Diebold Nixdorf Inc (DBD) 2016 Q3 法說會逐字稿

Good day, everyone, and welcome to the Diebold Nixdorf third-quarter 2016 financial results conference. At this time for opening remarks and introductions, it's my pleasure to turn the conference over to Steve Virostek, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Lori, and welcome to Diebold Nixdorf's third-quarter earnings call for 2016. Joining me today on the call are Andy Mattes, our Chief Executive Officer, and Chris Chapman, our Chief Financial Officer.

During this webcast we will refer to slides which are available on the investor relations page of DieboldNixdorf.com. Our discussion is being recorded and a replay of the webcast will be made available on our website later today.

Our comments will focus on results from continuing operations, unless otherwise noted. Additionally, any comments made on the financials or performance of Nixdorf represent a US GAAP view for the periods for which we are consolidating.

On slide 2 you can see that our discussion will include certain non-GAAP financial measures, which we believe are helpful indicators for measuring the Company's baseline performance. We have provided a reconciliation of these metrics to their respective and most directly comparable GAAP metrics in our supplemental materials.

Slide 3 contains a reminder that certain comments made today may be characterized as forward-looking statements. There are a number of factors that could cause our actual results to differ materially from these statements. You may find additional information on these factors in the Company's SEC filings.

Please keep in mind that forward looking information discussed is current as of today and that subsequent events may render certain information out of date.

And now I will hand the call over to Andy.

Thanks, Steve. Good morning, everyone, and welcome to the call. I am very pleased to speak with you today as CEO of Diebold Nixdorf. Clearly, the most significant milestone of the quarter was closing our transformative acquisition of Wincor Nixdorf.

It is hard to believe it has been about a year since we announced the combination and set the wheels in motion to obtain the necessary commitments from shareholders, lenders, and regulatory agencies. While this was a Herculean effort, we're pleased to have achieved all the necessary milestones within our projected timeframe and closed the transaction on August 15.

This is an extremely exciting time for us and is also a time of significant change and recalibration. Since the third-quarter financials include a full quarter of legacy Diebold results and a partial quarter for Nixdorf, we spent many hours bringing together the numbers and weighing the merits of how to present these results. Chris and I have prepared our remarks with these complexities in mind and with the objective of providing a transparent view of the underlying business performance.

For starters, I would like to recap our core beliefs as to how Diebold Nixdorf is better positioned to serve our customers and generate shareholder value.

First, unprecedented change in the banking and retail industries is creating tremendous opportunity for higher-value services and software. We see this in our results and in every customer conversation. As we move up the value chain, we have delivered organic growth in services and software revenue on a year-to-date basis. The Nixdorf acquisition adds to that growth and increases our addressable market.

Additionally, we have increased global scale and capacity to allow for greater collaborative innovation with customers. At this very early stage of the integration, we have already redirected our R&D focus on to more of high-growth technology areas. We showcased several innovations last month at the Money 20/20 conference in Las Vegas, which will capitalize on these trends.

First, cloud-based Software-as-a-Service. We demonstrated our cloud point-of-sale solution, which enabled small and medium-sized retailers to use a tablet computer as the primary customer touch point in their stores.

Second, the API economy and application marketplace. Our Aevi cashless payment subsidiary has built an agile, open ecosystem for secure transactions and value-added apps and services, which allows us to monetize the omni-channel opportunity for small to midsized retailers. Aevi added to its open ecosystem by announcing its cooperation with hardware vendor BBPOS to connect to Aevi's global marketplace, branching easily into mobile device options.

Next, big data analytics. We launched our connected insights platform, which shows how collaboration and data analytics expertise can drive better business outcome. Our capabilities are enabling financial institutions to have a complete view of their self-service channel and improve ATM uptime by anticipating maintenance needs. We are already piloting this solution with Banco Popular in Puerto Rico and a regional bank in the US.

And finally, miniaturization and mobility. We unveiled our extreme ATM concept, by far the world's smallest ATM at less than 10 inches wide, or roughly 1.5 times the width of a dollar bill. With retail floor space at an increased premium, size does matter and our customers are demanding smaller footprint solutions. This ATM concept combines cordless mobile transactions with encrypted touchscreen technology.

Another conviction is that retail solutions enhance our growth opportunities and spur innovation. As an example, we finalized an omni-channel software contract during the quarter for approximately 1,200 Pepco stores located throughout Eastern Europe. Once deployed, our software will enable customers to shop seamlessly in stores reaching online and mobile channels. This will add to our strong presence in Europe where our retail solutions are used by 24 out of the largest 25 retailers.

Growth in our industries will be driven by software innovations. On the banking side, our company has the leading multivendor software portfolio and our customers include 11 out of the top 15 financial institutions in the United States.

Our final core belief is that this combination will generate $160 million in cost synergies and result in higher profit margins than either company could have produced on its own. Since the close of the transaction, we have launched designated integration work streams and assigned cost synergy targets across the organization. Based on our work plans, we are more confident that ever in our ability to deliver on these targets.

These synergies provide a path towards our non-GAAP operating margin target of greater than 9% for 2019. In a nutshell, we are more convinced than ever that this was the right deal at the right time and we are off to a good start with a number of foundational achievements.

The domination agreement was approved by Wincor shareholders. The management team is in place, retaining key leaders and attracting new talent. As an example, Ashvin Mathew recently joined our company from Microsoft as CTO of our software business.

Many of you have asked us: How do you plan to get your arms around this truly global company and build a new common culture? We have taken steps to blend talent from both organizations, leverage best practices, and build a customer-centric mindset. Our new matrix operating model consists of three lines of businesses -- services, software, and systems -- and three regions -- the Americas, EMEA, and Asia Pac. This setup provides more focus and links logically into our growth and cost synergy initiatives.

On the governance side, we named three new members to the Wincor Nixdorf supervisory board, our Head of Compliance, Lisa Radigan, Chris, and myself. Additionally, we have added two directors to our Board of Directors, Dr. Alex Dibelius, managing partner of CBC Capital Partners, and Dr. Dieter Duesedau, former director of McKinsey.

Shifting gears, I will make a few comments on our third-quarter results. Solid Nixdorf results added to our quarterly performance, which is why we are not speaking to year-over-year growth comparison as they are not meaningful.

EMEA, which is now our largest region at approximately 38% of revenue, performed in line with our expectations. We continue to see constant demand for innovation, automating transactions, and realizing operating efficiencies. New orders in the regions were encouraging, including FSS wins in Turkey, the win at Pepco, and a competitive win for upgrading more than 10,000 point-of-sale terminals and software at one of the largest grocery store chains in Europe.

North America accounted for 31% of revenue in the quarter. We delivered organic growth in our services business as expected. While we have continued to see healthy activity in the North American market, our product revenue performance and orders were disappointing. This has not only impacted third-quarter results, but also has a carryover effect to our fourth-quarter outlook, which Chris will discuss.

We have much higher aspirations for our North America business going forward as brand transformation activities become mainstream in the US regional banking segment.

We also named a new leader, Octavio Marquez, who led the turnaround in both revenue and profitability of Brazil and Latin America over the past two years. He has met with a significant number of customers and aligned the sales organization around innovation and growth.

Latin America accounted for 17% of revenue during the quarter. Revenue growth and services, election, and lottery were offset by declines in security and FSS product volumes. Orders were up in Brazil for the second straight quarter; however, total orders edged slightly lower due to a difficult comp to the prior-year quarter when orders were up more than 20%.

Asia-Pacific generated 14% of revenue this quarter. Although we are more diversified in this region, headwinds in the largest market, China, continue to impact the top and bottom line. To reestablish our competitive presence in China, we recently finalized joint ventures with Aisino and Inspur, both major IT companies. We will leverage the innovation strength of both companies to regain market share, although the benefits will flow through our equity income line because we are minority partners.

On a completely different note, we also achieved another major milestone as we completed our corporate monitorship. Starting in 2013, these activities included: enhancing our compliance policies and processes, adding robust controls to increase transparency and oversight, hiring dedicated compliance professionals, and instilling a culture of compliance throughout the organization. By strengthening our process and controls we have not only fulfilled our settlement obligation, but built a stronger foundation as we execute our integration activities.

Special thanks to our General Counsel, Jon Leiken, Lisa Radigan, and the entire legal and compliance team.

Moving on to our fourth quarter; let me provide our first outlook as a combined company. We are targeting revenue of approximately $1.3 billion with adjusted EBITDA in the range of $100 million to $110 million.

With respect to 2017, we will provide guidance in February, after we have completed our first combined budget cycle and announced our year-end results. We are also planning an investor day in New York on February 28. I hope that you will join us for a half-day discussion of the Company's strategy and outlook.

With that, I will turn the call over to Chris for more details on our financial performance.

Good morning, everyone. As Andy just outlined, we closed the Wincor Nixdorf acquisition on August 15 and our third-quarter results include a full quarter from the legacy Diebold operations, plus Nixdorf results as of the transaction close.

For this quarter and the next several quarters, year-on-year comparisons will be made against the results for legacy Diebold. We will provide additional comments to help investors better understand the underlying trends in the business.

My comments today will focus on our non-GAAP results from continuing operations unless otherwise noted. As a reminder, the impact of the divested North America electronic security business is included in the income from discontinued operations net of tax line.

Starting on slide 6, non-GAAP revenue increased 68%. Organically, non-GAAP revenue decreased 2%, which is a result of continued growth in Diebold services business, more than offset by declines in Asia-Pacific, primarily related to China. Removing the effects of currency, organic financial self-service revenue decreased 8% with a decline in Asia-Pacific and, to a lesser extent EMEA, which was partially offset by improvements in the Americas.

One of the benefits of our acquisition is our new retail solution set and customer base. Retail added $176 million of revenue during the third quarter.

Looking at the remaining Diebold legacy businesses, the change in security of $9 million was primarily related to the lower volume in Latin America and North America. Brazil other revenue increased approximately $42 million year over year, as we delivered on the previously-disclosed election systems orders.

Moving to slide 7, total gross margin was 24.7%. Service margin was 28.8%, largely reflecting the new mix of business for our combined company with Nixdorf margins substantially lower than legacy Diebold. Product gross margin was 19.7%, reflecting a benefit from the higher-margin Nixdorf business, which was partially offset by the mix of business and reduced volumes in the legacy Diebold business.

Turning to slide 8, total operating expense increased $69 million over the prior-year period, primarily due to the inclusion of the legacy Nixdorf results, partially offset by lower reinvestment levels and cost-reduction actions at legacy Diebold. As a percentage of revenue, operating expense improved by 180 basis points when compared to prior year.

On slide 9, our operating margin was 4.8% for the quarter, reflecting a 70 basis point improvement year over year. Non-GAAP operating profit in the third quarter increased approximately $24 million, with declines in Diebold's legacy North America and Asia-Pacific segments more than offset by improvements in Latin America and the benefit from the combination with Nixdorf.

In the third quarter, non-GAAP adjusted EBITDA was $77.4 million, or 7.8% of revenue, compared with $41.5 million, or 7% of revenue, in the prior year. These year-on-year improvements were attributable to the acquisition.

Looking at operating profit in the third quarter as reported by segment on slide 10, North America operating profit decreased $10 million, which was driven primarily by lower product volume in the legacy Diebold business as highlighted by Andy. Asia-Pacific operating profit increased $2 million with a $10 million decline in the legacy Diebold business due to lower activity in China and India, which was more than offset by the benefit of the acquisition.

In EMEA, profit grew $26 million as a result of the Nixdorf acquisition. In Latin America, operating profit was up $8 million, primarily due to the legacy Diebold business driven by increased election systems activity and with lower operating expenses, mainly in Brazil. Our global and corporate expense increased $3 million as the impact of the acquisition offset lower spending levels at legacy Diebold.

Turning to the EPS reconciliation on slide 11, the non-GAAP EPS from continuing operations was $0.34 for the quarter. Non-GAAP EPS excludes non-routine expense of $1.99, which consists of $0.76 in purchase price accounting related to the Nixdorf acquisition; $1.20 for acquisition and integration expenses; $0.10 of restructuring; and $0.05 primarily related to the mark-to-market impact of the Company's foreign currency contract associated with the Wincor Nixdorf acquisition.

The tax benefit for restructuring and non-routine items, inclusive of allocation of discrete tax impacts, was $0.37. During the quarter, the non-GAAP effective tax rate from continuing operations came in at 23.9% and brings our year-to-date rate to 24.8%.

Moving on to slide 12, we delivered approximately $1 million of free cash flow from continuing operations for the third quarter and on a year-to-date basis we had a free cash use of $211 million. Included in the quarter and on a year-to-date basis are approximately $62 million and $95 million of cash payments for acquisition and divestiture-related expenses, respectively.

Excluding the effects of acquisition-related cash expenses, our free cash flow is benefiting from the Nixdorf acquisition, as well as improvements in the legacy Diebold business as we've made progress on our working capital performance. For the full year, we expect operating cash flow $20 million, capital expenditures of $50 million, and a free cash use of $30 million, which includes approximately $180 million of cash payments for acquisition, divestiture, and integration expenses, as well as cash taxes owed from the sale of our North America electronic security business. Our new outlook includes a positive contribution from Nixdorf, offset by lower GAAP net income from legacy Diebold.

On slide 13, we provide highlights of our liquidity and net debt position. As of September 30, we reported cash on hand of $788 million and gross debt of $2.1 billion, resulting in a net debt calculation of approximately $1.3 billion. Our capital structure was constructed to purchase all of the outstanding shares of Wincor Nixdorf.

Based on the current minority structure, near-term liquidity needs, as well as our confidence in future cash flows and expected benefits of our cost synergy program, we paid down $200 million of our US dollar Term B facility in November. This will reduce our interest expense by around $10 million per year and bring our annual run rate to approximately $130 million.

Moving on to slide 14, thinking about our fourth-quarter outlook, we have taken the following factors into consideration. First, the Asia-Pacific segment will reflect our new joint venture structures in China. A majority of this business will no longer be consolidated, but will be accounted for in the other income line.

Second, the complexities of consolidating our two companies, which include the nuances of the different accounting standards, IFRS and US GAAP, will have an impact on our reported results. Third, carryover performance from our North America segment as revenue from certain large projects moved into 2017. And finally, the challenging year-on-year comparisons for the retail business, which posted very strong revenue growth during Wincor's December quarter of 2015.

Based on these factors, we expect fourth-quarter revenue to be around $1.3 billion, net loss to be $34 million to $40 million, and an adjusted EBITDA to be in the range of $100 million to $110 million for the quarter. We also expect GAAP EPS to be a loss of $0.45 to $0.52 and non-GAAP EPS of $0.27 to $0.34, which includes an effective tax rate of approximately 32% for the quarter.

With that, I will open up the call for questions.

(Operator Instructions) Matt Summerville, Alembic Global Advisors.

Thanks, good morning. I wanted to just spend a minute talking about the outlook in the FSS business as it pertains to North America. It sounds like you are seeing slippage to the right in a couple of big deals there. Is there a way to quantify how much has moved out of what you thought was hitting into 2016 into 2017?

And then, Andy, if branch transformation is sort of becoming mainstream with respect to the regional bank space, as you mentioned in your prepared remarks, when do we finally start to see that show up in the order book?

Good morning, Matt. On the outlook on North America, if you think about the movement, I would call it roughly $30 million of product revenue that has pushed out of 2016 into 2017 on the hardware side. On top of that you will have the carry-on impact of additional service revenue. You typically see additional build work and professional service activity that comes along with that, so the overall margin impact is a bit higher than what you would see on the typical hardware margin side.

And I'll let Andy answer the other question.

Matt, on the bank transformation, as we discussed earlier, at the moment it's still all a big players' game and it's very much in project. We do see a lot of conversation on the regional space. I have had multiple customer interactions over the last three months where people are telling me that they have waited maybe even too long. So to answer your question, I would expect the regional banks to show back up towards the end of 2017 and going into 2018 from an orders point of view.

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

Then just as a follow-up, Chris, when you are sort of walking through the revenue view in Q4, can you specifically dig into China a little bit more in terms of what the step-down in product revenue looks like in 2016 over 2015?

And then I guess when do we start to see profitability that will hit other income start to flow through, if you will, from these JVs? I guess what's the lag there? If you could just be more granular about that, that would be helpful. It's very complex.

Let me try to talk China combined business. As we move forward, new order activity, when you look at the two JV structure, will be largely gone. So the hardware revenue with the Aisino JV will completely move over and that business will no longer be consolidated.

The same thing with the Inspur JV. We see that revenue for all new order entry activity is going to completely shift over on the hardware side. So if you think about that from a magnitude standpoint of the legacy business, it's going to be north of $150 million of hardware revenue from a year-on-year delta that you would expect impacting the comps from a 2016 to 2017 perspective. So that gives you a high-level view on the hardware side.

With regards to some of the ramp up, without going into all of the complexities, I would expect still the next four to five months we are going to go through some of the transition work. We're handing over manufacturing facilities and the complexities of that and actually will have a manufacturing facility that will be starting up as part of the Inspur JV.

And so I would expect year one to be slightly accretive when you look at the overall impact, with the bigger benefits as we move forward. Understanding that we only get, if you did a blended average here, roughly 40% of the combined profits as we go forward.

Great, thank you.

Gil Luria, Wedbush Securities.

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

That's a great question, Gil. I've been spending a lot of time with retail customers over the last month, as you can imagine, and I have to say with every visit I get more excited about the opportunity.

Let me just walk you through a few levers that will clearly play as a benefit to Diebold Nixdorf.

First, more so than in any other business, retail truly has global players. If you take a look at our retail revenue, I want to say about 30% of it actually is originated by global players. And given the combination of both companies, we are the only player in the world that can offer a solid end-to-end portfolio on the hardware, software, and services side in just about any country that retailers want to go.

Secondly, also on the retail side we see a very strong push towards services and managed services. The whole notion of a store lifecycle management is resonating with many of the top players; that's basically where we manage everything in a retail store that has a plug attached to it. They do that in an outsourced fashion because complexities are going up, cost pressure is going up, and they're looking for a partner like ourselves to help them through that.

Third, if you take a look at innovation cycles, the innovation in the payment space at the moment is happening more on the retail side and more from the consumer end of the story than it's happening on the banking side. If you take a look at Money 20/20 in Vegas, I want to say 80% of all the solutions, of all the topics that were discussed were consumer/retail-centric. And the fact that this is a less regulated environment, the fact that this is an environment where the consumer decides how to spend their money drives innovation, drives the level of collaboration.

We think we will see a lot of cool new technologies emerge on the retail side, especially when you think about cloud-based solutions. So all in all, with every customer visit I get more excited about the upside opportunities that we have on the retail side.

That's great. Then, Chris, you put $180 million of cash into this year's number in terms of restructuring and one-time expenses. How does that relate to the $200 million you initially planned for? And how much does that leave for restructuring and one-time expenses for 2017?

Recognizing you are not going to give any guidance on 2017, how just of the restructuring and one-time cash expenses do you still see that you will need to take care of going forward after the end of this year?

Yes, the $180 million that I referenced, that is the cash payout that's tied to the transaction. That does not include any impact of restructuring.

And so if you think about that, that is primarily the legal investment banker fees, some of our integration consulting impacts, the interest expense tied to the transaction of both companies post acquisition; so that also now includes the cash payments for the investment banking and legal fees for the Nixdorf piece, which will be coming through in the fourth quarter that will be actually paying out. So that $180 million is really just tied to getting the transaction done.

As we move forward, we have the integration activity that is going to be tied to delivering on the $160 million of combination benefits that we've outlined. We estimate that somewhere in that $130 million to $160 million range of one-time costs to achieve that. And we will provide more clarity on that and a little more granular walk on that over the next couple of years when we get together in February as we complete the work and the plans on that.

Got it, thank you.

Paul Coster, JPMorgan.

Thanks for taking my questions. Andy, when you first came in to Diebold one of the first things you did was to turn the service business into a profit center. You seemed to do that pretty quickly and I note that the Nixdorf service gross margins are considerably lower than those of your legacy Diebold business. Is this an area that might be described as low-hanging fruit and can you make material progress with respect to service margins in early 2017?

Paul, the service business is clearly one of the areas that attracted us to the combination. We've spent a lot of time and energy in looking at different service models. We believe we can have a very positive impact on the legacy Nixdorf service result, and if you take a look at how our synergy program breaks down, services will carry a fair share of that $160 million. I also believe we have services upside on the revenue side.

Now, keep in mind, those flow through as you perform the service, so it's not going to be a step-shape function, but both on the retail side -- I already mentioned the idea of the store lifecycle management -- as well as on the banking side, especially also in Europe, do we see more opportunities on the managed services side. So for me, services has growth opportunities on the top line, on the margin, on the fulfillment, and it's a complete new set up. And that's the area that we are spending a lot of time and energy on and will contribute to our 2017 OP improvement.

Just from the nature of the beast, you want to map that out more over a multitude of quarters. Service is never a one-point-in-time event.

Okay. And then on the FSS segment just a couple of questions. First of all, do you feel like -- just because of the timing of this acquisition that you've lost some share in the Tier 1, the national brands here in the US, of the ATM business? And can you tell us a little bit about FSS and branch transformation in Europe?

We clearly had some delays with some of the orders, both in the Americas as well as in Europe, in the third quarter. I think both companies have done a formidable job of keeping our order book healthy through the first half of the year.

When it became obvious that the two companies will combine, customers were holding off just to make sure that they have a full appreciation of who is their account manager and who they are dealing with. And you can see that; a lot of that will come through as orders in Q4 and Q1, but we had a little bit of a delay. And quite honestly, we lost one deal in North America that I wish we hadn't.

Having said that, just on the product revenue -- product side alone, we are currently sitting on a backlog that is substantially north of $1 billion. If I take a look at the North American backlog, it's actually up 15% to 20% year over year, so I feel good about the midterm outlook.

From a branch transformation point of view, Europe is the key driver. And as much as it sounds like we are singing the same old song, it's just now that people are truly starting to spend serious amount of money and the longer Europe finds itself in a negative interest rate environment, the higher the pressure on the cost on the banks, the more interest we get on technology upgrades, but also the more interest we get on the managed service side of the house just because people are trying to improve their cost position.

As I said earlier, I believe that the regional banks in the US will join the party towards the end of 2017, going into 2018. So midterm I feel pretty good about our FSS opportunities and I think we combined the companies as well as one could have. Admittedly, it's never quite as smooth as you would like it to be, but we've got everybody in place; the management is in place, the account managers are in place. So we are all heading down and back out there talking to our customers.

Thank you.

Justin Bergner, Gabelli & Co.

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

If you're referencing back to the legacy Diebold, we have hit upon North America; that's one. If you look and we've highlighted this, although we didn't articulate the number. If you look at China, the delay of the JVs and how that market has performed this year, it has been quite underwhelming and obviously that is critical to get the JV structure in place to be able to participate fully in that market as we move forward.

Then the last piece, which is somewhat by design, is you've seen some of this pause that Andy highlighted, but some of this transition of activity in Europe. Obviously, that's the strength of Nixdorf operation.

And as we finalize on the decisions there and move forward, you are going to start to see some of that natural flow we will say between the companies, depending on who has the more dominant position in the market, of that activity. So it'll get increasingly difficult to talk to the individual pieces, but I would say that's the last piece that would've had movement from a legacy Diebold standpoint. But I would say, combined company, it's not a net negative.

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

Yes, the Wincor results will be published today. They should be out probably within about an hour or so and then the financial statements will also be finalized after the audit work is complete later on. And I would also note those results will be in IFRS versus US GAAP and you will have some of the nuances between the two businesses that you will have to take into account.

Okay. And then one clarification on the acquisition accounting. Can you maybe help us understand the intangible amortization? How much it was in the quarter? How much it's expected to be in the fourth quarter?

And is it added back for non-GAAP results, both as you look out to the fourth quarter and as you look out to that 9% non-GAAP EBIT margin in 2019?

Let me try to do this for completeness' sake, so I'll give you all of the items. You've got three main items that are being backed out for non-GAAP purposes for the purchase price accounting. That is the deferred revenue impact, the inventory step up, and then the tangible amortization. Those are all three being excluded from the non-GAAP results.

So when you look at that in the third quarter, you have roughly $5 million on the deferred revenue, $32 million on the inventory step up, and then the remaining amount of the call out of roughly $17 million is on the intangible amortization. From a full-year perspective, the deferred revenue in 2016, that callout would be roughly $14 million; the inventory step-up roughly $63 million; and the full impact of the intangibles at approximately $50 million, $51 million on the full year.

When we go into 2017, the only two remaining pieces will be the deferred revenue, which will run its course as well due to the accounting treatment of that. That will be roughly $23 million in 2017. And then the intangible amortization, that will be roughly $125 million for the full year of 2017. Again, those will be excluded from our reported non-GAAP results.

I would also note, be mindful of the depreciation and amortization expense that we highlight in our table. That is inclusive of the intangible amortization and so that's backed out of the non-GAAP income, so you've got to be mindful of that impact in that number.

Okay. Then 2019, just to finish sort of the picture, that non-GAAP EBIT margin of 9% will include an intangible amortization addback somewhere along the lines of the amount in 2017?

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

Okay, thank you.

[Max Saul], GSO Capital.

My question was answered, thanks.

Saliq Khan, Imperial Capital.

Good morning, Andy. Good morning, Chris. Guys, a couple of questions for you. The first one is, with the previous divestiture of the North American electronic security business that you had done at Securitas, and now you are seeing a decline in the security volume within Latin America, what does the future look like for that business?

Does it essentially still make sense to be a part of Diebold? And if so, what you do over the next 12 to 24 months to right size this ship?

We are looking into that. First of all, when you get to numbers that are so small on the international market, you will have volatility. I wouldn't be super excited about a good quarter; I wouldn't be super concerned about a bad quarter.

It's basically activity that we do within certain projects and we will look at them project by project. It's not something that we will spend a lot of energy on for the Company going forward, so that's not one of our target growth areas.

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

Look, that's a great question. We're going to start getting into our big data analytics side on two sides of our business. On the banking side, we will start with the connected insight that I briefly touched on. It's pretty much turning services from a reactive, how quickly can you fix something when it's broken, mode into a proactive, preemptive mode, i.e., fix something before it breaks. We are using all the Internet of Things logic. We are using all the sensors that we have in the machines.

In the first pilot that we've done for the customers who are using this technology, we have gone from roughly 3.5 service calls per month down to 1.5. So massive improvement in the uptime for the customers and, needless to say, substantially less of an interruption.

But this is not only just to avoid things going bad, it also starts giving you data that you don't have, like how many aborted transactions did you have? Did people actually started to look at the marketing screen that a financial institution developed? What's resonating with customers? And we are just at the early beginning, which leads me to the second leg.

On the retail side, anything that has to do with buying behavior, interest of the consumer is of incredible value. In that side we are probably more the enabler of those analytics, because most of the retailers consider customer data the holy grail of their companies, but here, too, we are starting to provide way more tools to enable effective store analytics, customer profile analytics. We believe that the whole data analytics side will become a meaningful offering of our company for both banking and retail as we go forward.

Then, Andy, a last question for me is more of an industry-wide question, particularly because you had mentioned that you were at Money 20/20. If you take a look at what the retailers have been going through over the last several years and the conversations surrounding data analytics and tracking, all that has been there for quite some time. What I'm seeing on my end is that conversation really change from just pure data analytics towards artificial intelligence and what that could really mean for the retailers, but also what the solution providers need to be doing as we enter this third wave, in my opinion, of how technology is evolving.

So what are you seeing right now or what did you see at Money 20/20 that can give us a better indication of what the industry is going through and what that could mean or that could imply for types of things that we could expect from you?

Saliq, you are spot on. It is artificial intelligence. I would add one more to it: it's virtual reality.

We actually showcased -- at this point in time it's basically a lab study on how you can go shopping in a virtual environment. So this whole turning the store digital, turning the whole experience into a digital experience is going to be a fundamental shift and it's something that retailers are going to spend a lot of time and energy on.

It will be interesting to see, because there is no such thing as the retail industry. Retail is really many, many different verticals within it and a green grocer is going to behave different than a fashion outlet. So it will be very interesting to see which sub vertical within the retail will embrace this technology first.

But the whole idea of a connected consumer, connected commerce is to provide end-to-end, so that you can start your shopping list on your mobile phone. You go to the store; your phone will guide you to where to find things. It will cluster your shopping experience to where you like it to be. You can pre-test things in a virtual world.

That's all going to be reality over the next 36 months. That's why I said earlier I do believe the biggest innovative trends in our industry in the next two to three years will happen in the retail market. That's why we're so excited we are in it and we are going to explore it to the fullest.

Great. Thank you, Andy.

(Operator Instructions) Joan Tong, Sidoti & Company.

Good morning, Andy and Chris. Andy, my question is related to again on the FSS side. Just want to see your view, it looks like we are heading into a high interest rate environment and obviously that would be a good tailwind for some of your customers.

Do you think that that would take some time for you to benefit from this environment? Maybe the budget is getting better? And layer on top of that obviously you have the transformation trends. Just want to get your view on that.

Look, higher interest rates will be better for the banks, especially for the retail banks. Also, there's a lot of talk in the market right now about less government supervision and may be a little bit of an easing on the compliance side or for Dodd-Frank, which of course would be a huge benefit especially for the regional banks.

Because when you talk compliance, it's pretty much one size has to fit all and all the regional banks have been suffering horrifically. The number that I'm hearing over and over again is that the regionals' spend -- 40% of their OpEx going into compliance.

So should there be a change of the prevailing winds, that would be a huge benefit for our business and it would be a huge benefit for that target group that has currently been admiring the technology advantages and advancements that the big banks were able to afford. So both of those elements would provide tailwinds to the industry, especially the regional banks in the US.

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

I was actually down in Brazil three weeks ago and it's the first time, Joan, that I was down in the last two years where conversations with top bankers and top retailers actually made you feel better after you left the conversation than when you went into the meeting.

I think the overall sentiment in Brazil is that the new government is working very hard to right the ship. People are starting to get cautiously optimistic when it comes to 2017. I still think that 2017 is going to be a transitional year from all the malaise that they had into a better environment, but if the government continues down that track, that 2018 should become a better year for the country.

And when I take a look at our business, the encouraging piece is that we've seen our business with the private sector moving up; both on the hardware, but also on the software and services side we see opportunities. We see the private banks trying to drive investments and to take advantage of this betterment in the overall attitude towards the country.

Now Brazil is Brazil, so I want to be super careful in what I'm saying, but I'm am getting very cautiously more constructive on the country and our opportunities going forward.

Thank you. Then finally in UK, I just want to see if there is still a pending thing going on with the CMS or the antitrust authority over there. Thank you.

What happened in the UK is that the antitrust authorities showed up a little late to the conversation. We are still in talks with the CMA. Those are very professional, very detailed conversations.

These things take their time, but we have got the clearance in 10 countries around the globe. We will expect the very same thing to happen in the 11th country, but it will be into the first quarter of 2017 until all these talks will be completed. Until then, we keep both organizations separate and we still offer our solutions at legacy Diebold or as legacy Wincor Nixdorf and that's just the status quo.

I am encouraged by the level of professionalism that is out there in the conversations. It's just a process one has to work through.

Fair. Thank you, guys.

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

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

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