Diebold Nixdorf, Incorporated
Q3 2016 Earnings Call Transcript

Published: 15 Nov 2016

[Operator:]

Good day, everyone and welcome to the Diebold Nixdorf Third Quarter 2016 Financial Results Conference. At this time for opening remarks and introductions, it’s my pleasure to turn the conference over to Steve Virostek, Vice President of Investor Relations. Please go ahead, sir.

[Stephen Virostek:]

Thank you, Laurie and welcome to Diebold Nixdorf third quarter earnings call for 2016. Joining me today on the call are Andy Mattes, our CEO; and Chris Chapman, our Chief Financial Officer. During this webcast, we will refer to slides, which are available on the Investor Relations page of dieboldnixdorf.com. Our discussion is being recorded and a replay of the webcast will be made available on our website later today. Our comments will focus on results from continuing operations unless otherwise noted. Additionally, any comments made on the financials or performance of Nixdorf represent a U.S. GAAP view for the period for which we consolidating. On slide number two, you can see that our discussion will include certain non-GAAP financial measures, which we believe are helpful indicators for measuring the company’s baseline performance. We’ve provided a reconciliation of these metrics to their respective and most directly comparable GAAP metrics in our supplemental materials. Slide three contains a reminder that certain comments made today may be characterized as forward-looking statements. There are number of factors that could cause our actual results to differ materially from these statements. You may find additional information on these factors in the company’s SEC filings. Please keep in mind that forward-looking information discussed is current as of today, and that subsequent events may render certain information out of date. And now, I’ll hand the call over to Andy.

[Andy Mattes:]

Thanks, Steve. Good morning, everyone and welcome to the call. I’m very pleased to speak with you today as CEO of Diebold Nixdorf. The most significant milestone of the quarter was closing our transformative acquisition of Wincor Nixdorf. It’s hard to believe, it has been about a year since we announced the combination and set the wheels in motion to obtain a necessary commitment from shareholders, lenders and regulatory agencies. While this was a herculean effort, we’re pleased to have achieved all the necessary milestones within our projected timeframe and closed the transaction on August 15th. This is an extremely exciting time for us, and it’s also a time of significant change and recalibration. Since the third quarter financials include a full quarter of legacy Diebold results and a partial quarter for Nixdorf, we spent many hours bringing together the numbers and weighing the merits of how to present these results. Chris and I have prepared our remarks with these complexities in mind and with the objective of providing a transparent view of the underlying business performance. For starters, I’d like to recap our core belief as to Diebold Nixdorf is better positioned to serve our customers and generate shareholder value. First, unprecedented change in the banking and retail industries is creating tremendous opportunity for higher value services and software. We see this in our results and in every customer conversation. As we move up the value chain, we have delivered organic growth in services and software revenue on a year-to-date basis. The Nixdorf acquisition act to that growth and increases our addressable market. Additionally, we have increased global scale and capacity to allow for a greater collaborative innovation with customers. At this very early stage of the integration, we’re already redirected our R&D focus on tomorrow's high-growth technology area. We showcased several innovations last month at the Money 20-20 Conference in Las Vegas, which will capitalize from these trends. First, cloud-based service as - software as a service. We demonstrated our cloud point of sale solution, which enabled small and medium sized retailers to use a table computer as the primary customer touchpoint in their stores. Second, the API economy and application marketplace. Our AV cashless payment subsidiary has built an agile, open ecosystem for secure transactions and value added absent services, which allows us to monetize the Omni channel opportunity for small to mid-sized retailers. AV added to its open ecosystem, by announcing its corporation with hardware vendor BB Pod [ph] to connect to AVs global marketplace, branching easily into a mobile device options. Next, Big Data Analytics. We launched our connected in-size platform, which shows how collaboration and data analytics expertise can drive better business outcome. Our capabilities are enabling financial institutions to have a complete view of their sales service channel and improve ATM uptime by anticipating maintenance needs, we are already piloting solution with Banco Popular in Puerto Rico and a regional bank in the U.S. And finally, monetization and mobility. We unveiled our extreme ATM concept by far the world’s smallest ATM at less than 10-inches wide, or roughly one and a half times the width of the dollar bill. With retail, more space and an increased premium size does matter and our customers are demanding smaller footprint solutions. This ATM concept combines cardless mobile transactions with encrypted touch screen technology. Another conviction is that retail solutions enhanced our growth opportunities and spur innovation. As an example, we’ve finalized an Omni channel software contract during the quarter for approximately 1200 Pepco stores located throughout Eastern Europe. Once deployed, our software will enable customers to shop seamlessly in-stores bridging online and mobile channels. This will add to our strong presence in Europe, while our retail solutions are used by 24 out of the largest 25 retailers. Growth in our industries will be driven by software innovations. On the banking side, our company has the leading multi-vendor software portfolio and our customers include 11 out of the top 15 financial institutions in the United States. Our final core belief is that this combination will generate a $160 million in cost synergies and result in higher profit margins than either company could have produced on its own. Since the close of the transaction, we have launched designated integration work streams and assigned cost synergy targets across the organization. Based on our work plans, we are more confident than ever in our ability to deliver on these targets. These synergies provide a path towards our non-GAAP operating margin target of greater than 9% for 2019. In a nutshell, we are more convinced than ever that this was the right deal at the right time and we're off to a good start with a number of foundational achievements. The Domination agreement was approved by Wincor shareholders; the management team is in place retaining key leaders and attracting new talent. As an example, Ashwin Matthew recently joined our company from Microsoft as CTO of our software business. Many of you have asked us, how do you plan to get your arms around this truly global company and build a new common culture. We have taken steps to blend talent from both organizations, leverage best practices and build a customer-centric mindset. Our new metrics operating model consists of three lines of businesses, services, software and systems and three regions, the Americas, EMEA and Asia Pac. This setup provides more focus and links logically into our growth and cost synergy initiatives. From the governance side, we named three new members to the Wincor Nixdorf Supervisory Board, our Head of Compliance, Lisa Radigan, Chris and myself. Additionally, we've added two directors to our Board of Directors, Dr. Alex Dibelius, Managing Partner of CBC Capital Partners and Dr. Dusedau Former Director of McKinsey. Shifting gears, I will make a few comments on our third quarter result. Solid Nixdorf result added to our quarterly performance, which is why we're not speaking to year-over-year growth comparison as they are not meaningful. EMEA which is now our largest region at approximately 38% of revenue performed in line with our expectations. We continue to see constant demand for innovation, automating transactions and realizing operating efficiencies. New orders in the regions were encouraging, including FSS wins in Turkey, the win at Pepco, and a competitive win for upgrading more than 10,000 point of sales terminals and software at one of the largest grocery store chains in Europe. North America accounted for 31% of revenue in the quarter. We delivered organic growth in our services business as expected. While we continue to see healthy activity in the North American market, our product revenue performance and orders were disappointing. This has not only impacted third quarter results, but also has a carryover effect to our fourth quarter outlook which Chris will discuss. We have much higher aspirations for our North America business going forward as brand transformation activities become mainstream in the U.S. regional banking segment. We also named the new leader of Octavia Marquez, who lead the turnaround in both revenue and profitability of Brazil and Latin America over the past two years. He has met with the significant number of customers and alliance of sales organizations around innovation and growth. Latin America accounted for 17% of revenue during the quarter. Revenue growth in services, election and lottery were offset by declines in security and FSS product volumes. Orders were up in Brazil for the second straight quarter, however, total orders at slightly lower due to difficult comps to the prior year quarter, when orders were up more than 20%. Asia Pacific generated 14% of revenue this quarter. Although we are more diversified in this region, headwinds in the largest market China continue to impact the top and bottom line. To reestablish our competitive presence in China, we recently finalized joint ventures with Aisino and Inspur, both major IT companies. We will leverage the innovation strength of both companies to regain market share although the benefits were flow through our equity income line because we are minority partners. On a completely different note, we also achieved another major milestone as we completed our corporate managership. Starting in 2013 these activities included enhancing our compliance policies and processes, adding robust controls to increased transparency and oversight, hiring dedicated compliance professionals and installing a culture of compliance throughout the organization. By strengthening our processes and controls, we have not only for field our settlement obligation but build a stronger foundation as we execute our interrogation activity. Special thanks to our General Council Jon Leiken, Elizabeth Radigan and the entire legal and compliance team. Moving on to our fourth quarter let me provide our first outlook as a combined company. We are targeting revenue of approximately $1.3 billion with adjusted EBITDA in the range of $100 million to $110 million. With respect to 2017, we will provide guidance in February, after we’ve completed our first combined budget cycle and announced our year-end result. We are also planning an Investor Day in New York on February 28. I hope that you will join us for a half day discussion on the company’s strategy and outlook. With that, I’ll turn the call over to Chris for more details on our financial performance.

[Christopher Chapman:]

Good morning, everyone. As Andy just outlined, we closed the Wincor Nixdorf acquisition on August 15, and our third quarter results included full quarter from the legacy Diebold operations plus Nixdorf results as of the transaction close. For this quarter and the next several quarters, year-on-year comparisons will be made against the results for legacy Diebold. We will provide additional comments to help investors better understand the underline trends in the business. My comments today will focus on our non-GAAP results from continuing operations unless otherwise noted. As a reminder, the impact to the divested North America Electronic Security business is included in the income from discontinued operations net of tax line. Starting on slide six, non-GAAP revenue increased 68%. Organically non-GAAP revenue decreased 2% which is result of continued growth in Diebold services business more than offset by declines in Asia Pacific primarily related to China. We’re the effects of currency, organic financial sale service revenue decreased 8% with decline in Asia Pacific and to a lesser extent EMEA, which was partially offset by improvements in the Americas. One of the benefits of our acquisition is our new retail solution set in customer base. Retail added $176 million of revenue during the third quarter. Looking at the remaining Diebold legacy businesses, the change in security of $9 million was primarily related to lower volume in Latin America and North America. Brazil other revenue increased approximately $42 million year-over-year, as we delivered on the previously disclosed election systems order. Moving to slide seven, total gross margin was 24.7%. Service margin of 28.8% largely reflecting the new mix of business for a combined company with Nixdorf margin substantially lower than legacy Diebold. Product gross margin was 19.7%, reflecting a benefit from the higher margin Nixdorf business which was partially offset by the mix of businesses and reduced volumes in the legacy Diebold business. Turning to slide eight, total operating expenses increased $69 million EBITDA prior year period primarily due to the inclusion of the legacy Nixdorf results partially offset by lower reinvestment levels and cost reduction actions at legacy Diebold. As a percentage of revenue, operating expenses improved by 180 basis points, when compared to prior year. On slide nine, our operating margin was 4.8% for the quarter, reflecting a 70-basis points improvement year-over-year. Non-GAAP operating profit in the third quarter increased approximately $24 million with declines in Diebold legacy North America and Asia Pacific segments more than offset by improvements in Latin America and the benefit from the combination of Nixdorf. In the third quarter, non-GAAP adjusted EBITDA was $77.4 million or 7.8% of revenue compared with $41.5 million or 7% of revenue in the prior year. These year-on-year improvements were attributable to the acquisitions. Looking on operating profit in the third quarter as reported by segment on slide 10. North America operating profit decreased $10 million which was driven primarily by lower product volume in the legacy Diebold business as highlighted by Andy. Asia Pacific operating profit increased $2 million with the $10 million declined in the legacy Diebold business due to lower activity in China and India, which was more than offset by the benefit of the acquisition. In EMEA, profit grew $26 million, as a result of the Nixdorf acquisition. In Latin America, operating profit was up $8 million primarily due to the legacy Diebold business, driven by increased election systems activity and with lower operating expenses mainly in Brazil. Our global and corporate expense increased $3 million as the impacted the acquisition offset lower spending levels at legacy Diebold. Turning to the EPS reconciliation on slide 11. The non-GAAP EPS from continuing operations was $0.34 for the quarter. Non-GAAP EPS excludes non-routine expense as a $1.99, which consist of $0.76 and purchase price accounting related to the Nixdorf acquisition. At $1.20 for acquisition and integration expenses, $0.10 of restructuring and $0.05 primarily related to the mark-to-market impact of the company’s foreign currency contract associated with the Wincor Nixdorf acquisition. The tax benefit for restricting and non-routine items inclusive of allocation of discrete tax impacts was $0.37. During the quarter, the non-GAAP effective tax rate from continuing operations came in at 23.9% and brings our year-to-date rate to 24.8%. Moving on to slide 12. We delivered approximately $1 million of free cash flow from continuing operations for the third quarter and on a year-to-date basis, we had a free cash use of $211 million. Included in the quarter and on a year-to-date are approximately $62 million and $95 million of cash payments for acquisition and divestiture related expenses respectively. Excluding the effects of acquisition related cash expenses, our free cash flow was benefiting for the Nixdorf acquisition, as well as improvements in the legacy Diebold business, as we made progress on our working capital performance. For the full year, we expect operating cash flow of $20 million, capital expenditures of $50 million and a free cash use of $30 million which includes approximately $180 million of cash payments for acquisition, divestiture, integration expense as well as cash taxes earned from the sale of our North America Electronic Security business. Our new outlook includes a positive contribution from Nixdorf, offset by lower GAAP net income from legacy Diebold. On slide 13, we provide highlights of our liquidity and net debt position. As of September 30, we reported cash on hand of $788 million and gross debt of $2.1 billion, resulting in a net debt calculation of approximately $1.3 billion. Our capital structure was constructed to purchase all of the outstanding shares of Wincor Nixdorf. Based on the current minority structure, neutron liquidity needs as well as our confidence in future cash flows and expected benefits of our cost synergy program, we’ve paid down $200 million of our U.S. dollar term B facility in November. This will reduce our interest expense by around $10 million per year and bring our annual rate to approximately $130 million. Moving on to slide 14. Thinking about our fourth quarter outlook, we have taken the following factors into consideration. First, the Asia Pacific segment will reflect our new joint venture structures in China a majority of this business will no longer be consolidated, all of the accounted for in the other income line. Second, the complexities of consolidating our two companies which include the nuances of the different accounting standards, IFRS and U.S. GAAP will have an impact on the reported results. Third, carry over performance from our North America segment as revenue from certain large projects moved into 2017. And finally, the challenging year-on-year comparisons for the retail business which posted very strong revenue growth during Wincor’s December quarter of 2015. Based on these factors, we expect fourth quarter revenue to be around $1.3 billion, net loss to be $34 million to $40 million and adjusted EBITDA to be in the range of $100 million to $110 million for the quarter. We also expect GAAP EPS to be a loss of $0.45 to $0.52, the non-GAAP EPS of $0.27 to $0.34, which includes an effective tax rate of approximately 32% for the quarter. With that, I’ll open up the call for questions.

[Operator:]

Thank you. [Operator Instructions] We'll take our first question today from Matt Summerville at Alembic Global Advisors.

[Matt Summerville:]

Thanks. Good morning. I wanted to just spend a minute talking about the outlook in the FSS business as it pretends to North America. Sounds like you're seen slippage to the right and a couple of big deals there. Is there a way to quantify how much has moved out of what you thought was hitting into '16 in the '17? And then Andy if branch transformation is sort of becoming mainstream with respect to the regional banks spaces as you mentioned in your prepared remarks. When do we finally start to see that show up in to order book?

[Christopher Chapman:]

Hi. Good morning, Matt. On the outlook on North America, if you think about the movements I would call it roughly $30 million of product revenue that has pushed out of 2016 into '17 on the hardware side. On top of that you'll have the carry-on impact of additional service revenue you typically see additional build work and professional service activity that comes along with that. So, the overall margin impact is a big higher than what you would see on the typical hardware margin side. And I'll let Andy answer the other question.

[Andy Mattes:]

Hey, Matt. On the branch transformation, as we discussed earlier at the moment it's still all big player's game as very much in projects. We do a lot of conversation on the regional space. I've had multiple customer interactions over the last three months where people are telling that they waited mainly even too long. So, to answer your question I would expect the regional banks to show backup towards the end of '17 and going into '18 from an order point of view.

[Matt Summerville:]

And is this - I'm sorry go on.

[Andy Mattes:]

You can actually see that sometimes an outside event creates a higher degree of urgency and you could see that with our wins in Canada this year which were clearly all driven by the fact that the cost pressure on the Canadian banks has increased and hence our volume has been up substantially in Canada year-over-year.

[Matt Summerville:]

And then just as a follow-up, Chris. When you were sort of walking through the revenue in Q4, can you specifically dig into China a little bit more in terms of what the step down in product revenue looks in '16 over '15. And then I guess when do we start to see profitability that will hit other income start to flow through if you will from these JVs? I guess what's the lag there? If you can just be more granular about that that would be helpful, it's very complex.

[Christopher Chapman:]

Yeah, so let me try to talk China combined business. So, as we move forward new order activity when you look at the two JV structure will be largely gone. So, the hardware revenue with the scene of JV will completely move over and that business will no longer be consolidated the same thing with the Inspur JV, we see that revenue for all new order entry activity is going to completely shift over on the hardware side. So, if you think about that from the magnitude standpoint of the legacy business. It's going to be north of the $150 million of hardware revenue from a year-on-year delta that you would expect impacting the comps from a '16 to '17 perspective. So, that's give you the high-level view on the hardware side. With regards to some of the ramp up without going into all of the complexities, I would expect still the next four to five months we're going through some of the transition work. We're handing over manufacturing facilities and the complexities of that and actually will have a manufacturing facility that will be starting up as part of the Inspur JVs. And so, I would expect year one to be slightly accretive when you look at the overall impact with the bigger benefits as we move forward understanding that we only get if you did blended average here roughly 40% of the combined profits as we go forward.

[Matt Summerville:]

Great, thank you.

[Operator:]

Moving next to Gil Luria at Wedbush

[Gil Luria:]

Thank you. So, Andy as you get to look at the broad portfolio of businesses you now have. The retail is the new business. What’s your early assessment of the fate of that business into the overall Diebold Nixdorf and what potential do you see for that business?

[Andy Mattes:]

It’s a great question Gil. I have been spending a lot of time with retail customers over the last month as you can imagine, and I have to say with every visit, I get more excited about the opportunity. Let me just walk you through a few labors that will clearly play as a benefit to Diebold Nixdorf. First, more so than in any other business, retail truly has global players. If you take a look at our retail revenue, almost about 30% of it actually is originated by global players and given the combination of both company’s we’re the only player in the world that can offer a solid end-to-end portfolio on the hardware, software and services side in just about any country that retailers want to go. Secondly, also on the retail side, we see a very strong push towards services and managed services. The whole motion of a store lifecycle management is resonating with many of the top players and as basically where we managed everything in a retail store that has a plug attach to it and they do that in an outsourced fashion because complexities and going up, cost pressure is going up and they are looking for a partner like ourselves to help them through that. And third, if you take a look at innovation cycle, the innovation on the payment space right at the moment is happening more on the retail side and more from the consumer end of the story than its happening on the banking side. If you take a look at Money 20-20 in Vegas, I want to say 80% of all the solutions, of all the topic that were discussed were consumer/retail centric and the fact that this is a less regulated environment, the fact that this is an environment where the consumer decides how to spend their money, drives innovation, drives the level of collaboration and we think we’ll see a lot of cool new technologies emerge on the retail side, especially when you think about cloud-based solutions. So, all-in-all, with every customer visit, I get more excited about the upside opportunities that we have on the retail side.

[Gil Luria:]

That’s great. And then Chris, you put a $180 million of cash into this year’s number, in terms of restructuring and one-time expenses. How does that relate to the $200 million you initially planned for and how much does that leave for restructuring and one-time expenses for 2017, recognizing you’re not going to give any guidance on 2017, how much of the, just of the restructuring and one-time cash expenses do you still see that will - you’ll need to take care of going forward after the end of this year.

[Christopher Chapman:]

Yeah, the $180 million that I have referenced, that is the cash payout that’s tie to the transaction that is not include any impact of restructuring and so if you think about that is primarily the legal investment banker fees, some of our integration consulting impacts. The interest expense tie to the transaction of both company’s post acquisitions, so that also not includes the cash payments for the investment banking and legacy fees for the Nixdorf fees which will be coming through in the fourth quarter, that will be actually paying out. So, that $180 million is really just tie to getting the transaction done. As we move forward, we have the integration activity that’s going to be tie to delivering on the $160 million of combination benefit that we have outlined, we estimate that, somewhere in the $130 million to $160 million range of one-time cost to achieve that and we’ll provide more clarity on that and little more granular a walk on that over the next couple of years when we get together in February, as we complete the work and the plans on that.

[Gil Luria:]

Got it. Thank you.

[Operator:]

And we’ll go next today to Paul Coster, at J.P. Morgan. Please go ahead.

[Paul Coster:]

Thanks for taking question. Andy when you first came into Diebold, what was the first things you did look to turn the service business into a profit and you can do that pretty quickly and now the Nixdorf service gross margins, considerably lower than those of your legacy Diebold business, is this an area of market describer that all hanging through and can you make me through progress with respect to service margins in early ‘17?

[Andy Mattes:]

Well, the service business is clearly one of the areas that attracted us to the combination. We spend a lot of time and energy and looking at different service model, we believe we then have a very positive impact on the legacy Nixdorf service result and if you take a look at how our synergy program breakdown, services will carry a fair share of that $160 million. I also believe, we have services upside on the revenue side. Now, keep in mind those flow through as you perform the service there was not going to be a step shape function, but both on the retail side, I already mention the idea of the store lifecycle management as well as on the banking side especially also in the Europe, do we see more opportunities on the manage services side. So, for me, services have growth opportunities on the top line, on the margin, on the fulfillment and is a complete new setup and that’s the area that we’re spending the lot of time in energy on and will contribute to our 2017 OP improvements. Just from the nature of the beast, you want to map that out more over a multitude of quarters services never a one point and time event.

[Paul Coster:]

Okay. And then on the FSS segment, just to couple of questions first of all do you feel like you have just because of the timing of this acquisition that you’ve lose some share in the Tier I national banks in the U.S. of the ATM business and can you tell us a little bit FSS branch transformation in Europe?

[Andy Mattes:]

So, we clearly had some delays with some of the orders both in the America’s as well as in Europe in the third quarter. I think both companies have done a formidable job of keeping our order book healthy with the first half of the year which became obvious that the two companies will combined, customers will be holding up to just to make sure that they have a full appreciation of who is their Account Manager and who their dealing with and you can see that a lot of that will come through as orders in Q4 and Q1. But we have a little bit of the delay and quite honestly we lost one deal in North America that I wish we have it. Having said that, just on the product revenue, product side alone, we’re currently setting on a backlog that substantially north of a billion dollars if I think look at the North American backlog is actually up 15% to 20% year-over-year, so I feel good about the midstream outlook from its branch trance relation point of view, Europe is the key driver and as much as it sounds like we are saying the Samuel Song, it just now that people are truly starting to spend serious amount of money and the longer Europe finds itself in the negative interest rate environment the higher the pressure on the cost side of the banks to more interest. We get on technology upgrade but also to more interest we get on the manage service side of the house just because people are trying to improve their cost position. Now as I said earlier, I believe that the Regional Banks in the U.S. will join the party toward the end of ‘17 going into ‘18. So, midterm I feel pretty good about our appetite opportunities and I think we combined the companies as well as one could as admiringly is never quite as loose as you would like it to be but we have got everybody implies the manager’s vender implies, the account managers are implies so no head down and back out their talking to our customers.

[Paul Coster:]

Thank you.

[Operator:]

We move next to Justin Bergner, Gabelli & Company.

[Justin Bergner:]

Good morning.

[Christopher Chapman:]

Good morning, Justin.

[Andy Mattes:]

Good morning, Justin.

[Justin Bergner:]

Couple of questions here, first on the revenue side, I guess coming out of the second quarter there was revenue guidance of flat to plus 2% constant currency. As we think about what's changed versus that view. And you've singled out the $30 million of delays in the hardware side and some related service revenues. Are there other things that have changed versus that earlier guidance as well?

[Christopher Chapman:]

If you're referencing back to a legacy Diebold, we've hit upon North America that's one. If you look and we've highlighted this although we didn't articulate the number. If you look at China the delay of the JVs and how that market has performed this year, it's been quite underwhelming. And obviously, that's critical to get the JV structure in place to be able to participate fully in that market as we move forward. And then the last piece which is somewhat by design. As you've seen some of this pause that Andy highlighted but some of this transition of activity in Europe obviously, that's the strength that Nixdorf of operator. And as we finalize on the decisions there and move forward, you're going to start to see some of that natural flow will say between the companies, depending on who has the more dominant position in the market of that activity. So, it will get increasingly difficult to talk to the individual pieces, but I would say that's the last piece that would have had movement from a legacy Diebold standpoint. But I would say combined company is not a net negative.

[Justin Bergner:]

Okay, that's helpful. Secondly, should we expect to see Wincor results in the coming days or weeks given that they need to be publicly listed entity?

[Christopher Chapman:]

Yeah, the Wincor results will be published today and it should be out probably within about an hour or so. And then the financial statements we'll also be finalize that to be audit work is complete later on. And I would also note those results will be in IFRS versus U.S. GAAP and you'll have some of the nuances between the two businesses that you'll have to take into account.

[Justin Bergner:]

Okay. And then one clarification on the acquisition accounting. Can you maybe help us understand the intangible amortization, how much it was in the quarter how much it is expected to be in the fourth quarter, is it added back for non-GAAP results both as you look at the fourth quarter and as you look at to that 9% non-GAAP EBIT margin in 2019?

[Christopher Chapman:]

Yeah, let me give you let me try to do this for complete stake so I have to give you all of the items. You get three main items that are been backed out for non-GAAP purposes for the purchase price accounting that is the deferred revenue impact the inventory step up and then the intangible amortization. Those are all three be an exclusive from the non-GAAP results. So, when you look at the in the third quarter, you have roughly $5 million on the deferred revenue, $32 million on inventory step up and then the remaining amount of the callout of roughly $17 million is on the intangible amortization. From a full year perspective, the deferred revenue in '16 that call out would be roughly $14 million, the inventory step up roughly $63 million and the full impact of the intangibles at approximately $50 million to $51 million on the full year. When we go into 2017, the only two remaining pieces will be the deferred revenue which will run of course is well due to the accounting treatment of that. That will be roughly $23 million in 2017. And then the intangible amortization that will be roughly $125 million for the full year of 2017. And again, those will be excluded from our reported non-GAAP results. I would also note be mindful of depreciation and amortization expense that we highlight in our table that is inclusive of the intangible amortization. And so, that's backed out of the non-GAAP income. So, you got to mindful of that impact in that number.

[Justin Bergner:]

Okay. And then 2019 just to finish sort of the picture that non-GAAP EBIT margin of 9% will include in the intangible amortization add back somewhere on the lines of the amount in 2017, or.

[Christopher Chapman:]

The amount will you have multiple layers of amortization it will actually ramp down over the next five years and tail off. But just going from the top of my head, it would be roughly $90 million, is what I would estimate that would be the call out in 2019 for the intangible amortization.

[Justin Bergner:]

Okay, thank you.

[Operator:]

We’ll take our next question today from Mac [ph] at GSO Capital.

[Unidentified Analyst:]

My question was answered. Thanks.

[Operator:]

Oh! Thank you, sir. And moving next to Saliq Khan at Imperial Capital. Sir.

[Saliq Khan:]

Hi, good morning, Andy. Good morning, Chris.

[Andy Mattes:]

Good morning.

[Christopher Chapman:]

Good morning.

[Saliq Khan:]

Guys, couple of questions for you. The first one is, with the previous divestiture of the North American Electronic Security business, that you had done with Securitas and now you’re seeing a decline in the security volume within Latin America. What is the future look like for that business, it’s actually still make sense to be a part of Diebold and if so, what you do over the next 12 to 24 months, to right size this ship?

[Christopher Chapman:]

Well, we’re looking into the personnel, I mean we - when you get to a number that are so small on the international market, you’ll have volatility, I wouldn’t be super excited about a good quarter, I wouldn’t be super concerned about a bad quarter. It’s basically activity that we do within certain projects and we will - we’ll look at them project by project, it’s not something that we will spend a lot of energy on for the company going forward. So, that’s not one of our target growth areas.

[Saliq Khan:]

Got it. And then Andy, with the way that I have been seeing data analytics really unfold over the years. Most of the solution providers are simply doing a little more than just providing a raw data to the end customer. What are you going to help that do, to turn this state into a visual story, and this will you help create an experience that resonates with the end customer?

[Andy Mattes:]

That’s a great question, and we’re going to start getting into are the big data analytic side on two sides of our business. On the banking side, we’ll start with the connected insight that I briefly touched on. It’s pretty much turning services from a reactive, how quickly can you fix something, when its broken mode into a proactive, preventive mode, you fix something before it breaks and we’re using all the - that’s the internet of things logics, we’re using all the sensors that we have in the machines and the first pilot that we’ve done for the customers who are using this technology, we have gone from roughly 3.5 service calls per month, down to 1.5. So, massive improvement in the uptime for the customers and needless to say substantially less of an interruption. But this is not only just to avoid things going bad, it also starts giving you data that you don’t have like, how many of order transactions do you have. These people actually start to look at the marketing streams that a financial institution developed of what’s resonating with customers and we’re just at the early beginning, which leads me into the second lag on the retail side. Anything that has to do with buying behavior, interest of the consumer is of incredible value in that side were probably more the enabler of those analytics, because most of the retailers consider customer data the wholly grail of their companies, but here too, we’re starting to provide way more tools to enable, effective store analytics, customer profile analytics and we believe that the whole data analytics side will become a meaningful offering of our company for both banking and retail as we go forward.

[Saliq Khan:]

And then Andy, a last question for me is more an industry wide question. Think it because you had mentioned that you’re at Money 20-20, if you take a look at what the retailers have been going through over the last several years and the conversation around the data analytics and tracking all that’s been therefore quite some time. What I am seeing on my end, is that conversation really change from just pure data analytics and towards artificial intelligence and what that really mean for the retailers, but also what the solutions providers need to be doing, as we enter third wave in my opinion of how technologies evolving. So, what are you seeing right now, or what did you see at Money 20-20 that can give us a better indication of what the industry is going through and what that could mean or that could imply for types of things that we could expect from you?

[Andy Mattes:]

You lead your top on its artificial intelligence, I would add one more to it it's virtual reality. We actually showcased at this point in time it's basically a lab study on how you can go shopping in the virtual environment. This for this whole turning the store digital turning the whole experience into a digital experience is going to be a fundamental shift and it's something that retailers are going to spend a lot of time in energy on. And it will be interesting to see because there is no such thing as the retail industry. I mean retail is really many, many different verticals within it and green grocers is going to in a different than the fashion outlet so it will be very interesting to see which vertical within the retail will embrace this technology first, but the whole idea of a connected consumer a connected comers to provide end-to-end as you can start your shopping on your mobile phone you go to the store your phone will guide you to were to find things it will cluster your shopping experience to where you like it to be you can pretest things in a virtual world that's all going to be a reality over the next 36 months that's why I said earlier. I do believe the biggest innovative trend in our industry in the next two to three years will happen in the retail market and that's why we're so excited we're in it. And we're going to explore it to the fullest.

[Saliq Khan:]

Great. Thank you, Andy.

[Operator:]

[Operator Instructions]. And we'll go next to Joan Tong at Sidoti & Company.

[Joan Tong:]

Good morning, Andy and Chris. Andy my question is related to again on the FSS side, just want to see your view, it looks like we are heading into a high interest rate environment and obviously, that would be a good tailwind for some of your customers. Do you think that that would take some time for you to benefit in this environment maybe the budget is getting better and layout on top of that obviously, you have the transformation trend? Just want to get your view on that.

[Andy Mattes:]

Higher interest rates will be better for the banks especially for the retail banks. Also, there is a lot of talk in the market right now about less government supervision and maybe a little bit of an easing on the compliance side for - which of course would be a huge benefit especially for the regional banks. Because when you talk compliance, it's pretty much one size has to fit all and all the regional banks have been suffering horrifically. I mean the number that I'm hearing over and over again is that the regional spend of 40% of their OpEx is going into compliance. So, should there be a change of the prevailing wins that would be a huge benefit for our business and it would be a huge benefit for that target group that has currently being admiring the technology advantages and advancements that the big banks were able to afford. So, both of those elements would provide tailwinds to the industry especially the regional banks in the U.S.

[Joan Tong:]

Okay. And Andy can you go over like Brazil, what's you're seeing in Brazil, obviously, the Brazil non-core other business is quite strong, but just the core business. It seems like it’s been stabilizing for a quarter. Are you still seeing that?

[Andy Mattes:]

I was actually down in Brazil three weeks ago. And it’s the first-time Joan that was down in the last two years. We're in conversations with top bankers and top retailers actually made you feel better after you left the conversation than when you went into the meeting. I think the overall sentiment in Brazil is that the new government is working very hard to right in the shift, people are starting to get cautiously optimistic when it comes to '17. They still think that '17 is going to be a transitional year from all the malaise that they had into a better environment. But if the government continues down that track that 2018 should become a better year for the country and when I take a look at our business, the encouraging piece is that we’ve seen our business with the private sector moving up both on the hardware but also on the software and services side and we see opportunities, we see the private banks trying to drive investments and to take advantage of this betterment in the overall attitude towards the country. Now Brazil is Brazil, so I want to be super careful in what I am saying, but I am getting very cautiously more constructive on the country and our opportunities going forward.

[Joan Tong:]

Thank you. And then finally in UK, I just want to see, if there is still a pending thing going on with the CMS or the anti-trust authority over there? Thank you.

[Christopher Chapman:]

What happen in the UK, is that the anti-trust authorities showed up a little late to the conversation, we’re still in talks with the CMA, those are very professional, very detailed conversations, these things take their time, but we have got the clearance in 10 countries around the globe, we will expect the very same thing to happen in the 11 country. But it will be into the first quarter of 2017, until all of these talks will be completed, until then we keep both organizations separate and we still offer our solutions as legacy Diebold or as legacy Wincor Nixdorf and that just the status grow. I am encouraged by the level of professionalism that is out there in the conversations and insist a process one has to work through.

[Joan Tong:]

Okay, that’s fair. Thank you, guys.

[Christopher Chapman:]

Thank you.

[Andy Mattes:]

Thanks.

[Operator:]

And with no additional questions at this time, Mr. Virostek, I’d like to turn the program back over to you, for any additional or concluding remarks.

[Stephen Virostek:]

Yeah, I just like to thank everyone for joining us today, on our third quarter call and obviously if you have follow-up questions, please feel free to reach out to me. My phone number and email address is on the press release. Thank you.

[Operator:]

Once again, ladies and gentlemen, that does conclude today’s conference and again I’d like to thank everyone for joining us today.