Diebold Nixdorf Inc (DBD) 2017 Q1 法說會逐字稿

Good day, everyone, and welcome to the Diebold Nixdorf First Quarter 2017 Financial Results Conference Call.

At this time, for opening remarks and introductions, I would like to turn the conference over to Mr. Steve Virostek, Vice President of Investor Relations. Please go ahead, sir.

Thank you Mariah, and welcome to Diebold Nixdorf's First Quarter Earnings Call for 2017. Joining me today are Andy Mattes, President and CEO; and Chris Chapman, Senior Vice President and Chief Financial Officer.

Per our custom, this webcast is being recorded and a replay will be made available later this afternoon. For your benefit, we posted presentation slides to accompany our discussion on the Investor Relations page of dieboldnixdorf.com.

Slide 2 is a reminder that we'll be referencing certain non-GAAP and pro forma financial information, which we believe are helpful indicators of the company's performance. We've reconciled these metrics to their respective and most directly comparable GAAP metrics in our supplemental schedules on both our earnings release and in the back of the slides.

On Slide 3, we remind everyone that certain comments may be characterized as forward-looking statements and that there are 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, including our 10-Q, which was filed this morning.

As usual, this forward-looking information is current as of today, and subsequent events may render this information out of date.

And with that, I'll hand the call over to Andy.

Thanks, Steve, and good morning, everyone. During the first quarter, our company completed the transition to Diebold Nixdorf. We finalized the domination agreement and fully implemented the line of business structure as evidenced by our new reporting segment, which you can read about in the 10-Q filed this morning.

Now we're ramping up our long-term transformation activities with the launch of our DN2020 program, which we announced at our Investor Day in February.

I'm pleased to report that we're off to a good start. From a market perspective, we're seeing continued strength in retail and we're beginning to see banking order activity pick up. These trends drove systems order growth of more than 30% sequentially in constant currency with double-digit gains in banking and retail across EMEA and Asia Pac.

We had a positive book-to-bill ratio in the quarter for the company as well as each of the regions. First quarter orders drove our backlog up around 5% sequentially, adjusting for currency. Branch automation, contactless cash and recycling are driving much of the order activity from our banking customers. A good example is Banco Santander, which selected us to provide more than 1,200 advanced ATMs and recycling units in support of their digital banking strategy.

In total, Diebold Nixdorf sold more than 5,000 recycling units during the quarter to different financial institutions in 10 countries. The primary motivation of the bank is improved operating efficiency. Financial institutions who adopt recycling technology typically experience reduction in the order of 35% for cash replenishment cost. And Diebold Nixdorf is the only Western supplier with its own recycling IT, giving us a competitive advantage going forward as this market continues to expand.

Additionally, orders are benefiting from continued customer investment in anti-fraud measures. One of our national accounts in the U.S. is enhancing their entire fleet of ATMs with our anti-skimming card readers. Industry experts indicate that skimming costs financial institutions approximately $2 billion globally per annum. Additionally, we've been ready to assist our customers with software security improvements. We're also the first manufacturer to ship Windows 10 compatible ATMs, which enabled greater security against modern cyber threats, while enhancing the consumer experience.

Our retail customers are investing in a better in-store experience. We continue to build on our market leadership position in Europe. As an example, our retail team signed an agreement to supply and service more than 1,000 new self-checkout systems with COOP, a leading grocer in Switzerland. We also booked a $30 million win with one of the largest European grocery chains for more than 1,600 point-of-sale systems in 2 countries. The more interesting news is that we are enabling this very same client to expand to The United States with another 900 self-checkout and ePOS units. In Brazil, we won a contract for self-checkout terminals, related maintenance services and software for one of our multi-national customers.

These wins are encouraging as they demonstrate our ability to leverage our superior field service capabilities to expand our retail market presence with customers in the America.

In our services business, we experienced a modest decline in revenue during the first quarter when compared to pro forma revenue from the year-ago period. This is related to lower installation revenue, the run-off of 3 contracts for niche offerings in Europe and reduction in contract volume at 1 large account in the U.S.

For the second half of 2017, we expect stronger installation and maintenance services from recent contract wins will drive service revenue growth. One of these wins was a new multi-million dollar contract to service 8,000 ATMs with the largest private bank in Brazil. Long-term, the company's recurring services revenue will be aided by renewing our 2 largest outsourcing contracts, including a five-year deal with TD Bank and a 7-year deal with Hamburger Sparkasse, the largest savings bank in Germany. These agreements are the largest respective contracts from each legacy company and represent a total contract value of nearly $400 million. In my view, our new company has passed a litmus test with these large customers, demonstrating that our teams have truly come together and that the market recognizes the value of our solutions. The duration of these extended partnerships also affirm the importance our customers plays on the long tail of cash and our ability to help them manage it.

From a software business perspective, we delivered 6% constant currency growth in pro forma revenue year-over-year and 11% sequential growth in orders. We're experiencing encouraging customer demand from both industries, including multi-vendor and remote monitoring software as well as the accompanying professional services.

The partnership with Ziraat Bank, the largest financial institution in Turkey, is a good example of delivering remote monitoring software and innovative user experiences across all of its channels.

One of the highlights in the U.S. was the renewal of our software licensing agreement to continue providing a single payment platform to about 14,000 gas stations across the country.

Taking a look at the wins in the quarter, you can see that our sales engine is gearing up again following the break-in period of our new company in the second half of last year.

We are leading the discussion with customers, seeking advanced connected commerce solutions. But what you can also see is that most of these wins are larger, more complex projects, which are impacting the revenue conversion cycle within our industry. For the near term, the general rule of thumb in our business is roughly a 6-month contract to revenue conversion cycle with larger projects taking longer.

Applying this rule, our Q1 revenue reflect the mixed orders we had in Q3. In Q2, we expect our revenue will be flattish on a sequential basis, reflecting the weak orders from Q4. Looking at the second half of the year, we expect our solid Q1 orders will lead to revenue growth.

With respect to our DN2020 transformation program, the company is off to a good start under the leadership of our new COO, Jurgen Wunram.

Let me provide some tangible examples of our activities. We announced plans to close our manufacturing plants in Hungary. The company has also received all necessary approvals to wind down the legacy Diebold distribution center in the Netherlands. And in April, the whole company transitioned to Salesforce.com, which allows us to better manage our sales teams and processes in a consistent fashion.

Additionally, this platform gives us greater ability to target margin-accretive deals. We're focused on simplifying our set up and have initiated the process to streamline 250 legal entities, which is a key step towards realizing synergies from back-office consolidation and shared services integration.

Looking at our facility footprint, we reduced our real estate holdings by closing 16 offices. We also reduced the total number of redundant service part locations by about 15% globally. We are also streamlining the workforce and will have eliminated about 500 redundant positions globally through the summer.

Turning to our leadership team, we continue to scale up. We made 2 significant hires during the quarter, a new Chief Information Officer, Murat Ekinci, who has a solid background in the IT services industry and a new Chief Procurement Officer, Gorazd Vrbica, who has substantial experience both as a consultant at AlixPartners and an executive with Volkswagen.

During our next earnings call, you will hear a more detailed update on our DN2020 transformation program from Jurgen. I'm encouraged by the early progress and our ability to coordinate numerous intersecting activities. This gives us confidence that we should be able to exceed our cost synergy targets for the year. Innovation is a core component of our connected commerce strategy and retail is one of the more progressive environments in consumer trends. As such, many of our new innovations are in that space. For example, our company introduced a hybrid retail checkout solution, EASY eXpress, which has the versatility of being used as a self-service terminal or as a traditional cashier-assisted terminal depending on customer demand. And you key up solutions deciding to further digitalize the in-store consumer experience and attractively price entry-level back-office cash management solution. And we're demonstrating leadership in miniaturization through our extreme self-checkout concept. The width of this terminal is 1.5x the size of a dollar bill, making it the smallest self-checkout terminal in the world. We also introduced a miniaturized ATM named Essence, which features an intuitive multi-touch GUI with a sleek exterior design similar to what consumers have come to expect from smartphones and tablets.

Turning to our outlook for the year. We see our revenue for 2017 coming in around $5 billion as a result of new large project wins and the projected conversion rate of our current book of business. Our continued focus on cost reductions allows us to maintain our profitability and free cash flow targets.

And with that, I will hand the call over to Chris for his comments.

Thanks, Andy, and good morning, everyone. First quarter results represented in our new segment format for the combined Diebold Nixdorf operations. As Andy mentioned, our presentation of first quarter 2017 results includes our new lines of business, services, systems and software. In addition, we are providing select pro forma information for the year-ago period to help facilitate more meaningful comparisons. Please keep in mind that the pro forma financials are illustrative, but aren't definitive due to certain differences in how the legacy businesses were operated and the accounting treatment between the companies with only material changes addressed.

As usual, my comments today will focus on our non-GAAP results from continuing operations, unless otherwise noted. Beginning on Slide 6, we compared total revenue for the first quarter of 2017 with pro forma revenue from the year-ago period. On a constant currency basis, revenue decreased 3% primarily due to our systems and services lines of business, which I will detail shortly.

Looking at our mix of revenue for the quarter on a GAAP basis, services and software accounted for 62% of the business while systems accounted for 38%. Our geographic mix of revenue was 51% in EMEA, followed by 36% in the Americas and 13% in Asia Pacific.

With respect to our solutions, banking accounted for 74% of total revenue, while retail was 26% of total company revenue.

Moving to Slide 7, we compared key non-GAAP profit metrics for the first quarter of 2017 with pro forma financials for the first quarter of 2016. The $34 million change in gross profit is primarily due to the systems and services business, which I will discuss in greater detail later in my comments.

Operating expense is down $31 million or 200 basis points as a percent of revenue compared to pro forma 2016 results, with a large portion of this decrease attributable to the legacy cost reduction programs, in addition to the initial impact of the DN2020 program.

Our operating profit of $42 million was down slightly year-on-year as reduction in operating expense did not fully offset the change in gross profit, with the operating margin for the quarter of 3.7%, basically flat.

Our adjusted EBITDA of $75 million for the first quarter was down approximately $4 million versus pro forma adjusted EBITDA for the prior year reflecting a lower operating profit performance as well as lower depreciation and amortization expense.

For the next 3 slides, I will discuss the performance of our lines of business using non-GAAP revenue and gross margin. Now I will make comparisons to the pro forma metrics from the prior-year period.

Beginning with Slide 8, you can see the services revenue decreased 3% in constant currency versus pro forma revenue from one year ago. This change was due to the run-off of 3 banking contracts in EMEA and a reduction in contract volume in the Americas, which Andy previously mentioned.

The service gross margin decline of 150 basis points year-over-year is a result of these effects, which were partially offset by mitigating cost actions.

Moving to Slide 9. Total systems revenue decreased 4% in constant currency to $424 million versus pro forma revenue from the year-ago period. The primary drivers of the year-on-year change were lower banking volume in EMEA as well as the completion of a large deposit automation project in the Americas in the first half of the prior year.

This was partially offset by higher retail volume in EMEA with strong activity across the region. The change in systems gross profit was primarily in banking solutions, where we experienced unfavorable country mix in EMEA and lower volume in the Americas. If you were to look at our systems margins in the new line of business reporting segment, we've seen an improvement of over 100 basis points on a sequential basis compared to the second half of 2016 resulting from our early focus on deal quality and procurement initiatives.

Turning to Slide 10. Our software line of business delivered revenue of $110 million, increasing by 6% in constant currency when compared to prior year pro forma revenue. Software growth was primarily due to higher volume in EMEA across both banking and retail. The gross margin increased to 36.1%, primarily due to the mix of projects and the increase in volume.

Turning to slide 11. Non-GAAP EPS was $0.08 for the quarter. The non-GAAP EPS excludes restructuring expense of $0.17 tied to the DN2020 activities and nonroutine expense of a $1.03. The nonroutine expense consists of $0.55 from purchase price accounting adjustments, $0.25 from legal and acquisition-related expense, which is primarily due to the mark-to-market impact of the legacy Wincor Nixdorf AG stock options, integration expense of $0.17 as well as $0.06 of impairment and other nonroutine expenses.

The tax impact for restructuring and nonroutine items, inclusive of allocation of discrete tax impacts, was $0.34. During the quarter, the non-GAAP effective tax rate came in at 33.1%.

Moving on to slide 12. Free cash use was approximately $79 million in the first quarter, reflecting a $36 million improvement on a year-over-year basis. This improvement was partially attributable to contributions from the Nixdorf acquisition, which includes the benefits of the annual service contract prepayments and better inventory management of the combined company, which more than offset higher interest expense payments and capital expenditures.

On the right side of the slide, we provide highlights of our liquidity and net debt position. As of March 31, we reported cash on hand of $568 million and gross debt of $1.8 billion, which leads to a net debt calculation of approximately $1.2 billion.

From a leverage ratio perspective, if you were to calculate a pro forma trailing 12 months adjusted EBITDA, we remain at about 3x net leverage. In April, we initiated a refinancing of our term loan B debt in order to benefit from more favorable rates. As part of this activity, we plan to borrow $250 million from our delayed draw term loan A facility and will use those proceeds to pay down the USD term loan B facility.

In addition, we increased borrowings for the euro portion of term loan B to take further advantage of the interest rates. We anticipate that our new capital structure will be effective on May 9, and we expect to realize savings of approximately $5 million per quarter in interest expense.

Also in May, as part of our continuous process to evaluate our portfolio of businesses, we reached agreement to divest our Electronic Security business in Mexico to Securitas AG for $5.5 million.

Moving to our 2017 outlook on Slide 13. As Andy previously highlighted, timing played a key role. On the revenue side, based on the anticipated installation schedule for our current book of business, we see a shift of revenue towards the end of the year. As such, we're updating our revenue outlook to approximately $5 billion. This is inclusive of an approximate 2% currency headwind. The company expects a net loss of $50 million to $75 million on a GAAP basis for the year, which is increased from our prior guidance, primarily due to the higher expense for the outstanding options of Nixdorf AG shares.

We are maintaining our outlook for adjusted EBITDA at a range of $440 million to $470 million for the year. This reflects our confidence in exceeding our $40 million cost synergy benefit from our DN2020 program for the year, which will offset the change in revenue. Our outlook includes depreciation and amortization expense of approximately $110 million and share-based compensation of approximately $30 million.

On a non-GAAP basis, we continue to expect EPS of $1.40 to $1.70 and a non-GAAP effective tax rate of approximately 30% for the year.

Taking into account our first quarter results, our current scheduled backlog and cost synergies ramp up later in the year, we continue to see about 1/3 of our adjusted EBITDA to be realized in the first half of 2017 and 2/3 in the second half. On EPS basis, we expect to realize approximately 20% in the first half of the year, which is reflecting a lower interest expense in the second half of the year and the foreign exchange loss experienced in the first quarter. Our free cash flow outlook for the year remains greater than $50 million, including $100 million of integration and restructuring costs as well as $100 million for capital expenditures.

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.

Couple of questions. First, if I heard you right, you anticipated very strong orders in the first half of the year. You saw that in Q1. Interest expense is going to be lower for the full year, I think relative to how you're thinking about it before. And it sounds like you're comfortable that your synergy targets are going to exceed, I believe your guidance was around $40 million. So that expectation. So when I line that up, I guess, why are we not seeing the low end of your guidance come up or perhaps even guidance range? If you could close the loop on all that, that would be helpful.

Yes. Thanks for the question, Matt. First starting with the adjusted EBITDA, obviously, the change in interest expense is not going to impact that overall calculation. And what we've talked about with the change in revenue coming down, we see the cost offsetting. So the overall pieces there from an adjusted EBITDA stay aligned. When we look at the overall interest expense benefit, keep in mind that we're not going to see the full benefit of this in the second quarter, it's going to be more -- we'll get a half quarter of benefit and we get the full impact really in Q3 and Q4. In addition to that, we do have some items that are going against us below the line. You see in Q1, we probably had about $0.03 to $0.04 headwind that's offsetting a portion of the interest expense just on the translation effect. And we've a couple of other items that are going on below the line. So did not feel it was prudent to just put all of that benefit through the EPS at this time. Obviously, we will see how things go later in the year, but that's our current outlook right now.

And then as a followup, if you can speak a little bit more directly to what you're seeing in your North American banking business, perhaps delineating between the small and big bank market and maybe what customers are saying about spend plans in context of policy change or lack thereof?

Matt, at this point in time, from order book and pipeline, it's still a big boys game. The larger banks continue to invest and do so very deliberately. What we do see is across a broader universe, more emphasis on software as people are truly declaring the ATM channel as a very important route to market. And everybody wants to have their own unique approach to how do you address your customers. And needles to say, you need a lot of good software to do so. Other than that, we're getting positive vibes from the regional banks. But so far there have not been any concrete policy changes, hence people are waiting to see what's coming down the pipe. But should we see some easing on the Dodd-Frank's environment, that would definitely be considered a positive indicator by the regional bank. Also, I talked to the CEOs of the regional banks, community banks that had an opportunity to meet with the President. They came away pretty constructive from that meeting. But it's still a little bit of wait-and-see attitude what's coming out of Washington.

And we'll take our next question from Paul Coster with JPMorgan.

You noted the big banks kind of already fully committed to the branch transformation projects. In that context, don't really understand why the hardware perhaps would be back-end loaded. You'd expect slightly smoother deployment schedule. What am I missing here?

Paul, it's just a roll out of the deal. If you take a look at all the deals that we also mentioned in our release this morning, I mean, these are all a 1,000-machine-plus deals. And they just have their individual set of logic on when the banks are willing to roll out a project, in many cases depending on factors completely outside of our control, and quite honestly, our market if there is like branch reconfiguration or something included in that. Having said that, it is a -- the industry is shifting towards a big project industry. And I think we've mentioned that on earlier calls, the rip-and-replacement market has pretty much ceased to exist. Any time somebody looks at upgrading a machine, people look at going to the next-generation. People are looking to go for connected commerce. And that turns into a bigger project, which extends sales cycles and it also makes the rollout cycles a little bit more prolongated.

Your software business grew, which is good. And (inaudible) $110 million in revenue this quarter. Can you segment it at all. That which is attached versus unattached and what goes into each segment?

Let me just give you a little bit of an example of where we see momemtum building and then I'll let Chris give you the breakdown on the revenue. If I just look back, it's about 2 years ago that we acquired Phoenix. And between then and today, we've added about 2 dozen of regional banks in the U.S. alone to our portfolio. And we needed some of the certifications with the large providers. Those are coming in. So we were building our backlog continuously and you will start to see that being rolled out. So good news is we see software activity in the regional banking space. We see software activity in the large banking space. And as banks are moving towards contactless cash, we see upgrade opportunities in the software universe. So it's across all segments. It's across all geographies. And it's predominantly a North America and EMEA play.

If you think about it just from an allocation between what's license and maintenance versus the professional service, you have to bear with this a little bit. We're still getting all of our detailed reporting in place on that. So I don't feel comfortable giving exact numbers. But I would say, we still have a higher portion of this at the professional service level, call it maybe a 1/3, 2/3 between what's professional services versus what's the license and maintenance on a recurring basis, which is the line we hopefully talked about back in February at our Investor Day event.

And we'll take our next question from Kartik Mehta with Northcoast Research.

Andy, at the end of last year, you had talked about some issues in EMEA because you were trying to get both the organizations integrated and that resulted in some market share losses. As you said today, how do you think you're positioned there? And kind of what's happened in the market place that will give you confidence that, that trend has stopped?

Kartik, thanks for connecting last quarter to this quarter. Look, Q4 was weak. We had home-grown issues in Europe, including the fact we still had people on different comp plans. We didn't have a common management tool. If you take a look at our growth and our book-to-bill ratio in EMEA, as I said in my prepared remarks, that EMEA had double-digit gains both in banking and retail. So we feel very encouraged. And if I see the customers feedback, if I see the conversations that we're being invited to, lot of positive momentum. And it's not just one country, it's across a whole bunch of countries where the activity is going strong. You saw our press release about recycling in Russia, which was a huge step forward. You can also see recycling. It was a technology that started in Asia is now literally moving east, starting in Eastern Europe, coming to Western Europe, eventually it will hit the Americas. So lot of positive momentum. Lot of positive customer feedback. And if I may just take a look at the retail side, if you recall, last year was legacy Nixdorf's probably best year in retail. And we're topping those order numbers from where we were a year ago. So again, lot of momentum building out our leadership position in that market and -- especially driven by opportunities in this go market.

And then Andy, if you look at the retail environment in Europe, obviously in the U.S. a lot of pressure for brick-and-mortar retailers from online retailers. If you look in Europe, how do you think your position there and what kind of pressures is the industry witnessing there, if any, from the online world?

Well, online is a big topic, but let me put that in -- just in context for you. I saw a number the other day that if you take a look at all the purchases in retail, including the U.S., 94% of all the retail sales in the world are done through brick-and-mortar. So it's -- again, it's one of those rising phenomena versus what you have installed. Having said that, every retailer has to get their arms around a connected commerce strategy. You want to combine your in-store experience with your online experience with your loyalty programs, with your return program and that spells opportunity for software. That spells opportunity for our managed services. Our store lifecycle management is probably one of the hottest offerings that we have as a company. And I was with a large retailer in Europe few weeks back where we talked exactly about that. What they're basically saying, listen, why don't you guys take over the management of the complete branch, Andy? These are pretty sophisticated life cycles. We actually set up a whole demo branch with them to see how it would work. Can we do it? Would they feel comfortable outsourcing it to us? So very encouraging momentum along the value chain. And feel pretty excited about the opportunity in retail.

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

Yes, can you just describe the -- you're talking about the backlog of projects lengthening becoming more complex. Can you describe a little more -- in a little more detail what that entails? In other words, what are the aspects that are being added on to what were traditional legacy projects? Is there more -- as you've mentioned, is there more cash recycling being added? Is there more bank branch transformation services that may not be full branch transformation services, but the beginnings of so -- being added to so that the banks can move on as they move forward? What are the things that are adding to margin? What are the things that are subtracting from margin as this order flow begins to go through your year and into next year?

Well, I think you hit on all of them (inaudible). Let me start with biggest drivers, as I said, are recycling as well as contactless cash. So contactless cash is the combination of your mobile device through NFC with the machine. We have sent out quite a few press releases about wins that we had in Europe. If you take a look at what's happening here in the U.S., all of the 3 largest banks in the country have made very bullish statements that they want to upgrade their complete infrastructure to a contactless environment by the end of the year and that adds software. And when we talk connected commerce, keep in mind the software universe is now starting to connect to many more back-office software pipes, channels, towers, whatever you want to call them than we used to do in the past. In the old days, "all we did was we put software on top of a machine to make the machine run and connected it with the ATM network." Today, we start to connect it with the customer database. We start to connect it with the advertising database. We start to connect it with an asset management database. We start to connect it with an online banking database. We start to connect it with a mobile channel database. That's all good news because it actually drives professional services. It's very sticky. But it's also just may -- at least a little bit more project management planning and we got to team up with other partners. And one of the points we've also raised in previous calls is that this industry is turning to open APIs to more of a partner ecosystem and we are restarting to drive that more proactively. But it also means you have to coordinate more people to complete the overall project. So it's just -- it's good news, but it's driving complexity up and complexity drives time lines up. Simple as that.

Have you been given any idea of how long, in other words, trying to project out an IRR for these new more complex projects also involves customer loyalty and how long you believe you can now keep customers and keep that customer loving you, so to speak, for a longer period of time if you're going to invest more human beings into writing code, if you're going to invest involving more partners, that you're partnering up with in opening up, which opens you up to potential margin dislocation, on the other hand offset hopefully by the value proposition you're presenting to your end-users. What are the checks and balances there that you're considering?

Well, look, any time you look into software, the agreements are usually three-year agreements. But in reality, people are usually very loyal software customers for 5 years plus. Most of our managed services agreements, as you can see also with the large two ones that we renewed, are 5-year or 5-year-plus type of agreement. So I say realistically, we have at least a 5-year horizon where customers would commit to a relationship with Diebold Nixdorf. And that's a good thing, anyway you look at it. It gives us an opportunity to upgrade. It gives an opportunity to sell into an existing base. It gives us an opportunity to sell software upgrades, modify things, sell additional professional services. So everything is moving towards stickier longer-term relationships, which overall for the shape of the industry, I think is a good thing. Now everything I've said is predominantly a developed market play. You still have the buying ATMs by the pound and in reverse e-auction type of mentality in the Chinas of this world. And that's a different universe. But that's why we're so focused on Europe and the Americas at this point in time.

And we'll take our next question from Joan Tong with Sidoti & Company.

You guys talked about the sort of the conversion from backlog to revenue was how stretch out last year and then you talk about the same thing this quarter. I'm just wondering like if it is getting worse or is it just because of complexity of the deals, it's more this year versus last year, because I specifically remember you talk about this similar -- have similar comment like around this time last year in 2016?

Yes, Joan, it's much more the latter there. It's really about the complexity of the projects. And so when you see this activity in North America and Europe specifically, the complexity of the projects, this is not just bundled, we allow -- and we install hardware and we have a break/fix service contract. This is hardware, software, new applications bundling all of this together, which is a much longer project, in addition to the fact that some of these are quite large. As Andy said, these are pretty decent size volume. So this is not -- we are not installing 100 ATMs across a handful of locations. This is a much larger rollout. So it's a combination of items.

I see the industry in general is shifting. Its a trend that started last year and it keeps on going forward. And as I said, at the end of the day, I think it's a good thing for the industry, because it starts to be more meaningful. Just as you do your revenue comps until these things start to tail and compare with the similar environment, you'll see that little offsetting the comps.

I see. Got it. And then, for the software business, it's like a little bit over 10% of your total revenue. Just wondering if -- looking at the capability, like the software functions, I'm just wondering is there any like sort of area that you think that might be conducive to M&A activities going forward and that you can maybe filled into hole little bit faster and maybe offering a more comprehensive software type of offering for your client. Just want to get a sense of what you're thinking about in potential M&A, just to beef up that piece a little bit more. Obviously, it's very attractive revenue on a business on a margin standpoint.

Joan, you hit the nail on the head here. When you take a look at where do we want to generate IT, it's in the software space. And whenever we do something there, we undergo a very normal review process of make, buy or partner. And we will probably come up with a tick in every one of those boxes as we look at the next 18 months going forward. Also, if you take a look at our universe, the number that I saw the other day is that there are approximately 20,000 startups in the FinTech industry. It's probably reasonable to assume that not all of them will turn into a commercial success, but that doesn't mean that there isn't attractive IT that we want to guzzle up while it's available at very opportunistic prices. So we have a very clear radar of what's happening in the market. We're very committed to investing into the software space organically as well as inorganically, and we'll keep you posted as things progress further.

Okay. And then finally, can you give us an update of the other patent litigations with Hyosung? I think there -- still 1 or 2 of them were waiting for some sort of final conclusion there.

Yes, that's still winding its way through the process. I think over the next -- really next quarter we'll have an opportunity to give a bigger update after we see how some of the things progress in the court system.

And we'll take our next question from Paul Condra with Credit Suisse.

I just wanted to follow up on the retail business. I think you mentioned something about a new deal in the U.S. So can you talk a little bit about progress on the U.S. side and maybe growth in terms of systems and software?

Paul, thanks. Look, the U.S., not just the U.S., the Americas, basically think of them as a near greenfield opportunity for us. So just about anything we do is upside. Now the one thing that we're saying, hey, we got 2 -- cool technology and great service. The other thing is that people say we want proof. And I think we've talked about this earlier, that our first port of call will be large multi-national customers who we are already working with in Europe, who know us, who know our technology, who trust us, who say, well, listen, now that you got this great servicing offering, we will give you also business as we expand into the U.S. And you saw this with the 2 deals that we got, one in the U.S. as well as one in Brazil, where those large customers said, fantastic, we now work with Diebold Nixdorf. I was actually with a customer in Europe when the Brazilian business was being decided. And the guy looked me straight in the face and said, Andy, you realize Nixdorf of old would have never gotten this deal irrespective of the fact that we like the software and the hardware. It's just we were super worried about the technology support. So I am encouraged about the early wins. You will see more of our machines being rolled out in the Americas. Those will be proof points. And as a little bit of, like penguins of the iceberg, ones the first ones are in the water and they enjoy swimming in it, you'll see other ones follow.

I mean, can you give us any expectations or numbers just in terms of how you think that might grow in the Americas over this year? Or you're just not quite there yet?

Paul, this is early. As I said, a lot of people are looking at the pilots we're putting out there. I can tell you, we're getting a lot of unsolicited requests. People are excited, especially also on the -- in the SCO business, in the kiosks business that there is a new alternative in the market. And we'll take our chances and will keep you updated as we start winning deals.

Okay. And then I just wonder in terms of kind of complexity of deals, I was just curious to what extent is that you're beginning these conversations and maybe it's kind of a sales-driven upsale of your capabilities versus really being client-driven, they want you to do things that maybe you weren't expecting kind of going into the negotiations. Can you just talk about that?

It's actually probably a third variety. And you would see that especially in the MS outsourcing conversations, where you start the conversation with one side of the house, whether it's in banking or in retail, what they're saying, you know what giving the market pressure, we want to innovate the business model then they kick the tires with us. That's probably 6-month project. And then if you're comfortable, but then they also have to sell the project inside of their own community, because -- especially larger banks are complicated animals, then you got the retail channel with the digital channel, with the CIO organization, and you got to cross a lot of Ts and dot a lot of Is until the customers are being lined up. And it's very exciting that we talk about omni-channel and connected commerce. But it also means on the customer side, the number of people that you talk to gets bigger and that gets larger. So it's, as I said, I think ultimately it's a good thing. You'll just see things starting to move from the 6 months rule of thumb maybe to 9 or even 12 months in the rollout. And again, we'll keep you updated as things become more pronounced in our backlog conversion.

And this concludes today's question-and-answer session. Steve, at this time, I'll turn the conference back to you for any additional or closing remarks.

Yes. I just want to thank everybody for participating in the first quarter 2017 earnings call. If you have follow-up questions, please call us or e-mail us. Thank you.

And this concludes today's call. Thank you for your participation. You may now disconnect.