NCR Voyix Corporation (VYX) Q3 2011 Earnings Report, Transcript and Summary

Welcome, and thank you for standing by. [Operator Instructions] Today's call is being recorded. If you have any objections, you may disconnect at this time. And I would now like to turn the call over to Gavin Bell. Thank you, you may begin.

Thank you, Jared. Good afternoon, and thanks, everyone, for joining us for our Third Quarter 2011 Earnings Call. Bill Nuti, NCR's Chairman and Chief Executive Officer, will lead our conference call this afternoon. After Bill's opening remarks, John Bruno, Executive Vice President of our Industry Solutions Group, will update you on progress with respect to certain key initiatives; Bob Fishman, NCR's Chief Financial Officer, will then provide comments on NCR's total company 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, 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. Reconciliation 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 our website, www.ncr.com. For those listening to the replay of this call, please keep in mind that the information discussed is as of October 27, 2011, and NCR assumes no obligation to update or revise the information included in this conference call, whether as a result of new information or future results. With that, I'll now turn the call over to Bill Nuti.

Thank you, Gavin, and good afternoon to all of you and thank you for joining us. Our record third quarter performance is a direct result of good execution across our businesses and solid demand for our core solutions. And the results give us the confidence to raise our full year revenue, non-GAAP operating income and free cash flow guidance. In addition, we completed 2 important strategic transactions. The acquisition of Radiant Systems and our strategic alliance with Scopus Technology in Brazil, both of which will further accelerate our global growth prospects and help shape NCR's future. Despite heightening economic concerns including the sovereign debt issues in Europe, demand for our solutions remained healthy, particularly in the Financial Services segment, where Q3 orders grew 57% on a global basis versus the prior year period. Financial Services order growth was balanced across the board with increases of 106% in North America, 109% in our emerging markets theater BICMEA, 20% in Caribbean, Latin America and 17% in Europe. Total company orders grew 36% in Q3 compared to the prior year period and are up 22% year-to-date. The third quarter of 2011 was the best quarter with respect to order volume in NCR's history, and our backlog at the end of Q3 was also at a record $1.2 billion, up 23% year-over-year. It's important to note that these metrics are apples-to-apples as they exclude the impact of the Radiant Systems acquisition and are indicative of both the high level of execution across our core businesses, as well as the value proposition of our solutions we provide our customers. We are not immune to global macroeconomic forces, but we do deliver solutions to our customers that demonstrably increase productivity, reduce cost and improve the consumer experience. I'll speak to specific lines of business more in a moment, but from a high-level, we had a record order growth in Financial Services, which is benefiting in the U.S. from ongoing upgrades by regional banks, many of whom delayed purchases over the past couple of years and Brazil, where we booked the largest order in the history of our company in Q3. Our Scalable Deposit Module, or SDM technology, is playing an important role in our success. SDM has been widely adopted by the top 10 U.S. banks. However, in the last 2 quarters, we have seen increasing adoption by regional banks now that most major switching networks have certified the SDM. We are receiving orders from U.S. regionals and as well as the majors, and expect to deliver more than 5,000 SDMs -- units in 2011. Meanwhile, our Retail business has generated year-to-date order growth, and our services business continues to achieve better-than-expected revenue growth, increasing gross margins and improving the tax rates. We also continue to gain traction in our emerging verticals, particularly Telecom and Technology and Travel. In August, we completed our acquisition of Radiant Systems, which gives us a leadership position in a highly complementary third vertical, hospitality. As we have previously discussed with you, this new vertical market offers significant revenue synergy opportunities for NCR from both a customer and geographic standpoint. And most importantly, the business's technologies and market approach accelerate our drive to a more software-enabled business model in the years ahead. On an organic basis, NCR is making great progress in changing our revenue mix to higher-margin software solutions, including SaaS-based subscription products. For example, software orders grew 60%, while revenue was up 23% year-on-year. Margins were also up over 1,400 basis points to approximately 52%. Wins like Kroenke Sports and Entertainment and Speedway LLC, are a clear indication of the value we provide our customers. Kroenke recently signed a multi-year renewal of our software-as-a-service or SaaS, NCR APTRA eMarketing solution. They own and operate several professional teams and venues including Pepsi Center, Denver Nuggets and the Colorado Avalanche. Kroenke's Denver properties use NCR's cloud-based solution to provide highly personalized communications based on the customer's preference. Speedway, a gasoline convenience store company, has selected NCR Advanced Marketing Solution and NCR Enterprise Preference Manager to power its next-generation Speedy Rewards customer loyalty program. These products are part of the NCR c-tailing solutions, a set of software and services that enable retailers to offer customers greater personalization and consistency across channels such as e-commerce, mobile devices, social media and in-store. Overtime, we will share more with you on our progress in software as it is becoming a very meaningful percentage of our revenue stream. From an operational standpoint, our Radiant integration plan remains on track with synergy expectations tracking to our plan. We said that consolidating Radiant would provide annualized pretax cost synergies in the $40 million to $50 million range over the next 3 years and that remains our expectation. Moreover, we have been pleased with customer reaction to the acquisition and revenue synergy opportunities. We also announced in July, the formation of a strategic alliance with Scopus Technology in Brazil. Concurrently, we secured Scopus' parent company, Banco Bradesco, as a major ATM customer. The transaction recently closed and in the third quarter, Bradesco placed an initial order for more than 6,000 ATMs from NCR Manaus, but first under our supply agreement that has a target of 30,000 ATMs over the next 5 years. The Scopus alliance is an important strategic milestone for NCR in one of the world's largest and fastest-growing markets. But one we are historically, we had not invested sufficient resources to claim a leadership position. That has changed. By bringing in Scopus to take a 49% stake in NCR Manaus, we're taking the next step in a plan that began when we opened our ATM manufacturing facility in Brazil in late 2009. The goal of opening locally was to better position NCR to partner with customers who in Brazil value local sourcing and customized ATM technologies and capabilities. We believe this new alliance offers strong opportunities for future growth as we look to utilize Scopus' unparalleled local market knowledge and expertise to deliver manufacturing, productivity and time to market gains in the fourth largest ATM market in the world. Beyond financial services, Brazil offers NCR, significant growth potential in Retail, Hospitality and also Travel. Now let's take a more closer look at our results for the quarter by line of business. Looking first at Financial Services. We generated 18% revenue growth year-over-year due to ongoing solid performance across most key regions including North America, Europe, South Asia Pacific and CLA. Our Financial Services business also continues to serve as a key driver of our company-wide backlog growth. Financial Services global orders grew 57% year-on-year in the third quarter, which drove backlog growth of 40%, the highest level of backlog in this segment's history. As a result, we are raising our full year revenue guidance for Financial Services to growth of 7% to 9% on a constant currency basis, up from our previous guidance of 6% to 8%. Demand trends in Financial Services continue to demonstrate strength across all of our global regions. This includes the midsize and regional segment of the U.S. banking industry, where banks are unlocking capital spending so they can realize the benefits of technologies like our Scalable Deposit Module, or SDM, as well as our APTRA software line of converged banking solutions. North America orders grew 106% and backlog was up 96% versus the prior year period, with growth coming from both the U.S. regionals, where orders grew almost 300%, and the major banks were orders rose 19% over the third quarter of 2010. Key customer wins that highlight this regional bank's strength in the U.S. include a win at Redwood's Credit Union, a $1.9 billion credit union in California that shows 200,000 customers. This win is exciting for 2 reasons. We are replacing 39 NCR ATMs and 29 of the new 33 NCR SelfServ ATMs will include our SDM technology. SDM is the only available solution that allows consumers to deposit both cash and checks at the same time in any orientation through a single slot. SDM greatly reduces consumer transaction time, while also reducing dependency on higher cost, less convenient teller-based support. We announced recently that BMO Harris Bank, part of BMO Financial Group, is also deploying NCR SelfServ ATMs with SDM technology to replace a significant portion of the ATM fleet acquired through their purchase of Marshall & Ilsley Corporation. We will also be providing field maintenance services on this new fleet, which we are excited about given our focused efforts to provide a market-leading end-to-end solution for midsized U.S. banks. In fact, we recently introduced Total ATM Services, which is a new, managed services bundle for midsized and community banks. NCR Services will support an ATM network by delivering a comprehensive suite of services designed to continually monitor the ATM network using Predictive Services innovations, proactively identify and address issues before outages occur, and protect the ATM network from unwanted security threats. Finally, we continue to invest in our APTRA software line of converged banking solutions. During the quarter, we launched NCR APTRA Mobile Banking 3.0, a new platform that enables institutions to offer their customers banking services via downloadable apps, mobile browser or SMS. It is a truly robust platform that gives consumers the features and tools to conveniently manage their money while offering banks the ability to integrate mobile banking with traditional and online banking channels. In the Retail Solutions segment, formerly Retail and Hospitality, revenue grew 7% over the prior year period, driven primarily by results in North America, BICMEA, Japan, Korea and South Asia Pacific. Orders in the quarter were down 6%, but are up 5% year-to-date, largely due to difficult comparisons to the prior year period, specifically with respect to European retailers. Because orders were softer than expected in the third quarter, we feel it is prudent at this point to adjust our full year revenue guidance for Retail solutions, where we now expect revenues to be roughly flat with last year on a constant currency basis, down from previous expectations of 2% to 4% growth. Having said that, orders have picked up recently, and we expect year-end backlog to be up double digits versus last year, positioning us for top line growth in the Retail Solutions segment in 2012. We remain positioned at the forefront of advanced self-checkout and point-of-sale solutions as both customers and consumers continue their shift towards convenient and more advanced channels. Our point-of-sale technologies secured multiple customer wins during the third quarter, including the supermarket chain Warehouse Market Inc., as well as the Johnny Rockets Group and its franchisee partners. In Hospitality and Specialty Retail, the former Radiant business, revenues recognized in this abbreviated quarter with $36 million and operating income was $5 million. These results reflect approximately 5 weeks of Q3 as we completed this acquisition at the end of August. I'm pleased that our business momentum remains strong, and I'm confident that our team will drive the revenue and cost synergies we outlined for you earlier. NCR recently launched CPMobile, a new mobile retail management solution that enables specialty retailers to engage more directly with consumers throughout the sales process, while providing an enhanced level of customer service designed to drive increased revenue growth and competitive advantage. In addition, Radiant, or as I will refer to them going forward HSR, successfully implemented Quest technology in Queensland, Australia's Metricon Stadium. The Quest solution allows customers to use loaded tickets, voucher cards, bar tab account cards and more, while managers are able to update point-of-sale terminals during events through comprehensive realtime recording capabilities. We also announced a new agreement with the Seattle Seahawks, Sounders FC and First and Goal to provide Qwest stadium and arena technology for CenturyLink field and CenturyLink field events centers Food and Beverage service operations. So as our third quarter demonstrates, we are making good progress towards our goals in each of our 3 core solutions verticals. We want to continue to leverage our strong global market positions and our technology leadership to drive higher levels of sustained profitable revenue growth in these verticals for the long term. An important initiative we are pursuing toward that end is our new global partner program. The goal is simple, to construct a best-in-class channel program by investing in partner enablement and capabilities, as well as robust program development. We believe this commitment to our channel partners will create a stronger indirect sales infrastructure that can compliment our direct sales force and help meet the expanding demand for self and assisted service solutions in the global, small and medium-sized business market. Looking now at our Services business, we continue to demonstrate higher-than-expected year-over-year growth with Q3 revenues up 13% over 2010 and Q3 gross margins expanding by 280 basis points versus the prior year. This performance and our growing attach rates reflect the strong value proposition NCR Services delivers to our customers worldwide, productivity enhancements and competitive market share gains. This is best demonstrated by our recent agreement with Agricultural Bank of China to provide hardware maintenance services for approximately 10,000 NCR ATMs. This contract is not only our largest services win ever in China, it's also one of the largest ATM services contract wins in the history of the Chinese banking industry. We believe this contract reflects a major shift in China. Historically, banks in this market use local services partners to manage their ATM fleets, but ATM functionality has now reached a level of complexity and criticality where financial institutions require their fleets to be actively managed and supported by a more experienced and capable technical services support organization. Overall, NCR's value-added managed services capability continues to win business on a global basis. In the third quarter, wins in North America included a large U.S. telecom and one of Canada's largest retailers. In Europe, NCR won an extension of total premise services with one of the U.K.'s largest grocers, and we also secured managed service wins with large banks in China, India and the Middle East. In Entertainment, revenues grew 45% year-over-year and same-store sales growth was up 21% over Q3 of last year. Third quarter revenue growth can be attributed to our ongoing active management of our kiosk footprint, which is driving improved per-unit economics. As we discussed on our second quarter call, we're actively examining strategic alternatives for this business. We are pleased with our progress in pursuing strategic options for our Entertainment business, and we are currently engaged in productive discussions. We will keep you informed as efforts progress. John will provide you with more in-depth update on the performance of Entertainment business in a few minutes. Within NCR, we continued executing our cost-reduction plan during the third quarter, and remain on track to hit for our full year target of eliminating $75 million to $100 million in annualized costs. In addition, we further advanced our 3-year $200 million to $300 million reduction plan and have made solid progress to date. Our successful cost take-out, as well as our robust top line performance resulted in third quarter NPOI of $113 million compared to $90 million last year, up 26%. Turning now to guidance. Today, we are raising our full year revenue and non-GAAP guidance to reflect both strong performance in our core verticals, specifically Financial Services, and the expected contribution from our new Hospitality and Specialty Retail segment. We currently expect revenues in 2011 to increase in the range of 8% to 10% on a constant currency basis. We expect NPOI to be a range of $410 million to $420 million for the year, an increase of 23% to 26% compared to 2010. The change to the 2011 range reflects the improved business environment I've described, as well as the addition of our new business vertical, offsetting higher-than-planned losses from our Entertainment business. We expect non-GAAP earnings per share, which exclude pension expense and special items, to be in a range of $1.79 to $1.83 in 2011, an increase of 17% to 20% compared to 2010. In addition, we expect free cash flow to be in a range of $75 million to $100 million, up from previous guidance of $50 million to $75 million. Bob will detail our 2011 guidance further when he covers the quarterly financial performance. As a reminder, we typically provide initial guidance for the coming fiscal year on our fourth quarter call in early February. And that will be the case again for 2012. Obviously, we will keep a close eye on economic developments in the weeks and months ahead. But based on current business trends, as well as the addition of our new vertical, we are now expecting to provide a healthy 2012 outlook to you at that time. Now I'd like to turn the call over to John Bruno, who will talk about the Emerging Industries and discuss our Entertainment business in greater detail. John?

Thank you, Bill, and good afternoon, everyone. Bill updated you on the strong performance in our core lines of business, so I'd like to give you an update and provide further insights into our progress deploying SelfServ solutions, across our Entertainment and Emerging Industry segments. Most of you are familiar with our value equation, which articulates the way in which we view our core versus non-core businesses. We view these emerging growth opportunities as part of our strategy to diversify our portfolio by identifying proximate adjacencies to our core. By definition, these non-core businesses are relatively small, young, growing businesses that tend to be lumpy from quarter-to-quarter, and the third quarter 2011 was not in line with our expectation for these businesses in aggregate. Bob will update full year guidance by line of business in his section, but suffice it to say that while 2011 performance is trending behind our expectations and plan, these remain growth businesses and we will be very focused in terms of resource allocation to drive value for our shareholders. Looking first at Entertainment. As Bill mentioned, we continue to explore strategic alternatives relative to this business but these discussions are not distracting from our execution focus. At the end of the third quarter, we had approximately 10,000 kiosks deployed compared to about 7,000 at the end of last year's Q3. And as we've said previously, we continue to redeploy underperforming kiosks as we seek to grow transaction volume, improve our per unit economics and design our kiosk footprint to meet our profitability goals. Our work to optimize our DVD kiosk fleet is progressing. Revenues grew 45% and importantly, same-store sales grew 21% over last year's Q3. We deployed 500 kiosks during the third quarter, including 200 of the 1,600 kiosks we originally identified as underperforming units. To date, we have returned 800 of those 1,600 kiosks to market locations that we believe will drive performance in line with our goals. Another key metric, the Entertainment business was EBITDA break-even in the third quarter. We continue to pursue other profit-enhancing initiatives including premium pricing for the new releases and cross-selling. Testing of our premium prices is ongoing with a focus on consumer choice and expanding access to quality content. Now turning to developments across our other emerging industries. Emerging Industry revenues grew 1% in the quarter versus the prior year period, while operating margins expanded by 300 basis points and operating income grew 20%. This segment can be somewhat lumpy quarter-by-quarter. So on a year-to-date basis, revenues are up 9%, and operating income is up $11 million or 28% versus the prior year period. We continue to see good performance in our services-led Telecom and Technology or TNT line of business, where NCR delivers deployment, support, consulting and managed services to over 40 global telecom and OEM companies. We have a very strategic relationship with these customers as the preferred service partner helping them cost effectively build out their multi-vendor network infrastructure and bring reliable and scalable business services to the market faster. This line of business also provides managed technology and support services to some of the world's largest companies. We act as a single point of contact to manage the customer's business networks and provide IT support, enabling them to reduce operating costs, maximize availability of mission-critical business applications and focus more on their core business. Our TNT business delivered order growth of 53% and gross margin expansion versus the prior year period, with services growing at 10% versus last year. We expect solid revenue growth as we continue to secure new customers and expand our offer portfolio. The telecom carriers continue to focus on rolling out hosted services in IP service delivery and their need to build out wireless data network capability and availability, as well as the surge in businesses looking to cloud and Saas-based applications. These are all positive market dynamics, and position NCR well for future success in this business. In the third quarter, we expanded our multi-vendor services capability, achieving service-edge partner status for Ruben [ph] Network's Wireless LAN solutions, while continuing our certifications in building relationship with leaders like Cisco, Juniper and other partners. We also expanded our presence in emerging markets and enhanced our ability to service the retail operations of our telecom customers throughout the introduction of a new self-service bill payment kiosk. This new solution enables consumers in the Middle East and Africa to buy mobile SIM cards and pays bills quickly and easily at stores and other locations. We are already working with several leading mobile carriers in the region on this initiative. In the Travel segment, NCR continues to transform the way passengers check in for flights through our Mobile Boarding Pass technology. U.S. Airways will be deploying technology across 14 airports in the U.S. As a result, passengers can now utilize the convenience of using their Smartphone or other mobile device to check in and board flights. We are seeing a high rate of adoption of this technology as consumers look for ways to simplify the way the travel. The fact is also evidenced by our recently announced partnership with Dubai airports, who will be deploying 50 NCR Digital Sign Wayfinding kiosk touchscreen monitors aimed at effectively guiding travelers through Dubai International and Dubai World Central. Our Digital Signage Wayfinding monitors will help travelers locate gates, flight information, retailers and concessions in an intuitive and easy-use manner. We will also be providing support services for all of these monitors. We are actively and successfully migrating our core value proposition and positioning ourselves as the leading provider of innovative technologies that provide benefits to both customers and consumers. Changing transaction channels and customer preferences, as well as emerging technologies are reshaping the ways companies and customers interact and conduct business. We are positioned at the forefront of this transformative changes in a number of key emerging verticals that we believe possess strong growth prospects in the years to come. And with that, I'll hand it over to Bob.

Okay, thanks, John. NCR's total revenue in the third quarter was $1.4 billion, up 16% versus Q3 2010. Third quarter revenues include a 5% benefit from foreign currency translation. We reported GAAP income from continuing operations attributable to NCR of $16 million, or $0.10 per diluted share. This compares to GAAP income from continuing operations attributable to NCR of $78 million, or $0.48 per diluted share, in Q3 2010. NCR's results from continuing operations include special items in both periods. Income from continuing operations in the third quarter of 2011 included $62 million, or $0.27 per diluted share after-tax of pension expense, and $33 million, or $0.16 per diluted share after-tax of acquisition-related cost. Income from continuing operations in the third quarter of 2010 included $50 million, or $0.20 per diluted share after-tax of pension expense, $6 million, or $0.02 per diluted share after-tax of incremental costs related to the relocation of the company's global headquarters and $39 million, or $0.24 per diluted share of income tax benefit, due to the release of a valuation reserve related to our Japanese subsidiary. Excluding these items, non-GAAP diluted income per share was $0.53 per share in Q3 2011 compared to non-GAAP earnings of $0.46 per diluted share in Q3 2010. To analyze NCR's operational performance without the effects of special items and pension expense, please see the supplemental financial schedule included in our earnings press release that reconciles our GAAP to non-GAAP results. Excluding the impact of special items and pension expense, our Q3 2011 gross margin was 23.5%, up 80 basis points from 22.7% in the prior year period. The increase is a result of higher product sales, favorable mix and the successful implementation of cost reduction initiatives, driven by our continuous improvement program. Our acquisition of Radiant also improved gross margins in Q3 and will be a catalyst in driving gross margin expansion in the future. Operating expenses, excluding pension expense and special items, was 15.5% of revenue in Q3 2011 versus 15.3% in Q3 2010. The increase was a result of an investment in sales resources and the inclusion of the Radiant business in the quarter. Total company non-GAAP income from operations, or NPOI, was $113 million in the third quarter compared to $90 million in last year's Q3. Other expense net was $4 million in the third quarter of 2011 compared to other income net of $1 million in the prior year period. Other expense in the third quarter of 2011 included interest expense of $3 million. Income tax benefit was $1 million in the third quarter compared to a benefit of $45 million in Q3 2010. The prior year period included $39 million of income tax benefit due to the release of a valuation reserve related to our Japanese subsidiary. NCR expects its full year 2011 effective tax rate to be approximately 27%. Turning to the balance sheet, cash on hand was $341 million with total debt of approximately $1.1 billion at the end of the quarter. Moving to the cash flow statement, cash used in operating activities was $7 million in Q3 2011 compared to $48 million in the prior year period. Cash used in operating activities in Q3 2011 was positively impacted by improvement in working capital period-over-period. Net capital expenditures totaled $32 million in Q3 2011 compared to $69 million in the prior year period, with the decrease primarily due to lower capital spend in the Entertainment business. Discontinued operations resulted in $6 million of cash outflow in Q3 2011 compared to $6 million of cash inflow in Q3 2010, primarily due to a lower level of insurance recoveries relative to the prior-year period. In Q3 2011, free cash flow used was $45 million, which included $24 million of acquisition-related costs compared to free cash flow use of $111 million in Q3 2010. NCR defines free cash flow as cash flow from operations and discontinued operations less capital expenditures for property, plant and equipment, and additions to capitalized software. As Bill indicated earlier, we expect free cash flow for full year 2011 to be in the range of $75 million to $100 million, up from previous guidance of $50 million to $75 million. Before turning it back over to Bill, I'll update our revenue expectations on a constant currency basis for each line of business for the full year 2011. In Financial Services, we expect revenues to grow 7% and 9%, up from previous guidance of 6% to 8%. In Retail Solutions, we expect revenues to be about even with the prior year, down from the previous guidance of 2% to 4% growth. In HSR, we expect revenues to contribute approximately $135 million to NCR's top line this year. For Entertainment, we expect revenues to rise 60% to 70%. And as a result of lower-than-expected growth, we now estimate an NPOI loss of approximately $60 million this year, including corporate allocations. In Emerging Industries, we expect revenues to be up approximately 5%. In summary, the strength of our core, particularly Financial Services, is more than offsetting any weakness in our smaller non-core businesses. Now I'll turn the call back over to Bill for closing comments.

Thank you, Bob. The third quarter features strong operational and financial performance, along with executing important strategic transactions for our future. Our record order growth and historic backlog levels indicate the strong demand trends in our core markets. Our Financial and Retail businesses are performing very well, and the addition of a third core vertical industry provides a new platform for growth. Not only in the Hospitality and Specialty retail sectors, but across our businesses as we realize the revenue and cost synergy benefits from the Radiant acquisition. In the meantime, we are demonstrating strategic progress in key emerging markets like China with our major services win; and in Brazil, through our alliance with Scopus. As we execute on these initiatives, it is increasingly clear that the best path for procuring sustainable, profitable, long-term growth in NCR is to focus on the significant opportunity in our core businesses. At the same time, we continue to see tremendous potential in several emerging industries. As we gain more experience in these areas, we are better able to make sharper resource allocation decisions and to pursue only those opportunities that are the most compelling and which represent the most logical extensions of our competencies and assets. Our telecom and technology, as well as travel and transportation verticals, for example, show attractive growth potential as solutions including our check-in kiosks, and mobile boarding pass technology continued to see high levels of deployment and consumer engagement. In summary, our third quarter performance and recent strategic transactions affirm our expectations that we will finish 2011 on a strong note and enter 2012 very well positioned. As we look out further, NCR is gaining increasing strategic clarity around its core solutions offerings and our migration to a services-led, software-enabled business model. And we are also gaining confidence in the longer-term potential trajectory of the business. We look forward to keeping you updated on our progress. And operator -- I'd like to thank all of you for joining us, and the operator can now open up the call for questions. Operator?

[Operator Instructions] Our first question comes from Julio Quinteros.

Maybe just to come back to 2 quick things. One, if you can just walk us through the -- I guess I'd use the World Series Baseball analogy for now, the inning that we're in, in terms of the upgrade and the refresh cycle and if you could sort of divide the world into I guess Europe and the U.S., just to give us a sense for how much further we have to go in terms of this current cycle, if you want, on the ATM side?

Julio, this is Bill Nuti, I'll take that. I want to repeat something I've said before on the call, and I talked about quite often and that is that I think it's very difficult to talk about innings here because deposit has become a global industry and in particular, in the U.S. as well. So I -- several years ago, I think all of us in the industry described it potentially as a secular growth opportunity in terms of growing above the current market trends. It's becoming part of the market. And therefore, I think you're going to see this continue for quite some time. And it's not just an upgrade opportunity in the U.S. now that's shifted to regional banks per se. It's an upgrade opportunity in other countries like India and Brazil and certainly gaining traction in countries like China, and already, in Europe in terms of recycling. So deposit automation as a segment has a very long way to go globally and now has become a very key application for banks to offer. More specifically, in the U.S., I would say that most major banks are in the final throes of upgrading their systems. However, a large number of those banks, or a large number of the ATMs deployed, are probably now 4 years old and perhaps have deployed first-generation deposit automation technology. I would suspect a lot of those banks starting in the next year or 2 will come back around and upgrade those ATMs to a third-generation deposit automation technology like our SDM. So I think you're going to see an upgrade cycle begin in the larger banks like it did in '06. Probably, in the '13 time frame, maybe as late as '14. Those ATMs will be 8-ish years old. And they will be far behind their competitors who are rolling out new-generation deposit automation, which is much more consumer friendly. And so I think what you have here is a situation where this market will continue for the long term, and the global growth prospects of deposit automation remains significant.

Okay. And then can you just comment specifically and then try and differentiate the commentary we heard from your competitor Diebold in Europe earlier about some softness and weakness versus the strength that you guys cited in Europe?

Well, we had an excellent quarter in Europe in Financial Services. Orders were up 17% for us, and we had a very balanced growth across Europe for ATMs. There wasn't one particular area I would point to in Europe. Now remember, we're really well positioned in Europe and are the largest provider of ATMs in Europe today in terms of market share. We're #1. And no question, we've been benefited to some degree by competition perhaps paring back their participation in the market. But I would also say that we have a demonstrable competitive advantage in that because we're so broad in Europe, for example, we have services infrastructure in each country and deep services infrastructure, which is very difficult and frankly, costly to replicate. And therefore, we can go pan-Europe with some banks that are pan-European. We can go in-country for service delivery in a way that is difficult to replicate.

Our next question comes from Paul Coster. Paul Coster - JP Morgan Chase & Co, Research Division: I just wonder if you can talk a little bit about EMEA. Obviously, it's all front and center in terms of concerns at the moment. It sounds like you're riding through things okay. Can you give us a little bit of color, is that true of all locations? Also, Bill, you did at least express the view that the 2012 outlook at the moment is looking okay. Can you just give us a little bit of color around what it is that your underlying assumption is there in terms of sort of economic growth going into 2012?

Sure. Well on EMEA, in particular, Paul, no question that there are some countries that are slower than others. We all know who they are. Italy, Spain, Greece, in particular. That being said, we are continuing to sell ATMs and point-of-sale and other technologies in those countries. But in aggregate, Europe is holding their own quite well for NCR, and we're riding it well, extremely well, in the ATMs space or the financial services space in particular. And I think we've been doing a really good job from an execution standpoint there during some of the most difficult periods. I'm hopeful that what's happened over the last 48 hours in Europe will hopefully take some of the bank's eyes off of their balance sheet and refocusing on customer delivery and their business. And that will help us even further. I don't know the answer to that, and nor are we contemplating that in our perspective going forward. I think the most important thing going in our favor right now is the fact that our backlog in Financial Services is up 40% year-on-year. And our backlog company-wide is up 23%. So that gives us a tremendous amount of visibility for at least the next 2 quarters into our business. Paul Coster - JP Morgan Chase & Co, Research Division: And then this may be a little bit unfair throwing at you, throwing this information at you into your call, but Coinstar has just reported and they've announced that they're raising their pricing on DVD rentals to $1.29. I'm just wondering what your initial thoughts are in terms of your response to that kind of price action.

Well, it's John Bruno. That's something that both Coinstar and NCR have both been selectively doing in target markets. There's a number of reasons, and we've tested price elasticity as it relates to the value offer in that space. So that's not new news. We all look at consumer reaction and the price of the offer at all of those. So we are, again, aware of where they're trialing and of course, not aware of their global deployment plans, but we're doing a very similar analysis.

Hey, Paul, just a couple more -- I know Peter has a few more comments on Europe and some more specificity with regard to some of those key countries we talked about in terms of revenue growth in the quarter. So Peter?

Paul, this is Peter Leav, I just wanted to add some specifically around several key countries in Europe as it relates to the quarter. Our revenue was up 10% in Italy, 13% in France, 13% in Germany. So it was a good quarter-over-quarter story from last year, and I just wanted to make sure I gave you some detail.

Our next question comes from Gil Luria.

This is John for Gil. I just wanted to ask about your big win in Brazil with Bradesco. Can you talk about how you might be able to build on that and if you can possibly expand the business there to other banks?

I think I heard your question, it was -- but you we're asking about Scopus or Bradesco and can we...

How can we build, how do we plan on building upon that? This Is John Bruno. That relationship is strategic on any number of fronts. Most importantly, it helps us dramatically with investing in local, what we call, new product introduction engineers on the ground in combination with our own development plants. So we are learning a lot about the custom nature of ATM manufacturing. We have a unique space plan in which we build our own safes in-country, and we have now capabilities given the scale that, that relationship brings to us, to allow us to be very competitive in the marketplace and very innovative in the marketplace. So previously, we wouldn't have had the luxury or the ability to make the investments that this relationship does, so we intend to leverage it heavily in the financial services space. And more importantly, as Bill alluded to in his prepared remarks, we're very excited about our partnership with Scopus and their knowledge of the local market because we believe the market represents opportunities for us in our other core businesses of specialty retail, hospitality and our core retail market. So the leverage of our technological expertise, our manufacturing and design and engineering expertise with their local go-to market expertise are all leverage points outside of Financial Services, in addition to what we should be able to do given the investments that these orders bring to us within Financial Services.

Our next question comes from Michael Saloio. Michael Saloio - Sidoti & Company, LLC: Could you give us a sense of what the largest demand drivers were in the North American ATM business? Specifically, the smaller, mid-tier and regional banks. I'm trying to understand if it was ADA, was it PCI? Or is this really just kind of loosening of the purse strings and these banks finally moving towards deposit automation?

It's the latter, Michael. It's just regional banks moving more aggressively towards deposit automation. ADA is a small driver. I would say that one thing ADA does for us is if a bank has to go in for example and touch -- yes, meaning upgrade it for any reason, they look at doing other things while they're doing that. But the real key driver for us in nationals -- we always said 300% growth in the midsized bank segment in orders, what we had well over 100% growth in revenues. Almost all of it stems from the SDM technology we offer in the market today, and their move towards deposit automation.

I'd add only one other comment, and as a consumer, you'll see it. The smaller and the mid-tier banks need to remain competitive with the top 10 banks with the types of technology. And regardless of whether it's the mid-tier or the top tier, there isn't a bank branch, or I should say a banking company, retail company, that isn't considering discussing or implementing branch transformation. There isn't a conversation that we're having that they're trying to change the consumer experience for their consumers as they walk into these branches. So just the physical nature of changing -- I mean, changing the way bank branches operate is also driving discussions on our upgrade cycles and the use of net new technologies.

Our next question comes from Matt Summerville.

A couple of questions. Bill, first on retail, can you talk a little bit more about the incoming order trends you've seen the last few months? It sounded like they dipped down but have come back up as of late. Maybe put a little more color around that, and I guess how comfortable you are that there is inflection there versus something temporary. And then did -- on a pro forma basis, if you will, did Radiant see that same sort of trend in their incoming order rates that you experience?

First on retail, for us, in that we had a really difficult compare year-on-year in orders and revenue. We had a super Q3 last year in retail, in particular with European retailers. So that made it more difficult for us. I would say that the issue we faced in retail, and we faced all year, were the headwinds largely from consumables, not hardware, software, or self checkout. Our consumable paper business has been a drag on our retail business for the most part. A significant drag in terms of top line and bottom line. So that's masking what has been a pretty good performance in Retail overall on the year. We continue to see relatively good trends in Retail. I'm encouraged that we could end the year around double-digit backlog for retail going into 2012, strong on that front. So I feel pretty good about the retail space right now. And if things improve economically, in particular, I'll feel even better. And lastly, I'd say on that point, we are aggressively pursuing a number of internal strategies to drive growth in that business. And if we're half as good as I think we are, we should have a significantly better '12 in that space. On the Radiant side, they had a terrific Q3, a terrific close. Their business is going well. I mean, in fact, I would tell you that anecdotally, their funnel for their business is up fourfold from what it typically is since we've acquired them, which is giving us all a little bit of excitement, if you will, around the potential of this acquisition in terms of revenue synergies. Now that has to play out. But they did very well at the end of Q3, and they continue to do well.

And then just one follow-up if I may. Bill, can you talk a little bit about, in the ATM business, what you're seeing from -- you talked about sort of demand by region, maybe more what you're seeing from a pricing standpoint, kind of delineating between emerging markets and then developed. And then just Bob, if you can comment on the moving pieces associated with why pension expense is moving up, and if you have any thoughts on '12 there.

In terms of pricing, the environment is about where it's been for many years for us, and the developed market's pricing is stable. And the emerging market, it's more competitive or aggressive. I've seen no demonstrable change in that behavior for the long term. Now because of our global position, we have optionality with respect to what happens in some of these other markets, and I think we're better positioned. I think our cost structure as well is also improving in terms of our ATM cost structure as a result of SDM, which gives us a little more leverage. I mean, our margins were up 80 basis points year-on-year on top of being up 90 basis points year-on-year last year in Q3. So pretty tough compare to grow margins like that. And with Radiant now, Matt, I mean I'm feeling much better about margin growth potential in the coming 12 to 18 months. Bob, pension expense?

Yes. In terms of pension expense, Matt, 2 main drivers. One is FX, and the other is just in Q3, we looked at our actuarial estimates and in some of the countries, inflation was running higher. But probably, the biggest driver was just the length of -- the remaining length of time that we can allocate, the expense over was shorter when we looked at it. So we basically had to allocate some of that expense over a shorter period of time. We'll have a better idea of our 2012 pension expense once the numbers are final in Q4 and we use those updated assumptions. And so we'll give guidance as part of our normal process.

Our next question comes from Ian Zaffino.

This is Todd on for Ian. Can you -- in the retail business, it seems like organic revenue rose for about 3% for the quarter. Can you kind of break out for us the contribution between assisted checkout and self-checkout?

Revenue growth in the quarter for retail was up about 7.

Excluding FX.

I'm sorry?

Exceeding foreign exchange?

Oh, I'm sorry, I missed your point. Yes, self-checkout was up in the quarter in the single digits, and point-of-sale I think was equally up as well in the same range as single digits, low single digits in that area. Difficult compares, I would tell you, particularly on the self-checkout side. We had a tremendous self-checkout quarter in Q3 of last year.

So is it safe to imply that kind of like the shares remain constant versus last year?

No. I'd say -- you mean market share?

Well like aisle share or share between self-checkout and assisted checkout?

Yes, roughly the same as it was a year ago. And then external share, we continue to perform well in those areas.

Okay. And then on the Entertainment business and the DVDs, the comp seem to be -- the same-store sales seems to be a little bit lower than I would have expected just with a having a little bit lower unit growth this quarter than in the past. Can you kind of speak to why it accounts for 21% rather versus like a 30% last quarter?

Yes, I think there were 2 things that -- 2 factors that drove that. One is we continue to shift lower performing machines to higher performing locations. And so we're taking out of service in the quarter, n number of machines. And therefore, they're not revenue generating when you do that. And in some cases, when you shift them, it takes 30 days to get them back up and running. So it's a lengthy period of time to have an asset not generating revenue. But we're going to continue to do that because ultimately, the unit economics improved dramatically when we do that right. Secondly, the title flow in the quarter was weak. New title flow in the quarter was relatively weak for us. That gets better in Q4, and I'm encouraged by the number of new titles coming to fruition in Q4 and the fact that the industry is beginning to get pricing right.

Our final question comes from Kartik Mehta.

Bill, I just wanted a little bit of a clarification on the statement you made in your Financial Service in the press release. As you indicated, the margins look really strong, and I think you attributed it to lower service delivery costs, at least in the press release, and I'm wondering if you could just expand on that, maybe on that particular statement?

Yes, the real driver of our Financial Services' margins is services and our margin expansion in services. It's not the solution side of that business. So we've been very pleased with productivity gains in Financial Services and Services. Obviously, new offers coming to market like Managed Services offers, Total Premise, and Total Managed Services for regional banks offer us greater margin potential than we do break/fix. And we've done a good job in the latest quarter in just managing our fixed cost in that business and using continuous improvement to just make ourselves more efficient. So we're on that quest constantly, Kartik, but it was really the services' gross margin expansion that drove Financial Services' success in margin expansion in Q3.

And I know it hasn't been long that obviously, Radiant has been integrated in the NCR as getting integrated, but I know you've studied the business for a while. I'm wondering is it possible for you to take what you're learning in Radiant and apply it to your retail business so that the margins in that retail business can improve?

Absolutely, 100%. We're learning a ton on how to improve margins generally. Let me give you a quick example. The Software-as-a-Service business and Radiant, they're a subscription-based service. Call it a $50 million-ish dollar a year business. it's an 80-plus point margin business. We can leverage that team, that capability, those applications in our retail business. And by the way, software, organically is growing very well. It's not to be I think missed in this latest quarter. NCR proper is doing a brilliant job of building a fairly sizable software business in this company. Outside of that, we can take what Radiant does and apply it not just to retail, Kartik, but across all verticals. We're also learning from them in terms of everything, in terms of how they manufacture product, their supply chain. And while I think in those particular areas, 8x out of 10x we have an advantage because of scale or maturity. There are a few areas where we can implement some of the things that they bring to our company to make significant impacts on our own margin structure. So we feel very good about, if you will, their ability to export learnings to us. John?

Yes, there's 2 things I'd add, Kartik. It's really the distribution and the ongoing management maintenance. We've studied extensively how well they've built their site management practice, how they do software distribution, how the upsell and how they maintain and monitor that environment. We have a series of applications that we've had in market for quite some time that are very good applications, market-leading ones such as our Advanced Marketing Solution or even our Digital Signage and Coupon-to-Card loyalty. And we are working hard to adapt their practices and functions, as Bill said, to leverage our scale, to take advantage of the very innovative and leading model they have, to take those parts of our business into the market because the go to market is very different for those SaaS-based applications that is selling a piece of software bundled with hardware.

And Bill, I think you might have answered this question so I apologize, but I might have just missed it. I want to get your thoughts on ATM growth in the U.S., both from a hardware and service standpoint. Obviously, the market's doing well, and I wanted to get your perspective on how well you think the market's growing.

Well, we grew 106% in Financial Services in North America. I mean -- and by the way, that's on a big number.

But I guess I'm -- I apologize, Bill. I meant from a revenue point standpoint this quarter versus a year ago rather than orders. I apologize.

That's okay, no worries. So I couldn't be more pleased with North America's progress on revenue growth. They have over exceeded my expectations by a wide margin through excellent execution and frankly, innovation and competitive advantage vis-à-vis product, the SDM technology. Financial in North America, revenue was up 42% year-on-year. You're talking about a big number on top of a big number. So we felt very good about their performance. And frankly, the growth in large banks and regional banks was pretty darn good. We were over 100% growth in revenue in the regional banks and just under 20% in large banks. So very good balanced performance and frankly, great backlog. The backlog for our North American business is up 96% year-on-year.

And then just one last question, Bill. You talked a little bit about the DVD business, and you engaged in some productive discussions I think you've said. As you've gone down this path, does it seem like this is a business that you will end up selling? Or is it a business that you could see yourself partnering with somebody and keeping a portion of it? I know you've liked the characteristics of this business, but I want to get your thoughts as you've gone through these discussions.

Yes, sure. All of the above on that. We have -- we're lucky to have exceptional optionality today. We are in productive discussions relative to this business. But we also have a good -- this business grew 45% year-on-year. Same-store sales growth, up 21%. You just heard about the price increases in this industry across the board, that could be extremely helpful for NCR Entertainment. Ultimately, as well, if this business just stayed on current course and speed, it would be a big business next year for us. But that being said, let me be very clear. We have a lot of work to do on our core businesses. We're excited about what we have going on in Financial, Retail and Hospitality. I would like to focus the energies of this company in exploiting the opportunities there, particularly on our software business and our services business. So we'll continue with the process we have in place and see where it lands. Well thank you very much for all of you for joining the call. We appreciate your time. We will talk to you all in probably February. Take care.