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Diebold Incorporated (NYSE:DBD)

Q1 2009 Earnings Call

May 5, 2009 10:00 am ET

Executives

John Kristoff - VP and Chief Communications Officer

Tom Swidarski - President and CEO

Leslie Pierce - Corporate Controller and Interim CFO

Analysts

Matt Summerville - KeyBanc Capital Markets

Kartik Mehta - Midwest Research

Gil Luria - Wedbush

Reik Read - Robert W. Baird

Operator

Good day, everyone, welcome to Diebold Incorporated First Quarter Financial Results Conference Call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the Vice President and Chief Communications Officer, Mr. John Kristoff. Please go ahead, sir.

John Kristoff

Thank you, Patrick. Good morning and thank you for joining us for Diebold's first-quarter conference call. Joining me today are Tom Swidarski, President and Chief Executive Officer, and Leslie Pierce, our Corporate Controller and Interim Chief Financial Officer. Just a few notes before we get started.

In addition to the earnings release, we've provided a supplementary presentation on the investor page of our website. Tom and Leslie will be walking through this presentation as part of their comments today.

And we encourage you to follow along. We've included non-GAAP financial measures throughout our presentation this morning. Specifically, I would refer you to slides 25 to 31, which provide our rationale for the use of non-GAAP measures, as well GAAP to non-GAAP reconciliations.

A replay of this conference call will be available later today from our website. And as a reminder, some of the comments today maybe considered forward-looking statement. Internal and/or external factors could significantly impact actual results, and as a precaution, we refer you to the more detailed risk factors that have previously been filed with the SEC. Now, with that opening remarks, I'll turn it over to Tom.

Tom Swidarski

Thanks, John. Good morning, everyone. While we turned into solid first-quarter performance, I'm sure you saw in our release that we've lowered our expectations for the full year, due to the difficult global economic environment. This has had a disproportionate effect on Diebold's core markets. I'll walk you through the changes we are seeing in our customer base and provide full details behind our assumptions in a few minutes.

But before we review those details, let me spend a few moments on our first-quarter results. I'm pleased with the first-quarter performance, which exceeded our expectations. We continue to improve our operating margins in the service business, despite slightly lower revenue, and a difficult business environment. In addition, we experienced stronger than expected performance in our Asia-Pacific business unit. Also our net cash from operations increased 5% during the quarter despite a year-over-year decrease in revenue. This has resulted in a another solid free cash flow quarter.

Finally, we've strengthened our balance sheet and increased our dividend for the 56th consecutive year. As the quarter progressed however, the earlier weakness in orders that we had experienced in Russia, Eastern Europe, and the regional bank segment of the United States, became much more pronounced. Market demand, however, remained solid in Asia-Pacific, Latin America, and the US large bank segment. This presents a unique challenge for Diebold, because the weakness is occurring in some of our most profitable markets.

The large banks in the United States continue their brisk pace in deploying deposit automation. We are proud to be the only company to have deployed our deposit automation technology in all 50 states. Our strong relationship with the national accounts and a longer term nature of their implementation plans provide us good visibility to this segment.

Through the remainder of the year, we see large banks continuing to spend, and this deployment experience will enable us to leverage this learning into the regional bank space as they progress in the coming years. I'm also very pleased with the enhanced product portfolio and technological capabilities in this area. Along these lines, the plan launched of our enhanced note acceptor this summer remains on schedule. The design of this product is less complex and more reliable than our current offering, which is sourced from a German supplier. Based on the results of our pilots with this product, we are highly confident in this new cash acceptance technology, and it will outperform competitive offerings.

The improvement and reliability and lower production cost will also help us improve our margins. This positions us well, as deposit automation demand continues to grow globally. This successful deployment effort underlines the importance of investing in new solutions that create sustainable competitive advantage. These development investments remain critical, even as we streamline our business and aggressively attack our cost structure.

As I mentioned earlier, however, the demand in the US regional bank segment weakened significantly. I believe there are several catalysts driving this weakness. First, the deployment of capital remains extremely conservative in this space. Even some of the most well capitalized regional and community banks are concerned about the uncertain outlook.

As a result, they remain reluctant to make significant investments in their infrastructure at this point. Secondly, as the housing expansion over the past three years halted, so did the pipeline for new branch openings. From December, 2007, to April, 2009, the number of active proposed new bank and credit union branches filed with the government dropped by more than 50%.

In addition, in the first quarter of 2009, about 600 new branches were opened, compared to nearly 900 in 2008 and nearly 1,000 in 2007. Finally, many of our regional bank customers are very concerned about the proposed special assessment of 20 basis points on their deposits insured by the FDIC. This increase could have a sustainable effect on bank profitability in this segment, especially those with large deposit bases. This proposal became public on February 27, well after most of our customers operating a capital plans were locked down for the year.

As a result, they will have no choice but divert other planned spending to cover these increased costs if this proposal is implemented. This has created further uncertainty in the marketplace until a resolution is reached, which is expected to occur in June. Similar measures are also being entertained by the National Credit Union Association, which is adversely impacting spending decisions by the credit unions.

While this environment of uncertainty has adversely affected our outlook for 2009, we believe it could open the door to other opportunities in the future. Our integrated services business offers our customers the ability to outsource their entire ATM network operation to Diebold. This enables them to deploy the latest technologies while conserving capital and lowering their operating expenses.

Two objectives they are taking on critical importance in the current environment. While there is no question that integrated services is a compelling business model, we also recognize it has much longer sales cycle than our traditional offerings. It's still a relatively small part of our business today, but there is a lot of intrinsic value in this business. It's a sticky business in terms of creating a longer term, higher value relationship with our customers.

And Diebold has uniquely positioned itself in the space, as part of a broader strategy to invest and focus on expanding our reach within the core segment, the financial industry. We're the only partner that can provide the full range of solutions with a footprint necessary to consistently perform in this space. This provides us with a sharp competitive advantage in the industry, which will take on increased importance as conditions improve.

In Latin America, we had solid order growth during the quarter driven by Brazil, where we have a lead position in the marketplace and continue to build on the momentum of the major orders we received last year. So looking at the Americas as a whole, our strong service operation remains critical to our success, and will continue to leverage this capability moving forward. We believe our financial customers recognize the value and working with a company whose expertise and resources remain solely focused on their industry.

Turning now to EMEA; as I mentioned earlier we are seeing severe economic weakness in Russia and Eastern Europe. The sustained drop in oil prices has significantly impacted the Russian economy. These poor economic conditions combined with a tighter credit environment have had a dramatically negative impact on our sales in the region. This dramatic falloff in the first quarter orders in Russia and Eastern Europe was unforeseen, but is now factored into our new guidance range.

In Western Europe, we're also seeing some softening in demand, but not nearly at the level of impact that we've experienced in Eastern Europe. We have captured significant business in France and Italy, though we have a long way to go to become more significant player in Western Europe. But I am pleased with the progress and growth of our recurring services businesses. Our strategy is to continue growing this piece of the business, as well as containing costs throughout the region.

In Asia-Pacific, our first-quarter performance was stronger than expected, led by China. First-quarter revenue in the region was very solid. Although it dropped 9% in the quarter, this comes against a very difficult comparison to the first quarter of last year, when revenue grew 74%. This was result of the banks in China aggressively deploying ATM in advance of the Beijing Olympics.

Overall demand remains strong with Asia-Pacific orders up more than 30% during the first quarter. This performance was driven by China, Thailand, and Indonesia. Conversely, we're seeing deterioration in the Australian market, which has also been affected by the global economic recession. Australia accounted for approximately half of the drop in revenue in Asia-Pacific during the first quarter.

Now looking at our security business; revenue during the first quarter was off about 13% from last year. Reduced construction and delayed facility renovations affected us during the first quarter, and are expected to continue in this space. As I sited previously, the number of active proposed new banks and credit unions branches filed with the government dropped by more than 50% since December, 2007.

In addition, capital spend in the US regional bank space is tight, and our security business generates much of its revenue from this segment. Earlier in the quarter, I named Brad Stevenson to take over the leadership role for the security division. Since joining Diebold more than 35 years ago, Brad has held many field and headquarters posts of increasing responsibility within our self-service operations, software, and electronic and physical security groups.

Under his leadership, we have an opportunity to drive operational improvements in the security business in the Americas, particularly within the United States. We need to better integrate and align all our resources both in the security division and in the sales and service channels. Brad and his team are working to identify ways to improve our processes and focus on high-potential opportunities. Our strategy in the security business, however, remains the same to create high-value services that mesh well with our core expertise.

For example, we're developing enterprise risk management solutions to help our customers with everyday challenges and regulatory requirements. We are also in the early phases of introducing energy management solutions that can control and monitor heating, ventilation, air-conditioning, and lighting for our bank branch customers. This is another value-added service that could help relieve our customers of the every day challenges they face in managing their facilities, while also reducing their costs and increasing environmental efficiency.

As we already announced, we won a major contract with the U.S. Postal Service late last year. The system design is now complete, and we have begun installing this innovative IP video security solution system into the first United States Postal Service branches. This project helped establish Diebold as a credible player in the government space, which will be important as we pursue other large opportunities.

With our broad solutions portfolio, our goal is to further diversify and penetrate key markets such as government and commercial. Taking into consideration the overall effect of all the factors impacting our global businesses, we believe it is prudent at this time to reduce our revenue and earnings outlook for the full year. We are advising our 2009 EPS guidance down to $1.70 to $2.

We have clearly been successful in reducing our cost structure over the past three years. In the face of this changing environment, however, we are accelerating our ongoing cost reduction initiatives. We are also implementing other cost-saving actions in the near term. These additional actions include implementing further headcount reductions through hiring restrictions, attrition, and job elimination, representing an overall reduction of approximately 300 full-time positions.

We've also made further cuts in travel and other administrative and operating expenses. As you can see on the cost reduction chart, we are maintaining the cost reduction targets, we have established earlier this year despite a significant drop in production volume. As you can imagine, a portion of our previously anticipated cost savings were dependent upon higher production levels than we now expect. However, through a combination of identifying additional cost saving opportunities and reducing our variable production costs, we believe we can achieve our original cost elimination targets.

In summary, while the near-term environment has presented with us significant challenges, it remains highly uncertain. We believe the strategies we've established are the right ones for this environment. They are, growing our integrated services business, enhancing and delivering our deposit automation solution sets, building upon our competency and software by establishing Agilis Power as a multichannel platform of choice, and continuing to focus on expanding our presence in a government and commercial security spaces.

We are confident in our ability to execute on these strategies. We will continue to invest in our services capabilities around the globe as this represents the core competency of the company. We will provide the greatest value to our financial services customers through a combination of maintaining a competitive cost structure, while offering superior services. We will seek global growth while not sacrificing profitability. Finally, we will continue enhancing our strong balance sheet by working to compress the cash conversion cycle and by instilling more discipline around working capital management.

Before we switch gears on the call to discuss financials, I would like to take this opportunity to introduce Leslie Pierce, who is serving as our Interim Chief Financial Officer. Leslie's primary role is Corporate Controller. A position she's held for the past two years. Leslie has also served as Vice President of accounting, compliance, and external reporting, and has extensive experience within the company, coming up to the North American finance organization.

Most importantly, Leslie led the accounting and finance teams that successfully completed our financial restatement last September, which was a monumental task. In addition to Leslie, we have a strong and deep finance team in place. And I am confident that we will maintain efficiency within our global finance organization, as we conduct the search to fill our CFO vacancy on a permanent basis. And that search is now underway.

We have successfully managed our way through several difficult challenges over the past years. The current global economic crisis that is impacting our core financial markets merely presents us with another challenge. As we have done in the past whenever we face these challenges, we'll focus on what we can control, which is providing our customers with the most innovative and highest quality solutions and services, while maintaining an efficient cost structure.

We will continue to invest in our future success by bringing value to the marketplace, serving our customers and living our brand values in everything we do. With that, I'll now turn the call over to Leslie.

Leslie Pierce

Thanks, Tom, and good morning, everyone. Before we review the financial information, there are a couple items to note. First as we disclosed yesterday, we've reached an agreement in principle with the staff of the SEC on settlement terms. This marks an end to all the government investigations. This proposed settlement comes as a result of an incredible amount of hard work from a number of people both within and outside the organization. Our work in this area, however, is not complete, as we aggressively address our remaining material weaknesses.

We remain committed to improving our financial control systems, processes, and procedures with proper controls that drive efficiency, accuracy, and timeliness in our accounting and financial reporting. Secondly, it's important to note that we have restructuring charges, non-routine expenses, and impairment charges in our financial results. We believe that excluding these items, provides an indication of the company's baseline performance.

As a result, many of my remarks will be focused on non-GAAP financial information. For a reconciliation of our GAAP to non-GAAP financial information, please refer to slides 25 to 31 in the supplemental material provided on our website. Now let's turn to our financial results. First I'd like to refer to slide 12, which focuses on the first-quarter revenue highlights. Total revenue decreased $29 million or 4% in the first quarter, which included a net negative currency impact of 6%.

Looking at our financial self-service business on slide 13, revenue increased $5 million or 1% in the first quarter. The increase was driven by growth in the U.S national bank segment and our Brazilian operations. These gains were partially offset by lower revenue from the US regional bank segment and from EMEA, mainly in Russia and Eastern Europe. Asia-Pacific performance was lower than the first quarter, due to an exceptionally strong first quarter in China last year. First-quarter order in Asia-Pacific grew over 30% as we continue to experience strong demand in China.

Now turning to slide 14; our first quarter security revenue decreased $23 million or 13%. Security revenue continues to be adversely affected by significant weakness in the financial bank segment.

Performance in the US regional bank segment suffered due to lower bank branch activity and weaker capital spend. Also, we saw significant weakness in the Australian market, driven by deteriorating economic conditions. In the retail space, we continue to experience reduced spending by our major customers. Our government security business, however, grew on a double-digit basis compared to the prior first quarter.

Finally, Election Systems revenue was down $8.8 million or 60% in the first quarter of 2009.

Turning next to non-GAAP total gross margin, refer to slide 15. In the first quarter 2009, gross margin was 23.4%, down from 25.3% in Q1 2008. Product gross margin in Q1 2009 declined 4.4 percentage points. This decrease was the result of unfavorable mix caused by significantly lower US regional bank revenue and higher US national bank revenue. As you are aware, regional bank revenue is more profitable than national bank revenue in the US.

Lower revenue levels, mainly in Europe, also adversely affected quarter-over-quarter absorption. The mix shift in lower overall revenue more than offset the benefit from cost-savings initiatives. Conversely, service gross margin in the first quarter 2009 improved by 0.1 percentage points. This improvement came despite lower revenue, and was driven by productivity gains which we expect will drive continued margin improvement through the balance of the year.

Moving now to non-GAAP operating expense; as highlighted on slide 16 in Q1 2009, operating expense as a percent of revenue was 18.3% compared with 19.6% in the comparable period of 2008. Of note, we were able to significantly control our spend and positively leverage operating expense as a percent of revenue, despite a 4% drop in quarter-over-quarter revenue. This reflects the continued success we are having with our disciplined approach to cost reduction and control.

Now, if you would turn to slide 17, non-GAAP operating profit margin in the first quarter 2009 was 5.1% compared to 5.6% in the first quarter 2008. This decrease was due to the decline in gross margins as noted earlier, partially offset by the positive leveraging of operating expenses.

Turning to the EPS reconciliation slide; non-GAAP EPS from continuing operations in the first quarter 2009 was $0.39 compared to $0.42 in the first quarter 2008. Despite EPS being slightly lower quarter-over-quarter, Q1 2009 results were stronger than we anticipated. This was the result of exceptional performance in Asia-Pacific, mainly China, where some spending decisions were made earlier than expected.

Turning next to free cash flow on slide 19; I was pleased with our first quarter performance of free cash flow, which we defined as net cash from operating activities less capital expenditures. Q1 2009 free cash flow was negatively impacted by a voluntary contribution of $12 million to our pension plan, compared with no contribution in Q1 2008. Despite this contribution, free cash flow remained relatively steady, moving from $7.4 million in Q1 2008 to $7 million in Q1 2009.

Looking at the next two slides on working capital metrics; days sales outstanding, or DSO, improved by 10 days, moving from 62 days at March 31, 2008, to 52 days at March 31, 2009. Our intense focus on receivable collections continues to pay off, as evidenced by further year-over-year improvement in Q1. We view DSO as the leading indicator of performance and are pleased that we are able to build upon the gains we have made.

Inventory turns improved from 4.1 turns at March 31, 2008 to 4.4 turns at March 31, 2009. As you are aware, we are focused on plants and warehouse consolidations, and we continue to implement a just-in-time pull process, which should help drive improvements as we move forward.

Turning next to liquidity and net debt; net debt at March 31, 2009 was $283 million, a decrease of about $63 million from March 31, 2008. Our net debt-to-capital ratio was 24% at March 31, 2009, compared to 23% at March 31, 2008.

Given the continued tightness in the credit markets and the heightened importance of liquidity, I am pleased that we are able to maintain such a strong balance sheet.

Turning to our full year outlook for 2009, as Tom mentioned in his remarks, we have seen a dramatic weakening in demand in some of our most profitable markets. Specifically, Q1 product and service orders in EMEA were down over 40%, with much of that weakness coming from our more profitable business in Russia and Eastern Europe.

In addition, Q1 order entry in the US regional bank segment decreased more than we anticipated. We are facing a difficult market environment, which we expect will continue to disproportionately affect customer spending in our more profitable business segments. As a consequence, we now expect full-year revenue to decline 6% to 13% with currency headwinds of about 5%. Our expectation is that financial self-service revenue will decline 2% to 8%, while we expect security revenues to decline in the range of 3% to 14%.

Finally, we expect elections systems revenue of $40 million to $50 million with no anticipated elections revenue from Brazil. And lottery systems revenue of $5 million to $10 million. We now expect our full-year 2009 GAAP EPS to be in the range of $1.33 to $1.60. Excluding restructuring and non-routine expenses and income, non-GAAP EPS is expected to be in the range of $1.70 to $2. When we previously provided guidance, we highlighted several moving parts and assumptions as indicated on slide 24.

I'd like to spend a few moments discussing the more significant changes in these assumptions. First, looking at our cost savings initiatives, you will note that we have lowered the expected range of savings. While we still believe that $35 million in savings is achievable this year, as Tom said, some of our savings are volume sensitive. We have taken actions to add and accelerate cost reduction efforts. However, it may not be sufficient enough to completely offset the impact of the reduced volume.

The lower end of our revised guidance takes this into consideration. Second, the negative impact from revenue mix shift is now expected to be worse. This is driven by the drop in demand in our more profitable business segments and lower overall revenue volume. Finally, guidance in the other category has also been reduced. This is primarily caused by significantly lower revenue expectations in two of our marginally profitable business segments, Premier Elections and Australia, which has put them below their profit, break-even point in 2009.

In conclusion, during this challenging period, we are working to control our costs, gain efficiency, and maintain our strong balance sheet and cash flow. We also recognize the opportunity we have to sharpen our competitive advantage and put the company in a position to succeed when market conditions improve. This highlights the importance of investing in areas that are key to the company's strategic focus, such as deposit automation and integrated services as Tom touched upon during his comments. Now I'll turn the call back to John.

John Kristoff

Thanks, Leslie. Patrick, we'll open it up for questions now and take our first question.

Question-and-Answer Session

Operator

(Operator Instructions). We will take our first question from Matt Summerville with KeyBanc.

Matt Summerville - KeyBanc Capital Markets

Morning a couple of questions. Tom, in your prepared remarks, I believe you gave a figure for new branch applications or some sort of construction figure. Do you have what that full-year number was in '07-'08 and what it's projected to be in '09?

Tom Swidarski

Yes. There's a couple different things we look in that regard, Matt, all from various government sources. Probably the biggest indicator from an annual basis would be, we went back over the last seven to eight years and on a typical year, you would see applications for new bank branch and credit union branches in the neighborhood of obviously 3,500 and 4,000. What we've seen this year in terms of the applications that are out there, that number is closer to 1,500 to 2,000.

So, no matter how you sliced it, it was about 50% off from an application, and then we had some indications as the actual number of facilities opened in the first quarter compared to the past. And that was well off like 35% to 40% as well. Somewhere in that neighborhood I think is kind of the indicators we're looking at.

Matt Summerville - KeyBanc Capital Markets

Okay. Then you, I'm just curious, in the $1.70 to $2 guidance, last quarter you had mentioned the old range, $2.10 to $2.40 contemplated regional's being down as much as 30%. What is the underlying assumption for the small bank market in the US now versus your prior assumptions? And then if you can walk through a some similar numbers for Eastern Europe and Russia as far as what your assumptions are?

Tom Swidarski

Okay. Let me start with the US first. In essence, when we came into the year and were providing guidance, we were looking at the low end of the range as you've indicated. We said somewhere north of the 25%, I don't know if it's quite 30% or not. But right now what we're indicating in the bottom end of that range is approximately 40%. Pretty close to 40%. Based on what we've seen so far. As far as, and again, that's the regional bank space, which includes the credit unions and everything else. Obviously we have a different experience with the US -- with the major banks.

As far as Russia, for instance, what we've done with Russia in there is really taken Russia off the table for the remainder of the year. Basically, looking at that to say that based on we just had a conference call with our leaders from Russia over this past weekend, they were there for a week looking at the environment and talked to a number of banks. And in essence we've backed everything out that we had for Russia for the remainder of the year. So in essence, we've taken Russia, Eastern Europe risk off the table in the $1.70, the way I'd look at it.

Matt Summerville - KeyBanc Capital Markets

Okay. Just a comment on gross margins. I guess can you sort of walk through and quantify, you really provided in earnings walk-through by line item on, I think it was page 24 or something like that. I was curious if we could think about the additional negative mix shift, how much of an impact will that have on gross margins relative to what would have been embedded in the prior guidance? I'm trying to get a feel for what the incremental mix headwind is in terms of gross margin is my question.

Tom Swidarski

Yes. I'm not sure I have that at my fingertips. Leslie, do you have that?

Leslie Pierce

No. We didn't.

Tom Swidarski

I guess my suggestion would be there was that I'll get back to you on that, but, yes, I think it's probably best that I get back to you on that. But in essence, the details behind that, I don't have quite at my fingertips, but I think what we were looking at previously was something in the range of before around 27.5%, 28%. I think now 24% to 25%. But I have to get you more specific ones.

And that really would be, on the product side of the equation. The service side of the equation, the thought is we are going to continue to improve that margin. We've done a lot of things relative to that and we're looking to see an improvement in the subsequent quarters, maybe up a percent or so.

Matt Summerville - KeyBanc Capital Markets

Okay. That's helpful. Then one last question, I'll get back in queue.

Tom Swidarski

Yes.

Matt Summerville - KeyBanc Capital Markets

I was curious as to how much free cash flow you think Diebold will generate in 2009, and what the anticipated? It said in the slides that you provided that the $12 million was a voluntary contribution. I guess so as we think about '09 free cash flow, will there be any additional voluntary contributions this year? And then again, how much free cash you think Diebold will generate in '09?

Leslie Pierce

Regarding the pension contribution at this point in time, there is not a planned additional contribution. However, contingent upon market performance of the pension asset may dictate something different later in the year. As far as our overall free cash flow guidance, we haven't historically given free cash flow guidance for the full year.

Tom Swidarski

But we mentioned last time, north of $100 million. And I think we're comfortable with that still, Matt.

Matt Summerville - KeyBanc Capital Markets

Okay. Perfect. Thanks.

Operator

We'll take our next question from Kartik Mehta with Midwest Research.

Kartik Mehta - Midwest Research

I wanted to follow up on the free cash flow and maybe your thoughts on how you used it going into 2010. Is it your intention just to continue to improve the balance sheet and then take a wait-and-see attitude how to use it? Or are there other plans on how you might use that money?

Tom Swidarski

Yes. I think you got it spot on. As you've seen with the dividend, we continue to be confident in terms of providing that. There may be some small acquisitions here and there that we look at from a technology standpoint that make sense. But right now, it's going to be steady state relative to where we're at strengthening the balance sheet. And as we move forward and see what the economic climate looks like and as we come into 2010, we may have a different attitude relative to share repurchase, but I'd say right now kind of current course of speed.

Kartik Mehta - Midwest Research

Tom, what were your expectations for operating margins in 2009? I'm sure I realize there will be a range, but I'm trying to get a sense of what you think operating margins might do in 2009, considering new expense reduction and some of the mix shift in revenue.

Tom Swidarski

Yes. I think, Kartik, that I won't be able to provide you anything relative to the operating margins, but, I think, if you go back to the conversation maybe that we were having regarding Matt's question, in terms of the impact on product gross margin and what we think we're doing on service gross margin, you'll get a good sense of kind of our confidence that our service recurring revenue business model makes sense that we can prove those margins.

We think we can walk that up throughout the course of the year. We think the product gross margins are certainly going to be hampered this year because of what's happening in the regional bank space in Russia, two very important markets in that regard for us. As we've indicated, we're going to continue to be diligent relative to costs and pulling costs out, but I think that gives you a flavor for kind of the focus.

Kartik Mehta - Midwest Research

And last question, Tom. I just want to get your thoughts on maybe expectations for what's going to happen with branches. Obviously, a lot fewer this year than last year. I'm just wondering your thoughts about as we move forward, when do you think we might see an improvement or increase in branches at least in the US?

Tom Swidarski

Yes. I think Kartik, the way we've looked at it, and again we're analyzing this data fresh as it comes off, but we basically see that we've hit the bottom here relative to kind of all indicators in that regional bank space. Now, the issue we have is in terms of as things begin to turn, most of that revenue isn't visible until 2010 with revenue recognition because most of the orders you start taking toward the latter part of the second year into the third quarter become 2010 revenue.

And I think the big indicators to me, I mentioned it during my prepared remarks, but the issue of uncertainty, a lot of it is created by the FDIC insurance premium that's hanging out there. I was surprised at the intensity with which many of the regional banks and the credit unions, have looked at that, and someone have told me that it could be as much as impacted from somewhere between 25% and 40% of their, income for the year that they'd have to divert relative to the special assessment.

And that has really hampered their abilities to move forward in that they do not know what the actual numbers are. And there's a lot of debate going on in terms where it's going to settle out. And I think in the June timeframe, we're going to get a lot more visibility there. I think the other thing you see is the results from the stress tests and the consolidation that's going on.

You've got that trepidation that's still in the marketplace, but again, we will start getting that uncertainty behind us here in the next month or so. And, back to the initial kind of question you had in terms of the branch builds and the branch kind of environment, again, our indications are that it bottoms out here in the second quarter, and, not that we're going to ever revert back to maybe some of those higher levels, but the reinvigoration or reinvestment in terms of bank branch facilities, even if they're renovating an existing facility, starts to gain a little momentum. And we're putting some, programs in place that we think could help that in the second half of this year.

Kartik Mehta - Midwest Research

All right. Thanks a lot, Tom. Appreciate it.

Tom Swidarski

You're welcome.

Operator

We'll take our next question from Gil Luria with Wedbush.

Gil Luria - Wedbush

Thank you. Tom to follow up on some of those last points and SBIC assessment, you are saying that in June we'll get clarity about that. But in terms of what your customers are expecting right now, are they expecting a 20 basis point assessment? Are they expecting it to be one time, or are they maybe afraid that it will be bigger than that or it will happen more in the future? Where are the expectations right now, so we know when June comes around if that's a kind of a positive development or a negative development?

Tom Swidarski

Yes. I think, the vast majority is thinking it's going to settle in about 20 basis points. So part of it is, it in fact being 20 basis point and then being able to get on with their lives versus something else. The other piece that's hanging out there Gil that we've had discussions around is there's also some language talking about a second one-time assessment that could be an additional 10 basis points.

But again we should be getting something clarity on in the June timeframe. So I think part of it is the amount is less important than the certainty of what it is, and how it's going to be assessed. And you've got the same issue with credit unions where, you've had conversations of spreading it out over a number of years to a one-time hit kind of in the get-go. So the uncertainty is what really is causing the vast, I think, the vast pullback relative to orders.

Gil Luria - Wedbush

And then in terms of Asia, it sounds like China almost carried your entire quarter this quarter. But your guidance implies that that's almost going to go away or going to contribute a lot less throughout the rest of the year. Why do you come up with that assessment?

Tom Swidarski

Yes. Well, a couple things. First of all, China is a very big contributor. And we've got a big presence there. But we had several significant things that pulled forward on us. So that was a surprise to both us and our team in terms of the speed with which, we installed and moved forward in China. There was expectations in terms of rollouts that we had built into our plans through the course of the year that really impacted us in the first quarter.

I mentioned that there are three areas in Asia that we're seeing, significant strength in terms of the orders. China was certainly was one, but also Thailand, as well as Indonesia and India has been relatively remained fairly solid for us. Australia continues to be a challenge, currently is a challenge. We took down revenue and profits associated with Australia, which really dampens kind of the Asia-Pacific overall performance, but, as far as if there are other opportunities that present themselves throughout the course of the year, I think in terms of the four big countries outside of Australia, I think we're well positioned and have good teams in place to take advantage of it. Australia has been a lingering issue, and it's become a significant problem for us in the first quarter this year. So that's reflected in our guidance going forward.

Gil Luria - Wedbush

And then just to clarify, Russia and Eastern Europe for the rest of the year, do you have those set at zero or at Q1 levels?

Tom Swidarski

We basically have taken them off the table. So zero. While we have a few in order there in essence, I'd say it's about zero for your purposes.

Gil Luria - Wedbush

The last question I think, Tom, I heard you say, used the words 'Hit bottom'. And I think you're specifically referring to the regional banks. But if you take a broader point of view and some of the weaker regions, obviously Russia can't go any lower than zero. But in terms of the global market, do you feel that you're getting a similar sense?

Tom Swidarski

Yes, if I could mention that relative to each of the regions yes, my comments they were specific to the regional bank market. And the reason I said 'Bottomed out,' we had a week-long conference here in Canton with all of our field leadership. So, we had maybe 35 field leaders in from the United States representing the team that calls on the biggest banks in the United States to the smallest banks in the United States. And each of the regions represents various states.

So we went state by state through each of the markets for the regional bank, both on the security and the self-service side. The amazing part was there are regions that are doing exceedingly well. Then you have regions like Florida and Ohio and Detroit, I'm sorry and Michigan, California, parts of that that are really just off, 60%, 70%, 80%. And when we look at the economic environment that we're in, basically they've scrubbed that. We've looked at it and the team overall felt good about the dialogue that we're having in these markets. It's just the dialogue, start moving into bigger kind of issues like integrated services.

So from my standpoint, we got some indications as recent as Friday and Monday relative to orders here in the April time frame. While April I wouldn't call robust here relative to this market, I would say that it was modest improvement which I think was a sign we were looking for. It was reflective of the kind of conversations we were having with our team. So while we were getting anecdotal evidence, in fact the order book looked a little bit better than we had the first three months of the year which, again, gave us confidence that we've really hit the bottom in that regard.

And again, we're staying on top of that. We've got specific plans and activities in place, but we were able to very much dissect by state and by region within the state kind of where the issues were and feel very good that, we've got a clear understanding of it. And the 40% at the lower end reflects, what we think is possible. By the same token, if things turn a little quicker, I think we're going to be well positioned. And also we've very much focus a lot on the longer sales cycle things like integrated services and outsourcing and energy management solutions, and those don't turn as quickly. But I feel good about the activity and felt good about what we saw in April.

Gil Luria - Wedbush

Got it. Thank you very much.

Tom Swidarski

Welcome.

Operator

We'll take our next question from Reik Read with Robert Baird.

Reik Read - Robert W. Baird

Good morning. Tom, just back on the services side of things; it seems like you also expected that will moderate a little bit. The declines won't be as significant as they will on the product side. Can you talk a little bit about, how much of that is due to stickiness of today's offerings? And then also as you can add new offerings, how much offset do you get out of that?

Tom Swidarski

Yes. Right. Let me talk about kind of service and services collectively together. I'm thinking over the course of this year, we're going to see increased revenue in that space and increased margins in this space in terms of where we're at with service and services. What we're seeing is the delay in terms of timing has to do with the initial decision maybe to move the outsourcing or integrated services of the longer-term contracts. Those become lengthier kind of conversations. So, for instance, in the first quarter, we've had good activity and a big pipeline there.

But in terms of those turning into orders, that's taking some time and I think that's because of the hesitancy in the market. But I'm very happy with the level of conversations we're having about it. Likewise, we had a couple significant ones where we actually had an order and in one case it was canceled as a result of an acquisition or someone acquiring the guy that had the contract. That was a significant order that we had worked on for, 12, 13 months, but we have seen a lot of delays. We've seen things pushed to the right.

So, in that regard, I'm very confident in terms of our ability to deliver and what we're able to do both on the service side as well as the services and that's not just in the US, that's really around the world.

Reik Read - Robert W. Baird

And would you expect Tom that that gross margin for the full year would be in that 24%, 25% range?

Tom Swidarski

Yes. I think that's kind of where we're envisioning it.

Reik Read - Robert W. Baird

Okay. And then just a question on the operating expenses; if I back out the one-time items in the quarter, you get roughly $121 million. Is this given where you are with all of your cost initiatives? Is this kind of a good base level and we should be making volume adjustments off of that? Or are there some elements within that that simply aren't sustainable and we should think about those in the next couple of quarters?

Leslie Pierce

I would stay's it's the latter. What we experienced in the first quarter were some unique cost reduction initiatives that won't repeat in each of the subsequent quarters throughout '09. We'll continue with cost-cutting initiatives in other areas. However, with the reduction in revenue volume percentage-wise, it will be difficult to maintain what we saw in the first quarter.

Tom Swidarski

Yes, the other thing Reik that I would comment on the other side of the equation is, we think that we're continuing to improve our service and services margins because we'll continue to invest. So productivity and tools require investment. We are continuing to build out those capabilities on a global scale to allow us to improve margins, because I've mentioned in the past I was not satisfied with our service margins in Europe. We're increasing those, but it takes investment to get there.

The other thing is I mentioned in my remarks that, this enhanced note acceptor which was a cash acceptance technology which I've said all along has been a big detriment to us in terms of the amount of service calls we have to make on this technology that we buy from a German source supplier. Well, we're rolling out our own here in the June timeframe. So, we are going to continue to invest heavily in that as we get that rolled out and make modifications necessary to achieve the kind of performance that really will help us on the service side, as well.

So we're looking for that to not only be able to bring a more reliable, capable product that's easier to service at a better cost point to the market, and, as such we're continuing to invest there. So to Leslie's point, part of it was there were one-time thing. Part of it is we're going continue to invest along these lines to yield the kind of results on the long-term basis that I think are important.

Reik Read - Robert W. Baird

And Tom, I take it from what you're saying is maybe those investments were little understated in the first quarter and become a little bit greater in the second, third, fourth.

Tom Swidarski

Yes. I think that's correct.

Reik Read - Robert W. Baird

Okay. And then just one follow-up on Asia-Pacific.

Tom Swidarski

Yes?

Reik Read - Robert W. Baird

You talked about, China and Australia, Australia moderating, China having some orders pulled ahead. With respect to orders, you've got up 30%. So, is that simply a timing thing where those order that you're seeing to date don't really occur until fourth quarter or first quarter of next year? And, therefore, the next couple of quarters wind up being a little bit weaker?

Tom Swidarski

Reik, I'm not sure if I follow it completely. But in essence the 30% up really is the result of orders we are expecting in subsequent quarters that actually were pulled forward. So, in essence, we had very strong orders led by China, but they were, in fact, pulled forward. I think for the full year, though, we're still going to show nice order growth, up maybe, in the neighborhood of 5% to 10% for the full year. A lot of it happened to be pulled forward in the first quarter.

So, I feel very good about where we're at, where we're positioned, and the fact that we took them off the table, it was a good thing. Australia, if I might clarify a little on Australia. Australia, while we normally are at some kind of break-even point in Australia, we are really seeing deterioration in the Australian market. For us, Australia is a combination of self-service and security. We have a security operation down there that's actually bigger than our self-service operation. So, when I talk about Australia, the security impact has been really negative for us in the Australian market. And we may be down year-over-year in the neighborhood of 30% to 40%.

Reik Read - Robert W. Baird

Great. Thank you.

Operator

We'll have a follow-up question from Matt Summerville with KeyBanc.

Matt Summerville - KeyBanc Capital Markets

Just a quick question. Tom, can you just spend a couple seconds talking about the dynamic that's impacting the election systems business. And I would assume it $40 million to $50 million in revenue that that Premier Election will not make money this year.

Tom Swidarski

Okay. Yes. I think probably the biggest change that occurred in our forecast as we're thinking through the year was, Maryland I think was in the fourth quarter, and what we were thinking was going to be a sizable delivery there that we now think for all practical purpose is going to be pushed into 2010.

So, from the election system business, since they're impacted by these states that move big volumes at one time, the fact that we're getting visibility to that being pushed back, because of what the state wants you from an investment standpoint has a material impact in that regard. Other than that, it's pretty much I think status quo there.

Matt Summerville - KeyBanc Capital Markets

Any new thoughts as far as your long-term plans for that business?

Tom Swidarski

Yes. I think our existing thoughts remain the same. We are obviously, have a desired outcome there. We haven't been able to achieve that. But that's not deterring us from spending energy and trying to get there. So we definitely have not changed opinions in that regard.

Matt Summerville - KeyBanc Capital Markets

That's all I have. Thanks, Tom.

Tom Swidarski

Okay. You're welcome.

Operator

And we have no additional questions at this time. I would like to turn the call back to Mr. Kristoff for any additional or closing remarks.

John Kristoff

Thank you, Patrick. And thank you, everyone, for joining us this morning. As always, if you have follow-up questions, please don't hesitate to contact me directly. Thank you again.

Operator

This concludes today's conference. We thank everyone for their participation.

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