Diebold Nixdorf, Incorporated
Q2 2014 Earnings Call Transcript

Published: 6 Aug 2014

[Operator:]

Good day, everyone. Welcome to the Diebold Incorporated's Second Quarter 2014 Financial Results Conference Call. At this time, for opening remarks and introductions, I would like to turn the call over to the Vice President of Chief Communications Officer, Mr. John Kristoff. Please go ahead, sir.

[John D. Kristoff:]

Thank you, Adam. Good morning, and thank you for joining us today for Diebold's Second Quarter Conference Call. Joining me today are Andy Mattes, President and CEO; and Chris Chapman, Senior Vice President and CFO. Just a few notes before we get started. In addition to the earnings release, we've provided a supplementary presentation on the Investor page of our website. Andy and Chris will be walking through this presentation as part of their comments today and we encourage you to follow along. Before we discuss our results, as of past calls, it's important to note that we are excluding certain restructuring charges and nonroutine income and expenses from our non-GAAP financials. We believe that excluding these items gives an indication of the company's baseline operational performance. As a result, many of the remarks this morning will focus on non-GAAP financial information. For a reconciliation of our GAAP to non-GAAP numbers, please refer to the supplemental material at the end of the presentation. In addition, all results of operations reported today, including prior periods, exclude discontinued operations. As a reminder, some of the comments today may be considered forward-looking statements. Internal and/or external factors could significantly impact actual results. As a precaution, please refer to the more detailed risk factors that have previously been filed with the SEC. And finally, a replay of this conference call will be available later today from our website. For those listening to the replay, please keep in mind that the information discussed is only current as of August 6, 2014, and subsequent events may render the information in this replay out of date. And now with opening remarks, I'll turn it over to Andy.

[Andreas Walter Mattes:]

Thanks, John. Good morning, everyone and thank you for joining the call today as we discuss our results for the second quarter. There are several items I will be covering today

[Christopher A. Chapman:]

Thanks, Andy and good morning, everyone. I'm very excited about my new role as CFO, and I look forward to being a part of the new leadership team to drive transformation of the company. First, I'll walk-through our second quarter financial performance, then I'll provide an update on our 2014 revenue, earnings and free cash flow outlook. Now to review our financial results. Turning to Slide 15, total revenue for the quarter increased approximately 4% or 6% on a constant currency basis, as a result of increased volume in EMEA and Brazil, partially offset by decline in Latin America and North America. We expect our noncore business in Brazil to be a strong contributor to our revenue growth for the full year. The currency impact was primarily driven by the Brazilian real and Indian rupee. As we move to Slide 16, Financial Self-Service revenue was flat or up 2% on a constant currency basis, with growth in EMEA offset by a decline in North America. As we've noted, EMEA continues to perform especially well, posting solid revenue growth over the prior year. In North America, we had a tough compare in the National Account business, as a result of the large project with TD Bank in the prior-year period. However as Andy noted, orders in North America were up significantly in the quarter, which positions us for a stronger second half of the year. Total Security revenue on Slide 17, was up 2% compared with the prior-year period. Electronic Security grew 15%, driven by strong growth in North America. Offsetting this increase was a 14% decline in our physical security business. Looking at Slide 18. Brazil Other was up $24 million, mostly, driven by delivery on a large lottery order placed in the fourth quarter of 2013. On Slide 19, gross margin for the quarter improved 2.6 percentage points to 25.5%. This was driven by a solid improvement in service gross margin, which increased 6.5 percentage points to 30.8%. This improvement reflects the continued benefit of our service transformation efforts across the globe, including the ongoing benefit from our pension freeze and Voluntary Early Retirement Program in North America specifically. In the second half of 2014, some of our reinvestments will impact service cost of sales, as we focus on improving our systems and expanding our infrastructure to support our select geographic growth and our global service transformation efforts. Product gross margin decreased 2.2 percentage points to 18.7%. The decrease was the result of geographic mix, primarily tied to higher volumes and emerging markets. Moving on to Slide 20, total operating expense increased $9.3 million. Operating expense as a percentage of revenue was 19.3% compared to 18.7% in the prior-year period. During the second quarter, increased volume drove higher selling expense, as we continue to make investments in our transformation, such as expanding our sales coverage in Electronic Security. Turning to Slide 21, year-to-date, we've realized approximately $20 million of our planned $25 million in net savings. To elaborate further, while our gross savings are, relatively, equally distributed over the quarters, the majority of our reinvestments will impact our P&L in the second half of the year. Over the mid- to long-term, these investments in innovation, IT infrastructure, back-office transformation, service, sales and marketing will continue to improve our internal controls and processes, reduce our costs and position us for growth. Turning to Slide 22, non-GAAP operating margin in the second quarter increased 1.9 percentage points to 6.2%, as a result of increased volume and continued benefits of our transformation efforts. Looking at operating profit by segment on Slide 23, improvements in EMEA, North America and Brazil were partially offset by decreases in Asia Pacific and Latin America. The increase in EMEA is the result of our historical restructuring efforts in the region, coupled with strong growth. North America is directly related to the changes made to the cost structure. Asia Pacific was impacted by country mix within the region. In Latin America, lower volume, combined with the year-over-year comparison in Venezuela impacted operating profit. EPS on a GAAP basis was $0.64 during the quarter. This includes restructuring charges of $0.01 primarily related to the multi-year realignment plan aimed at establishing a competitive cost structure throughout the organization. In addition, we incurred non-routine expense of $0.02 related to legal, indemnification and professional fees. The largest driver was non-routine income of $0.20 related to the Eras divestiture that we announced during the second quarter. The combination of these factors brings us to $0.47 earnings per share on a non-GAAP basis for the second quarter. Our second quarter non-GAAP effective tax rate was approximately 36%, impacted by several discrete items. We are maintaining our approximate 30% non-GAAP effective tax rate assumption for the full year, but realize there could be upward pressure based on where we're at year-to-date. Moving on to cash flow on Slide 25. Our free cash flow results reflect the $71 million free cash used, which increased approximately $30 million from the same period last year. This is a result of increased working capital needs, as we've grown our business in the quarter and approximately $30 million in severance payments spread equally over the first half, primarily related to the VERP. Partially offsetting these items was an improvement in net income. Turning to Slide 26, DSO during the quarter is 59 days, flat from the same period last year. Looking at Slide 27, inventory turns were down slightly at 4.6 turns compared to the second quarter 2013 of 4.9 turns, as we build inventory to meet second half deliveries. Net debt, on Slide 28 for the period was $178 million, a $21 million increase from the prior-year period. Resulting in a net debt to capital ratio of 15%, an increase of approximately 3 percentage points. Looking at our outlook on Slide 29, the second quarter exceeded our internal expectations. We continue to be encouraged by the strong growth in orders in many of the regions, driving increased order backlog. Additionally, as previously discussed, we will be ramping up our reinvestments in the business this year. Therefore, we are maintaining our revenue guidance to be up in the mid-single digits and non-GAAP EPS guidance of $1.65 to $1.85. As a reminder, this includes the adverse impact of the valuation of the Venezuelan bolivar of approximately $0.12 and an additional $0.03 related to the divestiture of Eras. The Cryptera acquisition is expected to be neutral to earnings after integration costs in 2014. We expect restructuring charges and non-routine expenses to be in the $0.25 to $0.30 range, excluding the $0.20 gain on the sale of the Eras subsidiary. As previously highlighted, our full year non-GAAP effective tax rate is expected to be approximately 30%, but we're seeing some upward pressure on the rate. We're maintaining our free cash flow outlook for the year of $80 million to $100 million, this includes an approximate $35 million increase in our capital expenditures, as we make strategic reinvestments in our business. In closing, we have started off the first half of the year stronger than expected, focusing on continuous improvements to maintain and strengthen our control environment, while operationally reducing our costs and improving our working capital efficiencies. We are actively working to remediate our material weaknesses in Brazil and India and have made solid progress, still expecting to have both remediated during the year. The company is beginning to demonstrate tangible results from our turnaround efforts. However, it is still early in the process and we will fully ramp up the appropriate reinvestments in the second half to position the company for long-term growth. With that, I will open up the call for questions.

[Operator:]

[Operator Instructions] We'll take our first question from Paul Coster, JPMorgan.

[Paul Coster:]

A couple of things. Clearly things have changed a little bit on the financial services front. It wasn't so long ago that you felt that branch transformation was still a little bit premature. Because the customers would take a while to benefit from the implementation of technology -- they had, for instance, sort of, long leases that they couldn't break. But it sounds like things have changed. So I'm just wondering why that's starting to power through? And -- well, I'll save my second question.

[Andreas Walter Mattes:]

Paul, this is Andy. It's actually mapping out just like we told you. It's starting to pick up on the order side. Most of the activities in branch transformation is still in POCs, in showcase branches, branch of the future deployments of our OT customers. So it's not that much of a revenue tailwind at this point in time. But, we said at the last call, that activity and conversations and Diebold mine shares increasing, that trend continues down that path. We start to see mine share now translating into orders, which eventually will translate, of course, into revenues. It's going to be a steady increase over the next years to come.

[Paul Coster:]

Okay, got it. I got 2 quick questions, one is, how long does it take for orders to translate into revenues generally for you by region? And one last question, which is in emerging markets. You clearly you have low margins on the product sales. Is there anything you can do to improve the margins in those regions for the [indiscernible] in particular?

[Andreas Walter Mattes:]

Let me start on deal velocity. Apparently there's a wide range depending which country, which channel, whether they're are services-led or whether they're more product shipments. If you were to draw a distribution curve, I'd say the majority of the deals probably revenue, within a 6-month time window, but some of them grow as fast as 3 and others can drag out as long as 9- or 12-month.

[Christopher A. Chapman:]

Yes. On the cost side, Paul, we're obviously -- we continue to look at everything we can do to maximize our cost from a supply chain standpoint. We look to localize as much as possible, to eliminate currency risk. But I would say this is an area of constant focus for the company as we look to improve on our long-term margin trajectory on the product side.

[Operator:]

And we'll take our next question from Gil Luria, Wedbush Securities.

[Gil B. Luria:]

The Windows 7 upgrade seems to be kicking in, in terms of creating a tailwind for you. What's the trajectory of that cycle? Is that -- how many quarters do you expect that to last? When do you expect that to peak and then why is it not translating into higher-product margins for you? Are you just capturing it more on the service line?

[Andreas Walter Mattes:]

Gil, there's a few aspects. So, first of all, the curve goes as we discussed earlier. We always said this would be more a second half revenue event. So orders are coming in strong as we speak. The orders are going to revenue, probably, in the -- I'd say the peak is going to be in the Q4, Q1-ish time frame. You know that the Microsoft extended deadline runs out in April. I would expect some mad scramble on -- from some customers to do it last minute. And -- but there you got your revenue curve. From a margin point of view, while these deals are very margin accretive, keep in mind that the relative size of the deal comparison to everything else that we do in absolute numbers is a lot smaller. So the overall pull on the margins is somewhat muted by sheer size.

[Gil B. Luria:]

Got it. And then in terms of your Brazil business, could you help us separate, kind of, the 3 businesses there, in terms of what's going on with the Financial Self-Services versus the lottery versus the PC business. Is the PC business, is that spike over and you'll be comping in next year? Is the lottery business rolled out? Is it unusually a big year? And then where are we on the ATM business?

[Christopher A. Chapman:]

Yes, Gil just to break it down, the major pieces here, the PC/IT-related equipment, that really has peaked. There will be a small amount of activity in the third and fourth quarter but not big numbers to come there. The biggest piece of the Brazil Other is going to be in the lottery segment and expect the full year on that to be approximately $65 million -- $65 million to $70 million in total revenue on that with a larger portion coming through in the third quarter. And then lastly, when we look at the FSS business. We've talked about 2 really large deals that we've got that we've been delivering on, the first, which has been coming through the P&L over the last several quarters is with CAF, Caixa Economica Federal, and that will continue through the third quarter and really be wrapped up this year. The other large tender has been pushing out a little bit just as they finalize some of the branch deployment schedules and so expect that to really be -- really I'd say pickup full speed in the fourth quarter in some of that carry into the first half of 2015.

[Gil B. Luria:]

Any other large ATM orders this year in Brazil that could fuel next year?

[Christopher A. Chapman:]

Nothing that we want to speak to at this time, but there's nothing significant on the radar screen. I would remind everyone if you look at where you're at in Brazil, with large governments banks and with elections coming up, that's really going to close down a lot of activity that we would typically see over the next couple of months and I don't expect that to really pick up really in the last few elections and some of that gets settled out.

[Operator:]

And we'll take our next question from Matt Summerville, KeyBanc.

[Matt J. Summerville:]

Couple of things. First, how much Brazil revenue and earnings goes away in 2015 relative to 2014 as you're looking at it, at this point with respect to that Other category?

[Christopher A. Chapman:]

Matt, I would just look at the -- really at the big PC sales we have in the first half, so call that approximately $90 million of revenue and look at the bulk of the lottery, based on what we have in front of us right now, and so probably about $50 million that falls out. So from the revenue standpoint, just at the high level comparing to '15, I would say, it is about $150 million that falls out. Obviously, it's still a lot to go in 2014, and we'll see how our activity plays out, but that high-level on the revenue side and then apply approximately again, I don't have the exact numbers in front of me, but say a 10% to 15% margin pull through on that and that gives a rough order of magnitude.

[Matt J. Summerville:]

Great. I appreciate the granularity there. And then second is, I want to talk a little bit about the tax strategy. The volatility in you non-GAAP rate over the last couple of years is unlike any other name I follow. So can you go into a little more detail around the push and pull there and why, or perhaps it's not, but why it should smooth out at some point here?

[Christopher A. Chapman:]

Yes, Matt. I'm not going to go back through every year, but if you look at 2013 first, look at the size of our earnings and the distribution of our earnings. And I would say one of the keys to having a more stable rate is to have stable geographic revenue pull-through and margin pull-through and when you're in a transition and when you're going through some of the major items that we are facing in 2013, you saw some of that volatility in the rate. And so when you look at the first half of 2014, the earnings are still relatively small, so if you have a one-off discrete item that comes through and/or the small shift in geographic income, which again as you understand, not all revenue and profits created equal when it comes to the tax impact on that, we still see a little bit of that volatility. Sitting where we're at today, we would typically want to narrow the range in the full year, but looking at where we've been out with the tax rate, it's caused a little bit of that volatility. And we're doing everything we can to manage that and improve upon that and really in my mind, that starts with improving the underlying fundamentals in all of our businesses, improving and having steady stabilized profit that's going to drive that in the future. But we're absolutely looking to manage that, provide appropriate clarity on what we see coming through and build that into the ranges that we're providing externally.

[Matt J. Summerville:]

Great. And then just one quick follow-up. Andy, can you maybe talk about EMEA a little bit and what you attribute the recent success you've had there in terms of share gains albeit off a lower base? But you're clearly gaining share in EMEA.

[Andreas Walter Mattes:]

Matt, it's actually, Europe for me has been and continues to be, the microcosm of what we want Diebold to be going forward. They were clearly a drag to the P&L a few years ago. They've gone through their restructuring efforts first, they've done their streamlining first. And as part of that, we also stepped away from a, Thou must be in every country, logic and focused on target accounts. And that strategy proves out to be extremely successful. So we're laser beam-focused on the large names in the U.K., on the large names in Spain and in every one of those accounts where we focus our energy, we are starting to make very solid progress. In addition, if you were to look at the research reports, you'll see that due to the absence of the equivalent of an ADA compliance ruling, especially in the U.K., the U.K. probably has the most mature installed base of any country in the world. So this is a -- you have a pure technology upgrade cycle there; not superimposed by government regulations. Add branch transformation and next-gen technology to it and all of a sudden, the playing field gets releveled, which, of course, gives a company like Diebold an opportunity to reenter and to show our innovative solutions and to take part in the race and so far, with quite good starting positions.

[Operator:]

We'll take our next question from Matt Lipton, Autonomous Research.

[Matthew Lipton:]

I think, Andy, it was really, interesting to see what's happening with software in Diebold, you just hired a new head, it sounds like CapEx is increasing. So I'm just curious to get some more thoughts on where that software spending is targeted? Is it the Electronic Security or more so the FSS; and as we think about branch transformation, these smarter ATMs that have more hardware functionality, how important is it that the software goes hand-in-hand with the machine, and therefore a bank might have to think about their conversation with Diebold a little differently than they have in the past?

[Andreas Walter Mattes:]

Given my background, I still translate our industry back into IT speak and for me, an ATM in an IT world will be an appliance. It's a purpose-built hardware, but the hardware continues to commodit-ize and to lose its factor as a differentiator, on top of the hardware, you got a software stack sitting and the software stack continues to increase in importance and will, of course, drive the solutions and the user interface; the security that we can offer to our client. And then you add a very large services offering around it, to make sure that you can take this technology to market. And that's why we're saying we want to be a services-led, software-enabled company. That's why we're investing and Alan got a lot of the pedigree. He's been in this environment. He helped business transform from a hardware-centric to a more software-centric view, and that was very appealing when we talked with him. And I expect him to do similar work here at Diebold, and help us to accelerate down that path. And by the way, that logic is applicable to both FSS, as well as Electronic Security. If you take a look at what we've done at Electronic Security, for instance on the SecureStat side, which was software IP to differentiate Diebold, I mean we're pushing the 600 user mark as of the end of Q2, with very rapid growth rates. And that will also be an area where we continue to invest.

[Matthew Lipton:]

That's great. And then, just curious, we get a little bit of update on if you're having any more outsourcing discussions, similar to what happened with TD a few years ago. I mean, it seems that there could be continued fee pressure on banks here from some potential rulings from regulatory bodies. Are you seeing an -- like an increasing inbound on outsourcing arrangements or really no update there?

[Andreas Walter Mattes:]

Think about it in all terms of moving up the stack on the services side. So professional services, managed services and then outsourcing, there can be partial outsourcing to all the way of full outsourcing. And I can tell you the amount of conversations we're having is increasing, quarter over quarter, over quarter. Now, having said that, sales cycles in the services industry is anywhere between 12 to 24 months. These are not decisions that either party would rush into. There's a lot of getting to know each other, making sure the business cases are accretive for both players, scenarios going on. So this is not a fast-moving part of the dial. But if I look at our newly rolled out Salesforce.com pipeline portfolio, I can see our services offerings, in the pipeline, ramp up at a steady pace.

[Operator:]

And we'll take our next question from Justin Bergner, Gabelli & Company.

[Justin Bergner:]

My first question relates to working capital. I just wanted to dig in there a bit more. I noticed that each of the inventories and the accounts receivable have sort of increased from -- by about $100 million from the year-end number. I can sort of attribute 1/3 of that to maybe perhaps the low normal year-end levels and another 1/3 of that, perhaps, in the accounts receivable to the large Brazilian sales, and in the case of inventory, to start preparing for what's normally a stronger second half. Is that the right way to look at the change in working capital? And if so, sort of what explains the remainder of the increase?

[Christopher A. Chapman:]

You have the right pieces there. I mean, there's always going to be on the AR side, specifically a little bit of that geographic mix, payment terms are not the same across all geographies, but when you look at the typical seasonal flow, you've hit the right points there, and again, we see a little bit of that build in receivables and if you look at Diebold historically, and this industry historically, you'll see a significant pay down on that as we ramp in the second, third quarter and ultimately peak with revenue in the fourth and those payments come down in the fourth. The inventory again -- you hit the right point there as well. The inventory is building, really driving the demand that we have here in the third and fourth quarter. And so what you see right now, it's really the finished goods with some of that's in transit inventory and in the factory inventory, as well as ramping up to again meet those second half delivery needs.

[Justin Bergner:]

Okay, great. But nothing sort of unusual, other accounts receivable or inventory fronts.

[Christopher A. Chapman:]

No, no. If you look at the DSO performance, it's in line with historical trends and nothing out of the ordinary there.

[Justin Bergner:]

Okay, great. My second unrelated question. A bit different. If during your transformation, Diebold were to receive sort of external interest in the company perhaps by, like a, large software firm, how would Diebold treat such interest?

[Andreas Walter Mattes:]

It's just if you -- I mean, first of all, we take all conversations serious. Whatever has been brought to us on any opportunity, but I'm not quite sure I'm getting all of the angles that you're trying to get to.

[Justin Bergner:]

No, if a large software company were interested in taking a look at acquiring a company like Diebold, I realize you're, sort of, in the early stages of your transformation. Is the company, sort of, focused on, sort of, completing the multi-year transformation or would, potential, external interest be seriously considered at this point?

[Andreas Walter Mattes:]

Look that's an easy thing. My job is to drive the turnaround of the company, together with Chris and the complete management team. And to make sure we satisfy our customers, our shareholders, as well as ultimately, all the people that work for us. Now if in that process, at any given point of time, someone thinks that we might be a good adds to their portfolio, I have a fiduciary responsibility to take any of those conversations a, serious and if its meaningful and mindful to the board, then we'll take it from there.

[Operator:]

And we'll take our next question from Jeff Kessler, Imperial Capital.

[Jeffrey T. Kessler:]

First, can we just drill down a little bit more on EMEA. You've talked about the U.K. and you've talked about Spain and actually, the way it fits perfectly into your restructuring plans. Can you expand that to some of the other strong areas that you've had in EMEA? You've particularly mentioned earlier on the some of the Gulf states and I'm wondering -- I'm just wondering how -- it's still small, but can EMEA become the size of, let's say, Asia Pacific; given how young or in some sense, excuse me, how old some of the stuff is in EMEA, isn't there a lot of opportunity, relative to perhaps a couple of the other regions that you have, for a total change, given that there's potential for total change out?

[Andreas Walter Mattes:]

Jeff, those are all good questions and I think you're on the right track here. First of all, we feel very good about the momentum that we've established. If you look at EMEA, our focus clearly is Western Europe, it's the Middle East, we've got some nice orders, especially from Saudi in the first half of the year, as well as Africa and South Africa has been a Diebold stronghold and it continues to do so and there's also an opportunity as the South African Banks go north, to go with them. Now we will continue to invest, especially in the Middle East and Africa region. If you go back, the gentleman that we've asked to lead our EMEA operation, Bassem, he actually has this as his background in his past. So that was a very deliberate choice to make sure we get some more local expertise onto the European team. And we will continue to be very account-centric about our growth going forward and making sure we do this in a profitable, digestible and also in a very ethical way going forward, especially as we've reached out into the African nations.

[Justin Bergner:]

Obviously, country-by-country there's going to be countries in Europe where, either regulations or just the way you do business, or local competition, is going to make it hard for you to really become profitable unless you lower prices. I'm assuming that you are going to focus on those countries where you have the best opportunity.

[Andreas Walter Mattes:]

Jeff, the good news is when you grow from a small base, I don't have to defend the position in any given market. We will be very smart about target identification and where we're going. And we will continue down that path. Our objectives, not just for Europe, but for around the globe, is profitable growth. We never go for revenue for revenues sake, we're going for opportunities that make good business sense, either in the near-term or in the mid-term, over the life of the contract.

[Jeffrey T. Kessler:]

Okay. A quick second follow-up question on the software side. You've talked about the increased use of putting -- essentially putting the stack on top of the appliance and then adding services around that. When you look at the Electronic Security side of the business, you've got a SecureStat platform that's been set up. Is there the capability, ultimately, of integrating some of the Security software capabilities that you have on the Electronic Security side with the financial side? Or are they going to continue, simply, to go their separate ways, given the fact that you want to -- you do want to become more broad-based? On the other hand, you seem to have the capability, at this point in time, to integrate some of the platform capabilities from both sides to bring to bear on the financial area that you -- that's still 50% of your business in Security.

[Andreas Walter Mattes:]

You must have been sitting in one of our conference rooms, Jeff.

[Jeffrey T. Kessler:]

You want to hire me as a consultant? I'll do it.

[Andreas Walter Mattes:]

Cross-pollination between those 2 areas is one of the most heavily discussed and investigated topics we have within Diebold. You can even attribute part of our service gross margin improvements to that fact as outside of the large metropolitan areas in the U.S., where we've gotten really good and really smart at cross training and cross-utilizing service technicians. So while SecureStat, the way it's written, would not lend itself to run as an app on an ATM, the logic behind it, the thought process behind it, is very much applicable. And we do a lot of intellectual learning from one side of the house to the other. The other thing that we start to see, especially, as we get into the branch transformation environment, consumer retail is usually a little bit more innovative and a little ahead on the use of technology curve versus retail banking. So in many cases, there are use cases that we see, for instance on the consumer side, on the retail side of Electronic Security, that we're actually bringing to the financial institutions, by saying, "You might want take a look at what so and so does in the following industry because it's actually addressing a similar problem that you want to do with your branch of the future and you might benefit from that." So a lot of conversations going on. This is why we are excited of having both pieces of the business in our portfolio, and we'll continue to invest into both sides of the house.

[Jeffrey T. Kessler:]

Yes. And I'm assuming this also involves taking unstructured and structured data and trying to make sense of it for both sides, for both your financial and your retail -- and retail folks?

[Andreas Walter Mattes:]

Absolutely.

[Operator:]

We'll take our next call from Meghna Ladha, Susquehanna.

[Meghna Ladha:]

Most of my questions have been answered. Just 2 quick questions for Chris. Chris, Brazil Other segment, the revenue came in well above our estimates this quarter. I may have missed this but can you give more color as to what drove the upside there this quarter, and how we should think about growth in the second half?

[Christopher A. Chapman:]

Yes, within the quarter, about 2/3 of the revenue in Brazil Other was attributed to the lottery. And again, we announced that our order, I believe, in the fourth quarter of 2013. And so it was the initial deliveries on that order that drove the biggest piece. And what was your follow-up question with regards to the full year?

[Meghna Ladha:]

Yes, how should we think about growth in the second half? Yes.

[Christopher A. Chapman:]

The second half in the Brazil or in the Brazil Other, again, I think the total overall lottery right now I would estimate to be around $65 million for the full year. And probably another roughly $15 million, $20 million coming through on the IT-related equipment side and that would be the biggest pieces that we would see right now. It's going to tail off over the next couple of quarters based on what we can see right now.

[Meghna Ladha:]

Got it. And then given that you're investing more in the business in the second half, how should we think about the EPS progression, next couple of quarters?

[Christopher A. Chapman:]

I would say the reinvestments right now, I mean, I would say they'll peak a little bit more in the fourth quarter, based on what we're seeing. And so it's going to increase here over the next couple of months. Again, as we talked about, the savings are fairly equally distributed over the quarters and then the reinvest is going to ramp and so I would think about it in those terms.

[Operator:]

[Operator Instructions] And we'll take our next question from Paul Coster, JPMorgan.

[Paul Coster:]

I appreciate that you're reinvesting in the second half, and I can see why that would cause operating expenses to increase a tad. But what I didn't quite get was your comment around increasing cost of goods sold? I may have misheard. Can you just sort of revisit that? It's in your opening remarks, Andy?

[Andreas Walter Mattes:]

Let me start and Chris will take you through the numbers. But if you look at the areas where we're investing, one of the -- there's 2 main items in there, especially the IT transformation is also, of course, the back-office transformation as part of our foundational work for our service transformation. And these areas do not only show up on the OpEx side of the house. If actions are service-related, if we're introducing service software -- and we said publicly a few months back that one of the elements of our IT turnaround is that we're going to upgrade the company to Diebold for services -- these are discrete investments and those will be running through the P&L, on the cost of sales line versus the OpEx line.

[Christopher A. Chapman:]

Yes. And then just to add to what Andy talked about, and in addition to that, on the service costs of sales area, where we're seeing growth and in some of the markets we're going to have to expand our overall service infrastructure and service organization. So you will see some of that come through in those regards with the additional service cost of sales.

[Operator:]

And we have no further questions in our queue at this time.

[John D. Kristoff:]

Thank you, Adam. I'd like to thank everyone for joining us on the call this morning. And before we go, just one final announcement. We will be holding our annual Investor Day, on December 10, in New York City. So please look for a Save the Date e-mail in the coming weeks. As always, if you have follow-up questions, please reach out to myself or Jamie Finefrock directly. Thanks again.

[Operator:]

This concludes today's conference. Thank you for your participation.