NCR Voyix Corporation (VYX) Q1 2013 Earnings Report, Transcript and Summary

Welcome, and thank you for standing by. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I'd 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, and good afternoon to all of you. I'm on the key takeaways slide, Slide 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 the quarter, in the Q1, and it's a great start to the year not just the overall growth of NPOI year-on-year, but the margin we're now driving. Software was the key contributor to gross margin expansion. We're 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, 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 Feb. 6, and they had a good start to the year for NCR. We did have one significant win we'll talked about on today's call. We had several wins in the quarter but one certainly important win for our company, a great brand name in the organic grocery space. And today, ahead of schedule, Bob and I are going to talk about 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're 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 U.S. on a year-over-year comparison basis. We had a great performance outside the U.S. The U.S. was weak. But in particular, EMEA and China both performed well. They were double-digit growth. And frankly, Brazil also had a very, very good quarter. Operating margins were down slightly year-on-year. We were in an investment mode in this line of business in Q1. In particular, we're continuing to invest in services and R&D, in particular, in the branch space. We'll come to that in a moment. But we've 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're 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 U.S. that we think can have 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 U.S., given the regulatory upgrade cycle we were experiencing. So it was important to us that we did have a very solid quarter outside the U.S., 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, 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're going to be driving to high-single digits, 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're really pleased with the progress we have 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 U.S. 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. They were all planned, in particular, on 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 cross the $3 million number in March, so a mixed story in emerging markets a for us, for Emerging Industries. Let's talk Retalix for a 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 competence in synergy realization on the cost side here. Early on, I think we will overachieve our initial target to year 1 and close in on our 3-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're seeing 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 to through the details of Phase III. I'd like you to think about Phase III as a 2-year program, and the real focus here is to reduce the underfunded GAAP position we have to around $100 million by the end of that 2-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, we reduced the liability last year by about $0.5 billion. We're $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 deadweight 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 we'll talk to you today about as being NPV neutral or positive 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 mean, I'm pleased with, in particular, the diversification of our revenue stream by industry and by product and by geography. I'm 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're pleased with that. And we are seeing the 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 and our the 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're 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'm 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 the company by eliminating this complex issue that we've been dealing with for many years. With that, let me turn 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 the world's 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 is 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 larger U.S. ADA and PCA upgrade cycle of the past 2 years winding down, we faced some domestic headwinds in 2013. But we're seeing some strength in our international markets and has enabled us to start the year with solid revenue growth. Particularly strong areas for us where EMEA and China, where we had double-digit revenue growth year-over-year. We continue to see momentum and customer commitments for us 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 SelfServ 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 multi-vendor APTRA Edge software to simplify operations, reduce cost 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 multi-vendor ATMs into their network. According to RBR's newly published research report on multi-vendor software, NCR has maintained its leadership position as the world's largest supplier of multi-vendor ATM middleware and applications. This research was based on a study of 66 financial services organization in 38 countries, with the deployment 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 technologies surrounding branch transformation would be an underlying driver for ongoing demand for our solutions and that branch transformation 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, D.C. 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 1,000 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 the segment, and we look forward to updating you on progress on future calls. Turning to our Retail Solutions segment. We reported strong results, with the Retail's 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 SelfServ 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 #1 and #2, respectively, in leadership rankings for CRM vendors. This reinforces the powerful story that we were 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 the stores in the U.S., Canada and the U.K., 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, improved 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 stand out, we are delivering consumer engagement and mobility solutions that create exceptional consumer experiences. We continue to invest in developing 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 the 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 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 table-side 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 U.S. 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 in 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 kiosk. In March alone, NCR delivered record 3 million mobile boarding passes. The technology and telecom line of business continue 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 this solution in 5 stores, with 35 confirmed deployments in Q2. We're also seeing good traction with important Latin American wireless providers. In the first quarter, BlackBerry selected NCR to improve its cost position through our help-desk 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 3 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 continue 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 innovations 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 U.S. Our U.S. 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 U.S. severance plan, so our international entities will continue to record severance under the previous methodology. This is a good example of dealing with the 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 U.S. 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 15% in Q1 2012. The tax rate in the quarter benefited from the U.S. 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 decrease in cash was primarily attributable to the closing of the Retalix transaction in February. Total debt was $2.09 billion at 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 activity 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 in addition to capitalized software. We continue to expect free cash flow for full year of 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 includes services and 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 3 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 of our previous timeline. 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 U.S., over a 3-year period, we shifted our asset mix to approximately 100% fixed income at year end 2012. We also had 65% of our international asset and fixed income at year end 2012. As part of Phase II, we've contributed $600 million to the U.S. 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 million 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 U.S. planned contributions over the next 5 years, and we reduced the overall pension liability by approximately $750 million in the U.S. plan. Phase III execution has begun and will continue over the next 2 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'm 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 the 2-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 U.S. executive nonqualified retirement plan. We also completed an early retirement offer through the U.S. pension plan that to date has been accepted by approximately 400 U.S. employees. This will drive operational savings to the company. We planned future actions to include a lump sum offer to certain U.S. 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 U.S. qualified plan. We also plan to pre-fund and or order wind up one or more of our international plan and to pre-fund the U.S. plan to further reduce interest rates and funding risk. Finally, as part of Phase III, we have implemented mark-to-market accounting effective January 1, 2013. As a result, we have revised our prior year GAAP results included an additional schedule with our Q1 2013 earnings release. That's Schedule B. 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 mark-to-market accounting. This change is being implemented effective this quarter. Under mark-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 noncash charge. Under our historical practice, these differences will differ and amortize 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 will show how the various measures have changed for the last 3 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 U.S. 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 2 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 2 years. Under mark-to-market, we expect a 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 onetime action, 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 2 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 cost 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 2 years will have an even more meaningful benefit. We will continue to seek to reduce volatility, de-risk 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] Our first question comes from Katy Huberty with Morgan Stanley.

Could 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 for the last couple of quarters? Is that legacy investments or is that investments ahead of the branch automation opportunity?

It's the latter. We're making investments largely in branch transformation, Katy, as well as software. And the services investments we started back in Q3 of 2012, they'll continue on through the remainder of this year but become incrementally less as Q2, 3 and 4 unfold.

Okay. So if the branch automation revenue comes through, which it sounds like could be as early as the back half of the year, you would expect that the 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, is small in comparison to the total. But that is a more margin-rich environment because it's more software involved in that selling process and ultimate solution, and it's more services. Kenneth S. James - Sterne Agee & Leach Inc., Research Division: Okay. And then just a quick follow-up for Bob. Just to be clear on the guidance, the higher NPOI and EPS guidance includes the $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.

Next question comes from Paul Coster with JP Morgan. Paul Coster - JP Morgan Chase & Co, Research Division: It feels like you are moving into different segments of your traditional markets with 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, whom you now run up against and whether you sort of perceive yourself as the aggressor or the defender in that competition?

Well, I think, the -- Paul, 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 a very 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're still quite well positioned there. We're the #1 market share leader in hardware for ATMs and software for multi-vendor ATM software, for services in terms of services attached in our services business. So we're quite well positioned in the legacy space. And the positive aspect of branch transformation is 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've been working with several customers now for a long period of time on innovation in this space, large customers, as well as medium-sized customers. And so we feel good about the space overall. And we really feel excited about software and SaaS going down to market to the 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 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 Tec, 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're the aggressor in those 2 markets. Clearly, Hospitality, we're the aggressor and have a great position in the U.S., and we need to prove that internationally where we're #2. And that's really our goal is to take this wonderful and powerful solution we have, that again is software-intensive, out to the international market and in down-market effectively. In the other spaces, travel is going well. TNT has -- we have work to do there. I won't comment much on those due to 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 to be done there, but that's a new market opportunity for us. We now have well over 1,100 customers and growing quickly by the day, and that is a new segment that we feel we're well positioned for overall. So we're quite diverse. We have many different competitors across the board. We're now software-led, if you will, in those markets. And yes, there are more competitors we're dealing with, but we feel we're in a great position. Paul Coster - JP Morgan Chase & Co, Research Division: Okay. A quick follow-up. Bob, the guidance for the remainder of the year has been raised a little bit but by not much more than you've beaten by here. And well, my senses here being very conservative, what's your response to that?

Well, again, some of 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 viewed that as pretty significant. Again, from my perspective, the 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.

Next question comes from Meghna Ladha with Susquehanna.

In Financial Services, it came in above our estimates despite half year-over-year comps. How should we think about growth in the segment the next few quarters?

Yes, I think you should think about growth in Q2 -- in Q2, it's going to be a challenging quarter for us in terms of growth, again, because it's the most difficult quarter we're facing in terms of compares year-on-year, particularly in the U.S. 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 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 U.S. base mainly would begin to ease a bit. So I think the back half is going to be a better half for NCR and help us to achieve our guidance of 2% to 4% growth.

Okay. The next question is regarding FCPA. I don't see it in the press release. Bill, can you provide us with an update as to where we are with respect to the FCPA?

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.

Next question comes from Ian Zaffino with Oppenheimer. Ian A. Zaffino - Oppenheimer & Co. Inc., Research Division: I know you indicated that in Financial Services, the U.S. was down. Can you give us an order of magnitude how much that was down and maybe how much non-U.S. was up?

North America revenues were down around the mid-teens. I think it was around 15% in North America, and the rest of the world made up the difference for us, Ian. 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 U.S. being down a bit. Ian A. Zaffino - Oppenheimer & Co. Inc., Research Division: Okay. And then on the self-checkout, you also alluded to just 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 that 178% pace, although we'd like that year-on-year. But we don't expect that in the forthcoming quarters. We do expect to have a great Q2, 3 and 4 in that space. Ian A. Zaffino - Oppenheimer & Co. Inc., Research Division: Okay. And then the final question would be -- and 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, the pension. You're pretty much done with Phase III of the pension. You've 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?

Well, right now, one thing we have done well, Ian, and we're disciplined in this way is that we've kind of had great balance of focus here on legacy issues and growth initiatives. Right now, we're digesting our Retalix and integrating that. We're finishing the integration of Radiant, and I want to make sure we'd do those both well. And by the way, in doing them well, we'll 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've done so far vis-à-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 spend hours per week on this making sure it's done properly as do many tens of people at NCR. We're also dealing with other legacy issues that you may not see but do impact us, like the U.S. severance changes, so you're aware. As you well know, we traditionally have used FAS 112 as an accounting mechanism for severance accounting in the U.S. It's an old AT&T legacy vestige of the past. And now we're moving away from that in the U.S. And 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 using FAS 112 to amortize the cost of that severance over a 7-year period. So there are lots of those little -- they're not so little, but legacy issues were getting behind us. We are turning into rapidly a technology company and putting these legacy issues behind us culturally and otherwise helps us 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 a 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 will 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 issue like pension. We look at everything and examine what's in the best interest of the shareholder and we make a decision.

The next question comes from Matt Summerville with 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 that -- we should be thinking about that mix shift?

Well, if you remember, Matt, going back many years, we used to think about 70-30. I don't know what that is today, but I can tell it 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, Matt, because historically we would have had that at our fingertips. But now that we move more toward 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. And then Bill, can you maybe talk more about just ATM demand more focused on emerging markets. You hit on the U.S. I'd like you maybe just to touch on Eastern Europe, Russia, you mentioned China being strong and sort of what you're game plan is, your next move in Brazil as the Bradesco shift has fully anniversary-ed a quarter or 2 ago.

Yes, the -- and I'll have Peter kind of weigh in here as well. But my high-level perspective for you, Matt, 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 U.S. 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 timeframe, 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.

Matt, 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 and 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 the models may be different. But that market is still moving forward and something that we've 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, 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 business, both direct and through partnerships. We're in 180 countries, and that's something that served us very well and obviously helped our balance in Q1.

And 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 make sure I got this right.

And which year are you referring to, Matt?

I'm looking at 2013. Pre the move away from FAS 112, what would your severance expense have looked like, so if you were still amortizing it, versus the go-forward expenses incurred. I'm trying to understand the total change here.

I'd say it probably would have been between $150 million, $170 million. So if we hadn't made a change, that's what you'd be looking at.

And then what are we looking at now for the full year?

Well, on a run rate, you're looking at $20 million. And then we've included in the reconciliation that our forecast for pension expense this year, including the 2 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 the reconciliation between GAAP and non-GAAP, so think of it as a $20 million run rate and then impacted by a specific onetime transactions, like the termination of the executive plan and the ERO.

But that doesn't impact severance, right, Bob? I'm asking about what the severance expense would like.

I'm sorry, I thought you were asking about pension.

We're so focused on pension.

What with FAS 112 had been?

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

Next question comes from Julio Quinteros with Goldman Sachs.

It's Roman Leal in for Julio. I guess, first on the ATM backdrop, your competitor was out there today speaking about potentially changing their pricing structure, not clear whether that was domestically or across the board. And just curious, how much does pricing differ between you and your competitors domestically and across the board, I guess, globally in your ATM business?

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 and different markets that are more pronounced as it relates to your certain markets. So when we look at the business across the markets, there are different pricing structures and different competitive elements that we're seeing. So I think it is important that we leave it at that at this point. The discussion that we had this morning, we'll go back and take a look at the impact, but we're not looking at doing something comparable at this time.

Sure, that's helpful. In your Retail business, when you strip out Retalix and I just kind of look at the -- 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 is kind of your confidence in organic growth mostly driven by the self-checkout side of business?

Well, let me answer the question that Matt asked first, this way you'll have that 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 is 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're focused a great deal on that.

Our last question comes from Gil Luria with Wedbush Securities.

First of all, a very interesting announcement on Aloha Mobile. If you wouldn't mind giving us a little bit more details, when you launched it, is it a 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 then 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?

Okay. First, on Aloha Mobile, obviously, we're all well aware of the movement towards tablets and mobile devices as a means to check people out or in depending upon the industry you're in. And in Aloha Mobile space, we've mobilized the application. That announcement came in Q1. We're beginning to roll it out. We're having great success, by the way, in initial rollouts of Aloha Mobile so far. You're right to point out that Silver is also a point-of-sale mobile application but not in Hospitality. It is mainly for retail, small and really small business retail, if you will, the mom-and-pop store 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 U.S. for a few larger 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 -- go ahead, is that Peter?

Just one other comment on Aloha Mobile. In contrast to Silver, it is 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.

But just to clarify, Silver is a mobile-hosted solution retail. Aloha Mobile is an extension of your existing point-of-sale for ordering. It's not a stand-alone restaurant POS hosted on mobile.

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

Gil, it's John Bruno. I think I want to see you next week or in short, I'll take you through this in more detail. But I'd like to think about it as an application site similar to the way in which you think about our Hospitality business. And our teams sells it, as such to Peter's point, as an extension of 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, et cetera, 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 skinny-ed down for the much lower tier market.

Okay. Thank you all for joining today. This is a longer call than the 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 in July. Thank you.

Thank you for your participation in today's conference. Please disconnect at this time.