Diebold Nixdorf Inc (DBD) 2006 Q3 法說會逐字稿

[OPERATOR INSTRUCTIONS.] Welcome to Diebold's third quarter 2006 financial results conference call. At this time for opening remarks and introductions, I would like to turn the call over to the Vice-President and Chief Communications Officer, Mr. John Kristoff. Please go ahead, sir.

Thank you. Good morning, everyone and thank you for joining us for Diebold's third quarter conference call. Providing remarks today are Tom Swidarski, President and Chief Executor Officer, and Kevin Krakora, Executive Vice President and Chief Financial Officer.

Just a few notes before we get started. The replay of this conference call will be available later today from our website. And as a reminder, some of the comments may be considered forward-looking statements. As a precaution, we refer you to the more detailed information that has been filed with the SEC. And now with opening remarks, I will turn it over to Tom.

Thanks, John. Good morning, everyone, and thank you for participating in our call this morning. I continue to spend a great deal of my time with our customers and our associates around the world to keep my finger on the for the company. Since our last conversation, I was able to visit every major bank in China, current prospective customers in South Africa, Germany, Mexico, as well as many U.S.-based banks and credit unions.

I'm grateful for the reception I'm receiving as well as the frank conversations. This feedback validates our key priorities and directives established when I started as CEO last December. I'm encouraged by the tangible progress we made during the quarter. And our associates have done a tremendous job in executing upon our key priorities, which are improving customer loyalty, developing and refining our supply chain, improving the quality of the our products and services, and enhancing internal communications and teamwork.

As we continue to effectively address all of these priorities, our fifth priority of improved profitability will naturally follow. While we are in the early stages of this process, we were beginning to see tangible financial benefits. As a result, I believe we are positioned to achieve our three year corporate operating margin goal of 11 to 12%.

During the quarter, we made progress on a number of operational fronts. First, we have further refined our organizational structure. In September, I chose James Chen and Joao Abud to lead our international operations. In addition to leading our Asia/Pacific operations, James Chen is now responsible for operations throughout Europe, Middle East and Africa region. Abud is now overseeing all of Latin America in addition to his leadership responsibilities in Brazil. James and Abud are proven leaders who thoroughly understand our mark and help us expand our international business.

We've also made management changes deeper within our international organization. While I feel very good about these and other leadership changes we have made over the past several months, we will continue to fine-tune our leadership structure in other areas of the company. We also made progress on our manufacturing realignment during the quarter with a successful completion of pilot production at our new manufacturing facility in Budapest.

I'm pleased with the caliber of management and staff that we've been able to recruit to this facility, and we have received the necessary certifications needed to begin shipments to customers. In fact, we're on schedule to produce more than 1000 Opteva ATMs in Hungary during the fourth quarter. The consultation process around a plant closure of our manufacturing facility in Cassis, France is slowly moving forward and continues to prove challenging. We are committing the energy and resources necessary to complete this realignment as quickly as possible.

Since the company assumes implementation and support responsibilities for our global ERP system and other IT-related functions on June 1, we've addressed some of the more critical issues relating to the implementation. However, I'm still not satisfied with the current course and direction of the project. We were thoroughly evaluating our implementation plan from top to bottom, including the organization, processes, and software and hardware architecture in an effort to ensure an effective deployment of the Oracle ERP system.

Now, turning to our business segments. I will begin with financial self-service. Our business in Europe again performed well in the quarter with double digit revenue growth with the fourth consecutive quarter as customer demand for Opteva and Angilis remains high throughout the region. In addition, Asia/Pacific turned in a solid quarter as we fulfilled orders from various customers in China.

Revenue growth in the America's during the quarter was largely driven by Canada and Latin America, with particularly strong growth in Mexico, Columbia and Venezuela. In Canada, we significantly increased revenue as we continue to fulfill a single large outsourcing agreement. Despite the increase in Canada, overall demand in North America remains relatively flat. We were encouraged, however, by further price stabilization, which we will continue to drive in our processes. I am gaining more confidence that we are instilling the appropriate pricing discipline throughout our North America organization.

Likewise, we're beginning to see some results from the investments we've made in our services businesses around the globe. We continue to see improvements in service performance and response time, and this is reflected in our third consecutive quarter, sequential service margin improvement as we approach our goal of 22% gross margin.

In security, we've experienced significant growth in each of the four market segments. The financial market continues to be fueled by new branch construction, security technology upgrades, and branch modernization. In our newer market segments, retail commercial and government, we continue to grow and reinvest in the business. For example, in the government space, we completed acquisition of Actcom. Through active involve in the fast moving government uniformed ID standard incorporating smart card technology for physical and logical security access will enable people to bolster it's participation in these new programs and address the growing demands of the government marketplace.

In addition, we have a significant opportunity to leverage our existing infrastructure and our talented sales and service teams in growing international security. Recently I travelled to China to meet with employees and customers as we participated in a major trade show in Beijing. We continue to see great opportunities in the self-service arena. But we also are working diligently to integrate our security expertise into China, similar to the model we have in the U.S.

This represents an exciting opportunity for Diebold to position itself as one of the fastest growing global markets for security products and services. With solid prospects for continued growth and new and existing market segments in geography, as well as improving profitability of the business, security remains a key strategic focus of our company. Security will play a major role in our future.

Election systems turned in another strong quarter, and a number of states and jurisdictions continue to implement new technology in preparation for the upcoming elections. While the political environment leading up to the elections has generated significant media attention, I am confident in the leadership of our election subsidiary and resources they have in place to ensure our customers jurisdictions have the needed support to run their elections as smoothly and efficiently as possible. Working with these jurisdictions is the singular focus of every employee in that subsidiary. As we look at remaining few months of the year, I expect continued progress in the key initiatives resulting in further incremental margin improvement.

However, I want to emphasize that we are still early in the recovery process. We remain focussed on continuing to execute on a multi-year profit improvement plan and return the company to acceptable levels of profitable growth. Our associates and management team have worked very hard to get us moving in the direction of world class performance with regard to software, services, innovation, and a strong customer focus. It is critical we continue with the same level of commitment as we strive to reach our long-term goals. Now, I'll turn the call over to Kevin.

Thanks, Tom, And good morning, everyone. I am likewise pleased with the early progress we've made on the operational initiatives which are beginning to translate into improved financial performance. I am particularly pleased with progress we've made in improving free cash flow. During the quarter, we generated free cash flow of $65 million, bringing our year-to-date free cash flow to $110 million. This represents $56 million more than we delivered in the entire year of 2005.

Later in my comments, I'll be providing further detail regarding cash flow, but first let me spend time reviewing the rest of our financial results. We finished the third quarter with income from continuing operations of $29.5 million, compared with $13.5 million in the prior year period. Diluted earnings per share from continuing operations were $0.45 compared to $0.19 per share in the third quarter of 2005. The third quarter results included restructuring charges of $0.02 per share resulting from continuous realignment of our European operations. Excluding the impact of these charges, diluted earnings per share would have been $0.47.

Turning to orders. On a constant currency basis, financial self-services orders increased in low double digit range, with double digit order growth in the Americas, partially offset by declines in the Asia/Pacific and EMEA. However, orders in Asia/Pacific and EMEA are up in the double digit range in the year-to-date basis. Security orders increased in a low double digit range as we continue to benefit from new branch construction and modernization in the financial segment, as well as continued strong growth in the government, retail and commercial sectors. Total revenue for the quarter was up 17.4% with security revenue up 17.1% over the prior year period.

Financial self-service revenue was up 14.4%, led by an increase in EMEA of 22.8% as we continue to experience strong demand for the Opteva and Angilis solution throughout the region. Elections systems revenue was up approximately $22 million. Product gross margin was 29.3% for the quarter, compared to 24.9% in the third quarter of 2005. The improvement gross product margin was driven by an increased pricing discipline in a more favorable geographic mix within the Americas. In addition, approved possibility on higher revenue in the elections systems business also contributed to the gross margin performance. Service gross margin was 20.5% compared to 21.4% in the third quarter of 2005.

Excluding restructuring and special charges in both periods, service gross margin would have been 20.8% compared to 22.5% in the third quarter of 2005. While the margins declined quarter-over-quarter on a sequential basis, service gross margins continued their trend of steady improvement, moving from 18.4% in the first quarter, to 19.9% in the second quarter, to 20.8% in the third quarter. Again, all excluding restructuring charges.

This trend is a result of continuing in productivity gains, improved pricing discipline, and more recently, lower fuel costs. Operating expenses, a percent of sales was down slightly from 18.8% in the third quarter of 2005 to 18.3% in the current quarter. I anticipate operating expense to remain at these levels as we continue to absorb additional IT expense associated with our ERP implementation. During the quarter, we have made progress with a number of European IT stabilization issues. But as Tom mentioned earlier, we were thoroughly evaluating our global implementation plans in order to ensure an effective ERP deployment. I expect that we will have more to report on this topic for our next earnings release.

The year-over-year tax rate has been reduced significantly, moving from 39.3% in the third quarter of 2005 to 29.2% in the third quarter of 2006. The current quarter effective tax rate was positively impacted by 1.6 million net tax refund which contributed $0.02 of EPS in the third quarter. We recently receive approval for this refund, which relates to a lower tax rate in China for the fiscal year 2005. Additionally, our third quarter tax rate benefited from a lowering of our anticipated full year tax rate from 35.8% to 34.5%. This reduction in the full year effective tax rate reflects a change in income mix towards lower tax jurisdictions.

As I mentioned earlier, we had exceptionally strong free cash flow in the quarter. Free cash flow in the quarter increased by $109 million, moving from a free cash use of $43 million in the third quarter of 2005 to free cash flow of $65 million in third quarter of 2006. This improved performance is primarily the result of a renewed focus in attention to trade receivable collections.

These higher collections drove an 11 day DSO improvement to 67 days at September 30, 2006. This reduction in DSO was a result of significant improvements if our international operations as well as continued incremental improvement in our North American operations. I remain committed to incorporating this renewed focus into our standard operating procedures moving forward.

Also in third quarter, we collected approximately $11 million related to a total $32 million past due elections receivables from two counties in California. We will continue to pursue collection of the remaining balances.

Net data September 30, 2006, was $401.4 million, compared with $221.8 million at September 30, 2005. The principal reason for the increase in our net debt for the past 12 months was a repurchase of approximately 5 million shares company stock for approximately $200 million. Of the 5 million shares, approximately 300,000 were repurchased in the third quarter, leaving us with approximately 1 million shares remaining under our existing board authorization. Our net debt to capital ratio was 27.1% at September 30, 2006, compared with 17.3% at December 31, 2005.

Moving to our full year outlook, we are now expecting total revenue growth of 9 to 11%, with financial self-service revenue growth of 5 to 7%, and security revenue up 15 to 17%. In addition, we anticipate elections systems revenue between $175 and $180 million, and Brazilian lottery revenue of $35 million. We are now expecting GAAP EPS for 2006 in the range of $1.13 to $1.16 per share. Our full year restructuring charges are now anticipated to be $0.62 to $0.64 per share.

While the full-year restructuring guidance includes $0.41 to $0.43 of charges related to the planned closure of the production facility in Cassis, some or all of these charges could extend into 2007. Excluding restructuring charges, EPS for the full year is now expected to be in a range of $1.75 to $1.80 per share. Free cash flow guidance for the year is now expected to be in the range of $143 to $163 million, which includes $30 million of anticipated cash charges associated with the Cassis restructuring.

In closing, while we are very pleased with our third quarter results, all of our employees understand that we are in the very early stages of our recovery. As a result, we all remain intently focus on executing against our long-term profitability improvement plan.

With that, I'll turn the call back over to John.

Thank you, Kevin. Cecilia, we'll take our first question, please.

[OPERATOR INSTRUCTIONS.] And we'll take our first question from Kartik Mehta with FTN Midwest.

Good morning. I had a question for you. I'm assuming you expecting gross margins for product and service to improve in the fourth quarter. If that's so, is that because you anticipate a better mix of business, I guess more from the U.S. and less from international?

Let me address that first by breaking it on the service side. We absolutely expect the margin to see an improvement sequentially, and we've pointed out that we thought the fourth quarter we would hit the 22% gross margin target, and I think we are on our way there with all of the investments we've made and the improvements within the service side. Product gross margins I think are going be pretty constant from third to the fourth quarter, or maybe even slightly down, and that has more to do with mix of units as well as geographic mix.

So I think we're going to see, again like we did this quarter, year-to-year improvement in terms of gross margin on the product side, but sequentially, it will probably be down over the favorable mix we had in the third quarter. Kevin, do you have anything to add?

No, no. That's right on.

Okay.

Tom, is that one of the reasons that you brought down the high end of the guidance I think by $0.03 is because you're just seeing more business internationally and that just happens to have a lower margin?

I think the way we tighten the guidance by bringing $0.07 off the low end and $0.03 off the top end reflected us balancing a number of issues. We've talked about additional expenses with our ERP implementation, and ,as well, we can cease interruption.

Both of those have served to be negatives against our top end. Some of the positives, though, have been some of the service trends that we've seen on the margins, service margins as well as obviously the benefit from taxes that we've seen from lowering of the taxes.

Kevin, I'm assuming you still being hampered by duplicate cost of running the Hungary operations and Cassis, so is that still hurting your product margins?

Absolutely. We continue to operate the Cassis facility with very marginal output, we talked about two to three units coming out of there a day, and that is definitely way down on our cost as we go forward. And frankly, until we get that production facility closed, we will continue to have to absorb those types of expenses.

The other thing I have to mention on that is really the kind of the time and energy it continues to zap from us as an organization, and as a matter of fact, I am going to France here in November to meet with the -- some of the folks in the government facility that are high up in those administrative offices to see what we can do to move this thing forward to a conclusion here. You might imagine, every delayed tactic is being employed,and we are doing our best to balance that and manage it. But at some point here, we expect to draws this to a conclusion. I will be over there in November, hopefully, to move this forward.

As we've said all along, we would love to have this completed this year. There's a probability or a chance that it's's going to slip into '07. Every day that passes, certainly makes that more and more likely. So I think our -- my intention of going over there is to make sure that they understand what a good-faith effort we put together and what a good book three and four are, and to see what we can do in terms of removing the final hurdles.

Thanks. And just a last question. Kevin, I think you said this, and I might have missed it. What do you anticipate the tax rate to be in the fourth quarter now with the overall tax rate for the year?

34.5%.

For the fourth quarter, or is that for the year?

That would be for the fourth quarter. Actually, we had the $1.6 million net that's discrete to the third quarter that's a special item. So, the overall effective rate for the whole year will be 34 1/2 less the positive impact of the $1.6 million.

Thanks a lot, Kevin.

Sure.

And we'll go next to Matt Summerville with Keybanc.

Morning. Just a couple questions. First, you talk a little bit about the order activity you saw in the quarter in the EMEA and Asia/Pacific in terms of why orders were down year-over-year? Is it lumpiness, or is there something else go on from a demand end point?

The third quarter certainly in Europe -- Europe in general has been challenging for us in the third quarter, in particular, where there is a lot of folks not working the entire three months there. From our standpoint, I'm not too concerned about that because I see overall in EMEA that we are much, much better positioned in terms of our product, both Opteva and Angilis, and the certifications, so there is lumpiness there.

The other thing we have is some things that slipped from previous years in terms third quarter to fourth, or fourth that was pulled into third. So I think I'm very comfortable with our overall movement and encouraged by the order flow year to date relative to EMEA, and I think we've got still very good continued opportunities over there going forward.

Can you kind of do the same walk through with respect to your orders in Asia?

Yes. I think Asia, you heard us [inaudible] in terms of very happy with the organization there. We've made some changes, as I communicated, this James Chen, who's been overseeing all of Asia, is now going to oversee all of Asia and EMEA as well. In James' place, we divided Asia into two groups. One is Northern Asia and one is Southern Asia. We had good bench strength to be able to promote two individuals to run those two regions, and I feel very good in terms of our position in China. As I mentioned, I was over there and met with the major banks there. We had an opportunity to take our team into each one of those the major banks. And I look for continued growth for us in that regard.

I also mentioned that specifically in China, that I heard quite a bit from the banks in security. And as such, we're placing the world renewed focus in terms of security opportunities in that region and see with a we can do to bolster that piece of our business. The other parts of Asia, Australia is a big region for us relative to our security business, and we're seeing improvement operationally there, and I feel good in terms of overall Asia operation. I think this split into two distinct regions will allow additional focus and I think get us to the next level of growth and profitability.

So I guess to wrap up Asia, is the demand environment in the ATM business changed there?

No. I think the demand environment is solid.

When you look at Europe, can you talk about how sustainable you think the demand environment is there, and maybe talk western Europe as one piece and some of the developing markets as another. Is it a combination of in terms what you are seeing now, growth in developing regions, any stabilization and price, any commentary that you can provide there? And is this a more massive upgrade in replacement cycle that occurring in western Europe? Kind of talk about the drivers of your business there.

Okay. Let me try and address those. If I miss a piece of them, I'm sure you can refocus. You mentioned when you think of Europe, we have two distinct markets that we need to deal with. One is mature market, and the other is really the emerging markets. If I can start with the mature markets, Diebold was very, very late to the European arena to begin with. So when we made the acquisitions back in 2000, we bought two organizations, but we never were able to bring the right product and right focus in organization to bear until we had Opteva and Angilis introduced.

That gives me much more renewed confidence of having an opportunity to break into some of the major mature western European market we had not in the past. I would expect in France and in Italy and in Germany that we have really renewed opportunities to participate in that market. And I think you're seeing some evidence of that this year, and you saw little bit last year, but I see that continuing. In terms of the emerging markets, I think we're well position there.

First of all, with the new manufacturing facility that we have up and running, I'm happy with the progress we're making there. That gives us a nice gateway into central and eastern Europe. We have a combination of direct operations and distributors throughout there. With James Chen's involvement now. we are re-evaluating our go-to market strategy. And I think we may need to make adjustments there.

We're also looking at the individuals running each of those markets and countries. We are trying to do this in a country level focus because there are so many countries, there's different dynamics there. But I'm very excited about what we think we can accomplish in eastern Europe.

And then as far as the senior management team of the company, is it pretty much in place at this point? Are you still looking for somebody to oversee the ATM business?

We were looking for someone to of see the ATM business for EMEA. James Chen will certainly sit above that, most likely will in Asia/Pacific, and help us make decisions and help us identify the right person. But since we're moving our headquarters from Windsor to Switzerland, there are a number of folks that are coming with us, a number of folks that have chosen not to move.

As such, the biggest area that we are addressing right now is someone to run the entire EMEA operation. James Chen right now is basically spending every week in Europe and is effectively working with our -- Hendrick Funk who runs the operation today, side by side, and running the operation and James will do that intil we identify the right individual.

And then can you talk about the international price environment.

Yes. I would say that the international price environment still remains relatively challenging. Certainly there's so many countries out there that some of this is generalization, but the thing I like from my perspective, Matt, is we are now, the disciplines we're putting in place are allowing us to make decisions whether we want to actively pursue a bid or withdraw ourselves from some of those, and we've done that on occasion.

I think that's reflected in some of the margin improvement and I think that discipline we will continue to adhere to, and certainly that may mean again that there are opportunities that we walk away from. But I think that sends a signal to the market. That is our number one priority while we are thrilled with the overall revenue growth, that revenue growth is -- we want to make sure the revenue growth is tied to margin improvement. We're going to continue to adhere to that as we go forward.

Great. Thanks a lot.

We will go next to Reik Read at Robert W. Baird and Company.

Good morning. Tom, can you talk a little bit more about the ATM markets, particularly North America where it sounds like you are suggesting that market is still fairly weak, but are you seeing any changes in trend there, and then can you also talk a little bit about the role of bank branch expansion, how that continues to help out and if there are any changes there as well.

Okay. I think for us, when we talk about North America, the first conversation is Canada. Canada, for us, historically has been a relatively small market. But this past year, I think beginning in the fourth year of last year through the first three quarters of this year, Canada's been a major drive in terms of our revenue growth due to a large outsourcing contract. So the good news for us is that major progress for us in a space integrated services and outsourcing that we think is critical for our long-term health as a company worldwide, and we see that occur in Canada, is very encouraging. It's much like the experience we've seen in Brazil.

The second thing, if we look at U.S. part of the North American operation, we have been very focussed in separating it from the large accounts, which we call 20 strategic accounts, and the rest of the market which is the community bank market and credit union market, et cetera. The major trends I see there are very encouraging. While overall the market has been basically flat with a little bit of growth. I'm encouraged by the fact that with Check 21 and the movement of Check 21 relative to the banks, they are embracing that.

Now, the impact for us is deposit automation, which means the sophisticated module of the Intelligent Depository which is the check imaging module, the bulk note modules, and everything that constitutes deposit automation has begun. It's moving slowly. I think it's going to continue to move slowly throughout 2007, but it's not a case where folks are questioning it. It's a case where this is a sophisticated change to take place with the consumer. The way they do the transactions to the branch operations and the back office and how it flows through, as well as the operations in the front, and then, obviously, for us in terms of how we interact with that.

I again think that the deposit automation, for me, in the U.S. is a very encouraging story, but it's just going to be an elongated story. It's going to occur over the next three to five years. So it's not a case where you can just add the sophisticated modules to 1,000 units. It cannot happen. It requires a lot of change. So for me, that's a long-term trend that's going to continue, and we're moving down that path. We've got a lot installed, we've got a lot of pilots going on. And I'm encouraged from a standpoint that we are probably have 40 or 50 or 60 credit unions participating in this, which gives me a very good feeling in terms of the ground swell, just not a few or five or six big banks, but it's kind of across the board. I'm encouraged by that.

Can you, Tom, talk about how the bank branch expansion is -- it's been fueling things for awhile here. Is that still a steady trend?

Yes, and I would say more in terms of, I would use the term the modernization or the face lifts that banks are giving branches because when you look overall, and you add up credit unions and small community banks and major banks, at the end of the day, there's net gains and net losses and they net out pretty much to pretty small growth. For us it's the change that's important because every time a bank or a credit union wants to make a change the way to interface with a customer, our security business has tremendous opportunities there in terms of the product and services that we provide.

So for us, that is very healthy. So we are seeing that with the security business at large, that we're getting a lot of benefit in terms of security business from the branch modernizations that are taking place, which is really helped to continue to fuel the security business kind of across the board.

And then in Canada, you've had the one order. Is that an order that will continue to expand for you, and are there some others now that you have that under you that may follow?

In Canada's case, you have some very large entrenched banks that have large entrenched relationships, so I don't see this automatically applying to other banks. This may give us the opportunity to talk to some of the other major banks up there, but this is a long-term decision for them. So what will happen is they did a major upgrade in terms of all their technology, so you see a major flow in terms of revenue now.

From here going forward, it's more a matter of -- it's a change in business in terms of we now have the ability to remotely monitor and download software and do other things you do in an outsourcing environment. The revenue stream will be a constant revenue stream, but it will be much lower than what we experienced with the technology refresher upgrade that they experienced over the last four quarters.

Okay. Now just one last quick question on the operating expense side. The operating expenses grew a little bit faster than revenue. I know you've had some increased IT cost and legal cost. Can you talk a little bit about what the other factors might have been that caused that, and will that trend moderate a little bit? Will you start to get better leverage?

I think on the operating expense line, again, quarter-over-quarter those were favorable. So we actually leveraged a little on the incremental revenue. But I think that the absolute dollar spend, you are looking at, is kind of where we are going to be for awhile. And again, that reflects ramped up cost relative to IT and some higher legal expenses. In addition, some of the effect is obviously that we have to expense stock options and that expense is in there as well. So we were looking at, I think, a level of spend that should allow us with increasing revenues to show positive leveraging as we go forward.

Okay, great. Thank you.

As reminder to ask a question today, you may signal by pressing star-one on your telephone key pad. We will go next to Gil Luria at Wedbush Morgan Securities.

Good morning.

Good morning.

I have a couple questions on the restructuring and the supply chain improvements. First on Hungary, is the thousand units you will produce this quarter ahead of plan, or in line with what you thought? And then what do you expect to produce in terms of capacity in Hungary? At what point do you stop shipping to Europe from China and the U.S. and at what point does Hungary replace that supply?

The first part of that question, we were right on plan. Our original plan was forecasted to be a thousand units in the fourth quarter. Looking at where we are at through October, I feel pretty confident in terms of being able to do the balance and give or take a couple hundred units, you may end up with couple hundred favorable to that. But a thousand's the plan. We want to make sure the quality is right, we want to make sure the build is right.

Everything from the supply chain is flowing as it should, and through October, we're pleased with where we are at. We've certainly had a few hiccups along the way, but in essence, it's a startup. So we recognize that, so I'd say we were right according to plan. In terms of capacity for that facility, my expectation would be that if we can end this year as we have planned, that we should be able to get close to 10,000 units type of range in 2007.

The goal would be eventually to be able provide every unit in the EMEA region from Hungary, and we basically have the capacity to do that, and we don't want to move too fast. We want to move in a very orchestrated manner. So we will continue to rack this up through all those quarters next year. If we continue to meet or exceed the plan, then that is kind of the target we'll have. But the capacity will be able to do 15,000-plus units in that facility long-term.

And the second question, on the ERP implementation, you had a very bad experience with a third party provider, and the you decided to take ownership of this issue. And it sounds like now you're considering again letting a third party evaluate the program as it is to date. Are you also considering letting that third party do the implementation, or are you still keeping ownership of this program?

First, I guess the way I look, there were two events. The first event was the decision to power our ways with the third party provider who was, in essence, running the implementation for us. And we took that in-house, and what we've begun is a process of doing a couple things. One is hiring needed skills within our own group, and we're about halfway through that process.

The second thing was to target for specific questions, different third party providers that would be able to help us with questions, for example, on architecture and how that is set up. That might be one provider. We're going back to another one to deal with specific issues relative to some of the performance of some of the software itself.

So in this next stage, what we are doing is we're being targeted about looking for assistance outside the company where we need it, but we clearly are taking all of the ownership for getting this stuff in-house. So there is no third party provider that's going to come in and run this for us. We're going to direct that action ourselves.

Great. And then just one last quick question. What was stock based compensation for the quarter?

Stock based compensation, stock option expense?

Yes.

Roughly -- it was roughly about a $1.5 to $2 million.

Great. Thank you very much.

We will go next to Yvonne Varano with Jefferies.

Thanks. When you look at the revenues in the financial self-services and that growth that we are seeing, would you classify it best as being volumes, or are you getting any price when you net out the changes in the different regions?

We're definitely -- this is growth with improved pricing. So the business that we are attracting or winning or whatever, we are looking at that in terms of selling the value that we have with at the new platform and capabilities that we can deliver, and we are holding our sales folks accountable for that. We mentioned earlier in the year we were changing the compensation plan this year. I think that is one of the biggest drivers in terms of helping us at the margin line. And we continue to look at those aspects of the organization.

We have score cards in place to evaluate how we were doing by region and by team. So we can tell which ones have been able to yield a percent improvement or which ones have yielded half a percent or two and a half percent. It's proving to be a very, very effective management tool for us to improve our operations, and also to provide training and skills assessment along the way.

Was it mostly North America that you seemed to indicate that you are getting pricing, or are you seeing it in some of the regions.

I think we are seeing more of it in North America in the matures market. We've got out ability to -- It's spread out amongst so many different institutions. Some of the bigger markets that are driven by a few banks, it's a lot more challenging to do that on. So North America really has been our test bed, but we were applying similar disciplines to the other regions of the world, and we will look to do that even in a more significant manner in 2007.

As you can see the consolidation in the banks, do you think that gets more challenging in North America?

Certainly. North America, they have regulations in terms of the size of the bank, in terms of how many deposits that one can control, so I think just the way the North American operations or the North American banking market in place, when you look at credit unions and add them in, certainly there's been a consolidation, but if you look even in any regional market, whenever a big player comes in, two or three small de novos start up or whatever, so between the credit unions and small community banks, there are still in the neighborhood of 12 to 15,000 that we are doing -- we were approaching. And I don't see that changing in the near-term.

Great. Did you or could you give an outlook for DNA for the year?

We typically don't do that. I think as you look at implied guidance we have for the year, the expectation is that DNA is down -- flat to down a little bit I think in my comments earlier, someone asked about the different regions of the world and I was commenting on North America being basically flat.

That would be my comment for the fourth quarter as well. I'm not seeing any urgency that bulk note or deposit automation is going to explode in the fourth quarter. As I mentioned earlier, Check 21 is the biggest driver of activity for the next three to five years, but that's going to be spread out over a long period of time. So I think the fourth quarter continues to be flat in the North American region.

The other thing I'd just add is our fourth quarter last year was exceptionally strong. So from a comparison standpoint, that becomes a relatively difficult comparison for us.

Great. Thanks very much.

And with no further questions in the queue, I'd like to turn the conference back to Mr. Kristoff for any additional or closing remarks.

Thank you Cecilia, and thank you everyone for joining us today on the conference call. And as always, if you have additional follow-up questions, please feel free to call me directly. Thank you.

That does conclude today's conference, ladies and gentlemen. Again, thank you for your participation, and you may now disconnect.