Diebold Nixdorf, Incorporated
Q1 2016 Earnings Call Transcript

Published: 28 Apr 2016

[Operator:]

Good day, everyone. Welcome to the Diebold, Incorporated First Quarter 2016 Financial Results Conference Call. At this time for opening remarks and introductions, I would like to turn the conference over to Vice President, Investor Relations, Mr. Steve Virostek. Please go ahead, sir.

[Stephen Virostek:]

Thank you, Tracey. And welcome to Diebold’s first quarter earnings call for 2016. Joining me today are Andy Mattes, President and CEO; and Chris Chapman, Senior Vice President and Chief Financial Officer. During today’s webcast, we will be referring to slides, which are available on the IR page of diebold.com. A replay of our webcast will be posted to our website later today. Today’s discussion will focus on results from continuing operations unless otherwise noted. Please keep in mind that the results from our North American electronic security business are included in income from discontinued operations. We finalized the divestiture of this business on February 1. On Slide 2, Diebold’s presentation includes non-GAAP financial measures, which we believe provide a helpful indicator of the company’s baseline performance. We provided a reconciliation of these metrics to their respective and most directly comparable GAAP metrics in our supplemental materials. Slide #3 today reminds our participants that certain comments we make today may be characterized as forward-looking. There are a number of factors that could cause our actual results to differ materially from these statements. Additional information on these factors are contained in the company’s SEC filings. Please keep in mind that forward-looking information discussed is current as of today, and subsequent events may render certain information out of date. Slide #4 encourages our investors and shareholders to read our Form S-4 Registration Statement and offer document, which pertain to Diebold’s offer to acquire all outstanding shares of Wincor Nixdorf. These documents are available on the websites listed on this slide. And now, I’ll turn the call over to Andy.

[Andy Mattes:]

Thanks, Steve. Good morning to all our participants and thank you for joining us today. During the first quarter we had many positive developments on the strategic front. However, our operating results fell short of our expectations due to lower hardware volume, particularly in emerging market. Product revenue in our financial self-service business decreased 18% in constant currency. Our FSS services business however continued to grow increasing about 5% in constant currency despite lower installation services revenue. In China, product volumes continue to be impacted by the government by local mandate, which we largely expected. In other emerging markets, such as India and Brazil, we experienced slower decision making on hardware due to country-specific issues. In North America, our conversion of hardware backlog to revenues slowed as customers implement large branch transformation projects. While large national accounts are making significant investments which will affect all channels

[Christopher Chapman:]

Thanks, Andy, and good morning, everyone. My comments today will include a discussion of our first quarter performance and an update on our 2016 outlook. I will focus on our results from continuing operations unless otherwise noted. The impact of the divested North America electronic security business is included in the income from discontinued operations, net of tax line in the income statement for all periods presented. We closed this transaction on February 1 and the first quarter results include a $149 million gain net of tax. On Slide 11, you will see total revenue was down 11% as reported or down 6% in constant currency for the first quarter. Currency headwinds from all geographies impacted total revenue by approximately 5%. Excluding the impact of currency, the main drivers of this change were lower hardware volume in emerging markets and in North America, partially offset by growth in our service business. FSS revenue was down 4% in constant currency, while security revenue decreased $8 million or 11% in constant currency. The decline in security was primarily driven by a decrease in physical security related the lower volume and slower backlog conversion. Brazil other declined $5 million year over year in constant currency, due to low lottery and IT equipment sales. For 2016, the company’s revenue outlook of approximately $45 million for Brazil other is fully underpinned by a voting order currently in our backlog which is expected to convert to revenue in the second and third quarters. Looking at our regional segments, EMEA revenue increased nearly 5% in constant currency with improvements in both service and product revenue. Asia-Pacific and Latin America, excluding the Brazil other business, were both down approximately 18%. North America decreased approximately 2% with high-single-digit growth in service, which was more than offset by lower product volume. On Slide 12, you will see the total gross margin decreased 30 basis points in the quarter to 27.4%. Service margin decreased 50 basis points to 32.2% primarily from lower utilization due to decline in product installations. Product gross margin decreased 250 basis points to 17.9% as a result of lower product volume discussed earlier on this call. Moving on to Slide 13, total operating expense decreased $4 million. The decrease in spend is the result of our focus on cost reduction actions and lower variable selling expense. Given the product revenue decline versus one year ago, total operating expense as a percentage of revenue increased to 25.6%, compared with 23.5% in the prior-year period. For 2016, we continue to anticipate net Diebold 2.0 program savings of $15 million. Turning to Slide 14, non-GAAP operating profit in the first quarter decreased approximately $15 million from the prior year, due to lower product revenue and product gross profit. Our operating margin was 1.7% for the quarter. While we continue to focus on OP and EPS metrics, we are also disclosing a new profitability metric this quarter, non-GAAP adjusted EBITDA, which is shown on the right of Slide 14. Our management team believes adjusted EBITDA will be a useful additional metric for evaluating operational performance of Diebold, especially in light of our new capital structure. A reconciliation and definition of adjusted EBITDA is included in the appendix to our slides. In the first quarter, adjusted EBITDA was approximately $29 million or 5.8% of revenue compared with $45 million or 7.8% of revenue in the prior year. Looking at operating profit in the first quarter as reported by segment on Slide 15, North America decreased $7.7 million versus the prior year which included higher activity from the Windows 7 upgrades and the completion of a large deposit automation project in Canada in 2015. Asia-Pacific decreased $9.5 million, in line with our expectations, driven by continued lower product volume from Chinese banks and lower product volume and margins in India. EMEA decreased $2 million due to unfavorable customer mix. In Latin America, operating profit increased $3.9 million, driven by the benefits of cost actions executed in Brazil during 2015, as well as the impact of FX and favorable hardware mix in Mexico. The global and corporate line was flat versus the prior year. Turning to the EPS reconciliation on Slide 16, non-GAAP EPS from continuing operations was a loss of $0.03 for the quarter. Non-GAAP EPS excludes net non-routine income of $0.34 with a $0.56 benefit from the company’s foreign currency option contracts which we entered into when we announced the Wincor Nixdorf combination. This was partially offset by $0.22 of non-routine expense of M&A costs, and legal and professional fees. During the quarter, the non-GAAP effective tax rate from continuing operations came in at 234% due to the treatment of discrete items against a relatively small income before tax amount. Moving on to Slide 17, our results reflect a $115 million free cash use from continuing operations for the first quarter. As typical for our industry, the first quarter sees the lowest level of project activity and is heavy on cash use as we ramp up inventory to support future installations. Looking at the year-over-year variance, the increase of approximately $40 million is related to higher M&A fees of approximately $15 million and lower GAAP cash earnings. Though it is not manifested itself in the numbers yet, we made steady progress working through our previously mentioned North America service invoicing delays tied to our ERP conversion. Even more important, we were able to address the underlying issues. Consequently, we exited the quarter with a more normal billing backlog and believe we’ll start to see improved collection performance in North America in the second quarter. Turning to Slide 18, DSO reflected an increase of 14 days to 72 days in the quarter versus the same period last year, primarily due to higher accounts receivable balances in North America. Inventory turns decreased to 4.2 turns compared with 5.1 in the first quarter 2015, reflecting an increase in service parts related to the North America service business as we have successfully transitioned to servicing of thousands of competitive units. Now, that we have a couple of quarters under our belt, and we have stabilized the units, we have seen the service parts levels decline and we expect to improve the service inventory to be more in line with historical terms. Net debt shown on Slide 19 was $62 million, a decrease of €223 million from year-end 2015. The decrease in net debt is largely attributable to the proceeds from the divesture of our North America electronic security business, partially offset by our free cash use increase in the quarter. Moving to Slide 20, I’d like to spend a few minutes discussing the changes we’ve made to Diebold’s capital structure. We received $360 million - $365 million [ph] of gross proceeds from the sale of our North America electronic security business and repaid $175 million in senior notes in March. Approximately $116 million of this cash is restricted for payment of existing term debt as well as deal cost tied the Wincor Nixdorf combination per our credit agreement. As previously highlighted, in the fourth quarter of last year we finalized $1 billion of our new capital structure, which includes our revolving credit facility and Term Loan A agreements. Since then, we secured additional funds to pay for Wincor shares, refinance debt and fund our integration activities. This includes approximately $1.4 billion of Term B debt and $400 million of high-yield notes. This structure currently has a blended interest rate in the mid-5% range, which is in line with our expectations. The high-yield notes funded in April, and the Term B we’ll fund in May with the balances sitting in escrow until the transaction closes. This will result in additional interest expense of approximately $20 million for our second quarter and $30 million in subsequent quarters. Prior to the close of the transaction, we will exclude the Term B and high-yield interest expense from our non-GAAP results. Excluding the aforementioned items, we expect to incur approximately $5 million of interest expense per quarter for the remainder of the year. Moving to Slide 21, we are updating our outlook for 2016 from continuing operations. Our outlook includes the impact of the China JV, but does not include contributions from the acquisition of Wincor Nixdorf. As we discussed on our prior call, our 2016 outlook is underpinned by a number of large projects already in backlog. However, some of these projects, particularly in North America are not progressing at the rate we had anticipated. While we are taking mitigating cost actions, this slower convergence of backlog along with persistently weak demand from regional bank customers makes it prudent to adjust our outlook. We now expect full-year revenue to be flat to down 2% as reported or flat to up 2% in constant currency. For the components of revenue, we expect FSS revenue to be flat to up 2% in constant currency, security revenue to be flat for the year and Brazil other revenue of approximately $45 million for the year. In addition, we are introducing adjusted EBITDA guidance of $220 million to $235 million for the year. Depreciation and amortization expense is expected to be around $60 million and share-based compensation about $20 million for the full-year. And our earnings per share on a non-GAAP basis is now expected to be approximately a $1.45 to a $1.60 with an effective tax rate of approximately 28% for the full year. For the second quarter, we expect the non-GAAP effective tax rate to be higher than the full year rate, due to the treatment of the GAAP call-out items which is similar to what we experienced in the first quarter. As you think about the cadence of our adjusted EBITDA and EPS for 2016, it will be a second-half loaded year. We expect first-half adjusted EBITDA to be around 30% of our full-year. However, on a non-GAAP EPS basis, we expect first-half to account for about 15% of our full-year given the aforementioned tax treatment, as well as other below-the-line items. Finally, our free cash flow outlook remains around $150 million for the year. This outlook is inclusive of our identified restructuring and non-routine expenses, but does not include the cash tax impact tied to the gain on the sale of our electronic security business or expenses related to the combination with Wincor such as the additional interest, legal and integration costs. With that, I’ll open up the call for questions.

[Operator:]

Thank you. [Operator Instructions] We’ll go first to Kartik Mehta with Northcoast Research.

[Kartik Mehta:]

Hey, good morning. Chris, I wanted to get your perspective on the free cash flow, obviously came in less than what you expected in the first quarter. But you seem confident in the year. And I was wondering if you could walk through why the confidence and why you believe you can get to kind of a $150 million for the year.

[Christopher Chapman:]

Yes. First and foremost, looking at the first quarter, clearly, when you look at the GAAP cash earnings, and that’s excluding the hedge option contract gain, which is a non-cash item, they were fairly weak in Q1. So that your GAAP earnings always underpins where your cash flow performances is going to come out. We did see good progress as I mentioned in our billing in North America. It was really more elevated in terms of getting that corrected in the February-March timeframe. And so we see that pushing forward into Q2, where we’ll see those AR balance start to more normalize, and so, based on the - essentially the benefit that we’re still going to get from the 2015 items that’s still going to come through in the full year that hasn’t gone away. So we’ll get that benefit that comes in. Looking at then the earnings ramp, we feel very confident about our ability to have strong second-half earnings, as well as continue to get more efficient in our working capital to see that improvement. And you’ll see that ramp as we move throughout the year.

[Kartik Mehta:]

And then, Andy, Brazil is going to struggle for a little while now. And I’m wondering - do you think Brazil - is there a pent-up demand there or is it just a region that’s going to continue to kind of be lackluster for a long time?

[Andy Mattes:]

Well, Kartik, two things about Brazil. First, this was the first quarter in a long time where Brazil was actually a contributor to the Diebold bottom line. So we’ve taken the cost actions and we’ve lightened the load. So whatever additional volume is going to come through in Brazil will be accretive to the company. There is reason to believe that there are volumes to come. But given the fact that a majority of the spend in our industry, that in either government-owned or government regulated institutions, you never know until it’s truly inked and finalized. So, I’m very cautious on Brazil, but I have a positive bias that things could turn to the better as the year progresses.

[Kartik Mehta:]

And then, just finally, Andy and Chris, I know it’s been a little time now with Wincor, but there are still areas that you’re not allowed to look at. But based on what you’ve seen, how comfortable are you with the $160 million that you talked about in terms of combined savings?

[Andy Mattes:]

I feel very comfortable with that, Kartik. The one thing is the number. And as you said, that stuff is done in clean room. We’re not privy to that. But the reason it gives me all the confidence is the tone, the spirit that we have in the integration planning teams. You can see good athletes on both sides who really genuinely want to take two good companies and form one great company. The tone is very collaborative. It’s very fact-driven. And that’s the right platform that you need to get your arms around these synergies. And we feel very comfortable that we will get there. And given the fact that Wincor’s delta restructuring program is on a good track, that also gives us confidence that they read the tea leaves for their company properly which, of course, enhances our degree of certainty that the next level of synergies will be based on similar and sound assumptions as the first round that they did for themselves.

[Kartik Mehta:]

Thank you very much. I appreciate it.

[Operator:]

And we’ll go next to Matt Summerville with Alembic Global Advisors.

[Matt Summerville:]

Thank you. Good morning. Couple of questions, you look at revenue down $65 million, OpEx down $4 million. Given all the iterations of cost out that’s been occurring as a company for years now, why is the expense leverage not better than what you’re recording?

[Christopher Chapman:]

You do have a little bit of anomalies in Q1 where we saw a little bit higher healthcare and associated costs in Q1, which had our OpEx spends a little bit higher, roughly $3 million than what I would say as a typical run rate. That typically averages itself out in the overall year. So when we look at where Q1 should have been, our expectations would have been roughly, we’ll say, $3 million to $5 million better. If you look at the benefits we’ve gotten from our Diebold 2.0 program, you will see much better comps as we go throughout the year, as we’ve gotten the IT work largely behind us, as we’ve gotten the shared service work and lot of other cost actions behind us. So I expect those comps in that leverage profile to look better as we accelerate throughout the year, just getting past some of these smaller anomalies that we see in Q1.

[Matt Summerville:]

Got it, and then, as I think about the quarter you reported versus your internal expectations, we know Brazil is awful, we know China is like a nonstarter until you get this JV going, regional had been weak for a little while now. What was the real surprise versus what you guys internally were forecasting?

[Andy Mattes:]

See, Matt, the biggest thing that I see happening in the industry is that things are projectizing, if there is such a word, to a higher degree. And that you see that on the top-line on both fronts. So the deals that we look at on the orders side, on the orders pipeline, I’ve got more large deals in the pipeline than I’ve ever seen since I’ve been with the company. But by the same token, they take longer, sales cycles increase easily three to six months from where they used to be. Same on the deployment side, which, of course, translates into your backlog conversion, these big projects aren’t being rolled out overnight. They’re done very thoughtfully. They’re done very methodically. You got to connect a lot of dots. We love to talk about omnichannel in the industry as an opportunity. And it’s a great opportunity on the software side. The flipside thereof is you have to connect with all these different software universes and not everything on the customer side always goes flawlessly. So we would have hoped for some projects to get done sooner, faster. And just the reality of project management kicked them out of the quarter, which is also why we said it’s the prudent thing to be conservative on our year guidance, because projects just have a life of their own and things happen to the good or to the bad. But that’s the biggest swing versus if you compare with a year ago, a lot of the Win 7 upgrades, those were run-of-the-mill jobs, primarily build as time and material. We would literally do 50 units, 100 units, send out bills, get paid and that groundswell does not seem to be round as much as all transformational project, again, very exciting that complexity takes its toll on timing.

[Matt Summerville:]

Thank you. I’ll get back in queue.

[Operator:]

And we’ll go next to Gil Luria with Wedbush Securities.

[Gil Luria:]

Thank you, good morning.

[Andy Mattes:]

Good morning, Gil.

[Gil Luria:]

So Brazil, Russia, China. They’ve been on a downward trajectory for several quarters now. For each of those, what’s the quarter where all other things being equal, not assuming a recovery, they become flat year over year, they stop being a headwind in terms of year-over-year growth. What’s the quarter that that happens for Brazil, Russia and China?

[Christopher Chapman:]

Let me just walk through the pieces. Brazil, they would be more of a Q2, Q3, is when we start to bump up against better comps year on year, neutralizing for currency. So really, we see that transitioning. And part of that’s going to be, you have the voting order that’s going to be coming through here. That starts to revenue and so that will help some of the comps as well. So Brazil will start to flatten out and look better on those comps, as we - in middle of Q2 and second half. China, you have to look at that and do the before and after. There is no easy way to do that, because we’re - once we finalize the Inspur new JV, we will no longer be consolidating that piece of product revenue. And so, that’s going to make a pretty tough from a comp standpoint for Q3, Q4, would still be down year on year from that product revenue. The service component, which we will still consolidate in China, those comps look fine year over year and I would just call that, flattish to slightly up, if you’re just looking on as reported basis, you have currency going against you there a little bit. And Russia, we don’t have enough activity there to really have a comp issue year on year. There’s not enough meaningful activity. And it’s just one-off - more one-off like the transactional sales that we would see.

[Gil Luria:]

So, China, in terms of revenue, which Inspur will contribute to the comps only get easier in 2017?

[Christopher Chapman:]

That’s correct.

[Gil Luria:]

Then the second question is there is a lot of confusion about what’s going to happen with the minority shareholders for Wincor Nixdorf. Would you mind going through the logistics of how much you’re going to have to pay them out, what’s the process for getting them out, how long you expect that to take?

[Andy Mattes:]

Mattes here, Gil. First of all, there are so much funds being thrown around the deal. It’s just outright amazing. So let’s just go back to very simply, the reason than we had a 75% threshold for deal acceptance and the reason we work so hard to get north of that 75% threshold is, because once you have 75% of the company, you can run a company in Germany per your own direction without any problems. So we - just to be very clear, we don’t have to squeeze out anybody. If minority shareholders want to hang-on, they hang-on. The second thing, and I know it’s frustrating from a U.S. M&A timing point of view that everything in Germany is so structured and it’s a very rigorous process, but there is also a bright side of that. The minority, how do you deal with minority shareholders is absolutely a pre-described process, and it goes as follows. Once we have closing, we have already said publically a few weeks ago, that we will aspire to a domination agreement. Wincor will call for an extraordinary shareholder meeting in the appropriate timeframe. And then there is a formula, a government-defined formula that everybody has to follow, which basically does a DCF on the company valuation. And if you take a look at previous M&A transactions in Germany, in most cases, that valuation actually came in below the offer price, in some cases at and some cases above. So you just - let’s run through the math, that’s the offer price that than is being offered to the minority shareholders and they can opt to sell at that price and/or remain in the company, and then they will get a predefined dividend. And that’s the end of that story. It’s a very structured process. It’s done by auditors. And it’s something we’ll have to work through. It’s work. But there’s nothing that will stop us from getting to the synergies. There’s nothing that’s going to stop us from getting the teams together. There’s nothing that’s going to stop us to enhance and move forward on the innovation side, on the portfolio side. It’s just work.

[Gil Luria:]

So let me clarify a couple of things on that. So you will recognize all of the revenue in EBITDA from Wincor and you will pay out, to the extent there are still minority shareholders, a portion of the profit that would have been ascribed to Wincor as a dividend. So only a small part of the profit you will pay out to the minority shareholders. But you will recognize all the revenue and all the EBITDA that will come from Wincor. Is that correct?

[Christopher Chapman:]

Correct. We will consolidate their results in their entirety. And we will back out the minority piece through non-controlling interest. The dividend and the formula for that, Andy described, it’s a bit complicated to get into here, but yes, you have the essence.

[Gil Luria:]

Got it, and let me just add that it made my day that Andy used the term fud [ph]. Thank you.

[Andy Mattes:]

Hey, Gil, just to add one thing to that. This is not unusual. I know of cases - I want to say, Ford of Europe was one of them, where they were minority shareholders in the company forever. And nobody ever noticed. It was just a setup. So, again, this is why the 75% hurdle was such an important hurdle. That’s why we worked so hard and now it’s all about execution.

[Gil Luria:]

Great. Thank you very much.

[Operator:]

And we’ll go next to Justin Bergner with Gabelli & Company.

[Justin Laurence Bergner:]

Good morning, Andy.

[Andy Mattes:]

Good morning, Justin.

[Justin Laurence Bergner:]

First question would be in regards to the revised financial self-service guidance. The 200 basis points lowering of that, could you maybe break out how much of that 200-basis-point reduction is tied to North America, how much is tied to China other BRIC, just whatever way it makes most sense from a geographical point of view?

[Christopher Chapman:]

Yeah, Justin, this is Chris. If you think about the pieces and the biggest change that we have here, I would say, Asia is largely in line with what we had originally indicated, specifically on the China side. But I would point to India, little bit longer decision-making there. So there is a little bit of an impact from India on top of our previous outlook that we had provided. Europe continues to be in line. As you see in the first quarter, we started off strong, up year on year and continue to see very robust activity on the order front there. Latin America, Brazil largely in line with what we had outlined before. We talked about Brazil been underpinned by the voting order that’s going to come through. And so, no significant changes there. And the last piece which is the biggest component of the change is really what Andy had outlined. We have very robust backlog. We’re actually up in backlog year over year in North America, looking at this same point last year. And really that’s been driven by the national accounts, but down a little bit on the regional side. So as we think about the year and the slower start that we got in the first quarter, that change is largely attributable to just the timing of how those projects go. Now, our internal targets are still to achieve and to execute as we ended the year. But just from a prudent standpoint, we backed the revenue down the take into account that slower start and to have a more realistic ramp for ourselves in the second half.

[Justin Laurence Bergner:]

Okay, great. So it’s almost all North America on the revision.

[Christopher Chapman:]

Yeah. Based on the timing of how things have moved, that’s correct.

[Justin Laurence Bergner:]

Okay. Thanks, Chris, and good morning as well to you. The second question would be on the reconciliation between GAAP and adjusted EPS guidance. I guess there is a larger add-back for total non-routine expense of $0.60 to $0.65 versus $0.25 to $0.30. Is that relate to this interest associated with debt for the Wincor transaction or how - what’s the delta between those two numbers?

[Andy Mattes:]

Yes. You’ve nailed it. Whenever we provided the original non-routine outlook back in February, it was predicated on, current state not having certainty on the deal being complete. Now that the deal is done, we have the financing in place, we have those additional costs. So if you look forecast to forecast, the biggest individual piece is the overall interest expense of roughly $80 million, that in the full year. That’s the biggest item. On top of that you have three other pieces, roughly $10 million of additional legal expense to complete the transaction, the higher integration cost that we are now seeing, given we have ramped up and started significant amount of that activity. And the last piece is the gain associated with the option contract that we have, which kind of offsets those and we try to break out those pieces. And so, given we’re holding the interest essentially for the combined companies, we’re backing that out as non-routine. Once, we complete transaction that will just be part of our results as we report them moving forward.

[Justin Laurence Bergner:]

Okay, thank you. One final question here, on the Wincor call this morning they sort of backed out or isolated transaction expenses. I think they were $12 million in the quarter and they indicated that they would continue in the future quarters until the deal closes. Are those transaction expenses that Wincor backed out part of the transaction expenses that your filings have highlighted or are those incremental to the transaction expenses your filings have highlighted? And if so, how much will sort of come out of Wincor for transaction expenses prior to closing?

[Andy Mattes:]

Now, when you look at our filings, and there’s a ton of information out there, we’ve been inclusive of the combined company expenses as we put those together. And so, you have obviously your banker fees, which will ultimately go against the transaction. They won’t run through the P&L. You have your financing fees in there as well, which those will be amortized over the life of the debt. Those are two significant pieces that have been outlined in terms of a cash expense, but the P&L treatment will be a little bit different. And then, you have all your legal and integration costs that will run through. Those were all totaled in the numbers that we put out as part of the debt and the other items that we’ve been talking about.

[Justin Laurence Bergner:]

Okay, great. So some of those are just showing up on the Wincor P&L pretty close?

[Andy Mattes:]

Absolutely, and this is why we are trying to focus on the EBITDA metric and trying to give us much visibility we can to the underlying performance of both companies here as we move forward.

[Justin Laurence Bergner:]

Great. Thanks, Chris. Thanks, Andy.

[Andy Mattes:]

Yes.

[Operator:]

And we’ll go next to Saliq Khan with Imperial Capital.

[Saliq Jamil Khan:]

Great, thank you. Good morning, Andy, Chris.

[Andy Mattes:]

Good morning.

[Christopher Chapman:]

Good morning.

[Saliq Jamil Khan:]

Hey, guys, could you give little bit more insight into the branch transformation pipeline and the service opportunities that you mentioned in North America, and some sense of the timeline we can see the pipeline convert into actual revenues?

[Andy Mattes:]

Great question, Saliq. As I said earlier, we’ve got more large deals in the pipeline than I’ve seen in a very long period of time. They are on the product side. They are on the services side. They are clearly on the multivendor services side. I mean, we got feedback from the customers, where we took over competitive gear, what they - they were bragging that these machines have never operated better since the day when Diebold took them over. And then, word is getting out in the street, which means we’re getting a lot of interest around these things. As I said earlier, the only thing that we also see is that sales cycles are getting longer. In the old days we would look usually at six to nine months, we are now easily at 12 to 15, and in some cases 18 month sales cycle. We expect in the next three to four months to have some good deals to talk about. We also expected in the next three to four months to have some major implementations to rollout as the project - they’re all sitting in backlog. If you compare our backlog and if you exclude China, our backlog year-over-year is up and is - so the deals are all there. It’s just a question of what can improve that and we should see some noteworthy movements in next three to four months.

[Saliq Jamil Khan:]

Could you - one of the things you talked earlier was the contract that you had with BBVA. What does the revenue recognition look like for the product and service agreement? And could you also give a little bit more insight into the margin profile?

[Andy Mattes:]

Revenue, it’s very simple. Rev-rec is, as the hardware is delivered, installed and accepted by the customer, it’s always the same. And service revenue is installation which you recognize with the initial installation, then depending on how the contract is structured. And I’m sure you’ll appreciate that we’re not giving contract details on a public call. It depends on whether there is a…

[Saliq Jamil Khan:]

I figured, but I wanted to ask you anyways.

[Andy Mattes:]

There is a warranty period. And once you’re off of warranty service is built pro-rata usually on a quarterly basis.

[Saliq Jamil Khan:]

Got it.

[Andy Mattes:]

But I can tell you it’s an accretive contract.

[Saliq Jamil Khan:]

Okay, perfect. And then, the other thing that you had mentioned was, you noted lower hardware volume particularly in the emerging markets. Are you not seeing an improvement in the sale of the lower cost and the energy efficient ATMs that you had talked about a year-and-a-half ago or was there a different reason?

[Andy Mattes:]

No. We actually see these numbers go up. We also see what’s really encouraging. If you take a look at our NextGen product, if you take a look at the 5000 series, predominantly the 5500, is gaining big traction. We now have - we have about 50 certifications that you need in each country and in bank and configuration under our belt, still more to come. So we see the pipeline ramping very nicely, which is also we expect our pipeline to swing and our order mix to swing as the year progresses more towards to NextGen, which of course will be beneficial to our product margins. So all of that is going well, it does not offset the China effect. It does not offset the India, where the government - the three steps forward about a year and year-and-a-half ago and is now probably two steps back. And decisions have slowed down and it does not offset the political idiosyncrasies that Brazil is struggling with. These countries are so large that they overshadow the whole industry. If you take a look at it, the China market alone is about 35%, 40% of the world’s shipment market. And if that market is not accessible to you, there is not a single product feature that can undo that. Which is why we’re so excited about Inspur. And by the way, the best thing - I have the Inspur CEO here this week and we spent a lot of time. For the first time, we see the Chinese competitors being afraid of us in a long time. And I think that’s really good news.

[Saliq Jamil Khan:]

All right, perfect. And then, Andy, one last question for you. You guys had issued the $400 million of senior notes. However, this was down from the previous expectation of roughly around $500 million. Was there not enough interest in the debt markets or was there another reason? And could you also highlight what does the reduced amount means for you going forward?

[Christopher Chapman:]

It was actually the opposite. Because we had such high interest on the Term B side, we upsized the euro portion of that and we upsized the total Term B and that allowed us to then drop the high-yield component to a little bit of a smaller amount. And from an interest rate standpoint that was beneficial to us. And ultimately, we got the blended rate that we were looking for. So that was the rationale behind it.

[Saliq Jamil Khan:]

Perfect. Thanks, Chris. Hey, guys. Thank you. I really appreciate it.

[Christopher Chapman:]

Thank you.

[Andy Mattes:]

Thank you.

[Operator:]

And we’ll go next to Joan Tong with Sidoti & Co.

[Joan Tong:]

Hi, guys. Thanks for the color on the backlog and the pipeline. But if I’m looking at the revenue outlook for 2016, that down 2% to flat, I’m just wondering how much of the business is booked. Obviously, you have a very huge service component to it. But how much of the business actually you booked and how much you have to go to win to get to your 2016 revenue guidance? I assume that there are more business being booked, because you talked about your backlog actually increases quite a bit.

[Christopher Chapman:]

If you do the high-level math, Joan, it’s roughly two-thirds of it is booked. The backlog number that we see here today is, we’ll say, roughly in line with the same backlog that we reported in our 10-K. And so, if you look at the remaining revenue over the final three quarters, just on ballpark numbers here, don’t model everything around this, but it’s roughly $900 million in product revenue that we have over the next three quarters to realize on the product revenue side. And so, with that amount of backlog, it’s roughly two-thirds in-house.

[Joan Tong:]

Okay. I see. And then, Andy, can you just talk about India, because I remember in the past you talk about the BRIC countries. And you pretty much like talk about Russia and then Brazil and China as being week. We have seen that happening. But in terms of India, it seems like there was good like performance in the past. And then, now we talk about Indian is getting a little bit softer. Other than the government’s influence how do you see demand trends there?

[Andy Mattes:]

India has - my numbers might be slightly off, so take it with a grain of salt. But I think India had initiated 12 new banks, where the government gave licenses out and there was a lot of excitement around that. But unlike with many new initiatives, the excitement was - got a little ahead of its skies, realities setting in. So we see two things in India. We see decision cycles being slow, slower than they used to be. We also see pricing in India on the hardware front to be extremely aggressive. And as you know we are very selective in the type of deals that we take. So we don’t want to just have the bottom feeder deals. So between deals where value proposition makes a difference, where margin - where software makes a difference, where you can be margin accretive and the amount of opportunities, it’s just less than it used to be about two years, year-and-a-half ago.

[Joan Tong:]

Okay. Is it on the hardware side although have seen softness on the services business?

[Andy Mattes:]

No, the service side is completely un-impacted. It has - the service attach rate in India is close to 100%. Service margins in India are very accretive. It’s just how many of these things do you want to roll out and do all these new banks, once they’re - then once they’ve passed their initial excitement about this is our business model going to be. Are they really starting it out as strong or are they taking in more phase-in approach. And guess what, reality set in with these guys as well. And they said, you know what, we’re taking it little slower, just to do not burn through all the cash that we have. So it’s nothing that one should not expect. India, still a very great opportunity going forward, it’s a great market, but it has just slowed down.

[Joan Tong:]

Okay, okay. And then, questions regarding omnichannel, since, Andy, you talked about it. You mentioned about it a couple of times here. And then, you mentioned that before, and understanding like this is a specific area you also want to play. But it’s such a big like a space. Like which specifically - like which specific segment within omnichannel that you have product or Wincor has products? And what are we talking about here, market size, like growth rate, and things like that?

[Andy Mattes:]

If you take a look at the overall omnichannel market, you’re looking at $15 billion TAM. So the market per se is huge. And then you just got go through every channel, so very simply, if you think about that the branch of the future, that the teller is going to go away, that means all that’d be in front-of-the-counter technology meets the behind-the-counter technology. This is by the way in area, where we will pick up some very interesting IP from Wincor, because they’ve been stronger in the behind-the-counter technology than Diebold has in the past. So that’s one area where you have omnichannel. The second, of course, very important is the integration of mobile with the ATM. And we’ve got some really cool technologies that are going on in that segment. The third one is the integration that you see on the video side with the self-service, and again, a very strong point, because in our product-roadmap video is a feature that you can add to just about any product that we have on the landscape, which makes us very unique. You then have, of course, the interconnectivity into the whole retail side of omnichannel, which is the flipside of what the banks have. And there we’re extremely excited about the software opportunity and the software IP that we’re getting from the Wincor side. And if you listen to the Wincor call, you can see that retail is, as a market, is more in the upswing right now, which of course provides more opportunities as we go forward. So it’s every single channel that you have. But it’s also every single back-office system that you have to connect to. And talking about another asset that we’ll get with Wincor is, they have a practice in Europe to connect the ATM, the self-service world, with the SAP offices in the backbone that many banks run in Europe. So, lots of complexity, lots of opportunity, $15 billion TAM and we’ll definitely take our share of that market.

[Joan Tong:]

Thank you, guys.

[Operator:]

And we’ll go next to Nilay Mehta with KLS Investments.

[Nilay Mehta:]

Hey, guys. Thanks for taking my call. The first I just wanted to sort of touch on is the backlog. You guys talking about two-thirds covered for the year in terms of product revenue. What is your typical coverage in backlog sort of every year? This is my first question.

[Christopher Chapman:]

Yes. It’s fairly similar. And so, when we come into the year based on product, I mean, starting close between 50% at beginning of the year and working your way at this point up to around two-thirds is fairly typical.

[Nilay Mehta:]

And this is despite the fact that you guys have a sort of a longer projectizing the sales cycle now, given some of the more complex branch transformation issues?

[Christopher Chapman:]

Yes, I think we factored that into the current backlog and the ability to get it turned and turned into revenue here in the year.

[Nilay Mehta:]

Got it. And in terms of the backlog again, what’s the firmness of the backlog? What’s the ability for push-outs or cancellations et cetera by customers? And how comfortable do you feel with the backlog? And have there in the past been cancellations, push-outs, et cetera?

[Andy Mattes:]

We have not experienced any cancellations in the backlog nor am I aware of any of those conversations. And as I’ve said earlier, can projects push a quarter a few months? Absolutely, especially, if a bank opens new branches and the general contract, if there is no roof on top of the bank, you’re not going to implement a branch transformation solution. I mean, as mundane as that sounds, sometimes these things just get in the way with rollouts. But that’s just usual project management. We just got to get our heads wrapped around the fact that this business is going to be more project-centric. And that has a little bit more of volatility. But by the same token, it also gives you larger orders and you’ll see both effects in our P&L going forward.

[Nilay Mehta:]

Got it. And then, another sort of backlog related question. How do you guys see the backlog, I guess, trending going forward? Sounds like you guys are obviously talking to customers about additional branch transformation opportunity, et cetera. You did mention nationally it’s getting better, but regionally it’s seen sort of weak. How do you sort of see the trend of backlog going forward? And how much of your backlog, because it’s more product based, how much sort of attach rate do you see for yourself on services business?

[Andy Mattes:]

Let me take the second part, because we do not report service backlog, right. So all we talk about is product backlog. Service backlog would look very different. As most of the deals in backlog are developed market deals, the service attach rate is way north of 90%, probably even north of 95%. So that’s all goodness. And the - as I said earlier, the pipeline of large service deals, managed service deals, outsourcing deals, multivendor service deals is increasing at a very encouraging clip-rate. And that’s something that we’re working very hard to close, because these things provide very steady revenue. And as I said on previous calls, these service deals, they’re being recognized as revenue as we exercise the work, as we exercise the contract, so they never ramp - they never spike, but they have a very steady growth. And you can see that with our services software mix north of 65% in Q1. You can see how that mix is shifting. And needless to say, that is extremely sticky business, very high degree of predictability, very good margins.

[Christopher Chapman:]

Yes. And just regards to the trend question that you asked in the front-end on the backlog. If I just give you a quick sense by geography, all geographies are either right on top of the same number as last year, so flat to slightly up. When you look year over year with the only exception there being Asia, Asia is down given that the dynamic that we talk about in China and little bit of that slowness that we’ve seen in India as well, but if you look at Europe, up year over year. If you look at Latin America on a fixed rate, slightly up versus prior year and North America - North America is flattish, but it’s up in the nationals and down in the regionals from the activity that we’ve seen. So from a trend standpoint, backlog looks as healthy at this time last year as it did - or this year as it did last year.

[Nilay Mehta:]

Got it, I guess, my trend question one, will be more of a looking forward, how do you guys see the backlog developing, like what kind of deals and projects you guys are speaking with in terms of pipeline going forward on your…?

[Christopher Chapman:]

Yeah, we’re not going to get into all the specifics and break out those components. But I think as Andy highlighted what we’re seeing, there is very, very large project discussions. And we are opportunity-rich as we look in the out quarters in terms of continuing to grow the backlog. So I feel very positive about that.

[Nilay Mehta:]

All right. Thank you, guys. That’s it for me.

[Stephen Virostek:]

Okay. Operator, I think we have time for one last question.

[Operator:]

Okay. We’ll go next to Rob Jost with ‎Invesco.

[Robert Jost:]

Hi, thanks. I’ve got two quick questions. The first question has to do with a comment you made earlier about the way the projects are lengthening and becoming more complex. And so, I’m wondering is this also impacting the way that the banks think about the relationships, so they - should we expect them to be more monogamous, for lack of a better word, with their ATM vendors?

[Christopher Chapman:]

Well, all of us - in the industry would love to see that, right? I’m not quite sure whether that’s going to lead to monogamy, but it’s definitely leading to strategic conversations and strategic decisions, where you have more of an approach to - to a standardized solution is on the software side. If you take for instance one of the recent software wins that we had with our Phoenix Software in Australia, that’s where a customer had two different software universes. And they then standardized on Phoenix for the whole nation to make sure it’s one we want to interface, one look to the market. And that’s why our multivendor software capabilities are so important. I mean, the fact that we’ve moved into the number two space only nine month after the acquisition and the integration of Phoenix into our business, in my mind is extremely encouraging. If you then take the fact that Wincor is in the number space in the multivendor software space, and you combine those two, that’s going to be a very attractive area to grow from. And on the software side, you definitely want to run one software. You don’t want to run two or three different software elements. On the product side, I guess, we have to deal with multiple wives for a bit longer.

[Robert Jost:]

Okay. And then, my second question is just about your Inspur joint venture. And I may have missed this, so I apologize if I did. When do you expect that to start kicking-in in earnest?

[Christopher Chapman:]

As soon as we get the approvals on the local side, that’s just the technicality, because one of the benefits is that we will relocate our manufacturing, both ours as well as their current to one of the new cost-effective tax zones. And we expect that to be all inked and done in the beginning of Q3.

[Robert Jost:]

Okay. Perfect. Thank you.

[Andy Mattes:]

Thank you.

[Operator:]

At this time, I’d like to turn the conference back to Mr. Virostek for any closing or additional remarks.

[Stephen Virostek:]

I just want to thank everyone for participating on today’s webcast. If you have follow-up calls, please call us at Investor Relation or send us the e-mail. Thank you very much.

[Operator:]

This does conclude today’s conference. We thank you for your participation. You may now disconnect.