in the kind of reconciliation between GAAP and non-GAAP.

So think of it as a $20 million run rate and then impacted by specific one-time transactions like the termination of the executive plan and the ERO.

But that doesn't affect severance, right, Bob?

I'm asking about what the severance expense would look like.

I'm sorry.

I thought you were asking about pension.

We are so focused on pension, I think we --

So it was the whole question.

I'm sorry Matt.

(multiple speakers)

What FAS 112 would have been versus (multiple speakers)

Yes, and what is it without --

I think of it as it typically runs about $35 million and it might now be about $5 million better, $3 million to $5 million better.

Okay.

Got it.

Thank you.

Okay.

I gave you all this extra pension information as a bonus there.

That's okay, I'll take it.

Thanks.

Julio Quinteros, Goldman Sachs.

Good afternoon.

It's Roman Leal in for Julio.

I guess first, on the ATM backdrop, your competitor was out there today speaking of potentially changing their pricing structure.

I'm not clear whether it was domestically or across the board.

Just curious.

How much does pricing differ between you and your competitors domestically and across the board, I guess globally, in your ATM business?

Was it Roman?

Yes, it's Roman.

Roman, this is Peter.

So needless to say, we haven't announced anything of that nature related to pricing changes in the business, and it's just very variant.

There are probably other elements to take into account where we've got different competitors in different markets that are more pronounced as it relates to certain markets.

So, when we look at the business across the markets, there are different pricing structures and different competitive elements that we are seeing, so I think it's important that we leave it at that at this point.

The discussion that was had this morning, we'll go back and take a look at the impact, but we are not looking at doing something comparable at this time.

Sure, that's helpful.

In your Retail business, when you strip out Retalix and just kind of look at even stripping out the self checkout, how did the traditional point-of-sale perform relative to your expectations?

And how important is that in your guidance, or kind of your confidence in organic growth mostly driven by the self checkout side of the business?

Let me answer the question that Matt asked first, and it's what you'll have now because you're asking it indirectly.

If you look at self checkout hardware and software in Q1, it accounted for around 18% of our total revenues.

And again, while important and somewhat higher-margin than point-of-sale, even though our point-of-sale margins have gotten significantly better over the last few years in terms of hardware point-of-sale margins, the real big swing item for us now, given the size of it, is Software and Services.

So the rest of the business you can look at as a combination of hardware, and then the Software SaaS and Services piece.

Is point-of-sale important?

Yes.

It continues to be reasonably good margins for us, and it accounted for around 12% of our revenues in Q1.

So, as you can see, the diversity of this revenue stream has become quite substantial in terms of Software and Services and recurring in nature.

So we are focused a great deal on that.

Gil Luria, Wedbush Securities.

Thank you.

First of all, a very interesting announcement on Aloha Mobile.

If you would not mind giving us a little bit more details when you launched it?

Is it hosted or in-store?

I think you said small business, but initially about Silver you said the same thing and then rolled it out to a 300-store chain.

So if you wouldn't mind giving us a little bit more detail on that and when it's coming out.

And then the follow-up question to the last couple of questions in terms of when that big self checkout project, how long it's going to last, how many more quarters that's going to last.

First, on Aloha Mobile, obviously we are all well aware of their movement towards tablets and mobile devices as a means to check people out or in, depending upon the industry you're in.

And in the Aloha Mobile space, we've mobilized the application.

That announcement came in Q1.

We are beginning to roll it out.

We are having great success, by the way, in the initial rollouts of Aloha Mobile so far.

You are right to point out that Silver is also a point-of-sale mobile application, but not in Hospitality.

It's mainly for Retail, small and really small-business retail, if you will the mom-and-pop stores kind of device, so slightly different markets.

But again, we are utilizing a similar mobile embodiment of the technology.

Relative to self checkout, we'll continue to see self checkout momentum for -- in the US for a few large customers roll into Q2 and then into Q3, but we do anticipate also having an opportunity to extend the size of that particular order in this year -- going into the remainder of this year and into 2014.

Just a clarification -- is that Peter?

Just one other comment on Aloha Mobile, in contrast to Silver, it's an expansion of the existing base.

So, when you think in terms of our Hospitality space, which you know fairly well, this is an opportunity that's driven by a significant uptick in the number of mobile users in the restaurant space where we play and in many cases where we are desirous of becoming a bigger player -- the aforementioned discussion around global growth of the Hospitality business, whereas Silver we have a situation in which we are, in many cases, completely net new.

So I want to make sure the distinction as far as growth is important, as this is an add-on, a very important component of the mobile strategy, but it's in a base that exists in many cases.

Just to clarify, Silver is a mobile hosted solution in Retail.

Aloha Mobile is an extension of your existing point-of-sale for ordering.

It's not a standalone restaurant POS hosted on mobile.

It is an extension of our current Aloha point-of-sale capability to mobile devices but it is how also hosted as well as offered in server based functionality.

It's John Bruno.

I think I'm going to see you next week in short and I'll take you through this in more detail.

But I'd like you to think about it as an application site similar to the way in which you think about our Hospitality business.

And our team sells it as such, to Peter's point, as an extension to the existing brand.

It has full feature function and capability, but if you think about the Aloha suite, there's a lot more to it than just mobile ordering.

There's a whole bunch of things with promotion and loyalty and promotions, etc., coupon redemption and so forth.

So we bifurcate the functionality necessary to make the mobile enablement, improve it, but unlike Silver which is a complete mobile-enabled software solution which is inclusive of the package, it's a little bit different only because it's skinnied down for the much lower tier market.

Makes sense.

Looking forward to it.

Thank you John.

Thank you all for joining today.

This was a longer call than usual in light of the pension Phase III announcement.

We appreciate you sticking in there with us today, and we look forward to reporting back to you next July.

Thank you.

Thank you for your participation in today's conference.

Please disconnect at this time.

IMPORTANT NOTE - Certain of the prior year GAAP financial results that were referred to in NCR's April 30, 2013 earnings conference call that were recast in connection with NCR's change to mark-to-market accounting for pension expense in Q1 2013 were subsequently revised.

The revised prior year GAAP financial results and related discussions have been noted with an asterisk (*) in this transcript.

Please refer to the Explanatory Note in NCR's Form 8-K/A, as furnished with the SEC on May 8, 2013, for further information.

(*) NCR's GAAP income from continuing operations (attributable to NCR) for the first quarter of 2012 should have been $59 million, or $0.36 per diluted share, after the recast of its prior year GAAP financial results rather than the loss from continuing operations (attributable to NCR) of $10 million, or $(0.06) per diluted share, that was referred to in NCR's earnings conference call.

Please refer to the Explanatory Note in NCR's Form 8-K/A, as furnished with the SEC on May 8, 2013, for further information.

(**) Certain of the prior year GAAP financial results included in the referenced schedule that were recast in connection with NCR's change to mark-to-market accounting for pension expense in Q1 2013 were subsequently revised.

Please refer to the Explanatory Note in NCR's Form 8-K/A, as furnished with the SEC on May 8, 2013, and Exhibit 99.2 thereto for further information.