Diebold Nixdorf Inc (DBD) 2016 Q4 法說會逐字稿

Good day, everyone. Welcome to the Diebold Nixdorf Q4 full-year 2016 financial results conference call. At this time, for opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations, Mr. Steve Virostek. Please go ahead, sir.

Thank you, Matt, and welcome all to Diebold Nixdorf's fourth-quarter and year-end earnings call for 2016. Joining me today on the call are Andy Mattes, CEO; and Chris Chapman, Chief Financial Officer.

Our listeners should be aware that today's webcast is being recorded, and we'll make a replay available later today, via our website. For your benefit, we have posted presentation slides to accompany our discussion on the Investor Relations page of DieboldNixdorf.com.

On slide 2 of the presentation, we note that today's call, during the call, we'll be referencing certain non-GAAP financial measures, because we believe these measures are a helpful indicator of the Company's baseline performance. We have reconciled these metrics to their respective and most directly comparable GAAP metrics in our supplemental schedules on the earnings release, and in the back of the slide deck.

Slide 3 reminds our participants that certain comments today may be characterized as forward-looking statements, and that there are a number of factors that could cause actual results to differ materially from these statements. You may find additional information on these factors in the Company's SEC filings. As usual, forward-looking statements discussed are current as of today, and subsequent events may render this information out of date.

And before I hand the call to Andy, I would like to invite all of our listeners to join us on February 28 for our investor day. It will be a half-day discussion of the Company's strategy, integration road map, and financial targets. We will be webcasting that event, and if you would like to attend in person, please reach out to me. And now, I will hand the call over to Andy.

Thanks, Steve, and good morning, everyone. I'm very excited to speak with you today as we report the first full quarter for Diebold Nixdorf. I am particularly proud of the team, as we completely reshaped the Company in 2016 and laid the foundation for our future.

We acquired Wincor Nixdorf to improve our business portfolio, broaden our scale, expand our leadership in services and software, and increase our capacity to innovate and collaborate with our customers. We also divested our North America electronic security business, and launched two new joint ventures in China. These strategic achievements have had a profound impact on the Company.

Looking at slide 4, you can see that we have doubled the size of our Company and have significantly enhanced our mix of revenue. First, services represent a $2.5 billion business for us, up from about $1.3 billion. Basically, our services business now is larger than either legacy company on a standalone basis. And we have the largest organization focused exclusively on the banking and retail industries, with over 14,000 service professionals.

Next, our software revenue increased more than 3-fold, from about $110 million to $450 million. Taken on its own, this would place our software business well within the top 100 software companies globally.

Looking at the ATM software market, according to RBR, Diebold Nixdorf is the leader, with nearly 30% share higher revenue. This provides us with access to higher value and stickier revenue streams, as customers benefit from our stronger competitive position in software. Together, software and services is approximately a $3 billion business.

The remaining $2 billion comes from our systems line of businesses, ATMs, point of sale, and other self-service terminals. About one-third of all ATMs in service globally are Diebold Nixdorf.

With respect to retail POS, we are number one in Europe and among the top five globally. In total, retail makes up 20% of our revenue, and we are excited to now have access to this very attractive market. Retailers are responding to quickly changing consumer behaviors, with innovations in omni channel, payment and loyalty programs, and are less burdened by government regulations and compliance activities.

Over time, these innovations will influence how financial institutions serve customers. We believe retail represents a significant growth opportunity for our Company.

In addition, we have expanded our revenue mix from digital, cardless, and mobile transactions, from approximately 20%, to about 40%. So while cash use continues to grow globally and remains a very important enabler of our business, the continued growth of noncash transactions provides the Company with another avenue for growth.

From a geographic standpoint, Diebold Nixdorf has a stronger orientation to develop markets where branch and store transformation and automation is underway, and the opportunity for value-added services is high. Conversely, we have also lowered our exposure to the more volatile emerging market.

From an integration standpoint, we continue to make progress as shown on slide 5. In January, our 900 quota-bearing sales executives gathered for a global sales kickoff to enhance their understanding on the full breadth of the combined Company solution portfolio, as well as the value proposition. For the first time, the sales team is fully aligned around our goals, quotas, and account plans.

We have made extensive changes to realign our sales organization, to be closer to our consumers, and we are investing in training, so our sales executives can be even better consultants to our customers on their digital journey. These actions represent the foundation of our new sales excellence program, which you will be hearing more about in the near future.

You may recall Wincor shareholders approved the domination agreement at the end of September, and that certain shareholders filed contestation actions, which prolonged the process. I am pleased to report that these actions have been settled, and we expect the agreement to become effective in the coming weeks. We are also pleased to have cleared this hurdle and can now shift our integration work into a higher gear.

We are confident to deliver cost synergies of $40 million in 2017. During the year, our cost-synergy efforts are geared toward the realization of scale effects in the hardware business, and streamlining our management and workforce composition, which are the driving factors behind our $47 million restructuring charge taken in the fourth quarter.

Finally, our legal name changes in Q4 are more than just a rebranding effort. They tee up a multi-year process to consolidate and optimize legal entities.

Moving on to slide 6, fourth-quarter results include contributions from both legacy entities for the full period. Since the year-ago period contains no contribution from Nixdorf, year-on-year growth comparisons won't be very meaningful. However, you can begin to see the magnitude of our new business portfolio.

Overall, results were in line with our previous guidance. Yet, the top line was a bit lighter than expected, primarily due to our EMEA region. As you might recall, this region had the most overlap between the legacy companies, and therefore, is undergoing the most extensive integration efforts, which unfortunately resulted in typical near-term disruptions in the sales organization.

We are addressing these issues with our sales excellence program that I mentioned earlier. Dialogue with our customers continues to be positive and encouraging, including feedback from more than 100 clients who attended our digital banking conference held in Germany in November.

Our orders in EMEA reflect continued success with innovative technology solutions. Since our first installation of contactless, mobile cap capable ATMs in 2014, we have extended our leadership in this area.

In Austria, we are upgrading about 1,200 ATMs, or 15% of the country's installed base, with mobile contactless functionality and advanced bill payment at Raiffeisen Bank. In addition, we won a contract with Air Bank in the Czech Republic to deploy contactless solutions, so this trend is starting to go mainstream. Also, we won another large branch transformation contract with a top five bank in Spain.

On the retail side of the business, we won a competitive bid to furnish 1,600 POS terminals and end-to-end managed services to a French home improvement retailer.

In the Americas, Q4 results were largely in line with our expectations. With respect to orders, we finished the year on a high note, with growing contributions from national and regional customers in North America.

One of the exciting new orders was for 4,000 ATMs and related software sold to an independent ATM deployer. This is a good example of how we are bringing together the best of our combined solutions in order to penetrate new market opportunities.

Looking at Brazil, we have substantially improved performance to the point where we delivered order growth, revenue growth, and positive OP, with FSS being one of the main drivers.

In Asia-Pacific, we extended our technology leadership in mobile connectivity with Cuscal, Australia's leading independent payment solutions provider. We are collaborating to explore the benefits of beacon technology for the future of consumer transactions. Also, fourth-quarter awards included an end-to-end contract for systems, software, and services, with CB Bank in Myanmar, to extend its self-service offering as part of the government's financial inclusion objective.

Moving on to profitability, our adjusted EBITDA and non-GAAP EPS for the fourth quarter were both in line with our quarterly guidance, and Chris will elaborate on the underlying drivers for these results. I am pleased to report that free cash flow was $210 million for the quarter, including $82 million of cash spent on the acquisition. This was about $30 million better than anticipated.

Turning to our outlook for 2017, we are targeting revenue of $5 billion to $5.1 billion for 2017, or flat to 2% growth, when compared with our pro forma 2016 revenue. Underpinning our top-line targets are our $1.1 billion product backlog, paired with about $2 billion of recurring services and software revenue, and a growing sales pipeline. In addition, current market sentiment seems to be improving.

Our sales focus will continue to be around margin-accretive deals, especially in the areas of value-added services, branch and store transformation, and innovative software and hardware. Our target for non-GAAP EPS from continuing operations is a range of $1.40 and $1.70 for 2017, and includes the benefits of our cost synergies. Chris will provide additional comments on our outlook during his prepared remarks.

Looking forward, we are an opportunity-rich organization. There is some heavy lifting in front of us, but I feel really good about the leadership team, and our collaborative spirit. 2017 is all about executing our integration plans and delivering innovative solutions to our customers. Now I will hand the call to Chris for his comments.

Thanks, Andy, and good morning, everyone. Fourth-quarter results include a full quarter from the legacy Diebold and legacy Nixdorf operations. 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 about organic growth, to help investors better understand the underlying trends in the business.

We are one combined Company now, with one set of numbers, and are working hard to integrate the Company as quickly as possible, and we expect to file the 2016 Form 10-K in the coming weeks. We will suggest that you use the 10-K Form as the basis for all forward-looking analysis.

That said, for a period of time, we are still required to file financial statements for Diebold Nixdorf AG under IFRS reporting standards. Understand that the differences in the reporting standards, as well as the impacts of the integration activities and purchase price accounting, will be fully reflected in the US GAAP results. Lastly, comments today will focus on our non-GAAP results for continuing operations unless otherwise noted.

Starting on slide 7, non-GAAP revenue increased by approximately 106%. This growth was attributable to the acquisition and the legacy Diebold America's region. Organically, non-GAAP revenue decreased about 3% in constant currency, due to declines in Asia-Pacific, primarily related to China.

Removing the effects of currency, financial self-service revenue increased 68%, however, decreased about 6% organically, as a result of declines in Asia-Pacific, and the disruption in EMEA, that Andy previously highlighted. The retail business added $269 million of revenue during the fourth quarter, while security revenue was up 1%, and Brazil other revenue increased approximately $13 million year over year.

Looking at our regional segments, revenue grew within the Americas both overall and organically, with the legacy North America business down slightly. The legacy Latin America business was up 18% in constant currency, as we have been executing on a strong backlog within the region. The acquisition growth drove growth in both Asia-Pacific and EMEA, which offset the previously mentioned year-on-year declines in the legacy Diebold business.

Looking at the full-year 2016, non-GAAP revenue increased approximately 41% adjusted for currency, driven by the incremental business related to the acquisition. On an organic basis, revenue for the year decreased about 4% in constant currency. Primarily contributing to the decline was the previously-communicated structural change in the China market, as well as the change in EMEA related to the business combination.

Moving to slide 8, total gross margin for the quarter was 24.3%. Service margins decreased 8.5% to 25.5%, reflecting the new mix of business of the combined Company, with Nixdorf margins substantially lower than legacy Diebold. Product gross margins increased 2.9% to 22.8%, reflecting the benefit from higher margin business, which was partially offset by reduced volumes.

Looking at the full-year 2016, total gross margin was 25.4%, reflecting a 170-basis-points decline for the year. Service margins decreased 400 basis points to 29.3%, largely reflective the new combined Company's mix of business. Product gross margin increased 140 basis points to 20%.

Turning to slide 9, total operating expense in the fourth quarter increased $116 million over the prior-year period, due entirely to the inclusion of the Nixdorf results, with legacy Diebold reflecting a slight decrease over the prior year. As a percentage of revenue, operating expense improved by 100 basis points when compared to prior year. Looking at the full-year 2016, total operating expense increased $165 million, and improved 100 basis points as a percentage of revenue.

On slide 10, our operating margin was 5.5% for the quarter, reflecting a decrease of 280 basis points year over year. Operating profit in the fourth quarter increased approximately $18 million from the prior year, as the benefit of the acquisition was partially offset by lower contributions from the mix of business in the legacy Diebold operations. In the fourth quarter, non-GAAP adjusted EBITDA was $105.3 million, compared with $67.9 million in the prior year.

Looking at the full-year 2016, total operating margin was 4.8%, reflecting a decrease of 80 basis points from the prior year. Operating profit increased from $135.1 million to $158.7 million, year over year. Non-GAAP adjusted EBITDA was $266.1 million, compared to $211.5 million in the prior year. The acquisition had a positive impact on the year-over-year comparisons for both operating profit and adjusted EBITDA.

Looking at operating profit in the fourth quarter as reported by segment on slide 11, North America operating profit decreased $15 million, driven primarily by a higher mix of large bank volume and higher cost in service. The increase in service costs resulted from the expansion of our customer-facing workforce and higher overtime costs in our continuous drive to improve customer satisfaction levels.

Asia-Pacific operating profit increased $5 million, reflecting the benefit of the acquisition and increased scale in the region, partially offset by lower activity in China and India. In EMEA, profit grew $35 million, and includes the benefits of the acquisition. In Latin America, operating profit was up $3 million, mainly driven by increased volume in the region.

The global and corporate line increased $10 million, mainly due to the Nixdorf acquisition. As a reminder, we intend to change our operating segments from the four regions to three lines of business: services, systems, and software, starting in the first quarter of 2017.

Turning to slide 12, non-GAAP EPS from continuing operations was $0.32 for the quarter. Non-GAAP EPS excludes restructuring expense of $0.61 and non-routine expense of $1.33, which consists mainly of $0.98 from purchase price accounting adjustments and $0.24 from M&A-related expenses. The tax impact for restructuring and non-repeat items, inclusive of allocation of discrete tax impacts, was $0.58.

For 2016, non-GAAP EPS from continuing operations was $1.08, and excludes restructuring expense of $0.85 and non-routine expense of $4.17. The tax impact for these reconciling items, inclusive of allocation of discrete tax impacts, was $1.38. During the quarter, the non-GAAP effective tax rate from continuing operations came in at 29.2% and brings our full-year rate to 26.3%.

Moving on to slide 13, we delivered approximately $210 million of free cash flow from continuing operations in the fourth quarter, and were free cash flow neutral on a full-year basis, covering all acquisition-related payments of approximately $180 million. The free-cash-flow results came in approximately $30 million better than our previous guidance, driven by improvements in working capital across the combined operations. Contributing to these results were significant improvements in the legacy North America business, as we have addressed the invoicing issues which surfaced at the end of 2015.

On slide 14, we provide highlights of our liquidity and net debt position. As of December 31, we reported cash and cash equivalents of $717 million, and gross debt of $1.8 billion, resulting in net debt of approximately $1.1 billion.

As previously mentioned, the Company paid down $200 million of its term loan D facility during the fourth quarter. To provide a perspective on our net leverage ratio, if you looked at the trailing 12 months pro forma adjusted EBITDA, based on publicly available information, the net debt to adjusted EBITDA is below 3 times.

Moving to our 2017 outlook on slide 15. We expect revenue between $5 billion to $5.1 billion for 2017, which is flat to up 2% on a pro forma comparative basis. This is inclusive of an approximate 2% currency headwind. The Company expects a GAAP net loss of $30 million to $55 million, and adjusted EBITDA to be in the range of $440 million to $470 million.

These targets include the realization of at least $40 million of our cost synergies, depreciation and amortization expense of approximately $115 million, and share-based compensation of approximately $30 million. On a non-GAAP basis, we expect EPS of $1.40 to $1.70 and an effective tax rate of approximately 30% for the year.

The teams are working very diligently on integration activities and driving cost synergies. The cost benefits will flow more substantially through the P&L as we progress in the year. As a result, we anticipate about one-third of our adjusted EBITDA to be realized in the first half of the year, based on our current scheduled backlog and sequencing of our synergy realization.

On an EPS basis, we expect to realize approximately 25% in the first half, which results from the linear flow of interest expense, against the profits in the year. Based on these effects, we anticipate first-quarter non-GAAP EPS to be essentially breakeven.

Our free cash flow outlook for the year is expected to be north of $50 million, and includes about $100 million of capital expenditures, and $100 million of cash costs, years for workforce restructuring, and other integration activities. With that, I will open up the call for questions.

(Operator Instructions)

We will take our first question from Matt Summerville with Alembic Global Advisors.

Good morning. I want to talk about EMEA for a moment. How quickly do you think, Andy, you can stem, well, this referred to as the problems you experienced in the region, since the merger closed? And what did you actually contemplate, if anything, as far as the synergies?

And has what you experienced been above and beyond what you were thinking? And if so, why? If you can just flush all of that out.

Happy to do that, Matt. EMEA is the country where we basically did a reverse integration of the legacy Diebold organization into the legacy Nixdorf organization. And as much as you prepare for these things, and as much as you don't want them, the human element kicks in, and people are a little bit more worried about who they work for than spending time out there with their customers. And admittedly, we lost a few deals in EMEA in the second half that we wish we hadn't.

Having said all of that, all of that is in the rear-view mirror. Everybody is aligned. We've got the account managers mapped to the accounts. We've gone the account plans on all of the large customers.

We have talked with all of the top customers. I have personally talked to about three quarters of our top 100 banking customers around the world in the last 100 days.

And I can tell you, the pipeline going forward is looking strong. I would expect us to have a positive contribution from EMEA in the first half of the year. And there is some very exciting deals in the pipeline that, hopefully, we can talk about in the very near future.

Thank you. And then just as a follow-up, can you talk in a little bit more granularity in North America, what you're experiencing in the small bank side of things, the large bank side of things? Last quarter, you talked about $30 million or so of revenue getting pushed to the right. If that indeed happened, are you recapturing that? Just talk in more granularity about the demand trends here and whether you think the turn you've seen is sustainable.

Let me give you a quote from one of the top banks that I visited in the first week of this year. And they actually gave us a huge thumbs up and big kudos for how we'd done the integration. And they said, from their vantage point, the only thing that has changed is that when they ask us for new offerings, our portfolio has gotten bigger an broader, but the teams have their heads down and they felt super well taken care of.

If I take a look at the customer segments, we see opportunities with the large banks. We see opportunities on the regional banking side. If you look at Q4, the regional bank has been a positive contributor to our book-to-bill ratio in North America, which was north of 1, so that is a step in the right direction.

If you're listening into the market, especially in the regional banks, the sentiment is getting more positive. Needless to say, that if there is truly some relaxation on the compliance and regulatory overhead that the regional banks are carrying, that would be a good thing. And a lot of people have already reached out to us by saying, should that materialize, that they would be very interested in talking to us about projects that they had to shelf, given the fact that they didn't have the financial resources to doing so.

So overall, I'm constructive about the American business, and I'll believe there is good things to follow. Also, take a look at the deal that we won. And even though it is just a first deal in the foray of the ISO market, I do believe it's a big step for Diebold Nixdorf forward.

And if you look at it, this was basically legacy Diebold hardware combined with legacy Nixdorf software that provided a winning combination that scored big time. And it's a good example of how we're looking into new routes into the market and new avenues to take our revenue north.

Thank you.

And we will now hear from Paul Coster with JPMorgan.

Yes, thanks for taking my question. Can we just -- I really missed in passing, perhaps the most headline-catching part of the conference call, which was the first-quarter outlook. Chris, can you just talk us through the EPS outlook again, what you view as the shape of the year in terms of the EPS recovery and the whys and wherefores of all of the above?

I think it's best to start with the adjusted EBITDA first, when you look at the ramp of the year, and again, we said about one third, two third. When you compare the prior year now, we are dealing with the full interest load. And that's running a little bit north of $30 million per quarter.

So when you look at that across the expected earnings flow, you get a bit more of a dilution impact in the first quarter when that's typically our season, or seasonal low. So that's why we said one-third adjusted EBITDA in first half and only 25% of the EPS. So that's, I would say, the biggest overhang why you see a little more of a compression on the EPS.

The other piece, just from a modeling standpoint, and I know when I have seen certain information out there, we also have the non-controlling interest impact for the minority shareholders, which that's going to run a little bit more than $6 million per quarter that needs to be factored in to the overall flow across the year. And that's a direct deduction on the EPS side that you don't see burdening the adjusting EBITDA, based on how the calculations are handled.

Okay. And then looking back with the 2016 numbers, did you, in the fourth quarter, take out the China JV-related revenues? When does that start to impact the top line?

Yes, if you look at how that's affected from a legacy Nixdorf standpoint, that was effective essentially when we were completing the acquisition in the August time frame. On the legacy Diebold side, we still have to burn off that legacy backlog that was part of our business, and so the full impact of that will carry into 2017. If you think about it, on a pro forma year-over-year basis, combined Company, the China headwind effect is roughly probably about 1.5% or so, from a top-line standpoint, when you just compare apples-to-apples pro forma.

Okay. And then just two minor points to wrap up for me anyway. Can you just give us a little bit of insight into what is happening in the UK with the [CMA] review? And also, what is the subtext to the Hyosung litigation?

Happy to do so, Paul. In the UK, we're working with the CMA, very collaborative conversations, but we have not come to a final conclusion yet, and I cannot comment on the talks as they are ongoing. We do feel very confident that we will resolve them in the not-too-distant future.

On the Hyosung case, you know that the court has ruled in the favor of Diebold Nixdorf, and there is a secondary review of that And we should be able to debrief all of you by the end of Q1, at the pace that these things are going, on the final outcomes. But we feel very encouraged with our position, and we also are fighting very hard to protect our IP. And we feel that we've got a really good hand in court.

Thank you.

And our next participant is Kartik Mehta with Northcoast Research.

Good morning, Andy and Chris. Andy, I wanted to ask, I know you talked about EMEA and maybe that just didn't perform up to your expectations of fourth quarter. But I was hoping if you look worldwide, how you would think about market share, at least as far as Diebold is concerned, and what happened in the second half of the year.

If I go around the horn, start with Asia, Asia was down year over year, and especially China and that market share clearly went to the Chinese or to the Korean players. We talked about EMEA. And in the Americas, in Latin America, we have gained market share year over year.

If I take a look at Brazil only, our [efforts] that business in Brazil year over year was up north of 20%. And of course, that goes hand in hand with the country that's coming out of quite a very tough time and is starting to also look, hopefully, at a brighter future.

So I would say, if you take all of the Americas, it's up, LatinAm and Canada, probably being the main drivers, and EMEA, we went a little sideways, and we're pretty confident we're going to rectify that as we go forward.

Where we did get hurt is the whole separate in the UK did slow our business in the UK, down for both legacy Diebold and legacy Nixdorf. So back to the question that was asked earlier, it is in our very best interest to get the CMA issue resolved in a positive manner sooner rather than later.

An then, Andy, if you look at 2017 as a year of integration, but now you have a Company that's 60% software and services, and 40% hardware, how would you think about the growth rate of those three components? How can we move out of 2017 and the Company is more integrated?

Well, if you go through segment by segment, services revenue is the one that is like the steady Eddie. But it doesn't grow leaps and bounds in any quarter, because you RevRec as you perform. So I'd say, and as is always including, currency headwinds, Chris can do the translation into constant currency. But I'd say services in the round-about 2 percentage type of range. Hardware, probably around flat to 1 percentage, and that's just due to the price competition that we see, especially in Asia, that keeps dragging you down a bit. And on the software side, we're looking at a 5%, 6% growth rate.

And then just one last question, Chris, for you. I know you said the FX was about 2% to the top line. How does that translate to EBITDA impact for you?

Well, I'll let Chris do the translation. But just as you think through our business, and you mentioned the high order of magnitude that services had. The good news about our services business is it basically hedges itself. So while we will have a translation effect in our P&L, our margins are basically immune to FX changes, because the majority of the services that are being performed is being performed with resources in country, or resources from low cost global delivery centers. So that takes a lot of the ambiguity out of the FX headwinds. Chris?

If you think about it from a new combined Company standpoint, we do get a little bit of a benefit now that you have some of the currency headwind, given we have a much larger portion of our expense base now sitting overseas. And so that does offset a little bit of the translation impact.

But typically, you should think of that at roughly a 15% drop rate on the 2% from a currency standpoint. When you look at the fallout rate, from a margin standpoint, blended with op expense and gross margin, is how you should think of the fallout to the bottom line.

So 2017, are we thinking about $15 million, $15 million to $20 million, is that about right?

That math is right in the ballpark.

Thanks, Chris. I really appreciate it. Thanks, Andy.

We will now hear from Justin Bergner with Gabelli & Company.

Good morning, Andy. Good morning, Chris.

Good morning.

Looking at your revenue guidance for 2017, it seems like there's a 200-basis-point hit from currency. I think you said about a 150-basis-point hit from China. So if I adjust for those two factors, the business, ex-China, is expected to grow 3% to 5% constant currency. And I'm just wondering what building blocks should give me confidence in that level of growth, constant currency, ex-China.

A few things, Justin. On the systems side, the primary driver of our revenue is going to be the developed markets. We're all about going after the branch transformation, innovative technology, more margin accretive business.

Same holds true on the software side; that is predominantly a developed market play. And needless to say, that's where you will experience higher margin and stickier revenues.

And the same actually also holds true on the service side, especially as you go into the upper end of the services that are performing, the value-added service, the managed services. And if you're looking for some of the building blocks, some of our largest service deals that we hold globally are up for renewal in 2017.

So as we take these milestones in the first half, that should give you a very solid foundation. And if you run the math, services and software is basically $2 billion recurring revenue. We've got north of $1 billion in the system side, so we've got line of sight to about two-thirds of our revenue, as of January of 2017, and the rest, of course, is all the good stuff that we're going to sell and perform during the course of the year.

Okay, great. Thank you. And then will the revenue growth relative to that 3% to 5% be back-half weighted? Or should we see on a constant currency ex-China basis, that 3% to 5% would be pretty consistent throughout the year?

It's going to ramp a little bit more toward the back half of the year. I would expect Q1 could be probably the one of the tougher comps, and it will look better as we get into Q2, Q3, and then the end of the year as well.

Great, thank you. Just quickly, on the EBITDA guide pro forma, it's said to improve $40 million to $70 million. It looks like the lion's share of that is going to be synergies realized, maybe some slight pull-through on the organic growth. Is that how I should think about the EBITDA bridge, is essentially being synergies plus some slight pull-through on the organic growth? Or are there other major puts and takes?

I think you're thinking about it right, and if you look at the overall guidance model on the more flattish revenue, bottom of the range, we will look to execute and deliver on at least $40 million of the cost synergies. And then if you look at that, the opportunity on the growth side and the pull through of that, driving that. And obviously, if we're able to over-deliver then on the overall cost style, as well, that could also push us toward the upper end of the band.

Especially on the revenue side, as you said, that's going to have some contribution to the EBITDA uptick, and our focus will be clearly around margin accretive deals in 2017.

Okay. And then just quickly to follow up on that, when you say the cost out, Chris, are you referring to a specific target there or just general cost out?

The target, the $40 million that we have, the general cost out.

Okay. Thank you.

Our next question comes from Jeff Kessler with Imperial Capital.

Thank you, Hi, guys. Just, the question will revolve around cross-selling and the integration of the two Companies in both regions. But just as an example, at NRF a few weeks ago, you showcased a new self-checkout kiosk, which appears to be being installed at a large food retailer.

When you talk about like the market and the margin opportunity, and also who gets the sale? Who gets credited for the sale? If you've got Nixdorf coming over, selling the self-checkout kiosk in the region for a legacy Diebold person, how are you going to work that integration? And also, again, the opportunity for this cross-selling, too.

Jeff, first of all, thank you for highlighting one of our biggest growth opportunities that we have, which is retail in the Americas. As you know, legacy Diebold basically was not in this type of business. Legacy Nixdorf, very strong in Europe, but was always somewhat hamstrung in the Americas, not because of the ability of the technology, but just due to the simple fact that they didn't have the ability to service it.

So I've been in quite a few conversations, and you were mentioning NRF. It was actually a very exciting show for us, a lot of traffic, and a lot of people who basically said, would not have looked at you previously, but now that you're a combined Company, by all means, please come talk to us.

The other side, and that's what I was trying to mention earlier, when we said for the first time in 2017, we've got everybody on the same goal sheet. We now have the full domination agreement between the two Companies, and all the quotas are aligned. So we've done account plans.

And if you take retailers, it's pretty obvious that the most encouraging short-term venue will be riding the wave of global retailers headquartered in Europe, that are expanding into the Americas. And all of these things have been completely designed, [com plans] have been built around it, they are in the combined targets, the matrix is working very well, and it's not one side of the Company selling into the other side's territory. There is no more one side of the Company versus the other there is only one Company, one goal, one mission, and one level of success.

Okay. In the fourth quarter, it appeared that retail was a bit below what we expected. Was there any segment of that area that you felt that you really fell down, behind on, and was there a reason for that? Or is that due to you building up? You mentioned the integration, the integration situation could have cost you some business in the quarter. But was that the reason or were there other developmental regions in which you're putting the Company together to cause some of the fall-off against expectations in retail?

Actually, Jeff, the answer is even a lot simpler than that. If you look back at the October through December time frame in 2015, that was the absolute retail rock star quarter that Nixdorf had. I think it was the best retail quarter in the history of Nixdorf. And so it's just a question of tough comps, as simple as that.

If you now double click and you look at the stories within the story, for instance, one of the exciting pieces to see that in EMEA, which of course is the lion's share of our retail business today, our EPAS business grew north of 10%, so I am feeling very encouraged. It's a question of tough comps.

We've built out the infrastructure in the Americas. We have hired a seasoned veteran with Devora Henderson, who came from IBM Toshiba and is now leading our Americas retail activities. So I am pretty upbeat about the opportunity going into 2017.

So this is a 2017 issue that we can talk about retail, and European international's improving, or expanding into the Americas to view. It is not 2018?

No, we're talking 2017.

Okay. Great. Thank you very much.

(Operator Instructions)

We will now hear from Joan Tong with Sidoti & Company.

Good morning. Can you just tell us a little bit about the profitability in North America region, and there was a decline there? And you mentioned a couple of things. Can you just give us a little bit more color, and in terms of how you expect that would improve going forward? Thank you.

Yes, on the North America profitability, specific to the fourth quarter, the first item I mentioned was related to the overall just mix of the hardware business. If you just look at the flow of the activity that we had, it was a bit lower margin, large bank activity versus a better mix that we had in the previous year, more regional, lower large bank. And so that's just pure math based on the customer and the unit type that we had.

On the secondary side, we talked about the service business and the margins there, and we had really ramped up the overall hiring activity and increasing the overall workforce. One of the phenomenons that we're seeing in the overall industry is the overall status of technicians.

North America is essentially 100% employment, and there is significant, significant demand with the technician force out there. And so we ran into some, I would say, some overtime issues, and we have really been trying to ramp that up. And so that's beared out on the cost side. We've have taken actions to right that, and we're looking for that normalize over the next couple of quarters.

Okay, got it. And then regarding the $40 million synergy, I think, Chris, you had mentioned in the past $160 million multi-year, and most of the -- and for the first year, that is when you saw most of the expenses overlap. So now you're talking about $40 million first year post-close.

So I just wanted to see if you actually have pulled forward some of those synergies into 2017. And maybe you are making a little bit better progress in terms of integration, granted it's only like, one quarter after you closed the deal. So maybe just give us a little bit of clarification there, that would be helpful. Thanks.

I was starting to compensate, the comparisons that we're going to use, it's really going to be off of a base 2016, so the cost improvement moving forward. I think to do otherwise would be a bit difficult. So that is what we're calling the base year.

Were there some benefits that we've gotten in the near term in 2016, yes, but we're not going to add that into the overall program that we're going to be talking to and elaborating a little bit more on here in a couple of weeks at the analyst day event. So we have seen very good progress, we have gotten organized, and the foundation work is in place. Now, as Andy said, 2017 is about execution and looking to deliver on that overall number.

Okay. Finally, housekeeping, on the $115 million in D&A that you mentioned for 2017, how much is amortization of intangibles?

That $115 million is excluding that overall amount. And so --

Okay.

The number that we gave, it's trying to leave that completely separate. So if you look at the breakout, I can provide a little more detail on it. But I believe that dollar amount will be $120 million, give or take a little bit, will be the impact of the purchase price accounting for the intangible amortization.

Okay. Got it. All right. Thank you.

And our next question comes from Matt Swope with Robert W. Baird and Company.

Good morning, guys. Could you talk, Chris, a little bit about the cash you have on the balance sheet right now? Both how much you need to run the business and what your eventual plan is with that large cash number, as compared to amount of debt you have?

Well, first of all, I would start off just on the year-end cash flow performance, was very pleased with how the global operations of the combined Company came together and really drove strong performance in the overall working capital. And it was a joint effort, and really, really pleased with the outcome.

We ended the year, on a pro forma basis at networking capital as a percentage of revenue at 20%, which is in line with where the Company should be. And it's going to be a mark that we're going to work to use as a baseline as we move forward. So I think that foundational piece was number one. You do see, though, in our business, a typical seasonal draw-down that you will see in the first half. So when we go into 2017, and we think about the overall cash position, we are sitting with roughly $700 million to start the year. We are expecting to have fairly significant outlays for the overall integration and restructuring activities. We have estimated that to be approximately $100 million in the overall year.

If you look on a normalized basis, as well, we finished the year at $40 million in CapEx as a combined Company, but that's a bit artificial. It is an apples and oranges. You have to look at the full load of the combined Company, and that's now going to run at roughly $100 million. So there's a couple of big uses that we have in the upcoming year.

All of that said, we're still sitting with a little bit excess cash on the balance sheet. We will look at opportunities on the debt side to possibly restructure the overall debt burden and look to utilize some of that cash to possibly do some additional pay-downs. But I think the key right now is going to be funding the overall integration activities of the combined Company as we go forward.

And can you remind us what your longer-term leverage targets are?

We're looking to be under 2 times in the near term, so I would say over the next two to three years, from an obligation standpoint. And you I think another point that's always important to remind the analyst community as well, we do have an obligation outstanding. Now this is likely going to take a long time, but we still have roughly a $400 million obligation to our minority shareholders that sits out there, for the remaining 7 million shares that are held by legacy Nixdorf shareholders that did not tender their shares.

So after we finalize the overall registration of the domination profit loss transfer agreement, if any of the shareholders decide to surrender those shares, we have an obligation to pay cash for them. So that's something that when you look at our cash and the overall structure that we put in place, that I think a lot of people miss in their modeling or overlook that piece.

Do you think you need to sit in cash roughly equivalent to that $400 million just to cover that at any given time?

No, if you look at past practice, these proceedings will typically lengthen out for a period of time. After the registration of the domination agreement, there's typically a very small amount that will tender their shares. But I look at that and say, that's going to be an obligation over the next half decade or something that we're going to have. So we don't have to keep the full load of that, no.

Great. That's very helpful. Thank you.

And once again, we will hear from Matt Summerville with Alembic Global Advisors.

Thanks, just two quick follow-ups. First, what is your confidence in your ability to get the remaining Diebold 2.0 and Wincor 7 point plan savings? Or does that just get lost in the shuffle with all of this integration? We're not talking about an inconsequential amount that should still, theoretically, be incremental to what 's been tallied thus far.

First of all, Matt, nothing gets loss. The Diebold 2.0 is basically done; I think there's about $10 million left for the year. And we will also follow up on the legacy Nixdorf delta plan, and we will provide a combined model for you guys at investor day. Because otherwise, all of us starts tracking multiple work streams, and it gets confusing. So we'll bridge that for you, and we will include it in a holistic view. But we are chasing all the synergies that we have talked about, stand alone, and combined.

And then lastly, just to flush out the top line, what would be your expectation under the old reporting methodology, as we don't have a system software and services model to work off of, around that zero to 2%, or if you want to call it organic, 2% to 4%, ex-currency, how should we think about FSS, versus retail, versus security, versus Brazil other? If you can give a little more detail on that.

If I start at the bottom and work up, on the Brazil other, that business is going to continue to be quite small and lumpy. And so, minimal expectation on that for the 2017 assumptions. Security business, while we saw it actually up slightly in the quarter, we would consider that flattish as we move forward.

If you look at then the retail and the FSS, obviously we have to factor in the fact that we've got some of these headwinds, the currency, and the China effect. And so they're in about the 1% to 2% range, both if you look at it across all things being equal, with a little bit of currency headwind built into that as well.

Got it. Thank you.

With no further questions, I would now like to turn the call back over to Mr. Virostek for any additional or closing remarks.

Good, thank you, everybody, for joining us this morning. If you have follow-up questions, please call, and my contact information is on the press release. Thanks very much.

And that concludes today's conference. Thank you for your participation. You may now disconnect.