NCR Voyix Corporation (VYX) Q2 2013 Earnings Report, Transcript and Summary

Good day, everyone. Welcome to the NCR Corporation Second Quarter of Fiscal Year 2013 Earnings Conference. [Operator Instructions] At this time, I'd like to turn the conference over to Ms. Tracy Krumme, Vice President of Investor Relations. Please go ahead, ma'am.

Thank you very much. Good afternoon, and thanks, everyone for joining us on our second 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 the conference call will also be available later today on our website, ncr.com. For those listening to the replay of this call, please keep in mind that the information discussed is as of July 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 future 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 Slide 3, key takeaways for Q2. Let me kick it off with a perspective on how we're doing against our reinvention goals at NCR. We're doing a nice job internally. The team is doing an excellent job of delivering good execution on an aggressive plan, vis-à-vis, our vision for the future of this company, and I want to congratulate the team on that. Some of the key takeaways for the quarter that would lend itself to giving you confidence we're executing well to our strategic intent would first be our strong software growth in the quarter, inclusive of a solid quarter on SaaS growth as well. We don't use PS, as a factor in our revenue growth with software, but our PS business also had a terrific quarter. And you need to remember that our PS business is primarily in place to deliver software. So we don't add it to our revenues, but we had very solid quarter in PS. And as a standalone software company, this is a big software company today, and we remain on track to achieve our goals of this year and to 2015. In terms of new markets and adjacencies, we're doing well. The diversification of our revenue stream now gives us great balance, depth and breadth across a number of industries, geographies, as well as channels to market. We did have a great quarter in Hospitality, this quarter in particular, we'll talk more that, and Retail, inclusive of very solid results from Retalix. Software and services were the key components to our growth there, but generally speaking, those 2 businesses combined with services did a fantastic job in Q2. Services revenue were up significantly again driven by PS, Professional Services, up 52% year-on-year. And in that context, Retalix contributed significantly to that growth. And we continue to do a good job balancing these growth initiatives with legacy issues we're facing. We have not updated you recently on CI, or our continuous improvement, efforts, but we're doing quite well there. We'll achieved our goals for the year of over $100 million in cost savings. We will generate enough to reinvest half of that back into the business. And all of that's leading us to become a more efficient, productive, higher-quality company at lower cost structures. And we'll talk more about pension. Bob will address that in more detail, but we're doing well. And with regards to pension, Phase 3 is underway. Next slide. Okay. Here are the key metrics for Q2. Solid revenue growth, up 9%. I'm very pleased with gross margin expansion in the quarter, up 160 basis points in the quarter, very, very solid. And again, on the back of software growth in particular, but we also had good core gross margin expansion outside of some of the inorganic things that we've done. And all of us are pleased with the NPOI margin now reaching a record level of nearly 12%. If you look at the next chart, why? What was some of the underlying solid key issues we faced in each one the businesses that drove that. Let me start with Financial. First, we had a good quarter in Financial when you take away the impact of the U.S. market. I think what obfuscates this quarter is the fact that the U.S. market continues to be under duress and I expect that to be the case until around Q4. We'll talk more about that in Q&A, I'm sure. But we had great growth in markets outside the U.S., particularly China, India and also, Brazil. So net-net, I think the U.S. marketplace is, again, a bit of an issue for us, we'll talk more about, but I feel good about what I'm seeing, vis-à-vis, the order book in that market coming into Q4. Software is growing in that space, and we continue to gain share. And we are seeing more momentum in branch. So we'll talk more about that as well. Retail had a great quarter, again, on the back of excellent performance from Retalix. Operating income performance is solid, and that's basically the great quarter for self-checkout, as you would expect. And again, a balanced geographic performance across all key markets. Hospitality. I can't say enough about the performance of this business in the quarter. I'm really pleased with where we are. Our revenue is up 22%, again, driven by software and SaaS. And we continue to have a strong channels base here. SMB is doing quite well. Okay. Onto emerging. You kind of know the story here. The Emerging Industries are down 5% as expected, and I have to say, I do like what's going on in some key markets here, like travel. So I'm happy with where we are, but we need more focus on key emerging spaces in travel and T&T. Okay. Retalix, doing quite well. I talked about Retalix earlier. I do like what's going on in the business. I feel good about revenue growth, operating income and, I will say, good key wins in the quarter. So we'll talk more about this in Q&A. Q2, solid quarter, great growth, good diversity, solid expansion of the margins and good solid integration efforts for Retalix. Peter?

Thank you, Bill. As Bill mentioned, our solid performance in the quarter was driven by strong growth in Retail, Hospitality and Services, as well as steady results in Financial Services. We continue to ramp our software and SaaS businesses, which amounted to 12% of revenue in the quarter. Customer activity and our sales funnel remain robust as our innovative solutions in software offerings continue to provide competitive differentiation, drive sales and yield tangible business process efficiencies for our customers. During the second quarter, our strategic focus remained centered on omni-commerce opportunities with our customers. Today's consumer is intuitively turning to their smartphone or tablet as a means to interact and transact, and this is driving change in the businesses that serve them. NCR has invested ahead of these consumer behavior shifts and is developing and deploying critical solutions and software applications that allow our customers to empower consumers. In a world where omni-commerce interaction is becoming increasingly critical, we are advancing innovative transaction technologies across each of our verticals, and enable business growth and make every day easier. Starting the business review with the Financial Services. Q2 revenue was down 1%, coming off a strong 7% growth in the year ago quarter, with growth in Asia and Middle East-Africa, offsetting a decline in North America. Results reflected adoption of our branch transformation solutions, which make conducting transactions easier for consumers, while also optimizing our customer's branch operations. In fact, branch transformation solution revenue increased 136% over Q1 this year. We reached agreements with over 20 new APTRA Interactive Teller customers in the quarter, including multiple international commitments. Q2 Financial Services software revenue grew 3% year-over-year, faster than our overall business in the segment. We continue to generate customer wins with our APTRA multivendor ATM and multichannel software solutions. We remain the #1 ranked global provider of multivendor ATM software according to our RBR's Multivendor Software 2013 report. In addition, NCR's APTRA Passport for mobile check deposit solution secured more customer wins in the quarter, bringing mobile convenience to financial service consumers. One of these wins was ING DIRECT, who was making Passport available to its customers across all major smartphone and iPads, as well as tablets running Windows 8. More financial institution ATMs in North America and Middle East-Africa rely on NCR's APTRA after software suite than any other provider. Our Scalable Deposit Module, SDM technology, also continues to provide unmatched value for our customers. SDM allows for the deposit of checks and cash simultaneously in any orientation through a single deposit slot. Dollar Bank is replacing 60 older non-NCR ATMs with NCR's SelfServ ATMs with SDM as it looks to provide consumers with an improved deposit experience. Our team continues to focus on helping our customers to meet the challenges facing their business. An example is our response to Microsoft's decision to terminate its extended support of Windows XP Professional in April 2014. Financial institutions of all sizes are facing critical decisions concerning the migration of their installed ATM fleets to Windows 7. NCR is responding by designing a range of options for customers that will migrate their ATM footprint through a pathway that best meets their distinct business requirements. Turning to Retail. We reported strong results with revenues up 26% in Q2. This top line performance includes Retail software revenue growth of 111%, which helped drive strong profit margin expansion. We also continue to generate strong self-checkout revenues. We are highly enthusiastic about the potential for our Retail business in 2013 and beyond. Retalix plays a big role in that optimism. Retalix operates more innovative omni-commerce software platform available today and greatly strengthens our Retail portfolio. The integration of Retalix is on target, and the business is performing above our expectations and gaining new customers, including Petro-Canada, which selected our store point point-of-sale and fuel management software and South Africa's Massdiscounters, which chose our transportation management software. Our Retail innovation extends beyond Retalix, as we continue to execute our small business and self-checkout initiatives. During the quarter, we announced the strategic alliance with Vantiv, the third-largest merchant acquirer in the United States, serving nearly 400,000 merchant locations. Together, we will focus on bringing integrated, all-inclusive, point-of-sale and payment processing solutions to small and medium businesses. Greatly increasing the reach of NCR. This relationship began with the introduction of Vantiv Mobile check out powered by NCR Silver, which provides small business owners with a complete solution to manage sales, inventory and marketing. We have steadily increased the value proposition of NCR Silver as we look to empower small business owners with advanced solutions that make running their businesses easier and provide transaction technologies that give them competitive differentiation. Self-checkout remains another important growth driver for our Retail Solutions business, and we remain strongly positioned in this category. RBR's most recent report named NCR the world's largest supplier of retail self-checkout technologies with a 70% share of global shipments in 2012. Our Hospitality vertical continues to generate strong growth. Q2 revenues increased 22% year-over-year with year-over-year SaaS revenues and application sites up 36% and 31%, respectively. Overall revenue growth, including growth from software and SaaS, led to strong NPOI margin expansion. During the quarter, we made significant progress, advancing our SaaS and innovative mobile e-commerce hospitality solutions. Our SaaS-based Pulse Real-Time smartphone app continues to secure market adoption at Shake Shack locations and Hybrid Dining, a U.K. Burger King franchisee, joining the 5,500 other restaurant locations that utilize this software. Restaurant operators are driving strong activity with this solution as they recognize its ability to provide realtime insights into operational performance and help secure efficiency gains. Our digital signage technology is gaining additional traction in the restaurant space with Dunkin' Donuts implementing our High Definition NCR Vitalcast solution at locations across the U.S. Digital signage helps restaurant operators, engage consumers and bringing their menus to life, with visually compelling animations and messaging, including nutritional information, limited time offers and brand advertising. In our Emerging Industries, Q2 revenues decreased 5% year-over-year, as expected. The comparisons continue to reflect partial reduction of a large customer contract that we have talked on our recent calls. Despite this, during Q2, we successfully advance both our travel and technology and telecom businesses. In travel, China Southern Airlines agreed to deploy NCR TouchPort kiosk across 10 domestic hub airports. In addition, in early July, Copa Airline, a leading Latin America provider of passenger and cargo services, agreed to launch a suite of NCR travel-based solutions, including an NCR developed iPhone app, the NCR APTRA eMarketing platform and NCR Web check-in software. Our Technology and Telecom business signed a master service agreement with the North American Communications Resource, NACR, to provide complimentary support, maintenance and managed services when implementing unified communications solutions in North America. We believe the partnership will expand our telecom and technology service offerings and help drive future growth. In addition, during the quarter, we signed master service agreements and expanded our relationships with a number of noteworthy global telecom providers. We have expanded our offerings to include storefront solutions, digital signage and SIM dispense, which have been recently showcased in Europe, the Middle East and Asia, with great response. Finally, our services business continued its strong performance with revenues up 13% during the quarter as professional services grew 52%, consistent with our strategy of being a leading global provider of software and SaaS application. In April, we received recognition from Gartner as the global market share leader in retail IT services product support, being ranked #1 for the fourth consecutive year demonstrates NCR's unwavering commitment to being a leading global services organization. In summary, during the second quarter, we drove strong results across the globe. Our success is powered by our continued investment in advanced consumer transaction technologies that deliver value and differentiation for our customers. Our focus on growing software, SaaS and services revenues, expanding into new markets, and adjacencies and balancing growth initiatives with legacy issues is driving strong and consistent profitable growth and shareholder value. We entered the second half of the year enthusiastic about our ongoing reinvention. I will now turn the call over to Bob.

Thanks, Peter. NCR's total reported revenue in the second quarter was $1.54 billion, up 9% versus Q2 2012 and up 10% on a constant currency basis. We reported GAAP income from continuing operations of $86 million or $0.51 per diluted share. This compares to GAAP income from continuing operations of $89 million or $0.54 per diluted share in Q2 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 $0.68 per share in Q2 2013 versus $0.65 in Q2 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 material 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 Q2 2013 gross margin was 28.9%, compared to 27.3% in the prior-year period. This 160 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 17% of revenue in the second quarter of 2013 compared to 16.4% in the same period last year. The company continues to invest in sales and R&D. Non-GAAP income from operations or NPOI was $182 million in the second quarter compared to $154 million in the prior-year period, an increase of 18%. Second quarter 2013 segment operating margins were as follows. Financial services increased to 12.1% versus 10.9% in the prior-year quarter due to lower service delivery costs and reduced selling and research and development expenses in the second quarter of 2013 compared to the second quarter of 2012. The lowest service delivery costs were primarily due to our reimbursement from a supplier of some previously incurred costs. Retail Solutions increased to 9.5% from 6.8% in the prior-year quarter, mainly due to a favorable mix of revenue, including more software and the inclusion of the Retalix business. Hospitality increased to 17.1% from 16.2% in the second quarter of 2012, primarily due to a favorable mix of revenue, slightly offset by investments in SaaS, sales and R&D. Emerging Industries decreased to 13.8% from 22.6% in the second 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 $29 million in Q2 2013, which is mainly related to interest expense. Income tax expense was $23 million in the second quarter of 2013 compared to expense of $28 million in Q2 2012. Excluding the effect of pension and nonrecurring items, the second quarter of 2013 effective tax rate was 25% compared to 26% in Q2 2012. NCR's full year 2013 effective tax rate is expected to be 26%. Turning to the balance sheet, cash on hand at June 30, 2013 was $460 million, down from $483 million at March 31, 2013. The decrease in cash was primarily attributable to an $80 million pension settlement payment that we made to the U.S. nonqualified pension plan during the second quarter of 2013. Total debt was $2.16 billion at the end of Q2 2013 compared to $2.09 billion at end of March 2013. Moving to the cash flow statement, NCR used $32 million of cash and operating activities in Q2 2013 compared to $31 million of cash provided by operating activities in the prior-year period. Excluding the $80 million pension settlement payment that we made to the U.S. nonqualified pension plans during the quarter, free cash flow was a cash outflow of $21 million in Q2 2013 compared to a cash outflow of $41 million in the prior-year period. The decrease in free cash used was positively impacted by improvement in operating results period over period. 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 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 guidance and providing an update on Phase 3 of our pension strategy. The revenue guidance for our lines of business has not changed from our previous guidance provided during the Q1 earnings call. The guidance for our lines of business include services and is on a constant currency basis. In Financial Services, we expect revenues to grow towards the lower end of the 2% to 4%. In Hospitality, we expect revenues to increase towards the higher end of the 15% to 18%. In Retail, we expect revenues to rise towards the higher end of the 22% to 25%. Excluding Retalix, Retail revenues are expected to grow 7% to 9%. In our Emerging Industries line of business, we expect revenues to be up 3% to 5%. We're also reaffirming our previously issued overall GAAP and non-GAAP guidance. In terms of total revenue, we expect 9% 11% growth on a constant currency basis. Our 2013 NPOI estimate is $700 million to $720 million, and our non-GAAP EPS guidance is $2.70 to $2.80. For Q3 up, we expect NPOI to be in the range of $175 million to $180 million, a growth of 14% to 18% year-over-year. Additionally, we expect the Q3 effective tax rate to be approximately 27%, and other expense net, including interest expense, to be approximately $25 million in the third quarter. Turning now to an update on Phase 3 of our pension strategy. I've included 2 charts at the end of Bill's presentation that might be helpful. Please see Slides 9 and 10. We announced our Phase 3 pension strategy last quarter, which will involve a number of initiatives to be completed by the end of 2014. As you can see on Slide 9, we have a number of financial goals that we plan to achieve, which should 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. On Slide 10, we have a summary of the key initiatives and an update as to where we are today. You will recall that in Q1, we terminated our supplemental executive retirement plan, or SERP. First round payments were made in June with final-round payments scheduled for Q2 2014. This has reduced our global underfunded pension from $468 million coming into 2013 by approximately $95 million. Additionally, we completed an early retirement offer through the U.S. pension plan, which has been accepted by approximately 400 U.S. employees. We are progressing on track with other lump sum offers to certain U.S. deferred vested participants not included in the 2012 offer, as well as retirees in the U.S. qualified plan subject to any regulatory approval. We also have plans to pre-fund 1 or more of our international plans and to pre-fund the U.S. plan to further reduce interest rate and funding risk by year-end 2014. To that end, we just completed refinancing our credit facility, which raised an additional $300 million, $80 million of which was used to pay down the Q2 draw on our revolver for the SERP termination. We expect that additional contributions to the U.S. plan will follow before the end of next year. Lastly, as you know, we implemented mark-to-market accounting in Q1. We believe this change increases the transparency of our pension accounting. We are dedicated to removing pension as an issue for our investors and are proud of the accomplishments we have made thus far. We are on track with where we intended to be, and believe the work we have to do over the next 1.5 year will drive more meaningful benefits as we continue to seek to reduce volatility, de-risk the balance sheet and make the company easier to understand. And with that, I will open up the line for questions.

[Operator Instructions] We'll go first to Paul Coster with JPMorgan. Paul Coster - JP Morgan Chase & Co, Research Division: Bill, you mentioned that you got pretty good visibility into some kind of stabilization or growth in the Financial Services sector in the fourth quarter. Can you also talk about -- well, can you talk about that? And also this branch transformation, can you give us a little bit of color around where that's headed and as we look into 2014?

Sure. First of all, right now as we can see, Paul, today, we'll have, starting in Q4, I believe, begin to grow the Financial Services business yet again on the order book side of things. And, hence, improve our backlog position a bit going into 2014. By the way, our order book outside of North America is actually okay in this business. And the return to growth will come from seeing improvement in North America, particularly the U.S. Branch transformation will play a key role. In that, we had a good quarter in Q2, solid growth as we noted on Slide 5. And by the way, that's sequential growth over Q1, not year-on-year in that business. We're on track to hit the targets we have given you before in that business of around $80 million to $100 million in revenue this year. And I suspect 2014 is a move from, if you will, pilots to production for a number of our customers. And I suspect that in 2014, that business will grow to about $200 million in total revenue right now. Now, it could be a somewhat less than that or more than that, depending upon what happens the next 5 months, relative to some of these pilots we have going on. But again, I'm very encouraged with what I see there going into 2014 and '15. Paul Coster - JP Morgan Chase & Co, Research Division: My impression on talking to the Chase guys is that we're moving beyond pilots to, actually, implementation now. But I still don't quite know how to connect that to NCR's prospects. Can you give us some sense of what the real revenue items are for you that kind of derive from branch transformation? Is it a complete overhaul? Is it 1 in 10 terminals? Is it a higher value terminal, et cetera?

Well it's actually a completely different branch format, Paul, that banks who are looking to deploy than you would currently see today in the marketplace. Different kinds of branches, different formats, different sizes, and using technology more effectively to, if you will, to migrate high-cost low-value transactions through an automated device, but also free up the teller or the bank employee to spend more time with customers. I would say that if you look at the facts right now in the U.S., there is about 80,000 branches in the U.S. There's about $205 million -- billion spent annually in fixed costs around real estate and labor for branches. And so the opportunity for banks is obvious. It's to reduce that cost substantially, but the play is actually not just cost reduction. For them, it's around revenue generation. As you know, fewer people are going into bank branches. They're having a higher cost per transaction in the branch today, and we can help on both sides of that equation with our software and hardware solution set. And so the marketplace is actually quite large. It's quite substantial, not just in the U.S., but outside the U.S. Did you want to add anything John?

Sure. Paul, it's John Bruno. I'd say the way that I'd like you to think about it is, you typically think of NCR as a drive-through or a vestibule or an ATM piece of technology. But as Bill pointed out, the capital expenditure to really revamp the customer experience in branch in various different formats, smaller and larger, is really with displays. So we have offers now in everything from professional services capabilities and assessment to helping with the actual design of the facilities, the digital signage integration. And in addition to the machines we offer, which are the ones that you traditionally would understand, but also the net new machines, which could be cashless or a contact-based devices that are for other net new transactions that may not even take cash and/or check may handle bill pay or online issues because that's, as team, it was in the bank, that you're describing has done an excellent job in thinking about how it is they're dealing with customer acquisitions. They're trying to deal with a consumer that's starting transactions online, on mobile and potentially finishing them or starting them in the store finishing them online. So this technology is manifesting itself in a variety of net new products and services, which are software-based, professional services based, consulting based, as well as the machine types and then a whole net new variant machines. And my last point there is because not only the ATM transactions and off loading a piece as Bill talked about, but everything that sits behind the counter that is facing a teller today is being revamped to more contemporary architecture. And to get greater utilization, we're working with the retail branches to make that convertible. There's no reason that all that fixed-cost asset that's for the past decade has been purely just teller facing, can't be both teller facing and consumer facing in low-peak hours. So that is a complete rethink of the way in which a consumer engages in a retail experience than a bank branch. And so it hits every element of our P&L space beyond just the hardware.

And one more thing, Paul, this is not only about putting a bunch of $1 and $5 bills in a cartridge and putting it in an ATM in the branch. This is about dealing with workflow issues in the branch, choreography between employees and customers. There's a lot that's going into branch transformation that John spoke about holistically, and we're involved in every piece of that puzzle from consulting to implementation of that kind of a solution. So what you're seeing today is more around putting an ATM-like function in the branch rather than dealing with the high cost of workflow in the branch, which is what we're tackling. Now we're doing both, by the way. We're putting ATMs with video interfaces in branches. We're doing what everyone else is doing along those lines, but what we're doing is quite unique in that, ultimately, we're going to change the way the work process and workflow is designed for banks and branch banking.

We'll hear next from Katy Huberty with Morgan Stanley.

Bob, I was surprised to see the Financial Services margin up given the mix shift outside of the U.S.. Can you just quantify the one-time reimbursement were the margin and the profit dollars up, even excluding that reimbursement? And if so, what's driving that?

Yes, what we've tried to do with financial as we saw that the difficult compares from last year in North America from a revenue perspective and looked into kind of Q2 and Q3 of this year really focused on the expenses in that business and the costs. So we've gone after the sales, the R&D. We've looked at margin, we've looked at continuous improvement within financial, and really tried to optimize the operating margin as best we could. And so, you'll remember, Katy, back at the Analyst Day, we talked about financial service operating margins for the next 3 years would be somewhere between 11% and 13%. Last year, we finished at 10%. In Q1, we were at 8%, which is typical for that financial line of business then up to 12% here. I still think we'll settle in a range that shows something between 50 to 100 basis points of operating margin for 2012 -- for 2013. We'll continue to be very, very focused on not just the top line, but also the operating margin. We did have some reimbursement of costs, but I think primarily what you saw is just good focus on cost containment and expenses in the quarter. Again, I don't want to paint a picture that says it's 12% for the balance of the year. And that's why I temper it with something between 50 to 100 basis points of improvement in financial. And then as Bill alluded to, as the financial revenue starts to ramp next year, especially with the higher-margin branch transformation business, that's when things start to get more interesting in Financial.

Yes, Katy, I add 1 thing on this topic. We're going to invest more in Q3, Q4, in particular, in R&D. We have to get behind our branch transformation solutions with a bit more heft in investment. Some of that will be recycled from other areas. Some will be net new. And so that will have a negative impact on operating income margins in the back half of the year. But to Bob's point, we expect to see an improvement year-on-year in that business regardless, because we are -- I think we always been quite good. When we hit the brakes, because we see what's coming, we have great visibility in terms of what's coming. We hit them quickly. And I think operationally, in a sound way.

Got it. So some margin expansion this year and then if the revenues grow next year, you could see a little bit more in 2014?

It's revenue and mix, right. Next year, it will be revenue growth and mix story given branch transformation is a higher-margin solution. And we expect to have more software next year in the mix as well in PS, as we roll out some of our new solutions in software.

Okay. And then just a follow-up on the Retail business, the 6% growth x Retalix. Obviously, much better number than where you're tracking last year but it was down from the 27% growth, I believe, last quarter. Is that just a difference in timing of Walmart self-checkout orders that showed up in the first quarter and not as much of that in the second quarter? Or what else drove that deceleration?

Yes. By the way, on that point though, we did have a good quarter year-on-year in self-checkout. As noted on Page 5, the orders are -- the revenue is was up 33% year-on-year. But with the order book, the self-checkout was also quite good in Q2. So I was pleased with that. It was up over 30% year-on-year in orders in Q2. So it did not slow down tremendously and it was a mix of customers, it came from not just 1.

And Meghna Ladha with Susquehanna has our next question.

So today, you're raising retail guidance at the higher end of your guidance that you had given back in Q1. If you look at Retalix, it was about $50 million in Q1 and about $82 million this quarter. If you assume a similar run rate in the second half, you get to about $295 million, which is above the $250 million to $260 million guidance for the year. So can you help us understand some of your assumptions behind your Retalix guidance for the year?

Mag, I think we're being conservative right now, to be very candid with you. We own this business for a quarter and half. We have a lot to learn before we are as comfortable as we are with the rest of NCR, vis-à-vis, guidance, to take it up. But right now, I would not be surprised if they did come in that range. However, it's too early to call, and we just simply don't know enough yet.

Okay. And then with respect to self-checkout, it was another good quarter, but excluding Walmart, Bill, can you talk about some of the discussions you've been having with other retailers who want to adopt this similar model?

Yes, I'm encouraged with self-checkout. As I said, we had a good order book in Q2. It was a mix of customers from around the world. Australia, Europe, U.S., so it was not 1 customer in particular that drove our success. Orders the size of Walmart however, are difficult to repeat. However, I do think we are having substitutive discussions with a number of customers that could be equal to that size over the course of the next year. So I remain enthusiastic about the general global acceptance of self-checkout and what that means to our balance and continued growth. And then, these large customers who are beginning to move to NCR as a platform for self-checkout and could close in the same kind of range that we saw at Walmart over the course of the next 2 quarters.

We'll hear now from Ian Zaffino with Oppenheimer.

It's Tom Narayan for Ian. I guess piggy backing on the last question on guidance and you guys are saying you're being, I guess, conservative. Is there anything specific to this quarter may be that's causing you not to maybe re-evaluate or raise guidance like you did last quarter?

Well, my comment was specific to conservatism with regards to Retalix. But relatively speaking, I'd say the 1 caution flag that I'm keeping my eyes closely on is North America Financial. As I said, we have had great success in financial generally outside of the U.S.. The U.S. remains slow. We were down 17% year-on-year in revenue in the U.S. marketplace, in financial. It was the key issue for us. We're the only thing not humming at NCR, is North America Financial. Now the good news is the diversity of this company today is so vast, we can withstand this kind of a hit to our overall revenues and profit. When that business gets going, the leverage is enormous on our P&L. So I'm watching that closely. That's why I wasn't as open to raising guidance right now.

Okay. And on the credit facility raise on Friday, I guess you said you put $80 million of it towards re-upping the revolver. What was the rest of it for? Is it just general kind of corporate reasons or is there anything specific?

Yes. I would think of it as primarily for Phase 3 pension. So it could be international pre-fund, it could be a U.S. pre-fund. We're working through the different options, but think of it as Phase 3 pension.

We'll hear next with Dan Perlin from RBC.

Since Financial Services is bifurcated right now, where you've got something a lot of growth outside the United States and then North America, obviously, was down. Can you just remind us, kind of what the mix in that segment is, North America versus rest of the world? And then also can you just remind us kind of the recurring piece of that business for maintenance? How much of that is?

Yes. In North America, I don't think [indiscernible] guess on this, but I think it's.

We'll get you that. In Q1, U.S. was 25% of Financial revenue. In Q2, it's 20% to 25%.

In that range.

So it shows the diversification that we do have internationally.

Okay. So 25% U.S., everything else is rest of the world. And I want to remember like almost half of the division is tied to some sort of either recurring maintenance or other services fee stream, is that accurate or is it changing a little bit over time?

About half the revenues in Financial are services driven. So some of that is customer services, some of that is professional services. Most of it's actually [indiscernible] customer services business.

Okay. So when we talk about the down 17% and then going into the fourth quarter with the order book picking up, we're really talking about really 1/4 of that division and then some of that really is recurring, so it's a little bit less than that. So that -- I'm just trying to get a sense of magnitude to turn it in your favor, so to speak.

Yes, I think the best way to think about that, Dan, is to think about that, again, right now, as we look at all the cylinders of this car, that's the 1 cylinder not hitting, is North America Financial. It does represent 1/4 of our business. You can think also about 1/4 of our maintenance business as well and attach on that business. Generally speaking, I think it has a meaningful both the topline growth but also margins. If the U.S. National Bank, small bank segment gets going, it can have a meaningful impact on our overall gross margin and net margin in that business.

Got it. And then just a question for Bob, I'm often kind of wondering this quarter was not all that dissimilar. Why not -- why can't the business generate a higher cash flow conversion rate? Is there something embedded with just the pension accounting that runs through everything that makes it that much more challenging? Or I just have a hard time dissecting that. So any kind of light would be helpful. I mean [indiscernible] cash flow.

A lot of it is we build inventories and working capital to deliver a big Q4. So historically, what we've seen is a lot of our free cash flow comes in the fourth quarter of the year. As hard as we try to smooth that out, and believe me we try, it just so happens that because of the way our revenues flow, a lot of that free cash flow happens in the fourth quarter. The pension contributions, you're right, are pretty steady at throughout the year, so that doesn't help. But that's primarily what you'll see if you look back over the last couple of years.

Okay. And then just 1 last 1 on Hospitality and kind of the demand, can you parse that a little bit in terms of where the pockets are? Historically, you've seen a lot of really good growth in the large chains, QSR in particular. And I'm wondering is that still your sweet spot? You mentioned a little bit in the smaller restaurants, so I'm wondering if you're seeing share gains also in more table service?

Yes, first of all, Hospitality had a great quarter in terms of balanced performance across key geographies. So we had a great quarter in the Americas, the EMEA and APGA. So balance is solid. Secondly, if you parse out the business channel, SMB, for us, small and medium business, had a terrific quarter as noted on Page 5, and that was up almost 40% year-on-year. And so small restaurants through other channels are beginning to make a meaningful impact on our revenue stream. But quick service had a great quarter, in particular, software in quick service had a great quarter. Table side continues to do well for us, both small and medium business, as well as large customers in that space. We're doing a nice job of getting ourselves in Europe, better situated in Europe and also, Asia Pacific. Any other comments, Peter?

Just 1 other comment would be continued traction with franchises as we see expansion of our solution move into the franchisee locations that's been a great source of proliferation of the technology as well.

And Kartik Mehta with North Coast Research has our next question.

Just a couple of questions on the U.S. ATM side. I'm interested in your perspective right now, is there any difference in the market in terms of large national banks versus regionals? Are you seeing 1 category of financial institution spend over another? Or is it about the same?

I think all these Nationals are doing a bit better than the smaller banks, regionals, as well as a credit union style banks. Remember, last year, there was a big secular upgrade cycle and most of those smaller banks, as you know, Kartik, upgraded most of their fleets in terms of everything from an innards of an ATM, CPU, memory, software, right out to, of course, being prepared for the regulatory upgrade cycle. And so we had a significant growth period from probably Q1 to late Q3 as a result of that. That will begin to circle back with Windows 7 upgrades coming later this year, early next year. And you'll begin to see more of a steady flow of that business in that space. But I think that's more 2014 in terms of revenue realization, not 2013. Large nationals continue to roll out deposit. They continue to be active, in particular, in branch transformation. And on an overall basis, that segment continues to be more steady. Do you agree with that, Peter?

Absolutely.

And then, just Bill, your thoughts in Europe, fundamentally for ATMs, at least to what you're seeing, where you might be seeing some growth or whether you see some -- if you see any pockets of weakness?

Yes, we had, again, the emerging markets was solid. I cited earlier in my presentation, China, Brazil and India, but Turkey had a great quarter for us. Western Europe was up and down. We grew year-on-year. Revenues and financial services in EMEA, as a whole, as a company, so it was not a bad quarter by any measure of how you look at the business given the circumstances we're faced with there. But I would say Western Europe, slower or kind of steady as it goes. Turkey, emerging markets better. Russia was a slow quarter for us in Q2. Will to be a better back half of the year there.

And Matt Summerville with KeyBanc has our next question.

Just 1 on Hospitality and then 1 follow-up. The growth you're seeing around 20%, how much would you say is being generated by the acquisition of a brand new site that is not running, anything Radiant-related, whether it be an existing customer or nonexisting customer versus growth in the application base with the current install base? Do you know what I mean?

Yes, Matt. There are 2 ways we measure that. One is SaaS sites, which are net new. And the other is just looking at the business and getting a good understanding of what install base customers are buying versus new. I don't have the exact numbers in front of me, but SMB to the channel is a lot of net new, so that growth is mostly net new customers, SaaS new sites, net new customers. And then we've had a few larger customers buy from us this quarter who've not been traditionally our customers.

And then Bob, I'm just still trying to sort out this ATM profitability per Katy's question and the comment Bill made, talking about how North America can be a pretty a lucrative. So it'd really be helpful if we had that ATM reimbursement number in dollars.

We chose not to break that out separately, Matt. It's a bit complicated. What I would say is that the profitability came from the lower service delivery costs emphasis on selling and R&D. And again, the point I was trying to make, Matt, was don't get ahead of us here. You see that 12% operating margin, think of it for the full year as being up 50 to 100 basis points over last year's 10% operating margin. So that's the way you should think of the financial line of business. Obviously, if we get more branch transformation revenue that helps. And certainly as part of our Analyst Day in November, we'll model out the next 3 years for you.

Okay. I appreciate that it's complicated. But in absolute dollars, is profitability up or not in the ATM business excluding that reimbursement?

It definitely was up.

So it's less than $10 million?

The -- yes, in terms of what? The supplier reimbursement?

Yes.

In the quarter?

Yes, I'm just trying to understand what the margin -- I'm not sure why that's not something you disclosed. I'm just trying to understand what the profitability...

I'll tell you why it's a little complicated, Matt, and I appreciate the healthy push back, but it's a netting of cost that we've incurred over the last 12 to 18 months. So it's -- that's why it's a bit complicated. Operating margins are up excluding that, a heavy focus on expenses. Do not get ahead of us and start modeling out 12% for the full year, Matt, think of it as a 50 to 100 basis points up.

Yes, I'm not confused about that at all.

We'll go on to Gil Luria with Wedbush Securities.

I want to get a little bit of a sense of how much branch transformation is incremental. Let's say you were selling the banks that you're going to generate $100 million of branch transformation revenue from this year. If the technology wasn't available and you were just selling them ATMs and software and the services that go with that. How much revenue would you have generated from those same banks, if they were just coming in for the product set that you currently sell?

It's all incremental. It's 100% incremental. We wouldn't be selling ATMs that sit inside the branch in the same configuration we sell express banking or Interactive Teller.

So I guess, my question is if those branches -- if those banks chose to have a standard branch instead of this type of branch how much would they be spending on ATM software and services?

I got you. There will be a more traditional customer, Gil, in buying ATMs for both in lobby and then for distribution. All of the revenues that have traditionally gone to the current players in the branch are shifting a bit, both in terms of software and hardware. And you'll see companies like NCR begin to move into that adjacency that's now an adjacency for us, but also market share gains, generally, in terms of hardware and software in the branch.

Okay. In terms of -- now that you've integrated Retalix and it seems to be going well, are you looking again at M&A? When you look at the 2015 targets that you laid out at the last Analyst Day, do you think those targets are doable without doing additional deals? Or are you already starting to look for deals similar to Retalix and Radiant?

I think all of those targets are doable with the small roll-ups and acquisitions we have already discussed we'll do over time. Nothing of significance. Right now, Gil, we're focused on pension Phase 3, the integration of Retalix and Radiant. Radiant, by the way, is finally integrated this quarter. Both -- by the way, both of those assets are doing extraordinarily well. The fit was near perfect. They have great talent. We're executing to our plans. We're well above our plans in some cases. Synergies are being realized, both revenue and cost. I think there's more revenue synergies in Retalix than we originally thought. And if something would've come along, Gil, that was superb fit like those 2 companies, we would look at it and we would certainly figure a way how to fit that into our long-term plan because, again, we feel like we have a tremendous future in this company, both organically and, vis-à-vis, our reinvention goals. And we're going to continue to look for assets that fit. Now we're spending more of our time on other things, but if something comes along that is like of those 2, we'll take a serious look at it.

And now we'll go to John Williams with UBS.

Very quickly, I just wanted to touch on the dynamics within the Silver business. I know you have a brief update earlier. But I was just curious as you think about that, what's the uptake been? Who is really your addressable market? And how do you see that playing out over the next year or so?

Yes, we have a couple of thousand customers today, which is slower than we'd like. But we are bringing on new distribution partners. Vantiv, the most recent partner we've brought on is beginning to ramp up. We're talking to other potential distribution partners as well. We still feel very, very optimistic about that business, medium to long term. We talked about the dynamics of that business being in our favor in terms of small merchants moving to mobile point-of-sale, and some of the powerful applications we provide for them. And we also are beginning to feel more comfortable we have the right overall distribution strategy in that space. But right now, I say that's our #1 focus. We should be able to get some substantial growth in terms of users over the next 12 months. But, John, do you have any comment on that?

No, I think it's right, Bill. I mean that part of the business, the small business market, I mean, there's approximately 8 million or so small businesses in that space. They spend about $16 billion on technology. It's a very interesting space for us, and we like it because it sits in the center point of what we do. When we're out there, they're all confused by how do they integrate point of service, plus promotion, plus loyalty. And it's Silver -- with Silver solution, we're trying to get that solution right. Not overly complex, needs to be easy to implement, easy to use and ongoing as both a software and a SaaS model. So for us, we're spending less time now on the technology itself and the platform, which is where we've spend our time in the past. And the lion's share of our time on the distribution channels and the take rates on how we get that moving up, because it is a different sales motion than what you would expect for traditional retail, which is very different than what we do. So getting that right is important and that's where our focus and intention is.

Is the expectation -- and maybe this is more for John, is the expectation that this is something that could see the potential future customer? Or is it just really to protect the flank, so to speak, so that you don't lose somebody to a square or another emerging tablet that could potentially take a customer away for good?

Yes, so it's a bit of both, and let me answer that. And it's also a bit of a learning for our legacy businesses as well and the Enterprise business, let me explain why I mean that. So when you look at the ultra low end of the market, you mentioned Square, very, very different customer base, smaller than even and a different customer base, the one that I've just alluded to. The Silver is targeting more of the merchants that are small businesses, in fixed locations, typical main street, high street-type locations that have inventory, a point-of-sale and doing some promotional loyalty versus potentially where Square has focused it's time, which has been further down market, those people that are purely-only cash-only type merchant. So yes, we look at it in our business to watch and then following the low-end market moving up. But also, we learn an awful lot about the top end of the market and the enterprise as they push their way down. So our whole platform in the Silver space is as informative to our Counterpoint business and our Hospitality small business as it is to the ultra low end of the market where Square plays today. So it is a very wide open market, it's very large. And we're trying to make sure that we get the technology right, the price sensitivity right of what people will pay for in value. And you can do the math, when I talk about 8 million merchants in that target space that spend $16 billion, that's roughly $2,000 per merchant on technology. So we've got to get the offer right, the sensitivity right, and ensure that the value is there. When it's there, and it's easy to acquire, they purchase it in spades.

Okay. If I could just sneak one last 1 in for Bill. Just as you think about, you size the opportunity for EMV on the ATMs side. I noticed you've gone through the various cycles throughout the last few year's, like ADA for instance. That was potentially reasonably incremental for you over the years and it seemed to work that way. But how do you think of EMV, is it nearly of the same size opportunity? It doesn't sound like it would be, but I guess how incremental could that be for you over the next few years?

EMV will be mainly a retail opportunity for us. There'll be some implications to Financial Services, but less so than the Windows 7 upgrade cycle will be. The combination of those 2 will not eclipse the ADA cycle in my opinion, in terms of size and scope. They'll be meaningful. They'll be nonsecular growth in nature, particularly in the U.S.. But not as significant in size. So when you think EMV for NCR, think some aspect of that will be Financial Services, but the big play for us is in Retail.

Okay. So not so much, it's probably more popping things out on ATMs and just replacing pieces versus replacing whole units?

That's correct. Yes, thank you. And thank you all for joining us today. I think that's the final question. We look forward to seeing you again or talking to you again in October.

Again, that will conclude today's conference. Thank you all for joining us.