Gary Brode of Silver Arrow Investment Management: Long NCR

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Nineteen emerging managers were selected from within the SumZero community on the basis of
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UPDATE (12/5/13) FROM GARY BRODE (SILVER ARROW):
"Since our presentation, NCR has announced a material acquisition of a Digital Insight,
a privately owned company. Silver Arrow Investment Management has closed its po-
sition in NCR while we are researching this new acquisition. We may re-enter it at a
future date."
Favorite Investment Book:
Margin of Safety by Seth Klarman, Fooled by Randomness
by Nassim Taleb, One up on Wall Street by Peter Lynch
Favorite Quote/Author:
If you could make 100 investments like this one, youd do
it and make money overall. Doug Hirsch when evaluat-
ing an uncertain investment with a high probability-weight-
ed chance of success.
Most Attractive Area of the Market Right Now:
Economically sensitive companies and nancial services.
Least Attractive Area of the Market Right Now:
Defensive investments and hyper-growth companies trad-
ing at triple digit valuations.
Best Past Investment Made:
Las Vegas Sands (LVS) The company has irreplaceable
assets including more than 20% market share in Macau,
and one of only two casinos in Singapore. LVS produces
high free cash ow and management is shareholder-friend-
ly. We rst bought it 18 months ago in the mid-$30s and
sold it in the mid-$60s increasing that prot by buying and
selling multiple times during that period.
Worst Past Investment Made:
The Active Network (ACTV) Weak nancials, a stressed
balance sheet, huge management turnover, and conversa-
tions with race directors, online advertising salespeople,
and competitors led us to believe this was a company with
little value. An acquirer with a lot of cash disagreed with
our assessment.
Personal Investing Style:
Value / Value with a catalyst
Areas of Personal Expertise:
We primarily focus on US-based equities. We are gener-
alists and have done extensive work in Media, Healthcare,
Gaming, Banks, Technology, Insurance, Transportation,
and restructurings and reorganizations over the past 2
years.
Gary Brode Silver Arrow Investment Management, LLC
Age: 44 Title: Managing Partner Location: New York, NY
Education (Undergrad/Grad/Certications): University of Michigan
Previous Employers/Positions: Managing Partner and Founder of Akita Capital Management, LLC,
Senior Analyst at John A. Levin & Co., Securities Analyst at Brahman Capital and Seneca Capital
Bio: Mr. Brode began his career in the M&A department of Morgan Stanley, and then moved to the
buy-side. He worked in Risk Arbitrage under Doug Hirsch at Smith New Court, and joined Mr. Hirsch when he started
Seneca Capital focusing on special situations investing. Mr. Brode began doing long/short equity investing over 13 years
ago. At Brahman Capital, he initiated positions across many industries, and was also responsible for Brahmans health-
care portfolio which was a signicant reason for the rms excellent performance (up approximately 64%) during his
three years there. Mr. Brode joined John Levin & Co. where he exercised investment discretion and made the rm money
in each of the 15 positions he initiated. He Co-Founded Akita Capital where he was a Portfolio Manager for the rms
research-intensive value-oriented long/short equity strategy. The rm held up well in 2008, and put its investors in cash
in September of 2008; shortly before the signicant market decline. In January of 2012, Mr. Brode joined Raji Khabbaz in
starting Silver Arrow. He is a Co-Portfolio Manager for the rms long/short equity concentrated best ideas fund. He is
also the author of TV is Next; a book on the coming decline of the television business.
AUM: $5 million Firm Strategy: Long/Short Equity Fund Disclaimer: Please see section 3 of appendix.
Fund Description:
Silver Arrow Investment Management, LLC is a New York-based investment rm that manages the investment partner-
ship, Silver Arrow Partners, L.P., and selected managed accounts. The managers employ a long-biased, concentrated
portfolio strategy, relying on a rigorous and fundamentally driven value investing approach. The rms objective is to
focus capital in select opportunities that boast the best risk-reward tradeoff, and then achieve a knowledge edge.
Focusing efforts on fewer and more meaningful investment opportunities has a profound and positive impact on security
selection. Limiting a portfolio to the best ideas, results in a very high research threshold. The portfolio managers each
have over 15 years of experience in value investing, with specialization in restructurings and reorganizations, and other
special situations.
Firm Focus: Fundamental value and special situations.
We manage a focused best ideas fund based on in-depth
research.
Past Ideas Submitted on SumZero: Fifth & Pacic Cos
Inc (FNP), Wellpoint (WLP), Digital Realty Trust (DLR),
Metlife Inc (MET), Royal Bank of Scotland Group PLC
(RBS)
NCR - The Rise of The Machines

Man vs Machine vs The Future

In science fiction writer Frederick Pohls The Midas Plague, Pohl
imagines a world where robots overproduce consumer goods forcing the poor to
consume constantly while the wealthy live simple austere lives. Kurt Vonneguts
Harrison Bergeron posits a world where the government uses technology to
handicap people who are smart, attractive, or physically talented to ensure a
world of complete equality and constant discomfort. Alternatively, Star Trek
describes a much different future where access to unlimited energy and
replicators that can instantly produce any food or consumer good means that all
of humanity has unlimited material wealth. Whether the future is a utopia or a
dystopia, whether it features greater or lesser equality, or whether it promises a
higher standard of living or not, it seems that all agree that the future belongs to
machines.

While it is interesting to debate whether machines replacing human jobs is
good or bad, these changes are taking place irrespective of our moral bias, or
feelings on the matter. NCR began as the National Manufacturing Company in
1879 and in 1884 was renamed the National Cash Register Company. Many
people view NCR as the sleepy manufacturer of ATMs which have been
ubiquitous in the United States for 30 years. In contrast, we see NCR as a
leader in producing technology that will replace human labor and reduce costs for
business owners. We believe that a misperception about NCRs growth
opportunity as well as investor concern about a once-serious, but now-resolved
pension issue has led to a value opportunity in the stock.

1GaryBrode|SilverArrowInvestmentManagement|Gary.Brode@SilverArrowCap.com|(917)5466821

Financial Services

NCRs product lineup is large and diverse. The Financial Services division
sells automated equipment to banks including ATMs. This division accounts for
a little over half of NCRs revenue and a little under half of its segment EBIT.
Financial Services had a weak third quarter this year with sales down 4% which
was a primary reason the stock sold off after the earnings announcement. Sales
to US-based financial institutions were weak and that lack of growth is acting as
a weight on the stock price. On its recent earnings call, NCR said that fourth
quarter bookings look strong.

Looking beyond the short-term quarterly noise, there are reasons to be
optimistic. At their introduction in the United States in the 1960s, ATMs were an
effective cost cutting device for banks as they enabled financial institutions to
replace expense tellers with machines. There was always a natural limit to how
far this trend could continue because ATMs were only able to handle certain
transactions. Were now seeing an upgrade cycle in the US driven by a new
generation of ATMs that have enhanced capabilities.

The new generation of ATMs allows customers to deposit cash and
checks without envelopes. While this may sound like an insignificant change,
some bank customers didnt like the idea of putting a bundle of checks in an
envelope, putting that envelope in a machine, and counting on someone to
properly account for it later when the customer isnt present. The new machines
immediately confirm to the customer the dollar amount of the checks and print
out a scanned copy of the checks on the customer receipt. 80% of teller activity
relates to deposit-taking and check cashing, and the new machines should be
able to handle 90% of what tellers do now. The more transactions that can be
handled by machine, the fewer expensive tellers are required in the branch.


In the not too distant future, well start to see more video teller machines
where a customer can speak to a remote bank teller who can operate the
machine. Bank tellers in high wage areas are going to be replaced by cheaper
labor in other locations. Because the tellers will be remote and required staffing
across many branches is more predictable than in individual branches, the
overall need for tellers will be reduced.

Many of us can remember the days of waiting in line at the bank to
withdraw cash. Customers prefer the speed and convenience of ATM banking.
Were headed for a world where mobile banking directly interacts with ATMs in
many ways. Soon, youll be able to use your phone to program a cash
withdrawal. Then, when you get to the ATM, youll just enter a code and the
machine will dispense your cash. Youll receive a receipt by email. This will
reduce the amount of time customers spend at the ATM. Even the machines are
becoming more efficient.

While the US ATM upgrade will benefit NCR, the best opportunity for
growth in this business is overseas. According to a Barrons article last year, the
US has 1,500 ATMs per million people. That figure is just 100 in China and 50 in
India. According to RBR, the Russian ATM market is growing almost 10% a year,
China is growing between 10% and 15% a year, and India is around 20% a year.
Globally, NCR has number 1 share in ATMs.

The Financial Services division grew 6% in 2012 and is roughly flat this
year. Last year, NCR projected that this business could grow the top line 6% -
8% a year for the next couple of years and that they could increase EBIT margins
from 10% to 11% to 13% by 2015. Given the opportunity for a US upgrade cycle
and for international growth, this seems reasonable to us.


We would note that due to a deadline for the SumZero / Institutional
Investor conference where this will be presented, this report had to be
completed before the 2013 NCR Investor Day.

Retail Solutions

NCRs Retail Solutions division is an area where were particularly excited
about the opportunity. NCRs electronic point of sale (ePOS) systems can be
thought of as a modern version of the business started in the 1800s by the
National Cash Register Company. Globally, NCR has 11% share of this
business, ranking #2 behind Toshiba. The worldwide ePOS business has been
growing around 5% - 10% a year, and there are several innovations that could
allow this growth to continue.

NCRs Silver point of sale product is aimed at helping small businesses
connect with their customers. Armed with Silver, a business owner can check
on sales and inventory from their smart phone or tablet anywhere or anytime. It
also enables businesses to receive and process payment away from their main
cash register. A gardener or home fitness instructor can take payment on their
mobile phone. A business owner could go to a trade show, take payment for
orders on their tablet while keeping track of sales at their physical business. A
retail establishment could sell outdoor or impulse items in front of their store
without putting in the wiring or weather protection required for a full POS system
outside.

The area where we see the most opportunity for growth is in electronics
that allow businesses to operate with fewer employees. One example would be
a deli counter at your local supermarket. Currently, customers take a number,
and wait to tell the supermarket employee what they want to order. The
employee spends part of their time taking the order and part of their time filling it.


An NCR kiosk would allow customers to enter their order while they wait.
Employees behind the counter would then spend all of their time filling orders
and none taking them from the customer. Greater efficiency means a busy deli
counter could operate with fewer employees. This is one example, but the
general principle can be applied across many retail opportunities.

In our opinion, the next big area where retail establishments will replace
employees with machines is self-checkout. Weve seen these machines in New
York-based drugstores for years. They are also regularly used in supermarkets.
They can be a little uncomfortable for customers who have spent a lifetime
interacting with store employees to buy a pack of gum, but technology moves on
and people always adjust.

Self-checkout is NCRs market. The company has 70% share
worldwide up from 64% a year earlier and 79% share in the US. Bears on
the stock justifiably point to the fact that the global self-checkout market barely
grew last year, and is growing this year only due to a huge order by WalMart.
Our view is this market is growing due to a huge order by WalMart! Self-
checkout machines allow a store to use less human labor and reduce costs.
WalMart is a leader in reducing costs and passing a share of those cost savings
on to their customers.
1

While WalMart focuses on labor savings, some Asian locations are
choosing self-checkout due to their small footprint. When youre running a small
store with high rent, maximizing your available selling space can be a difference-
maker to these businesses. We expect to see continued adoption of this
technology in more retail locations. RBR projects that yearly sales and the

1
We understand that the idea of WalMart putting additional pressure on employment and wages
is upsetting to many people, and that others believe that its beneficial for WalMart to be as
profitable as possible. While we enjoy political and philosophical debates in our free time, as fund
managers, our goal is to interpret the world as it exists as accurately as possible.
installed base of self-checkout machines will double between 2012 and 2018.
This strikes us as a conservative estimate.

Retail Solutions represents about one third of NCRs revenue and a little
less than 30% of segment EBIT. At its 2012 analyst day, NCR projected that
Retail Solutions would grow 7% - 9% (excluding the Retalix acquisition) a year
and raise operating margins to 8% - 10% by 2015 from the 6% level in 2012. For
the reasons explained in the previous paragraphs, we think that those revenue
projections are not aggressive. As for the targeted 200 to 400 basis point
improvement in operating margins by 2015, NCR is already seeing that level of
improvement in 2013.

Hospitality

The Hospitality division is only 10% of NCRs revenue, but with EBIT
margins in the mid to high teens, it has the potential to earn almost as much as
the Retail Solutions division. Hospitality has a similar business to Retail
Solutions. Hospitaility primarily provide ePOS systems to restaurants, stadiums,
and other entertainment venues.

A good POS system is crucial for any restaurant or bar. It facilitates
communication between servers and the kitchen, and enables much better
inventory and expense control than would be possible without one. NCR has #1
share in this market.

A new generation of mobile and kiosk systems will both enable future
growth and reduce employee payroll for business owners. NCR is already rolling
out new systems that allow customers to order to-go items from apps on their
phones. Earlier this year, the company announced a new system enabling
customers to place an order at select J amba J uice locations from their phone
and pay for the order using PayPal. Instead of waiting in line to speak to an

employee at the counter and then have that employee handle payment, the
customer just walks in and receives their pre-paid and pre-ordered shake. For
the customer, it means a much shorter wait or no wait. J ust like the earlier deli
counter example, the J amba J uice employee would go from taking orders,
making shakes, and collecting money to just making shakes. Eventually,
innovations like this will lead to lower staffing levels and reduced employee
expense for business owners.

Well start to see the same kind of functionality in restaurants. While we
expect high-end white-tablecloth restaurants to remain full service, mid-range
restaurants will soon be taking orders from in-store seated customers using their
cell phones. These orders will go straight to the kitchen, and servers will bring
them out to the table. Customers will be able to pay from their phone using a
credit card or PayPal. Again, server responsibility will go from taking orders,
delivering food, and handling payment to just delivering food. Restaurants will
need fewer servers to handle the same number of tables.

We are surprised that there arent already more self-serve kiosks at quick
serve restaurants. We dont think customers require a lot of personal interaction
to order the #1 combo meal at a Burger King of McDonalds, and we suspect that
many of them would be happy to punch in their order at a kiosk, pay there, and
go to the counter to collect their meal. By eliminating order-taking and payment
collection from counter employees responsibilities, these restaurants could
provide the same service with fewer staff members.

Last year, NCR projected 3 year revenue growth in Hospitality of 13% -
15% annualized. Year to date, theyre up 21% over last year. Were a little less
confident in NCRs margin guidance for Hospitality. NCR projects 2015 EBIT
margin of 20% - 22% which is up considerably over last years 16.3%. There
hasnt been a lift in margins this year despite the revenue increase, so while the
projections are possible, wed like to see a few quarters of improvement before

we express more confidence in NCRs projections. It is worth noting that due to
the relatively small size of Hospitality compared to the rest of NCRs business,
each margin point of EBIT in this division will only amount to $7MM - $8MM of
pre-tax income so a miss of a couple hundred basis points here wouldnt have
much of an impact on 2015 results.

Emerging Industries

NCRs Emerging Industries is executing on several opportunities to use
machines to replace jobs formerly done by humans. The most obvious example
is airline check-in kiosks. NCR provides the kiosks for 4 of the 5 largest airlines.

It was not that long ago that any trip to the airport meant waiting in a long
line to check in and receive your boarding pass. Now, you can walk into the
terminal, swipe your credit card to bring up your reservation, and the machine will
print your boarding pass. The kiosks will also allow you to see the aircraft
seating chart, change your seat, and pay for an upgrade or more desirable seat.
If you need to check a bag, you can indicate it on the screen, then just bring your
bag to a baggage specialist. The entire process is much faster for the customer,
and reduces the need for contact with a counter agent leading to lower demand
for these employees.

Similar kiosks can be used for self check-in at hotels, rental car facilities,
and to purchase bus tickets. In each of these cases, NCR technology will reduce
the demand for counter staff. While we typically find airline counter
representatives, hotel check-in personal, and rental car staff to be friendly helpful
people, it is uncommon that we have a situation where they can provide
additional value. In most situations, if using an automated kiosk gets us through
the check-in experience more quickly, that is what wed prefer. In no case, would
we look forward to a return to waiting in long lines to check in for short domestic
flights.

In 2012, NCRs management projected 3 year CAGR of 10% - 15% in
Emerging Industries with flat, but high operating margins of 23% - 25%. This
division is small and contracts are lumpy. Year to date in 2013, there has been a
slight decrease in revenue versus last year and a decrease in margins. We do
like the overall opportunity for NCR in this segment, but it hasnt executed on that
growth promise yet in 2013. The good news is that with this segment
representing only 6% of NCRs revenue, a miss in this segment this year wont
have much impact on the bottom line.

Pension

We believe that the pension issue is one reason that NCR trades at a
discount to its peers. Back in 2008, NCR had a traditional pension system that
was heavily invested in equities. The equity portion of the pension plan had
substantial losses that year, and NCR has been climbing out of a giant pension
hole since then.

Over the next few years, NCR moved almost all of its pension assets to
fixed income. It also shut down most of its pension plans which capped the
amount of shortfall the company had to address. Then, NCR offered buyouts to
certain participants in its US pension plan. Finally, the company invested large
amounts of capital into the remaining pension system to reduce its obligations.

This issue has been an overhang on the company for the past 5 years and
has necessitated pro-forma reporting of earnings and operating income. The
good news is that the company is just about at the end of dealing with its pension
requirements. At the time of this writing, NCRs pension shortfall is down to
$326MM which is less than $2/share. Our view is that it makes sense to use
non-pension earnings and cash flow to value the company and to subtract $2
from that valuation to account for the pension.

Management

We are focused on two things when we evaluate this management team.
First, they regularly give three year guidance, and have a habit of making those
numbers. In 2010, management gave revenue, operating income, and EPS
guidance for 2013. We still have one quarter to go, but it looks like the company
will clear each of those hurdles with room to spare. In general, it is difficult to
make 3 year predictions about the revenue and margins of a large worldwide
business. This management team has offered aggressive multi-year guidance
and made those numbers.

Wed like to see the company do a better job of converting earnings into
free cash flow. To managements credit, they agree. On the last conference call,
the CEO noted that his top priority was being a good operator and his second
priority was improving cash flow generation. As investors, we like his priorities.
Hes executing on the operational side. Well be looking for the cash flow
generation to improve over the next few quarters.

Valuation

In 2012, NCR earned $2.49 before extraordinary items and pension.
Company guidance is for $2.70 - $2.80 in 2013 and $3.65 - $4.25 in 2015. (As
noted earlier, the deadline for this report was before the 2013 NCR Investor Day
where we expect the company will update guidance). We are modeling $3.13 in
EPS in 2014 and $4.01 in 2015. We expect 2015 free cash flow/share to be
approximately equal to EPS.

Its often helpful to get a sense of how comparable public companies are
valued. We looked at Diebold and Wincor Nixdorf in the ATM market, Toshiba,
Hewlett-Packard, and MICROS Systems in ePOS, and Fujitsu and ITAB in self-

checkout. Most of these companies trade at earnings multiples in the mid-teens
to mid-twenties, but we dont find that to be particularly influential in our view on
valuation. NCR isnt a pure play in any specific area, and neither are most of the
comps. Several of these companies arent growing much, several of them only
compete with NCR in small areas of their business, and others arent very liquid.

We prefer to focus on NCRs earnings growth which we expect will come
from high single digit revenue growth, and a few hundred basis points of margin
expansion. If NCR can go from $2.49 in earnings to around $4 in 3 year years,
we would expect that kind of multi-year secular growth story combined with final
resolution of any pension issues will result in at least a 15 multiple. (We reiterate
that the NCR pension shortfall is now less than $2 a share and should be under
$1.50 a share by year end). NCR currently trades at 11.5x our 2014 estimate
and 9.0x our 2015 estimate; multiples typically reserved for low-growth
companies. We think a $60 stock price 12 18 months from now is possible.

Summary

In NCR, we see a fundamental story highlighted by a multi-year secular
growth trend. Regardless of whether we like it or not, many of the jobs requiring
human interaction will be replaced with machines in the form of computers, smart
phones, tablets, and kiosks. This will happen because in most cases, the
machines can take orders and instructions from customers faster, more
accurately, and at any hour. Customer time spent waiting in line, explaining what
they want, and exchanging payment will be significantly reduced. More
importantly, these devices will allow both large and small businesses to cut staff
and reduce expenses. As we noted earlier in this report, once WalMart has
found a way to reduce its expense structure, others will follow, or be
uncompetitive.


Weve seen anecdotal reports of customer discomfort with some of these
devices including self-checkout machines at drug stores and supermarkets. We
think those reports are accurate and unimportant. As we noted in a previous
piece of Silver Arrow research, there was a time when most VCRs in the country
were blinking 00:00 because no one could figure out how to program the time.
Eventually, technology becomes more familiar and easier to use. People adapt.

NCR is a leader in enabling this trend. The company is #1 in ATM market
share, #1 in hospitality, #2 in ePOS globally, has 4 of the 5 largest airlines as self
check-in customers, and has 70% of the global share of retail self-checkout
machines.

Management has a history of delivering on long-term promises, and the
2015 guidance they gave at the 2012 investor day looks reasonable. The areas
where 2013 results to date imply that management might be a little aggressive
are small, and a miss in those areas are not likely to cause the whole company to
fall short of its guidance.

We believe that the stock is inexpensive relative to its prospects due to
two reasons. First, we think the market is overly focused on recent unimpressive
results in the US ATM market. We expect that a US upgrade cycle and much
higher growth overseas will address this concern. Second, NCRs pension issue
has been a big overhang on the stock for years. The company has now moved
its pension assets out of equities, has stopped adding most new employees to
the pension plans, and has bought out many plan participants. After spending
years making up for the pension shortfall, NCRs pension underfunding is now
less than $2 a share. This issue is about to disappear from any list of investor
concerns.

NCR earned $2.49 in 2012 excluding pension and extraordinary items,
and has given guidance of $2.70 - $2.80 for 2013. We think $4 in EPS and free

cash flow per share in 2015 is within reasonable possibility. We expect that kind
of growth combined with a lifting of the pension overhang, and a long-term
secular growth story can get the company a 15 multiple and a $60 stock price
(versus the current $36 price) 12 to 18 months from now.


Gary Brode is a Managing Partner and Portfolio Manager for Silver Arrow Investment
Management, LLC. He started his career in the Mergers & Acquisitions Department at
Morgan Stanley & Co. and has spent the last 20 years working for hedge funds, including
Seneca Capital, Brahman Capital, and the Event Driven Group of John A. Levin & Co.; all
funds with up to $2.5 billion in assets. He was a Founder and Managing Partner of Akita
Capital Management, LLC, a value-oriented long/short equity hedge fund.
Raji Khabbaz is a Managing Partner and Senior Portfolio Manager for Silver Arrow
Investment Management, LLC. He has spent the last 18 years working as a portfolio
manager, focused on value investing, special situations, and long/ short equity investing. He
co-founded Highline Capital Management, LLC and Pierce Street Capital Management, LLC,
two value-oriented long/short equity hedge funds. He also served as a portfolio manager at
Ivory Capital, overseeing up to $1 billion in firm assets. In 2009, he formed Silver Arrow
Investment Management, LLC, a value investing investment partnership, focused on
managing concentrated equity portfolios. Mr. Khabbaz began his career in the Mergers &
Acquisitions Departments at Morgan Stanley & Co. and Gleacher & Co. He received at MBA
from the Harvard Graduate School of Business and B.A. in Economics with honors from the
University of California at Berkeley.
Silver Arrow Investment Management, LLC is a New York-based investment firm that
manages the investment partnership, Silver Arrow Partners, L.P., and selected managed
accounts. The managers employ a long-biased, concentrated portfolio strategy, relying on a
rigorous and fundamentally driven value investing approach. The firms objective is to focus
capital in select opportunities that boast the best risk-reward tradeoff, and then achieve a
knowledge edge. Focusing efforts on fewer and more meaningful investment opportunities
has a profound and positive impact on security selection. Limiting a portfolio to the best
ideas, results in a very high research threshold. The portfolio managers each have over 15
years of experience in value investing, with specialization in restructurings and
reorganizations, and other special situations.
SumZero is the worlds largest community of investment fund professionals. SumZeros
members-only website is designed to help fund pros identify and connect with other
professional investors in a compliant environment, share proprietary data and research, and
identify career opportunities within their industry. SumZeros membership currently includes
thousands of the worlds largest and most prominent hedge funds, mutual funds, and private
equity funds. Founded in 2008, SumZero is built on the belief that investing is not a zero-
sum game.
Gary Brode and Raji Khabbaz are SumZero contributors.

Gary Brode of Silver Arrow Investment Management: Long NCR

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