Diebold Nixdorf Inc (DBD) 2014 Q3 法說會逐字稿

Good day, everyone. Welcome to Diebold Incorporated third-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 and Chief Communications Officer, Mr. John Kristoff. Please go ahead, Sir.

Thank you, Kim. Good morning and thank you for joining us today for Diebold's third-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 non-routine 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 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. Also, 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.

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discussed is only current as of October 30, 2014, and subsequent events may render the information in the replay out of date.

Finally, I did want to quickly mention that we will be holding our analyst day in New York on December 10. We will be providing additional details around our Diebold 2.0 turnaround program as well as our outlook for 2015. Please feel free to reach out to our investor relations team for more information.

And now with opening remarks, I'll turn the call over to Andy.

Thanks, John. Good morning, everyone, and thank you joining the call today as we discuss our results for the third quarter.

As usual, there are several items I will be covering today. First, I will provide key takeaways from our strong third quarter. Second, a regional update. Third, an update on our Diebold's 2.0 turnaround strategy. And finally, our outlook for the remainder of 2014.

Now, let's discuss the key takeaways from the quarter, on slide 7. This was another solid quarter for Diebold as we execute on our turnaround strategy and continue to see results from our transformation efforts.

Taking a closer look at the performance, I was pleased with healthy revenue growth of 9% year over year. Each of our lines of business grew in the quarter with financial sales service up 5% and security up around 3%. Brazil Other was also a strong contributor.

Our financial self-service business continues to perform well, particularly in EMEA, where we have been able to grow above the market rates. Gross margin performance was strong due to a favorable geographic and customer mix in the quarter, combined with the benefits of our prior restructuring activity.

Our cost savings initiatives and subsequent reinvestments are tracking in line with our expectations. As we have discussed before, we're investing in IT and back office transformation, service infrastructure, R&D, and sales and marketing. Heading into the fourth quarter, we have already achieved our 2014 full-year goal of $25 million in net savings.

Outside of the financial results, we continue to generate positive operating momentum. We had a number of new customer wins related to branch transformation, managed and professional services, as well as electronic security; on which I will elaborate more later. Bottom line, we are winning in our markets and growing our presence.

We remain keenly focused on providing our customers superior solutions that help increase efficiency and improve security, supported by an active R&D pipeline. Over the next several months, we will be moving a number of new solutions out of our labs and into the shop window.

Due to our strong performance year to date, combined with our fourth-quarter outlook, we now expect full-year revenue to be up approximately 7%. We're also narrowing our 2014 non-GAAP EPS guidance range to $1.70 to $1.80, which includes an increase in our expected full-year non-GAAP tax rate. Chris will go into greater detail on the components later in the call.

Heading into the fourth quarter, we are right where we wanted to be and have been able to absorb a number of events, such as Venezuela currency devaluation, the divestiture of the ERAS subsidiary, and a higher full-year tax rate.

We're positioned to lever earnings within the original earnings guidance that we provided last year. We continue to subscribe to our philosophy that we say what we're going to do, and then do what we say.

Now, let's talk about order activity in our regions, on slide 8. Overall, as a Company, we had a reasonable order entry in the quarter. While total orders for both product and services in the third quarter were down 7%, this was primarily driven by tough comps in Brazil. Excluding Brazil, financial self-service and security were up in the low-single digits.

In North America, total orders for both products and services increased roughly 3%. In financial self-service in North America, total orders increased 2% as we continue to see Windows 7 and branch transformation activity ramping up in North America, particularly in the regional bank space.

Our electronic security business in North America continued its double-digit growth rate with another strong quarter of order activity. As we've highlighted in the past, this growth is tempered by the decline in our physical security business, which resulted in total security orders up about 3%.

Moving to Asia Pacific, total orders increased 8% for the quarter, and similarly on cash and currency basis, with strength in China partially offset by a decline in India. In EMEA, total orders were down 16%, primarily due to tough year-over-year comps in the third quarter of 2013 when orders grew 30%. Having said that, year-to-date total orders are up some 20% in this region as we continue to expand our footprint in major accounts.

In Latin America, total orders for the quarter were up 11%. Mexico and Peru were particularly strong, which helped this region achieve a near record level of order entry for a single quarter.

In Brazil, orders for the quarter decreased about 45%, affected by the lumpy nature of the Brazil Other business. Going forward, we'll see a similar effect on the revenue side as 2014 results will create tough comps in 2015.

Looking at our total business for the quarter, on slide 9, we continue our focus on becoming a services led, software enabled company. Servicers and software revenue continue to make up the majority of our total revenue year to date at 56%.

Moving to slide 10, let's discuss our Diebold's 2.0 turnaround strategy and a few key initiatives as it relates to our eight point program. First, in terms of establishing a competitive cost structure, we took another step toward our midterm goal of sustaining service gross margin levels above 30% annually, as we continue to improve workforce utilization and service tools.

Our [sales] team, it continues to build out global infrastructure for our back office transformation. We have set up centers of excellence in each geography and are transitioning work strengths to our counterparts at Accenture.

We remain on track with internal expectations, and we'll be focusing on fully implementing this relationship in 2015. Having said this, you will see in Chris's comments that the cost of this and other transformation activities are beginning to manifest themselves, as we indicated on our last call.

Second, we drove a number of innovative customer solutions during the quarter. As you may have seen, we recently announced our new 5500 series of cash dispensers, our first all-new product line in a number of years. The solution was developed in collaboration with our global customers and was funded by our R&D investments.

Unveiled in London earlier this month, the 5500 is geared towards the mass market in key international regions and provides a lower total cost of ownership for the ATM deployer. In addition, the 5500 features the ActivEdge secure card reader we recently introduced.

We will be following this up with several new solution launches in the coming months. Going forward, bringing more innovation to the market in a continuous manner is an important part of our turnaround strategy.

Our branch transformation offering continues to gain traction with global, national, and regional accounts. During this earning season, numerous large banks highlighted the need to invest in branch transformation technology to increase efficiency.

We continue to make inroads with our pilot program and secure several wins within the regional bank space, a few of which we announced during the third quarter. However, I will remind you that we envisioned that broad adoption of this technology will take place over time, so the tailwind from branch transformation should strengthen in 2015 and well into 2016.

In the security business, we rolled out an enhanced SecureStat portal that improves efficiency and security for our customers. Since 2013, we have added around 700 users to our SecureStat platform.

In addition, we have essentially completed the expansion of our electronic security sales force. This now brings our ES sales force to approximately 130 sales executives. We believe these enhancements will help continue to drive the momentum we've been generating in our electronic security business.

In regards to further leveraging services and software, we were able to announce two meaningful wins in the quarter. Belgian Post has implemented our multi-vendor software, as well as outsourced the management of its entire fleet of ATMs to Diebold. As a result of combining Diebold's software and services, we are able to significantly reduce complexity and improve the performance of Belgian Post's ATM network.

We also announced an extensive follow-on agreement to update the ATM fleet for Bankia, one of Spain's top financial institutions, through a comprehensive managed services project. These are just two examples of how we have led with services and software to grow our share by offering an integrated solution to our customers. To further illustrate this point, in our core financial self-service space, service revenue outpaced the growth in the product category by a 2 to 1 ratio for the quarter.

In conclusion, I'm pleased to have another solid quarter in the books, and feel good about the achievements we are reaching in our Diebold 2.0 transformation. We are a Company in transformation. We are not fully transformed. A lot of heavy lifting is still in front of us.

We are focused on consistent execution and continuing to move our Company in the right direction. We're meeting our near-term objectives and remain confident in our long-term prospects. With that, I will turn the call over to Chris for more details on our financial performance.

Thanks, Andy, and good morning, everyone. I will start off by walking through our third-quarter financial performance and then 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 9% on a GAAP and constant currency basis, as a result of increased volume across all regions except Latin America, which was down slightly due to a decline in the security business. As I noted in the second-quarter call, we expect our Brazil Other business, which consists of lottery, IT, and election solutions to be a strong contributor to our revenue growth of the full year.

As we move to slide 16, financial self-service revenue was up 5% on both a GAAP and constant currency basis, with growth in Asia-Pacific and EMEA partially offset by a decrease in Brazil. As we have noted, EMEA continues to perform especially well, posting solid revenue growth over the prior year. In Brazil, the decline was driven by lower volume due to timing based on customer delivery expectations.

Total security revenue, on slide 17, was up approximately 3% compared with the prior-year period. Electronic security grew 14% driven by strong growth in North America. Offsetting this increase was a 12% decline in our physical security business.

Looking at slide 18, Brazil Other was up $34 million, mostly driven by delivery on the large lottery order placed in 2013. On slide 19, gross margin for the quarter improved 1.3 percentage points to 26.2%.

This was driven by a solid improvement in service gross margin, which increased 1.4 percentage points to 30.4%. This improvement reflects the continued benefit of our service transformation efforts across the globe.

As I noted last quarter, some of our reinvestments are being charged the service cost of sales, as we focus on improving our systems and expanding our infrastructure to support our growth and global service transformation efforts. Therefore, we expect our service gross margin to finish the year at approximately 30%.

Product gross margin increased 1.9 percentage points to 21.2%. The increase was primarily the result of favorable geographic and product mix, primarily tied to the US regional bank market, EMEA, and Latin America.

Moving on to slide 20, total operating expense was 19.5% of revenue, compared with 18.1% in the prior-year period, representing an increase of $22.6 million. During the third quarter, increased volume drove higher selling expense as well as investments we have made it sales and marketing. In addition, as Andy highlighted, we continue to make investments in our transformation, such as IT, back office transformation, and R&D, as we work to bring a pipeline of new solutions to the market over the next several months.

Turning to slide 21, year to date, we have realized our planned $25 million in net savings. As was highlighted during our last call, our gross savings are relatively equally distributed over the quarters. However, the majority of our reinvestments impact our P&L in the second half of the year.

As you can see, the increase in our third-quarter operating expense reflects this impact, bringing our year-to-date savings to $45 million and our year-to-date reinvestment to $20 million. Midterm, 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 third quarter decreased 10 basis points to 6.7%. We've been able to fund our reinvestments this year through our improved operating performance and transformation efforts.

Looking at operating profit by segment, on slide 23, all regions improved from the third quarter of 2013. The growth in North America is directly related to increased volumes in the regional bank market and growth in the FSS service business.

Asia-Pacific benefited from favorable country mix within the region. The increase in EMEA is a result of our prior restructuring efforts in the region, coupled with strong growth from our targeted account strategy. And higher volume in Mexico drove the majority of the improvement in Latin America.

The decrease in the corporate segment reflects the business reinvestments we have been highlighting on the call. EPS on a non-GAAP basis was $0.54 during the quarter.

This excludes restructuring charges of $0.01 as well as non-routine expense of $0.03 related to legal and domestication and professional fees. We are also excluding and $0.01 tax benefit associated with our prior-year foreign cash repatriation. Our third-quarter non-GAAP effective tax rate was approximately 29%, which brings our year-to-date non-GAAP effective tax rate to 32.8%.

Moving on to free cash flow, on slide 25, our free cash flow results reflect a $34 million free cash use, which increased $31 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 are building inventory to meet delivery commitments during the fourth quarter and the first quarter of 2015.

Turning to slide 26, DSO increased five days over the prior year. Primarily as a result of strong revenue in September and geographic mix, primarily associated with Asia-Pacific.

Looking at slide 27, inventory turns were down slightly at 4.4 turns, as a result of higher finished goods inventory in transit, to support near-term deliveries. Net debt, on slide 28, for the period was $265 million, an approximate $80 million increase from the prior-year period, resulting in a net debt to capital ratio of 21%, an increase of six percentage points.

I now want to take a moment to update you on a few additional items. First, our team has remediated our material weakness related to controls over Brazil indirect taxes and communication, and is focused on remediating our remaining material weakness in India. The Company is continuing to strengthen it's control environment with investments in our systems, processes, and people.

Along those lines, we recently attracted and hired two new leaders in the finance organization. Henry Orphys has joined Diebold to lead our global tax function, and Dave Kuhl to lead our global treasury activities.

Henry comes to Diebold from KBR, where he served as Vice President of Tax and also spent his career in the tax organizations at several large global companies, including Intel, where he spent more than a decade. Dave most recently served as Vice President of Finance at Ingersoll-Rand, and held treasury and finance leadership roles at American Standard, Dupont, and Exxon.

Both men have outstanding experience operating in complex multi-national business environments. And we will leverage that experience as we grow the Company.

Finally, the Company renewed its credit facility during the quarter, which is now extended to August 2019. The facility was increased from $500 million to $520 million with no changes to debt covenants.

Looking at our outlook, on slide 29, as Andy mentioned earlier in the call, we are increasing our revenue growth expectations for the year to approximately 7%. This is supported by our strong backlog, which grew year over year by approximately 20%.

Driving part of the increase in revenue guidance is activity in Brazil Other, where we have received extensions to previous orders in early October for both lottery and IT related equipment. Given the short cycle time to deliver on these orders, we took a position on the necessary inventory in the third quarter.

We are narrowing our non-GAAP EPS guidance to $1.70 to $1.80, inclusive of an increase on our full-year non-GAAP tax rate assumption. As noted on the second quarter call, there was pressure on our non-GAAP effective tax rate, and the year-to-date effective tax rate is now at 32.8%.

Based on better visibility to our full-year mix of income and discrete tax items, we now expect our full-year non-GAAP effective tax rate to be approximately 32%. As a reminder, our full-year earnings guidance includes the devaluation of the Venezuelan bolivar of approximately $0.12, and an additional $0.03 related to the divestiture of ERAS. We expect restructuring charges and non-routine expense to be $0.21 to $0.23 range, excluding the $0.19 gain on the sale of our ERAS subsidiary.

We are maintaining our free cash flow outlook for the year of $80 million to $100 million. This includes an approximate $25 million increase in our capital expenditures as we make strategic reinvestments in our business.

Year to date, we have continued to consistently execute, remaining steadfast in our focus on continuous improvements to maintain and strengthen our control environment, while operationally reducing our costs and improving our working capital efficiencies.

As you can see, the Company is beginning to demonstrate tangible results from our turnaround efforts. We have strategically ramped up the appropriate reinvestments in the third quarter, as we lay the foundation for long-term profitable growth.

With that, I'll open up the call for questions.

Thank you.

(Operator Instructions)

Gil Luria, Wedbush Securities.

Yes, thanks for taking my question. If you wouldn't mind going through the details of Brazil Other revenue and profit for this year?

And I know you're not going to provide 2015 guidance, but how much of that do you expect to fall off next year? So we know how to properly model next year, at least in that regard? That seems to be a very big factor.

Good morning, Gil, this is Chris. Just to break down the major pieces of Brazil Other. So, year to date, the Brazil Other is at approximately $175 million revenue. I expect that to be around $220 million on the full year.

The major pieces of that being around $100 million in lottery, and about $120 million in the IT related equipment. So, it's about a $40 million increase from where we were at on the last call.

And so, if you think about that moving into 2015, I would expect that to fall off a little bit north of the $150 million we talked about before, likely closer to $170 million fall off. But again, I would note, and you can see it here in the third quarter as well, that's a little bit of a lumpy business.

Going forward, to model for 2015, I would expect that to be a approximately $50 million. If you're looking at the go-forward estimate.

And that comes in at a pretty high profitability level, if I recall, so about 15%. And at that rate, that's about a $0.30 earning that we have this year that's not going to come back next year, is that right?

Both of those product lines are not created equal. I would say it's somewhere between a 10% to 15%.And again, you've got a lot of factors in terms of the timing of when you purchase the inventories, the potential currency headwinds that kick in with that. But I would say, if you modeled a little bit south of that, closer to a 10% blended drop rate, that's probably a little more appropriate.

Got it. And then wanted to ask about the new 5500 line. You're saying it's the first new product line in a long time.

What kind of advantages -- you're talking about lower total cost of ownership for the customer. What kind of a financial advantages over time will it offer Diebold in terms of the cost of maintenance and then gross margins?

Gil, this is Andy, good morning. A few things that will make this a very important milestone for the Company, it's actually the first time that we've developed a product for the international markets.

In the past, the Company always used a US model and then adopted it to international needs. This time we did it the other way around.

So therefore, it's geared toward the customers. It will help the customers to drive a lower total cost of ownership because we have taken all the green ATM capabilities that we've already released with our India machine a few months back, and now they are standard for the complete international market product line.

If you're looking for the Diebold's benefits, just to put it for you in terms of complexity, the product probably has about 30% lower sku number count than it's previous model. Now, these things, of course, you've got to ramp them up, you've got to make sure you've got the volume, you've got to switch over factories, but in the long run this will drive, again, the idea of efficiency, productivity.

And then the last point is, which is also a first for us, we've put a lot of money on the R&D side into this serviceability of the machine, which will help us to continue to drive our services led focus in the regions. And which will also help us to generate the service margins north of 30%.

Got it, thank you very much.

Kartik Mehta, Northcoast Research.

Good morning. Andy, you talked about strength in North American, and I think you said the regional bank market, or maybe said that, Chris.

I'm wondering, is this a one-time strength? Or based on orders, do you think we're finally to a point where you can see the regional bank market getting better?

This year has been good and the regional space. And just think back, if you think about our US business, it's really the tale of two different stories.

Our national account business is still recovering from the loss of two of the largest banks in the US that the Company had experienced some years back. Our regional business, however, has been steadily regaining momentum.

If you're looking for a magnitude, I would say both on the orders and revenue side year to date, we are up, like, double digits in that business. And if I look at our pipeline, especially encouraging if I look at the new projects around branch transformation, innovative ideas, managed services, a lot of interest in the regional space. So, we're cautiously optimistic about that segment of the market.

Then, Andy, EMEA had a very good quarter. And if you look within EMEA, is there a particular region that's providing the strength? Or is it that all the regions are growing about the same for you?

Let's go back. The biggest key to our restructuring in EMEA is we got out of the, we're going to be everything for everybody in every country.

We're having a very clear major account focus. And the good news here is that, especially in the UK, in Spain we've been able to win new accounts and we see business ramp up. While in markets like in South Africa, where we always held a very strong position, or in France, our business continues to run at very high levels.

Then, Andy, just lastly, you give guidance about a year ago. Since then, obviously, some good things happened and some things that you didn't anticipate have happened. As you look back, now heading into 2015, how do you feel about where Diebold is, both from an operational standpoint and a management talent standpoint to take you to the next level?

As I said in my conclusion, we're a Company in transformation. We're not transformed. We've done a lot of foundational work for the Company.

We're getting closer to the end of the crawl phase of our turnaround program. We're starting to I walk, and the switch over will come, as we said earlier, around the middle of next year.

So we feel very comfortable and confident with the progress that we've made here today. We brought some great talent into the Company. But by the same token, we still have a lot of heavy lifting in front of us and we're not throttling back.

Quite the contrary. And we've got to make sure we continue on our path to execute every quarter and get things done to lay the foundation right for the Company. And with a solid foundation, a lot of good things can happen in the mid to long term.

Thank you very much.

(Operator Instructions)

Paul Coster, JPMorgan.

Yes, thanks very much for taking my questions. Andy, first up, on branch transformation. Obviously, it's very much focused on self service inside bricks and mortar environment.

I haven't seen any adverts on TV and it's really not routinely available. Are the banks really committed to this or are they still in the pilot phase? What was your assessment of the transition towards that technology?

That's a very fair question, Paul. But the underlying driver is the banks are trying to reduce labor costs in their branches while remaining in the neighborhood, making sure they can square that equation, and doing all of that while keeping a very good customer service. So the only way you get there is through automation.

So everybody wants to go there, everybody's trying to figure out how do I do this. And most importantly, if I use technology to do this, how do I differentiate my offering from the guy down the street.

So we're seeing a lot of interest, a lot of momentum, but as I said earlier, this is not something that's going to happen overnight. This is not a consumer product. This is an enterprise solution.

It will rollout over the next 10, 12, 16 quarters, and every one of those bank is going at their own pace and going at there own deployment rate here. But we see branch transformation to be a solid tailwind for our industry for the next two to three years to come.

Okay. Just switching to security for a moment, you've done a very impressive job of bringing on the electronic security platform. The physical security business is declining as a percentage.

Is that an intentional act on your part? For instance, are you raising the bar on that business, demanding a higher return on investment, turning away business in the physical security space?

Well, look, the electronic security business, we are a system integrator. We are hardware agnostic. And also, because it's all around solution, this is why the SecureStat is so important because you can connect to our services without having to do a forklift upgrade of whatever equipment you may have installed.

We're focusing very much on the profitability of those orders. We don't grow our business for revenue sake.

And the other thing is we see a lot of growth in the commercial space. So, for instance, this quarter, we were able to land a very meaningful order with Sprint, which again, will drive the ball further down.

Now, on the physical security side, this is a business that is declining at a steady pace. But it's going to -- the decline is probably going to flatten out as we go forward, and it provides a solid base for solutions with the banks, especially think around drive-up solutions, that type of stuff, and we're maintaining this business for as long as we can.

Okay. Well, last question on the electronic security side. I believe you're still in investment mode there.

When does that business turn profitable? And what do you think the, in isolation, the operating margins of that business will be when it's reaching maturity?

We haven't disclosed bottom-line numbers of that business, but I can assure you it's already profitable today and more volume will make it even more attractive to our bottom line.

Very good. Thank you.

Justin Bergner, Gabelli & Company.

Good morning, Andy.

Good morning, Justin.

First question is regarding financial self-service revenue. I mean, as you think about the tailwind's of bank branch transformation and the headwinds of maybe some Windows 7 upgrade revenue ceasing into next year, at what time do you think we'll start to see acceleration in your financial self-services revenue or order profile?

Well, short of giving guidance for next year, our objective -- take a look at where the market is at. The probably most reputable market research company in this space is RBR. They are predicting a 4% to 5% unit growth CAGR between 14 and 19.

Revenue is usually probably 1 point below that because unit count is driven very heavily by growth in emerging markets. And our objective is clearly to continue to grow at least at market rate.

Okay, that's helpful. My second question relates to free cash flow. It seems like the free cash flow outlook is being maintained, but there might be some headwinds on the inventory side being offset by a slightly lower CapEx.

I guess, is that view correct? And then the second part of that question is, is it possible to quantify how much working capital is being absorbed by the higher Brazil Other revenue than earlier anticipated?

I will take the first part of that, Justin, I may have to get back to you on the second part, just to quantify it as I think about that a little bit. But, no, your overall assumption is correct.

If you look at where we're at, a growing company consumes capital. And if you look at our performance in the third quarter from a free cash flow standpoint, again, we had a very strong end to the third quarter from a revenue standpoint. And that means some of that revenue you're not going to necessarily collect on, and so you're going to have a higher receivable balance.

And as I noted as well, we've taken an inventory position on the Brazil Other moving into the fourth quarter. And so, if you look at the activity, if that cycle repeats itself going into the end of the year, I can see us that we may end up little more on the lower end of our free cash flow range.

But overall, I feel very happy with our underlying working capital metrics and that performance. And again, that change in where we're at in the working -- or excuse me, our free cash flow, is really just driven by the demand in the business.

And to your last part of that question, that's probably about, if you look at that Brazil Other as we head into the fourth quarter, the total impact of that, probably close to $30 million approximately is what we're carrying into that. And so, again, the timing of that revenue and moving that inventory will dictate some of that final free cash flow performance for us.

Thank you, that's helpful.

(Operator Instructions)

Matt Lipton, Autonomous Research.

Hey, guys. Good morning. Quick question, Andy, we were talking about branch transformation earlier, and I think it's pretty obvious that regional banks are still dealing with their real estate footprint.

So the orders that you're seeing or the conversations you are starting to have, is at the high end, the in-branch kiosk, your branch performance series? Or is it more standard remote deposit capture ATMs, maybe with need the video concierge services?

How does software really fit into the conversation? Is the new Agilis platform a big part or are people looking for elsewhere for software and really just looking at you on the product side right now?

Well, that's probably yes to all three of your questions because everyone of those regional bank has a different starting point. The good news is we are getting questions on all three elements. The first question is the teller replacement and the additional functionality that you can put on the machine, which lends itself more to the higher end of the product spec portfolio.

You have some of the regionals that have not embraced deposit yet, so you've got that piece going. And the Agilis software, as well as the service offering that we have out there, especially in that space are very attractive.

Just think about it, we've got 22,000 machine under management in North America alone. If you take a look, the next largest bank network would be Bank of America, I think they have roughly 16,000 out there.

So, the fact of the matter that we can offer economies of scale to a smaller financial institutions that are at par with the big guys is a very attractive value proposition. And we see many branch transformation conversations started from that angle as well.

So, it's still very much in the conversation phase? People just looking at all different products, not necessarily gravitating to one solution quite yet?

The market is so early stage, there isn't even a definition out there by the research guys, what all is in branch transformation and not? Some people define it more loosely than others.

So, we're actually very much looking forward to the research guys defining swim lanes, and once those are out, we can then start reporting our success and our progress along those swim lanes. But until then, it's a fuzzy picture.

Got it. And then, Chris, when didn't talk about FX at all in the call. I'm just curious, of the 7%, given the visibility you have into the business mix from the orders in the fourth quarter, how much of an FX headwind, given where currency has moved in September, is contemplated in that guidance in the fourth quarter? Thanks.

There is a small amount of it, of a currency headwind. I would say, in new terms of when we finalize our forecast, we did factor in some of the recent movements in the rate. But again, you've seen a little bit more of a pressure, specifically on the Brazilian reais.

Overall though, when I look at our business from an overall currency standpoint, I feel very good about having a nice large global service presence, which helps insulate us from some of those currency movements getting. We've got the revenue and in our cost alignment, the same currency.

So, overall, right now, I would say to the guidance, a small amount of pressure. We've had about 2% year to date, mainly in the FSS space, and that's almost all been between Brazil and India. And then, so those of the major movements we've seen so far.

That concludes today's question-and-answer session. At this time, I would like to turn the conference back over to Mr. John Kristoff.

Actually, I think we have more question it looks like, Kim.

Okay, we will take this question from Meghna Ladha of Susquehanna International Group.

Thank you. Thanks for taking my question.

Chris, the product gross margin, it improved quite a bit sequentially. How much of it was related to Brazil? And directionally, how should we think about both the product and services gross margin as we leave 2014?

Yes, if you look at the product gross margin first in the quarter, that was really driven by the regional bank space in North America along with Europe and Latin America. So, there's not a lot of Brazil Other impact in that when you look at on the year-over-year basis.

If you think about our product gross margins on a full year, I would model that at approximately 19% given where we're at. On the service side, I did outline that a little bit on the call. Year to date, I think, we're right at the 30% mark, and I expect the full year to end right in that same level.

Thank you.

Now, I would like to turn the conference back over to Mr. John Kristoff.

Thanks, Kim, and thank you, everyone, for joining us on the call this morning. As always, if you have follow-up questions, please contact me directly. And thanks again for joining us.

And that does conclude today's conference. Thank you so much for your participation.