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Diebold Inc. (NYSE:DBD)

Q1 2010 Earnings Call

April 27, 2010 10:00 am ET

Executives

John Kristoff - VP, Chief Communications Officer

Tom Swidarski - President and CEO

Brad Richardson - EVP, CEO

Analysts

Reik Read - Robert W. Baird

Matt Summerville - KeyBanc

Paul Coster - JPMorgan

Zahid Siddique - Gabelli & Company

Gil Luria - Wedbush Securities

Michael Saloio - Sidoti & Company

Kartik Mehta - Northcoast Research

Operator

Good day, everyone and welcome to the Diebold Inc. 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, Jessica. Good morning and thank you for joining us for Diebold’s first quarter conference call. Joining me today are Tom Swidarski, President and CEO; and Brad Richardson, Executive Vice President and Chief Financial Officer.

Just a few notes before we get started. In addition, to the earnings release, we have provided a supplementary presentation on the Investor page of our website. Tom and Brad will be walking through this presentation as part of their comments today, and we encourage you to follow along.

We have also included non-GAAP financial measures throughout our presentation this morning. Specifically, I refer you to slides 26 through 32, which provide GAAP to non-GAAP reconciliations as well as our rationale for the use of non-GAAP measures.

A replay of this conference call will be available later today from our website. And as a reminder, some of the comments today may be considered forward-looking statements. 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.

And now, with opening remarks, I’ll turn it over to Tom.

Tom Swidarski

Thanks, John. Good morning, everyone. As you’ve seen this morning we delivered solid operational results despite a difficult comparison for the same period last year. And which we had particularly strong earnings. In fact, we exceeded our internal expectations during the quarter as some business closed sooner than expected and we benefited from a more profitable segment mix. As a result, we’ve gained more confidence in the full year outlook we provided during our last call, and we are reaffirming our guidance for both earnings and revenues for 2010. I am particularly pleased with the continued positive gains in our service and services businesses as we have put a great deal of focus on this area.

As the products business begins to stabilize growing and improving our services business further is paramount to our overall success. Our continued investment in infrastructure for services particularly in the Asia Pacific region enabled us to improve service profitability once again during the quarter. We are on track to achieve our goal to improve service gross margin for the third consecutive year. Our competitive advantage lies in our unmatched stability to deliver a full range of service, support and software solutions that work reliably at lower cost and with the flexibility to meet diverse customer demand. That’s the driving force behind our service strategy emphasis in our core businesses and it’s the key to our future success.

Finally our net debt position improved by over a $100 million from 31, 2009. Brad will expand on this during his comments but from my perspective, we’ll continue to focus on working capital improvement throughout the year.

Now, look at our performance during the quarter and the market environment in the geographic regions. You’ll note that we are now bringing out North America and our revenue disclosure. North America remained a key market for us. And we believe this new format will provide investors with more transparency and better understanding of our overall business. Brad will discuss this in more detail during his remarks.

In North America, revenue declined 17% and order sale 9%. This expected drop occurred primarily in the national bank segment with the completion of large, deposit automation deployments but major national banks credit a very challenging comparison. From profitability standpoint, however, we benefited from a more favorable mix of business within the segment during the quarter. I’m also encouraged by the year-over-year increase in financial self-service orders, we saw at the regional bank level.

In fact, first quarter regional bank orders also improved compared with the fourth quarter 2009, and it was the highest order entry period we’ve had in the regional bank space in five quarters.

While one quarter does not constitute a trend, this is the first increase in orders we’ve seen in this space in quite sometime. We’ll continue to monitor order activity in North America but our expectations remained that total revenue will decline modestly for the full year. On the services side of the business revenue decline in the mid-single digits as a result of lower installation revenue. Services revenue outside of installation grew during the quarter as we continue to increase our focus on a value added segment of our service business. Along those lines I continue to be encouraged by customer activity and the level of interest we have been receiving in the integrated services portions of our business. I recently visited with two important regional customers in the U.S. and the information they shared with me underscore the validity of our strategic direction and integrated services and equally important our ability to execute.

Because of our track record over the years we have developed a great deal of trust within that segment of the market. As these customers we focused on our core of banking business, this confidence in our ability to take on aspects of their operations where we can drive improvements in technology, efficiency and cost. In addition, we are continually building credibility within the industry as a result of our performance in this space. Last week the international association of outsourcing professionals announced its list of the top 100 global outsourcing companies. We ranked 15 on the list, moving up from 35 on last year’s list.

There selected profits mere as much as the criteria of financial institution considers when evaluating service providers. Placement on this list is the highest rated global financial self service company is a reflection of the timing resources we have committed to this area. During the quarter we added more than $420 million in new integrated services contract to our existing base of which we had a profitably $100 million of remaining revenue at the end of Q1. While we are still working from a relatively small base, I’m very encouraged by the rate of which we are growing this business.

Looking at our security business in North America, our outlook and the market environment remained largely unchanged. The financial security market remains depressed as new brands construction continues to lag behind previous norms. Although global revenues in orders were down from the previous year, we are encouraged by some of the recent developments we are seeing in security. For example, in the enterprise security space we are working with a National Oceanic and Atmospheric Administration or NOAA to set the ground work for streamlining identity, credential and access management across that agency’s entire enterprise.

This initiative will help NOAA develop a viable solution for managing universal identities and access to settle facilities and systems. We hope that these efforts will result in best practices for addressing security credential needs across multiple agencies and help the federal government jump start its credential management initiative.

In another development, we partnered with Verizon Business’ network implementation services to provide comprehensive physical security solutions to its customers. Working with Verizon Business’ enables us to offer a managed security solution that include hardware, software and network services all under one umbrella, the both industry leading managed security solution have been backed for years by strategic alliances with hardware providers to supply best in class equipment that help secure the assets of our customers.

Integrating Verizon Business’ network into these solutions will provide even more value. Looking ahead we feel that enterprise security and other growth initiatives we have outside the financial state particularly in security monitoring, retail and commercial market will help us build growth.

Looking at Asia-Pacific, as we mentioned during our prior call, we anticipate the region returning to its historic seasonality where revenue is more back and loaded to the second half of the year. From an orders perspective we saw a significant decline against the difficult comparison to the first quarter of 2009 when orders increased in excess of 30%. In addition, orders in Asia were up more than 50% in the fourth quarter. This lumpy quarter at entry activity is typical in this region and not an indication of any particular trend. So the year-over-year drop in orders was inline with our expectations. For the full year, we still expect to grow in the region even compared with our very strong performance in 2009. Our service business in Asia experienced some healthy gains during that quarter with strong contribution from our managed services business. This contributed to the gross margin improvement during the quarter.

In India, our integrated services business is having success. As many customers in the market are beginning to see the benefits of working with us on a total outsourcing business relationship. Our total service revenue grew more than 35% during the quarter and now represents more than half of our business in India. We will continue to invest resources in this space throughout the region as Asia pacific remains one of our key growth markets.

In EMEA, we saw an increase in revenue during the quarter as we began to work through our strong order book from the fourth quarter 2009. We are having success in areas where we are well positioned such as France, South Africa and the Middle East and plan to invest its resources to capitalize on other high potential markets within a region such as Turkey.

Yesterday we announced a multi-year ATM outsourcing and deployment agreement with ZAO Citibank, one of the leading banks in Russia. Thanks to our outsourcing service, Citibank will obtain a single point of contact for the ATM related operations including both the network management efficiency and its client services. To this bank’s decision to choose us for its integrated services agreement confirmed our commitment to continue investing and our services infrastructure in the region. The rest of the region as a whole remains challenging as the overall economic environment is relatively weak.

As discussed over the previous call, we are expecting revenue growth in EMEA for the full year and I anticipate year-over-year growth to accelerate over the next couple of quarters. Yet much work remains in the EMEA for Diebold to be in position as strongly as we are in other regions of the world. In Latin America business remains strong. We completed some business sooner than expected. This drove increased orders and revenue during the period throughout the region.

We expect the market for self-service in Latin America to remain very healthy. In Brazil, we continue to strengthen our competitive position as the clear market leader in financial health service solutions. In fact, our production facility Manaus recently shipped its 100,000 ATM unit to the Brazilian market. We will continue working to maintain our leadership position in Brazil based on competencies we’ve built over the last two decades in design, engineering, software and services.

Additionally, we are on schedule to begin production very soon on the Brazil election systems order and still anticipate completing this project by the end of the third quarter. On the operational front, we are on track with our smart business 200 initiative and are delivering savings to the company. Based on the steps we’ve taken to date on the number of important operational initiatives, I am confident we will continue to execute on those elements of our business that will have a significant impact on our performance moving forward.

Importantly as I stated previously, we are reinvesting some of the savings we generating from our operational improvements and are putting them back into our business. While achieving cost savings remains important to us, we understand the critical nature of altering our competitive position and developing new services and solutions that generate top line growth.

That’s why we’ve increased our investment in R&D for service infrastructure as well as product development. An increased commitment to R&D spend will be an ongoing focus for us as we plan for future growth. We feel confident enough in the market and our ability to keep executing on our plans that we will continue to increase our investment in this area. In closing, I feel lots of good start in 2010, and I’m confident in our position in key markets especially in North America and Brazil. As well as the progress we’re making to become a stronger, better organization. As a result, we are reaffirming our outlook for 2010 in both revenue and earnings, while I’m pleased with our performance during the quarter along with some positive indicator to the market, visibility to the remainder of 2010 remain somewhat limited, thus we remained conscious on our near-term outlook. We continue to see a number of great opportunities in key areas to capitalize on our technology and services expertise.

Therefore, we will continue and work to deliver our total value proposition particularly as it relates to deposit automation, enterprise security and integrated services.

I am confident to the path we are traveling and tell the right strategy to deliver, sustain success and shareholders value for 2010 and beyond. With that, I’ll turn the call over to Brad.

Brad Richardson

Thank you very much, Tom and good morning to everyone. I am pleased with the steady progress we’ve made on a number of fronts. We did a good job of continuing to improve our working capital position and we also made solid progress on improving our gross margin during the quarter, particularly, in the service business. You’ll also note that in today’s earnings report we’ve added more disclosure around global orders and are providing additional detail related to orders and revenue in our North American business. We believe this will provide additional detailed behind one of the most important business segment. We are also now providing a more detailed breakdown of other income and expense. This is consistent with my philosophy of open disclosure and transparency.

Finally, you will see that during the quarter we repurchase 337,000 of the company shares. There are 2.6 million shares remaining on our existing board authorizations. As I mentioned during the last call, we feel our shares are in excellent value and we will continue with the measured approach to our share repurchase program.

Before we discuss our first quarter results, as with past calls it’s important to note that we have restructuring charges, non-routine income and expense in our financial. We believe that excluding these items give an indication of the company’s baseline performance. As a result, many of my remarks will focus on non-GAAP financial information or a reconciliation of our GAAP to non-GAAP numbers please refer to the supplemental material at the end of the presentation provided on our website.

In addition, all results of operations reported today including prior periods exclude discontinued operations. Now let’s turn to our financial results.

First I’d like to refer to slide 12 which focuses on first quarter revenue. Total revenue was $619 million down 6% from the first quarter of 2009 for 11% on a constant currency basis. For the quarter, product revenue dropped 14% primarily in North America for the completion of large deposit automation deployment by major national banks created a very challenging comparison.

On the other hand, service revenue increased 1% with strong performance in Asia Pacific offsetting the reduction in installation revenue as a result to lower product sales in North America.

Looking at our financial self-service business on slide 13, first quarter revenue was $472 million down 5% from the first quarter 2009. This decrease was mostly attributable to the decline in North America. In the security business on slide 14, first quarter revenue decrease $13 million or 8% from the same period in the previous year. This decrease was due primarily to continued weakness in the US financial market.

Especially in the segment of our business which relies heavily on new bank branch construction. However as Tom mentioned, we are encouraged by opportunities developing in the enterprise securities space. Looking at slide 15, total gross margin for the first quarter increased 1.8 percentage points from the first quarter of 2009. The increase was attributable to improve profitability in the company’s service operations.

Product gross margin for the quarter declined 0.1 percentage points due to a significant decrease in revenue partially offset by favorable segment mix. In service, the gross margin grew by 3.5 percentage points during the first quarter at normal cost in the prior year period created a relatively easy comparison.

In addition, margins benefited from improved productivity and favorable mix. The mix was positively impacted by higher integrated service revenues in North America and Asia Pacific. Moving now to Non-GAAP operating expense, as highlighted on slide 16 in Q1 2010 operating expense as a percent of revenue increased 2 percentage points from the comparable period of 2009.

Operating expense in the first quarter increased $5.3 million from the prior period. However, excluding the impact of currency operating expense would have declined by approximately $1 million also included in operating expense is an increase of $2.1 million currency adjusted in research and development as well as certain cost associated with the previously announced job reductions in our North America operation.

As Tom noted, we’ve increased our investment in R&D for services infrastructure as well as product development.

Now turning to slide 17, non-GAAP operating margin in the first quarter 2009 was flat compared to the first quarter of 2009. While I am pleased that we are able to maintain consistent margin on significantly lower revenue, a 6.1 percentage point operating margin falls well below our expectation and what I believe this company is capable of achieving. We will continue to be aggressive in generating global growth and managing operating cost and our efforts to reach our stated operating margin goal of 10%.

Turning to the EPS reconciliation table on slide 18, GAAP EPS from continuing operations in the first quarter of 2010 was $0.37 per share compared with $0.13 per share in the first quarter of 2009. Excluding restructuring charges and non-routine income and expense, our first quarter non-GAAP EPS was $0.34 per share compared with 46% share in the first quarter of 2009.

I would note our non-GAAP tax rate in the first quarter of 2010 was 28.6%. In the first quarter of 2009 our non GAAP tax rate was 5.5%. If you apply the 28.6% tax rate to the first quarter of 2009 results. The non-GAAP EPS would be inline to what we reported this year. For 2010, we do expect the full year tax rate to be approximately 28%.

Looking at free cash flow on slide 19, we define free cash flow as net cash from operating activities less capital expenditures. Free cash use in the first quarter of 2010 was $66.6 million compared with free cash flow of $7 million in the first quarter of 2009.

The first quarter was adversely impacted by approximately $50 million in accounts receivables that were scheduled for the first quarter but ended up being received in December of 2009. Excluding these early payments, free cash use would be inline with prior years as noted on the slide. Given the normal backend loading nature of our cash flow, I remain confident we will generate free cash flow in excess of $100 in 2010.

Looking at slide 20 and 21 on working capital metrics, our balance sheet remains strong and I am very pleased with the year-over-year working capital improvements we made during the quarter. Days sales outstanding improved four days while inventory turns improved 0.3 turns. We anticipate continued improvement in our working capital metrics particularly inventory turn as we complete our global plant realignment and warehouse consolidation efforts.

George Mayes and I are working closely together to drive additional improvement and sustainable improvements in inventory turns as we move forward. Turning next to liquidity and the net debt on slide 22, net debt at March 31, 2010 was a $178 million, a decrease of a $108.1 million from March 31, 2009. Our net debt to capital ratio was 15% at March 31, 2010 compared to 24% at March 31, 2009. Versus December 31, 2009, our net debt position increased by approximately $112.7 million.

On slide 23, we have provided a net debt bridge along with a year-over-year comparison chart. The main reasons for the net debt increase in the first quarter of 2010, relates to the early accounts receivable payments I mentioned earlier, average increase and net debt seasonality, increase in Brazil inventory relating to our voting machine production, our share repurchase program and other items.

Turning to our full year outlook on slide 24, as Tom mentioned in his remarks, we are on track and reaffirming both revenue and earnings guidance for 2010 that we established in February. In conclusion, we’ve done a good job of maintaining focus on the key initiatives and strategies that will put us in a position to deliver a 10% operating profit and 15% return on capital employed.

As shown on slide 25, we’ve provided a bridge to our operating profit goal. The key component this bridge are top line growth, additional volume against our fixed manufacturing and service cost, tight control of general and administrative expenses and continued leverage of our SB 200 cost savings initiatives I’m confident that we can achieve these goals to continued investment and discipline in these areas. In summary, my priorities remain to help drive the strategic transition of the company, supports the improvement of our operative shown performance and drive further improvements in our financial control processes and system.

I remain confident that the focus in ongoing initiatives for working capital improvement will continue to generate gains for the remainder of the year and increase our ability to invest in growth opportunities and return value to shareholders in the form of dividends and modest share repurchases.

Based on the results we have delivered to date, I feel confident that we continue to move in the right direction on all those areas. I’ll now turn it back to John.

John Kristoff

Thank you, Brad. Jessica before we take our first question, in order to enable everyone to get their questions in today. I’d ask you to please limit yourself to one question and one additional follow-up and then if you have further questions, please feel free to get back in queue and we’ll do our best to get through everyone this morning. So, with that Jessica let’s take our first question.

Question-And-Answer Session

Operator

Thank you. (Operators Instruction). We’ll go first to Reik Read with Robert W. Baird.

Reik Read - Robert W. Baird

Tom, just on your comments on North America. Could you maybe just go through the year and talk about the offsets out there to the large deposit automation programs that have rolled off and I guess if you can give us some magnitude and when these kick in and I guess I’ll think about it in terms of are there other deposit automation incremental services from these large players, are there some larger bank refreshes that may kick in at some point and then maybe a little bit more color when the regional started to kick in from your order commentary?

Tom Swidarski

Okay, let me try and breakdown a few pieces Reik because you asked a quite a few things in there. First of all is I think of it in a three large bucket that make it maybe more understandable for other one, the first would be, we’ve had three aggressive players in North America moving forward with deposit automation and obviously for us they give us very tough comp as several of those began to slowdown if not complete their rollout in the third quarter and little bit in the fourth quarter of last year.

If I get below that group and say the next group of the major players that are out there, that would be constitute the next 20 institution so now you are talking about institutions number for through 20. I would say that the level of activity has increased significantly and from that I mean most institutions last year regard to their rolling out deposit automation or not that this tier bank was experimenting in their labs. So they may have had a couple of units and were testing various suppliers.

We actively engaged in several rollouts that are beginning as well as pilot that constitute in the terms of 50 to 75 units. So that’s much more than just a couple in a lab or one or two in the cafeteria so to me that was a pretty solid movement forward. Some of those actually want to begin rolling out several hundred in a second half of the year.

Some want to begin their pilots in the second half of the year but the fact that we have moved from what I would call the lab and prototype environment and the testing and certification of software and writing all that software into second half of the year with people beginning to rollout meaningful numbers in that tier institution, I think is a positive sign. I think that third way I would comment then it’s really the remainder of the institution which is 1000s of mid-tier community banks throughout the country.

Certainly there is still a backdrop over lot of institutions that are not yet healthy. There are some institutions that are closing but we are seeing more activity from this group than we have had in the long time which was in my comments that are order interactivities specifically within that group was up significantly over fourth quarter and meaningfully over last year at the same time.

So, for us as we tap into the size and scope of our North American operation deposited automation is an important area of focus in a important areas of decisioning and we are seeing that not just in one or two regions, we are seeing that really across the United States beginning to take hold. I think its taking a hold for a couple of reasons, number one because you have the big three that has been out there another advertising on TV, if you are in those markets you’ve got to be able to compete and compare yourselves.

So, in some cases they are getting swept along to say well and I may not like the ROI but I got to get there and there are other things I can use. I think the second thing that we are seeing now is, with this tier of institution those that are below the top 100 you have different decision criteria. I think it plays much more into sweet spot of Diebold. So the decision criteria no longer is Jeez, I just have to have an expensive deposit automation device that has bulk check and bulk note. We have the capability of providing single check with bulk note.

We have a capability of providing single note with bulk check and any combination there and as you get into that we can take an institution that may not have the volume some of the bigger players into an ROI calculation that makes much more sense. We are the only ones with all four varieties that you could mix and match with as well as build upgrade any single check to a bulk check or any single note to a bulk note and I have the capability of doing rapid processing, meaning you can do both those transactions at the same time.

So not only do I believe we have the infrastructure that makes sense, I think we also have as you get into this tier a technological advantage and a cost advantage that makes a whole lot more sense for us going forward.

Again we are going to be very intelligent in terms of how we continue to compete here but I think as it moves to institutions that have different cost points and different value propositions it plays much more into our capability.

Reik Read - Robert W. Baird

And would the deposit automation with these larger players, does that suggest that there is a bigger services backlog just from that alone?

Tom Swidarski

Yes, somewhat, yes it does. It also I guess on the bigger players would mean, all institutions as they move into a technology I mean we generally request their technology every say seven years with some of the biggest players I mean they begin this rollout five years ago and so as such are coming up on certain ones, its not going to be the math of rollout that we just experienced but there will be some site that need to be moved, some sites with new software, some sites with new technology and if you recall we’ve developed new technology last year in terms of handling the notes.

That was the one area I was most uncomfortable with our capability and while in deposit automation three quarters of all the transactions are check transactions, being over handled notes important. Well that’s a Diebold developed, a Diebold deliver now capability which I think puts us in much better technological stating as well as cost point in terms of being able to work with suppliers. So as you deal with the biggest players, there is just the regular routine business that they would have to do and if they will do to keep their fully trust but it certainly won’t be of those size of magnitude that we experienced over the last four to five years.

Operator

We’ll go next to Matt Summerville with KeyBanc.

Matt Summerville - KeyBanc

A couple of things, first with regard to (inaudible) Tom, you mentioned your ATM orders were down 9% and I thought that was to begin to fairly easy comparison the prior year, recognizing those sequentially you had a pretty good order input quarter in Q4, can you just kind of circle back on that and kind of reconcile how that is supportive of and outlook for growth in the region this year?

Tom Swidarski

Sure Matt. EMEA particularly, our order growth in the fourth quarter of 2009, was significant. So what happened as you might expect with timing issues some of the fourth quarter of 2009 was originally forecasted in 2010 like I got pulled ahead. So from our standpoint, that’s nothing but good news even though from a comparative standpoint it puts us down when you look at the two quarters combined to the two previous, fourth quarter and first quarter, in an aggregate level we would be up in a pretty good position.

So we feel very good about the backlog and the opportunities we’re seeing there going forward. Having said that as I said in my comments, of all regions of the world for us, from a competitive standpoint that’s still the area we have to do the most work in and so while I’m confident in terms of our revenue generation for this year and it will be up over the last year, from an overall standpoint we still have a lot of work to do in that region.

And so we are strong in particular areas but we can’t say that we are strong across the board in EMEA, so we have got a lot work to do in various western European and Eastern European countries by the same token given where we have come, we now have a better product set, we now have a better organizational structure, we have now better service infrastructure and much like this order with the Citibank Russia.

We are finding ourselves after table and winning some meaningful opportunity to yourself. I feel good about the path we are on certainly nowhere near comfortable with the situation we have, or how much opportunity we have to grow in that region and I think you are continuously investing heavily in EMEA.

Matt Summerville - KeyBanc

Just one follow up question, with regards to something Reik had mentioned that when you look at your answer to this question, that the next two buckets beyond the big three players you kind of have as you mentioned that institutions for 220 and then literally 100s of that thousands of smaller banks, where are you finding their add with regards to getting the back office technology in place to be able to effectively facilitate the sharing and clearing of the check images.

Tom Swidarski

Yes, okay Matt. Let me again answer that within the two buckets, because both are different. The bucket I was the most concerned about was really the smaller players, the regional players because they are so dependent upon processors and networks and then (authorizing) the software that links in and as you might recall in 2009 I’ve mentioned that repeatedly that a lot of the deposit automation, even if someone was interested, they didn’t have ability they could buy the technologies from us or someone else but they couldn’t actually get it to run in the fashion they wanted.

A lot of that infrastructure has been addressed throughout 2009 and will be addressed in 2010. And we see it first in terms of the software that we were asked to write. So for me, you need to have the software written before you can, you can utilize the terminal in a fashion that is advantageous. So that’s where we are seeing activity in given me good hope that infrastructure is going to be pretty much complete with most of networks here in 2010.

Thus that supports the kind of beginning level of order entry that’s giving us some hope kind of going forward. If I move up to tier right below that may be the top three I would say that those folks are prepared. They’ve done a lot of work both in the lab in terms of the software of what was being done as well as the routing of and connectivity into their back office systems and I have confidence in that these.

You are moving from the lab environment as I indicated to now what they are calling pilots but when you are piloting 75 or over a 100 ATMs you are not feeling like this beginning of a rollout. And so I feel good about that beginning here in the second half of 2010. And I think it also speaks to really 2011, 2012 with both of those buckets.

Operator

We’ll go next to Paul Coster with JPMorgan.

Paul Coster - JPMorgan

Tom in your prepared remarks, you clearly found very confident about the full year guidance, but as you signed off, I think you said that’s little bit more cautious on the near-term outlook. Can you clarify that statement? I might have misunderstood it.

Tom Swidarski

I think that’s accurate I think for us in terms of the full year. In terms of both guidance and revenue, we are confident in terms what we can deliver. The first quarter revenue was inline with our expectations. So our expectations were slightly below with what was without in the market place and certainly from a revenue standpoint when you don’t have the sheer volume of some of the major players rolling with deposit automation there, that means you have lots and lots of other folks that have to make up that mix to fill that bucket and the other thing I would say is certainly in the US bank market as I mentioned, the bank branch construction which has a big impact on our security business is still very, very weak.

So we are trying to balance those out and which gives us confidence that what we are going to do but also means that we still have a long way to go here relative to both the revenue and earnings performance as we come to the first quarter.

The other thing is we still do out forecast calls and we are trying to gain confidence again after five quarters of not having a lot of confidence in the forecast calls lets say here is what’s really going to happen and we have the kind of visibility we like into the systems, so I would say we are comfortable with how we position that given the backdrop that both the United States and other regions of world there are still some financial crisis and economic crisis issues that people working through even though from a general economy standpoint it feels a whole lot better than it was certainly six and nine months ago

Paul Coster - JPMorgan

And Brad, I really welcome the disclosure on the orders which is helpful but of course it’s relative to last year, how do we interpret it relative to what I believe was a pretty strong order quarter last year but also can you give us some sense of the books of bill or some kind of absolute number here?

Brad Richardson

Certainly, the comparison that you do see that we have provided is versus the prior year quarter and I would just reinforce the point that in the fourth quarter of last year Paul we did see very, very significant order improvement again versus the previous year’s fourth quarter in excess of 40% in the financial self-services so its that combination of a strong fourth quarter a moderate performance in the first quarter that ultimately we think positions the company for a second half decent overall revenue growth performance.

Paul Coster - JPMorgan

Can you share book-to-bill by any chance?

Brad Richardson

No I don’t think we can provide that at this point Paul.

Operator

We will go next to Zahid Siddique with Gabelli & Company.

Zahid Siddique - Gabelli & Company

I have a couple of questions first, last week NCR your competitor reported and what they said was that the orders in Asia Pacific were approximately 25% and I think you said down 25% and they also said Europe orders were up 15% and you said down roughly 9% or 10% I am trying to see where is the disconnect, do you have a feel, are you possibly losing share or do you have a feel why there may be this disconnect?

Tom Swidarski

Yes, I think first of all you are comparing apples and oranges but these are the first and that what we are talking about really is the self-service, they are talking about kiosks and entertainment and retail and a whole bunch of other things. So I guess the real issue that we are talking about is, and I can explain our issue relative to self-service but certainly can’t compare it to something that’s kind of amorphous in that regard.

From our standpoint in terms of self-service, again I think the answer is more focused on the fourth quarter I mean you need to look at our fourth quarter and our first quarter kind of combined because our fourth quarter was so large I think Asia Pacific alone was up over 50% and EMEA was up 20 some or 30 some percent and the Americas regions was up in like they’re like fashion. So when you combine that with the first quarter, it gives you a little more smoother kind of alignment of comparison. So again, I think we’re comfortable with kind of where we are at given compared to fourth quarter was in, how much of our fourth quarter was actually in the first quarter, forecast originally and that moved on. So again, I view that as positive news even though it makes a little lumpier when you look at it.

Zahid Siddique - Gabelli & Company

And I think the numbers of NCR gave and the ones that I shared what’d be ATM orders but you’re saying it’s mainly timing and you’re not seeing any sort of shares last to NCR or other competition?

Tom Swidarski

No, I think when you look at kind of our results, so you look at again the fourth quarter combined with our first quarter we’re very confident in our position in all of those markets.

Zahid Siddique - Gabelli & Company

Okay and then my next question is on new products. You’ve talked about deposit automation, are there other products that what the nationals, well that the Nationals and regionals could go to next once I guess as this thing ramps up so what’s next after deposit automation?

Tom Swidarski

Okay, so I would say the first issue Zahid relative deposit automation is for deposit automation is probably still another four or five years from completion. So there is a lot of work we have to do on deposit automation. All around the world and specifically in the United States because I’ve mentioned before, really have may be three institutions and may be a total of 35,000 ATMs in the Unites States that deposit automation, our expectation is that somewhere between 50% to 75% of all these banks our expectation is that somewhere between 15 , 75% of all the bank owned ATM’s may have deposit automation over the five year period, so they are still 100,000 or very large number that deposit automation is going to impact.

I said second thing would be really the movement in terms of integrated services and by that I mean not every big bank wants everything that we talk about relative to outsourcing but the ability to monitor, the ability to understand remotely what’s happening, those are all key issues where those are very complex software solutions that I think for well situated for as we move forward, so I think those would be the areas would be kind of the immediate areas people are going to be evaluating them looking at as you rollout this sophisticated technology uptime becomes that much more important or liabilities that much more important and if you have downtime you need to have that minimize and being able to remotely diagnose it or fix it is critical. So, everything we build in kind of what I would call Brazil relative to those competencies and capabilities, we are bringing to the United States in other parts of the world and think we have world class solutions.

Zahid Siddique - Gabelli & Company

Okay and lastly what are you seeing on pricing across your various regions?

Tom Swidarski

Okay, for our pricing standpoint, my general comment would be I think fairly stable. I break it into two buckets, you’ve got products and you’ve got your service and services. The product bucket is more sensitive to price invent service and services on a grand scale standpoint in that, a lot of times you have a major bank or a significant player in any region of the world will make a lots of order, two, three, 400,000 ATM’s, it is a price competitive situation and I think we all face that in most regions of the world, probably the region that always has been the most price sensitive is the Asia region as we got the India and Indonesia and other regions there but I understand any shift or change in that make up here and I think the good news is with our strategy relative to outsourcing and integrated services as you add and fumble services together there is less focus on the hardware price and more focus on a total value proposition which really again place to our capability and our competency. So that’s where we would want to continue to move the market to and that said certain institutions and we feel good about that.

Operator

We go next to Gil Luria with Wedbush Securities.

Gil Luria - Wedbush Securities

Could you give us a little bit of more a detailed update on the cost cutting on the $200 million program where we are today, how much do we still have left in 2010, 2011? And you are talking more about reinvesting it, what percentage of the gains that we still have will be reinvested versus flow to the bottom line.

Tom Swidarski

Okay, I will start and then Brad can fill in if I miss certain pieces. In essence Gil to the year we had I think about $35 million in our sites relative to smart business 200. It has been kind of our perspective all along, it’s probably about 50% give or take a percent or two in terms of reinvesting versus dropping the savings. And I think we are on track for that this year. We feel good about the pipeline of project we have in place.

And we are working both spaces in terms of direct and indirect spent in terms of what we are focused on taking cost out. When you talk in terms of R&D the two areas I would say the two primary areas we have got focus on has to do with continued development with the deposit automation technology and services infrastructure and software and they kind of go hand-in-hand and you may see Gil I guess the number would probably in neighborhood of $5 million to $7 million, through the course of the year in terms of R&D, is that right?

Gil Luria - Wedbush Securities

$2 million in the first quarter.

Tom Swidarski

About $5 million to $7 million somewhat in that range, $7.5 million in terms of probably increased focus on R&D and those of these are kind of the primary or it will be software specifically on power software, the second would be the services infrastructure of which the software helps facilitate and also monitoring kind of software that goes within the services infrastructure and then really deposit automation to continue the development of those solutions and build out of improvement in terms of quality and taking cost out of that.

Gil Luria - Wedbush Securities

And then for 2011 how much do you have left?

Tom Swidarski

I think its $30 million, Gil.

Gil Luria - Wedbush Securities

And that will get you to the 200 overall?

Unidentified Company Speaker

Yes, that gets us to 200, that’s correct.

Operator

We will go next to Michael Saloio with Sidoti & Company

Michael Saloio - Sidoti & Company

The growth you are seeing in integrated services sounds encouraging especially internationally you said you had a $100 million base, you had a $20 million in this quarter. Could you just give us a little more detail about may be which one of these contracts is worse like the one you announced in Russia as far as revenue contribution in margins and how much of the growth in that business is coming from North America versus international?

Tom Swidarski

Yes, I will try to answer that in some pieces because I think we give you some dimension to it. The size of these contracts varies dramatically and it varies by how big the network is, how many units you are talking about and the other thing that here is when we talk about this contracts that we call them total contract value because generally speaking these are three to five year contracts, most are tending to be towards the five year level. So even though you may have a contract value picking numbers that $20 million or $10 million, that’s spread out over five years.

So because the services that we are rendering, we are going to render those for five years, thus we recognize the revenue over that period of time, depending on if they refresh their hardware piece more of that may come in year one but we think about it in terms of a five year bucket thus you end up with some of that from every quarter being a backlog in the future quarters and the future years. So that’s why we like the business, its very recurrent, its sticky and it allows us to really help the bank focus on really improving their overall operation and how they run that and solve bigger problems rather than getting into a price discussion on the price of two ATMs.

So most of the business today in the United States let me start there is with smaller institutions. So these are institutions may be with anywhere from three or five ATMs up to 50 or 100, that’s kind of the sweet spot that we are after relative to this. Outside the United States they tend to be larger. So the institutions of Brazil were very large and some of the ones in India are very large and probably the split between that is that we were probably begin that’s larger outside the United States clearly than we were inside the United States because this really began to take hold inside United States over the last two years and almost coincided with some of the issues that the institute, that the industry has faced.

So I would say right now that’s getting closer to 50-50 but it’s still weighted greater outside the US. In terms of margins, we report this within the service category, this will help our service margins long-term again at the small piece that we have got a $1.5 billion in service and services so it’s going to take a while to have the kind of impact we want but again we think goes well for 2011, 2012, 2013 as this start to build into some serious venue which is why in the past, where I had commented on the service margin improvement. Some of its productivity on traditional service, some of it is adding services with a little bit of higher margin mix into it.

Michael Saloio - Sidoti & Company

And second question, could you just go into a little bit more detail about uses of cash with over $450 million right now, do you have any plans for debt reduction and just a little bit more detail on what you mean by modest share repurchases over the next two years?

Brad Richardson

Yeah, Michael. I just point out again go back to our priority uses for cash and for our free cash flow which again we think this year will exceed $100 million and certainly our priority for that cash is to reinvest back into the business in terms of our capital investment, which is somewhere in the neighborhood of $50 million to $60 million.

We certainly are looking at modest if you will Bolton type and synergistic acquisition that can help us grow. We’re very, very focused on then returning moneys to shareholders in the form of our dividend which is over $70 million a year and then modest share buyback.

So as we look at the environment today, again, we feel confident about the guidance that we have provided, but yet there are still uncertainties out there and therefore we are going to continue with the share buyback program but at a modest rate, I can’t project what that is but you can see in the first quarter we purchased about 337,000 shares. So again, that’s the priorities and the reason that we are being modest here is because again we want to preserve our powder if you will toward for reinvestment back into business as well as maintaining a high level liquidity given the uncertainties that we have in the marketplace.

Operator

(Operators Instruction). We’ll go next to Kartik Mehta with Northcoast Research.

Kartik Mehta - Northcoast Research

I want to ask you little bit about your service margins and your thoughts on how sustainable they are for the rest of the year. Obviously you had a really good quarter and I’m wondering if that particular percentage is sustainable throughout 2010?

Tom Swidarski

Yes, Kartik I would say that it is sustainable. First of all, the increase over last year is not sustainable with that level but the absolute number is sustainable. We had some easy comps last year and we had some one time frames that hit so it made the gross margin improvement significant but I think when you go back and look at the last 16 quarters of service gross margin, you’ll see a steady climb in the right direction here, lot of that has to do with productivity training and kind of the investment we continue to make in that which we are doing.

Some of that has to do with a little bit of influence now in terms of services starting to play a little bit of a roll in terms of that mix. But overall I feel pretty good about our ability to increase for the third consecutive year somewhere in the neighborhood of percentage point increase. So, we are confident that while you won’t see a 3% variation compared to quarter-over-quarter. We think mid-25 is achievable and doable as we move forward in the space.

Kartik Mehta - Northcoast Research

And then Tom, I think you said that some business of course sooner than you expected but then I think you also said revenue was kind inline with expectations. I am wondering how are you referring to that or what was your different type of business you expected closer than you thought?

Tom Swidarski

Yes, I think, in a couple issues in that regard. I mean first of all when we try to look at the size of that comes earlier. It was probably a neighborhood of we probably had $0.04 to $0.05 improvement relative to orders coming in a little bit sooner. When you compare that then with what happened to us in what the devaluation of the currency. I think that number --- it was about $0.04 so it kind of impacted or kind of upset one another there.

But again from an overall standpoint feel good about what that meant to first quarter still think we end up with very strong kind of underline performance. And stronger activity levels which we set for couple of quarters now. Then activity doesn’t automatically turn into orders.

But the comfort level of that activity now in somebody’s long lead time discussions leading into something meaningful. We are gaining some strength there specifically kind of in the US gives us good confidence relative to the outcome from the revenue and the earnings standpoint this year.

Operator

(Operator Instructions). This thus concludes the question and answer session. At this time, I would like to turn the call to Mr. John Kristoff for any additional or closing remarks.

John Kristoff

Thanks Jessica and once again thank you all for joining us this morning. As always, if you have any follow-up questions please feel free to reach out to me.

Operator

This does conclude today’s conference. We thank you for your participation.

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