Diebold Nixdorf Inc (DBD) 2017 Q4 法說會逐字稿

Good day, and welcome to the Diebold Nixdorf Fourth Quarter and Full Year Earnings Conference Call. At this time, I would like to turn the conference over to Mr. Steve Virostek, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Vezina, and welcome to Diebold Nixdorf's year-end conference call for 2017. Joining me today are Chris Chapman, Interim Co-CEO and Chief Financial Officer; and Jürgen Wunram, Interim Co-CEO and Chief Operating Officer.

During our webcast, we will be referring to slides which are available on the Investor Relations page of dieboldnixdorf.com. And for your benefit, we will post a replay of this webcast to the IR website later today.

Slide 2 contains a reminder that we will be referring to both non-GAAP and pro forma financial information, which we believe are helpful indicators of the company's performance. We have reconciled these metrics to the respective and most directly comparable GAAP metrics in the supplemental schedules of our slides and today's earnings release.

Moving to 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. This forward-looking information is current as of today, and subsequent events may render this information out of date.

And now I'll hand the call over to Chris.

Good morning, everyone, and thanks for joining our call. Let me begin by characterizing 2017 as a year of significant accomplishments and also several challenges.

Our focus was on integrating our legacy operations, eliminating redundancies, and creating a new industry leader, all while enhancing relationships with our customers. We are firmly committed to the Connected Commerce strategy, led by a strong services and software business and supported by innovative hardware.

Our accomplishments have set a solid foundation for the future, though there is still much work to be done and further investments to be made during the next phase of our transformation.

Jürgen and I will be providing an update on 2017 results, our DN2020 program, and will be introducing our 2018 outlook. We delivered results in line with our latest 2017 guidance, with full year revenue of $4.6 billion. This was in line with our prior expectations as we delivered year-over-year growth in services, software and in our retail solutions in the fourth quarter.

Profit highlights for the year include adjusted EBITDA of $382 million and a non-GAAP EPS of $1.13, which were both at the upper band of our guidance range. Supporting the results were over $100 million of cost savings realized from our DN2020 transformation program, which Jürgen will be detailing.

Looking to 2018, we are encouraged by the stability and improvements we've seen in the services and software businesses over the past 2 quarters. We've delivered double-digit growth in software order entry and have a solid service contract base entering the year.

On the banking hardware front, we've continued to see a subdued pace of orders during the fourth quarter, particularly in the Americas and in Asia Pacific. While we enter the year with relatively flat backlog and a solid pipeline of opportunities, we don't expect the pace of banking hardware activity to pick up meaningfully in early 2018. Offsetting the trend in banking orders, total orders were up low single digits, with strength in retail in the quarter.

I'll now hand the call over to Jürgen to discuss our retail business, services and software wins and progress on the DN2020 program.

Thank you, Chris, and good morning. I'm encouraged by the continued strength of our retail solutions. For the quarter, retail revenue grew 6% in constant currency, driven by service and software, preliminarily in Europe.

In addition, retail orders increased nearly 20% in the fourth quarter, and included a $45 million contract to provide comprehensive service, software and systems with a European fashion company operating in 12 countries. We also signed a $40 million agreement to upgrade thousands of point of sale terminals for leading grocer across 9 European countries. Following installation, we had benefits from recurring services and software revenue over a multi-year period.

To extend our market leadership, we are building and introducing new consumer-centric solutions to support the future of retail. This January, at the National Retail Federation Show, we launched our Storevolution offering. It combines interactive technologies of our industry-leading Vynamic software platform to deliver enhanced functionality for new customer experiences, a high degree of reliability and new insights.

We also deepened our leadership team by welcoming Mark Brewer as our Senior Vice President and Managing Director of Global Retail. Mark brings many years of retail technology experience to the company, and is responsible for leading our retail connected commerce strategy and operations, customer relationship management and global sales.

Moving over to the banking business, as Chris mentioned, our hardware sales remain challenged in the quarter. At the same time, we are continuing to renew large maintenance contracts.

During 2017, Diebold Nixdorf signed large contract renewals valued at just over $1 billion, which demonstrates our continued strength in delivering superior service in an always on environment. For example, we signed a maintenance contract, covering more than 18,000 ATMs in Brazil. We also secured a contract extension with a major French retailer to service over 7,000 POS and self-checkout terminals, and we increased the scope of work to include our Managed Mobility offering.

In the fourth quarter, we secured more than $100 million in new service contracts which will become recurring revenue over a multi-year period. Within our managed services business, we are continuing to gain traction. During the fourth quarter, we signed an ATM-as-a-service contract for nearly $14 million with a German bank. Key operational metrics in our Services business demonstrate continued improvement, following the investments we have made in additional service technicians, training and support systems.

We saw meaningful improvements on service levels across North America. As an example, with one of our largest banking customers, we were able to reduce the call rate by about half while also improving the resolve time.

With respect to software, license order growth picked up approximately 25% in the fourth quarter, as we unified our portfolio through the new Vynamic platform and brand. Vynamic is the first end-to-end connected commerce software portfolio, designed to enable secure transactions across mobile devices, fixed terminals and online channels.

Key software wins in the fourth quarter included a new contract with JP Morgan Chase, the largest bank in the United States, to deploy Vynamic monitoring and fleet management software. We also booked a $10 million licensing agreement with Banco Santander in Mexico for omnichannel and Vynamic marketing applications. These wins help to build on our number one market share position in ATM software. We are encouraged by the momentum in the quarter, following the launch of Vynamic, and our focus is to carry this momentum into 2018.

Moving on to slide 5, I am pleased to report on the progress of our holistic DN2020 program, which includes our integration and operational excellence initiatives. The graphic on the right of this slide contains the six key elements of the plan and our objective to realize $240 million of savings by the year 2020.

We made significant progress in 2017. We have reduced headcount by 1,300 full-time positions, with a net impact closer to 1,000 employees. While this activity occurred throughout the organization, a larger proportion came from G&A functions, such as finance, IT and support roles.

In addition, we are streamlining G&A spend through process improvements, greater use of shared services and implementation of best practices. Next, as of today, we have consolidated more than three quarters of our redundant country legal entities. This project simplifies business processes at the country level, and boosts productivity by unifying our core IT systems. These activities are resulting in incremental G&A synergies from management integration, back-office consolidation and operational excellence.

In the area of Research and Development, we eliminated redundant projects, streamlined the portfolio and refocused our efforts on innovation for customers. We have reallocated resources to invest more heavily in our Connected Commerce strategy, including our Vynamic software platform.

We have reduced our global manufacturing capacity from 180,000 ATMs per year to around 100,000. We also streamlined the number of ATM models by more than 50%, and renegotiated more than 90% of our direct material spend. These activities have taken on greater importance to maintain our gross margin in the systems line of business, while we have experienced lower demand for banking hardware. Within the Services line of business, we have consolidated and standardized service delivery for approximately 90% of countries. To enhance our operating efficiency, we have also eliminated approximately 1/4 of our service parts depots around the globe.

Through our execution of the DN2020 program, the company realized over $100 million of savings as the result of our integration and operational excellence programs during 2017 and we expect to realize at least another $50 million of savings in 2018.

And now I will hand the call back to Chris for a discussion of our quarterly financial performance and 2018 guidance.

Thanks, Jürgen. My comments will now focus on non-GAAP results from continuing operations, unless otherwise noted. Year-over-year variances for fourth quarter financials are comparable, given the timing of the Nixdorf acquisition closure in the third quarter of 2016. For the full year of 2017, we will be comparing our financial results to 2016 pro forma numbers to facilitate more meaningful comparisons.

On Slide 6, you'll see that total revenue for the fourth quarter was flat at $1.25 billion but was down 5% on a constant currency basis. Revenue declines in the systems line of business were partially offset by growth in both services and software.

Looking at the mix of revenue, on a GAAP basis, services and software accounted for 62% of the business, while systems accounted for 38%. The geographic mix of revenue was 52% in EMEA; 34% in the Americas; and 14% from Asia Pacific. Banking solutions comprised 74% of total company revenue, while retail solutions accounted for 26%.

Looking at Slide 7, the company generated $4.6 billion of total revenue in 2017, which compares with pro forma revenue of nearly $5 billion in 2016. Revenue was down 8% in 2017 on a constant currency basis, as revenue declines and systems and services more than offset the growth in our software line of business. We've also provided the mix of revenue on a GAAP basis for our lines of business, regions and solutions, which is fairly consistent with the fourth quarter percentage mix.

Moving to the next slide. We provided a year-over-year comparison of key non-GAAP profit metrics for the fourth quarter. Gross margin declined approximately 80 basis points to 23.5% for the fourth quarter, primarily due to lower volume and an unfavorable mix in our systems line of business. Operating margin decreased approximately 70 basis points to 4.8% due to the change in gross profit margin coupled with slightly higher operating expense versus the year-ago quarter. Operating expense was relatively flat year-on-year. Our adjusted EBITDA margin of 8.7% increased by around 20 basis points versus the prior year.

On Slide 9, we compare key profit metrics for 2017 with pro forma results from 2016. On this basis, gross margin declined about 70 basis points, primarily from lower volume of our banking solutions in our systems line of business and the associated decline in installation services.

Operating profit margin decreased approximately 20 basis points due to the change in gross margin, which was partially offset by cost savings and a benefit of approximately $30 million from lower variable incentive compensation expense, which includes a favorable impact related to a mark-to-market compensation program.

Despite the significant decline in revenue, adjusted EBITDA margin increased by about 30 basis points to 8.3%, as the company benefited from the aggressive cost actions that Jürgen previously outlined.

Turning to Slide 10, for the fourth quarter services revenue increased 2% in constant currency when compared to the year-ago period results, as maintenance managed service revenue growth offset lower installation activity. Service gross margins of 26.5% in the fourth quarter increased 45 basis points versus the prior year period due to the favorable mix of contracts and realization of cost savings.

Moving to the bottom of the slide. You'll see comparisons for the full year. On this basis, services revenue decreased 3% in constant currency in 2017 due to lower installation revenue and the previously disclosed contract runoff in the Americas and EMEA. While services gross margin of 25.5% in 2017 decreased approximately 120 basis points over 2016, we saw a solid sequential improvement over the last couple of quarters, resulting from better utilization, additional cost savings and process improvements.

On Slide 11, systems revenue in the fourth quarter decreased 15% in constant currency compared to the prior year period. We experienced lower banking activity in all regions, while retail systems revenue was in line with the prior year. Systems gross margin decreased 250 basis points to 16.9% due to lower volume and an unfavorable mix versus the prior year, which was only partially offset by cost synergy benefits. For the full year of 2017, systems revenue declined by 16% in constant currency, due to lower volume in the banking business. We also experienced a difficult year-over-year comparison in the retail business, which relates to larger Brazilian voting and lottery contracts in 2016. The systems gross margin of 19.3% in 2017 declined approximately 80 basis points versus the prior year, as the cost synergies could not fully offset the steep decline in banking volume.

Turning to Slide 12, you'll see software revenue of $139 million and the fourth quarter increased 12% in constant currency when compared with the prior year period due to growth in EMEA. The gross margin for software decreased to 32.6% as a result of a higher mix of revenue from professional services.

For the full year of 2017, software revenue increased 1% in constant currency despite the headwind from lower systems volume due to strong retail activity in EMEA. Software gross margins of 34.8% decreased approximately 120 basis points year-over-year, relating to our mix of projects and professional services activity.

Moving to Slide 13. Non-GAAP EPS was $0.40 for the quarter, which is an $0.08 improvement compared to the previous year, primarily due to the benefit of a lower tax rate. Non-GAAP EPS for the current period excludes restructuring expense of $0.06 and non-routine expense of $0.70. The non-routine expense primarily consists of $0.38 from purchase price accounting adjustments, $0.23 from acquisition and integration expense and executive severance of $0.07. There was a one-time charge of approximately $95 million or $1.25, resulting from the change in the U.S. tax law. The tax benefit for restructuring and non-routine items, inclusive of allocation of discrete tax impacts, was $0.18.

For 2017, non-GAAP EPS was $1.13, and excludes restructuring expense of $0.65 and non-routine expense of $3.45. During the quarter, the non-GAAP effective tax rate from continuing operations was 22.5%, which brings our full year rate to approximately 20%. On Slide 14, you can see that the company generated $245 million of free cash flow in the fourth quarter, which was an improvement of $35 million compared with the year-ago period.

Working capital improvements in the quarter more than offset lower net income and higher CapEx. Our strong performance in the quarter brings our year-to-date cash use to $32 million, which includes restructuring and integration payments of approximately $140 million.

As discussed previously, we accelerated our DN2020 activities in 2017, so that we could capture the benefits sooner than originally planned. As a result of the acceleration of our activity, you will see a substantial decline in restructuring and integration payments in 2018. On the right of the slide, you will find highlights of our liquidity and net debt position. As of December 31, we had $617 million of cash on hand, gross debt of $1.85 billion, net debt of approximately $1.24 billion and leverage ratio of about 3.2 times.

Turning to the 2018 outlook on Slide 15. We expect revenue to be in the range of $4.5 billion to $4.7 billion, with an anticipated currency benefit of around 2%. The company expects a GAAP net loss of $40 million to $65 million, inclusive of depreciation and amortization expense of about $125 million and share-based compensation around $35 million.

Adjusted EBITDA is projected to be $380 million to $410 million. After removing the impact of restructuring and non-routine items, we expect non-GAAP EPS to be $1 to $1.30, which assumes a non-GAAP effective tax rate in the mid-20s. On the right-hand side of the slide, we provided a waterfall chart to bridge the significant changes from our 2017 actuals to the non-GAAP EPS guidance for 2018. Starting with our reported results for 2017 of $1.13, the expected higher tax rate will have an impact of around $.10 cents, incremental cost benefits of at least $.50 cents, and a headwind of approximately $0.25 cents from normalized incentive compensation expense. The final component of the bridge is the range of revenue and mix of business.

We project our free cash flow to exceed $50 million for the year based on our improved GAAP earnings and capital expenditures of about $85 million and integration and restructuring payments of approximately $90 million. To give some color on 2018, and consistent with our comments on the prior earnings call, we see a slow start to the year.

Specifically, within our Systems line of business, we expect first quarter revenue and profit to be down versus 2017. While the company entered the year with a similar backlog to the prior year, our Q1 expectations include normal seasonality and customer installation schedules. In addition, while we have made significant improvements to our global manufacturing footprint, we have recently experienced a few growing pains and associated minor supply chain delays that will impact our systems revenue in the quarter.

While we are doing everything we can to improve the start of the year, we currently expect non-GAAP EPS in the first quarter of 2018 to be around break even. Despite the expected slow start to the year, we are encouraged by the current pipeline of Connected Commerce opportunities in front of us, as we continue to gain traction in ATM-as-a-Service, grow demand for our new Vynamic software solutions and expand our retail offerings.

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

(Operator Instructions) Our first question today comes from Matt Summerville of D.A. Davidson.

A couple of questions. First, in the fourth quarter, Chris, what was your book to bill? And I guess what I'm trying to get at is it looks like we saw a sequential decline in backlog somewhere in the range of a $100 million to $200 million. I don't have the exact number. So on that band, did you end the year with a backlog you thought you would end with? And did you recently change sort of the definition around, I'm looking, at Slide 3, how long it will take that backlog to convert? And I guess, again, what I'm sort of getting at is, is backlog all that relevant anymore to you guys?

Multiple questions there, Matt. Let me just take them one at a time here. So when you look at where the book to bill was at, we didn't publish the amount for the quarter. I would say we were a little under 1 as we exited the year. When you see the activity in the quarter though, and you're asking around the definition of how we think about backlog or what we're booking. I will say that we had several large awards where we have the positive indication. However, we are not going to book anything through the order entry until we actually finalize certifications, which are going to come in the first half of the year, which that would have moved us well north of 1 in the fourth quarter. So I would say, given some of these longer schedules that we're seeing from an installation, the complications around certification activity, quite healthy. What we actually booked puts us under 1, but the indications and the pieces that we're now working through are really going to help us to drive the second half revenue and is underpinned by actual firm wins from customers, but not booked into orders yet.

Got it. And just as a follow up, maybe talk about what defines the high versus the low end of the non-GAAP EPS guidance range, which at a $0.30 range, is obviously pretty wide. And maybe speak to specifically what the organic expectations would be, high low, banking versus retail? And then, similarly, maybe to what your competitor did on their fourth quarter call, how was Diebold sizing up the Windows 10 opportunity?

Yes. Well, first, let me give a little bit of color by the line of business as we go through. That now -- that will touch a little bit upon the solutions. Obviously, the biggest piece of the range next year is going to be to the systems line of business. And the guidance that we've given implies we could be close to flat to maybe down in the high single digits on the systems line of business, and that's really the variability that we see in the banking, and this is really going to be timing related. As we looked at the full year guidance, as we've seen how things have played out over the last 12, 18 months, we did not want to get, we'll say, overly ambitious early in the year based on not having some of these installation schedules finalized. We've seen how that played out in 2017, and took a very prudent approach on how we view the overall guidance, and so that's the biggest piece of variability. On the services side, we looked at the services business to being maybe down 1% or 2% to flattish to up a little bit, and that's really going to come down to the the associated installation activity tied with the systems business. And the software business where we have seen strong order activity, double-digit growth for a number of quarters. Now we expect that business to be up mid to high single digits. I will say that we have a little bit of nuance to the new Rev Rec that could give us a little bit slower start to the year. But ultimately, we should be able to pick that back up in the second half of the year, as we think about the individual pieces.

The item that you asked around Windows 10, I will say, the activity that we saw specifically associated with Windows 10 in Q4, it definitely was starting to pick up a little bit, but one quarter does not make a trend. And so I've not seen enough right now to say that we have an inflection point, where that activity is going to pick up. Let's see how Q1, Q2, Q3 play out, and give a little more color after we see more activity to see if the market is starting to pick up some momentum there.

We will now take a question from Paul Coster of JPMorgan.

I apologize for focusing in on the system business. But clearly, it's sort of the main challenge at the moment. When you say there's been delays, and there are certification complexities, can you be specific about what is causing these delays and what needs to be certified, and why it's complex?

So the specific one I'm talking to and it's a public -- was made public, and this is in Brazil. It's a fairly large order that we won. And it's essentially a new device that we have to go through and finalize the certification on, and it was for recycling unison. So that certification activity is going on, and this is roughly a 6,000 unit order that's going to be delivered over in 18-24 month period. And obviously, the timing and completion of that certification, and getting that stuff done would impact the installation and how much of that ends up in '18 versus pushing them into '19. And so it's normal activity, I would say, from a Brazil standpoint, very large orders that are delivered over multi-quarters, and have to have the certifications complete, and then see the installation timelines with the banks before we factor all of that or the full impact of that into our 2018 numbers.

Okay. Got it, and then you've reduced your manufacturing capacity for ATMs. So I assume this isn't a short-term reaction. It's your view on the overall market. Can you talk about what principles went into reducing the capacity by, what, nearly, 50%? And also what happens if there is a spike in demand? Do you look to move to a more variable model in the future?

Jürgen speaking. So I'm taking that question. So definitely, when we combine the businesses, our joint capacity was higher or much higher than we expect also in the future. And you know that we have seen a lot of changes, for example, in Asia, with China and so on. So we have to adjust, so to say, strategically, our capacity, and that is this reduction from 180,000 ATMs to around 100,000, but that's -- Paul, you were absolutely right. That is, so to say, our strategic capacity. And underneath this, we need kind of tactical flexibility, and that -- we have that because we use, for example, in Europe and Germany, a lot of temporary workers for, so to say, the near term scaling up and scaling down because we will have this volatility also in the future. So that our, so to say, tactical flexibility means that we have in the system. But strategically, we have adjusted exactly to what we see also in future as being the target. Also, you should know that the final assembly that is, so to say, in-house is a pretty small part. So overall, value chain components are outsourced and the preproduction lines are pretty high automated, so that doesn't require so much labor or work also, yes? So -- and that we feel pretty fine with where we are in terms of capacity and in terms of flexibility to adjust for short-term volatility.

Our next question today comes from Paul Condra of Crédit Suisse.

I just wanted to ask on the EPS guidance. It sounds like you're talking about that's mostly a function of what happens on the top line. But if the revenue does feel like it's coming in towards the low end of expectations, is there anything you can do kind of on the cost or expense side to get that EPS closer to mid or upper range? Or is it all just going to be contingent on the revenue?

No, obviously, you look at the activity and how we behaved in 2017 and got more aggressive in accelerating a lot of the actions, and we still have many opportunities on that front. And so I would just indicate that our behavior would be no different. We need to continue to go after the combination benefits, as we brought the companies together, in addition to looking at other areas that we can get more, I will say, aggressive and constructive on taking costs out, depending on where the volume is at.

Okay. And then I also wanted to ask just about the JPMorgan win, I mean, they made a big announcement of the branch overall. What are you hearing from other bank partners kind of along that vein? I mean, are you getting the sense that there's maybe more activity from other large banks that want to reinvest in branches or is that -- feel kind of like a one-off?

I think you have to look at it in a couple of ways. Number one, as you've seen the change in the overall branch footprint, the number of ATMs that are actually deployed under service contract has been quite stable and increasing over the last number of years because you still have to have the touch point with your customers, and so you still see the branches being an important aspect of that. Obviously, it's a costly component of that and is trying to drop down. But what you've seen though is all of the major institutions and retail outlets continue to invest it in various branch channels or into various, I will say, micro branch channels, as they're looking to interface with the overall consumers and enhance their consumer experience. So I would say there's not a one-size-fits-all or a one-size-fits-one, but you see significant investments across these multiple channels, and then trying to integrate all of those together with the software, with the mobile, and have, I will say, a similar looking field across that entire channel, and so that's where you see things continuing to move.

If I can squeeze in one more, and then I'll jump off. But just on the Vynamic, I mean, who you kind of view as your competitors with that product?

So first of all, Jürgen speaking again. First of all, I think with our Vynamic launch, it was a very important step, so to say, to integrate the different platforms that we have in both companies in one leading architecture. So the Vynamic launch has been received pretty good with our customers. That goes also along with the good order activity we have seen in the last quarter. The Vynamic goes far beyond, so to say, having software on the physical touch points, so that means on the machines. It is, if you want a complete suite that ensures that we have secure transactions across mobile channel, across self-service channel and also the Internet, it is pretty much designed to keep the customer engaged. That means customer experience management that our clients have on both sides on the banking and retail space. And last, but not least, to have also a core of data analytics functionality that we have and will continue to invest into, yes? So having said this, it's so to say a complete suite of software, and you can't say there is one competitor. On the software space, the market, the offering in the software space is much more fragmented than you would have seen, for example, for hardware. So by that, we would, so to say, have different competitors and different players in the different functionality areas, yes? On the -- just on the ATM space, we are leading in many, many markets. We are the #1, so to say, on our software.

We will now take a question from Justin Bergner of Gabelli & Company.

Kudos on running a good call under the new management structure. I guess I just wanted to start off by exploring if you could sort of describe how the interim management structure is working in your own word or words. It seems like there's a good division of responsibilities that's allowing smooth functioning. But it would just be great to hear a little bit about how this arrangement is working.

Yes, Justin. I would just say, first of all, Jürgen and I had a very close working relationship prior to any of the changes, and we've continued that after the change at the CEO level. So I would just indicate that we've split it, along with our day jobs in terms of what we're focused as CFO and COO around the geographic orientation that we are sitting in. Obviously, Jürgen's got a little more of the background on some of the European side, where I do on the Americas, and we've split certain things on Asia Pacific. You look at it from the banking versus retail, and Jürgen was already overseeing the retail operations. So he oriented there and I oriented towards the banking, and we were both already heavily steeped in the operational activities from various negotiations, issues with customers and working very closely with our extended leadership with our regional leadership and our line of business leadership as well. So I would say it's been -- obviously, these things -- these type of changes do impact and do have some impacts inside the company, but we've tried to make it as seamless as possible, while we're in the process of conducting our search for the new CEO.

Great. That's helpful, and then...

I can -- sorry, Jürgen speaking. I can absolutely confirm. I think together, we will drive, so to say, our strategy, going forward. Our Connected Commerce strategy, and the other falls, pretty naturally, so to say, how we divide the work. So I think we are pretty good aligned on that one, yes?

Okay. Switching gears. With respect to the free cash flow guide, I mean, if I take the $1 to $1.30 of adjusted EPS and subtract out the restructuring and integration expenses, assuming that most of those are cash, I get to a number that would probably suggest a little bit less than $50 million of free cash flow. So all those restructuring and acquisition expenses that are being added back to adjusted EPS in '18 cash, and if so, are you getting a working capital benefit in that $50 million plus free cash flow guide?

Yes. I mean, if you just look at the high-level bridge, you've got an $80 million, roughly $80 million swing to the bottom end of that $50 million versus the $30 million use. On a year-over-year basis, we said we had integration restructuring payments of roughly $140 million in 2017 and $90 million next year. So there's a $50 million swing just in cash. That's cash payments, not expense, in terms of what we've outlined there. Then you have the underlying improvements as well, and the overall adjusted EBITDA or the overall GAAP earnings as well, where that piece would pull through. And an additional working capital efficiencies that we have the opportunity to still go after and get those benefits through the company. So those would be the major pieces of the change from 2017 to 2018 on the free cash flow.

Okay. And then finally, in the waterfall chart for the EPS bridge, you have a mix volume bar, which I'm not sure you spelled out, but it looks like it's a $0.30 headwind or about $30 million pretax? What's the mix component of that? It would seem like if hardware is more negative, that would be beneficial to your mix. So where are you getting the mix headwind?

Well, you always have certain regional and customer mix that you have to contemplate as well, and so more developed market volume comes through with better overall mix versus what you have coming through in some of the more price competitive developing markets. And so just depending on that total mix of activity, that could be one component there. And obviously, if we're able to pull through more on the services and software, as you indicated, that would come through at a premium margin compared to where we would be on the system. So just quantifying those big pieces that we have in the overall range there, and understanding that you have to factor in the installation pull-through as well that you get on the hardware. And you start missing on some of the hardware volumes in the developed markets, and you're going to bleed a little bit more on the underutilization and your service organization. So that's what we were factoring in with that range that we provided there.

(Operator Instructions) Our next question today comes from Rob Wildhack of Autonomous Research.

Hi, Chris. Hi Jürgen, can you expand on the software margins a bit? I know you said license did well, and that seems like you should be higher margin. So what's driving the year-over-year decline this quarter? And then how do you think about the gross margins and software into next year and beyond?

Yes, the -- Jürgen speaking. So overall, what we have seen in the order book is quite a good order activity on the license part of the business. But you know in our industry, we have to implement the IP, so to say, and that is called professional service. And this professional service is in terms of margin, definitely below what you would book, so to say, for license or software as a service margin, yes? So from that point of view, the margin that we have seen overall in the software business is pretty much a function of the mix, and so mix also into fourth quarter, we have seen a higher portions of professional service that more or less describes why we have seen that margin point, yes?

And then has there been any noticeable uptick in activity with U.S. regional banks?

We saw decent activity, actually, in Q4. That was up from what we've seen over the last, probably, I don't know, 12 quarters, but one quarter does not make a trend. And so there is the expectation of just the age of the overall fleet, what our market position is across that fleet and then the Windows 10 tailwind that should be driving additional activity there. But we sought to see how the next couple of quarters play out to see if that trend is going to continue to, I will say, get better.

Our next question comes from Justin Bergner of Gabelli & Company.

One quick follow-up here. Should we assume that new mid-term targets will have to await sort of the CEO appointment? Or should we expect something, some update before that?

Any additional updates, are not going to be forthcoming here in the near term. We're committed to executing on our DN2020 program. As Jürgen indicated, our strategic pathways that we're pursuing, we're going to continue to head down those paths very aggressively, get the cost out and any additional updates on mid-term, longer term numbers will come at a later time.

We will now take a question from Matt Summerville of D.A. Davidson.

Just a follow up, Chris. I think it was towards the end of your prepared remarks. You mentioned that you're having some supply chain issues as a result of some of these manufacturing transitions. Can you get into a little bit more granular detail in terms of what exactly you're encountering? And where, and perhaps how much of a revenue and profit headwind that issue, in and of itself, is contributing to sort of the first quarter "guidance you issued a few moments ago."

Yes. I'll let Jürgen give the details on the manufacturing side. Just to hit the last part of what you said. We're looking at Q1 impact roughly around $15 million from a revenue standpoint with, I would say, a little bit higher than our average gross margins tied to that, so you can do the math on that component, but I'll let Jürgen speak to the -- some of the issues on the manufacturing side.

Yes, Matt. As we have talked you through, we have moved a lot in our supply chain, yes? So we have reduced capacity. We have closed a factory in Hungary. We have to relocate a lot of stuff and so on. So there's a lot of movements with a lot of people movements, process movements, systems -- new systems installations and so on. And in that, at the same time, we see a kind of shortage in the market on some electronic components. And here, we see from today's perspective a minor risk for Q1 that Chris just gave you a kind of assessment on the quantification. This will not go away. This probably shift will from Q1 in a later quarter, yes? So that's a story behind, so we have done a lot of work on the supply chain, a lot of good work. If you see also the robustness of our gross margin in the systems line of business, after this down tick on the volume side, you see that, that was quite effective. So from that point of view, I think this is a story around it, but again, we see only a minor dip from that point into one.

And then just as a follow up, Chris. Heading into 2017, I think you guys originally guided to about $40 million of realized cost savings. You ended up pulling forward delivering, it sounds like, a little over $100 million. You've sort of set a guidepost towards $50 million incremental realized in '18. Is there a magnitude of pull forward opportunity that you can layer in on top of that? And if so, is it as substantial as what you were able to do in '17?

Well, as you pick up speed on these activities, the further you get into the program, the tougher it gets, and so we went after every opportunity we could. And frankly, the financial performance of the company allowed us to go at some things with a little more urgency and aggressiveness than we could have otherwise, and so we're not going to sit idle. We've established the baseline of $50 million for 2018. We're going to work on delivering that component first. And if we have the opportunity to be north of that, rest assured that we'll be doing everything we can to do that.

(Operator Instructions) There are currently no questions in the queue.

Okay, very good. I'd like to thank everybody for joining us for our year-end 2017 earnings call. And reminder that if you have follow-up questions, please give a call to Investor Relations. Thanks very much.

That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.