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Diebold, Incorporated (NYSE:DBD)

Q1 2011 Earnings Call

April 27, 2011 10:00 am ET

Executives

Tom Swidarski – President and CEO

Brad Richardson – EVP and CFO

John Kristoff – VP and Chief Communications Officer

Analysts

Kartik Mehta - Northcoast Research

Matt Summerville - KeyBanc Capital Markets

Gil Luria – Wedbush Securities

Paul Coster – JPMorgan

John Williams – Goldman Sachs

Operator

Good day, everyone and welcome to Diebold Incorporated’s first quarter financial results conference call. Today’s call is being recorded. At this time for opening remarks and introductions, I would to turn the call over to the Vice President and Chief Communications Officer, Mr. John Kristoff. Please go ahead, sir.

John Kristoff

Thanks, Ardra. 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 CFO.

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 Brad will be walking through this presentation as part of their comments today, and we encourage you to follow along.

Before we discuss our results, as past calls, it’s important to note that we are restructuring a non-routine income and expenses in our financials. We believe that excluding these items gives an indication of the company’s baseline operational performance. As a result, many of the remarks this morning will focus on non-GAAP financial information.

For a reconciliation of our GAAP to non-GAAP numbers, please refer to supplemental material at the end of the presentation.

In addition, our results of operations reported today, including prior periods, exclude discontinued operations. Finally, 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. As a precaution, please refer to 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

Thank you, John. Good morning, everyone. Thank you for joining our call today. As you’ve seen our earnings report this morning, we got off to a slow start in the first quarter. However, these results didn’t not come as a surprise to us, as we anticipated a slow start in the first half of the year.

While we don’t provide quarterly guidance, we have communicated that 2011 would be heavily back-end loaded from an earnings perspective. We slightly exceeded our expectations for the first quarter despite heavy losses in Europe and a higher tax rate. Increased order activity in the North American continues to drive the business on a macro level and given the strength in our North American backlog, our outlook for the year remains intact.

Let’s review our results in the North America during the quarter. Revenue increased 3%, while order grew about 5% in the region. Most encouraging is that financial self service orders within the regional bank space where we enjoy competitive advantage increased more than 30%. This marks the second consecutive quarter in which financial self-service orders in the regional bank space have increased over 30%. As these orders convert to revenue in the second half of the year, we expect a significant uptick in operating profit.

The increasing demand in the space continues to be driven by three primary factors. One, pent-up demand in the marketplace. Two, industry and regulatory requirements such as, ADA and PCI compliance. Three, increased deployment of deposit automation enabled ATMs as more regional and community banks are implementing this technology to compete with their larger rivals. As depicted on the graphic on slide six, we now have over 20,000 deposit automation terminals deployed across the country and that number is rapidly growing. These factors have also contributed to significant growth in our integrated services business.

During the quarter, we brought in approximately $50 million in additional IS contracts, significantly exceeding the prior periods, as well as our own forecast. By comparison, in all of 2010, we signed about 150 million in IS contracts. One such example of the type of customers we’re signing on is Union Square Federal Credit Union in Texas. As part of our contract, we deliver monitoring, remote services and enhanced security for its network of 20 ATMS over the next five years.

A powerful combination of these services enhances Union Square’s ATM uptime and security, while enabling the credit union to minimize its operational infrastructure and equipment investments. Union Square was one of the many great success stories we had in the IS space during the quarter.

We remain the only company in this market that offers a complete outsourcing solution for integrated services business model, which continues to grow at an impressive rate. This is what truly separates us from the competition, especially the new competitors. They’ve recently tried enter our space in the US. Our capabilities in this area are not easily duplicated as it was time consuming and expensive to develop this expertise and infrastructure over the past several years.

When you combine our strong market position with our unparalleled capabilities and services, clearly stand to benefit most from the ongoing resurgence in the North American market. In summary, we are optimistic regarding the state of the North American financial self-service market, our strong competitive position and our expectations in this space for the second half of 2011.

Let’s now look at our security business. Orders for the quarter declined 6%. Revenue decreased slightly, as growth in services revenue was essentially offset by a drop in product-related revenue. The growth in overall security services was driven by the enterprise security segment, which grew in revenue approximately 20% during the quarter.

We are excited about the opportunities this segment brings as we continue to win major projects such as, the New World Trade Center Transportation Hub in New York City. Diebold’s integrated system will include the installation of video surveillance, access control and alarm devices throughout the hub.

In addition to our work at the Transportation Hub and Tower 4 at the Trade Center site, we anticipate additional security integration opportunities will arise moving forward. I feel confident in our ability to win additional business related to this project. Keep in mind, given the size and complexity of these types of projects, revenue is generally recognized over a multi-year period.

In addition, security product revenues decreased in the financial space, which is more product-centric and dependent upon new brands construction. However, we expect activity around branch refurbishment to pick up in the second half of the year. Again, I am extremely encouraged by the recovery in North America and the progress we are making in grow our integrated services business. The region remains our most important and profitable market. Our brand is the strongest and we have an unmatched service capability. As such, North America will serve as the primary catalyst for earnings growth in 2011.

By contrast, in Europe, we continue the significant undertaking of restructuring our business to attain expectable profitability. Our operating loss in Europe was substantial during the quarter, as our cost structure remains out of line with the revenue we generate in the region.

Revenues for the period was down approximately 5%. However, I am encouraged by the growth in orders during the quarter which illustrates our ability to effectively compete in the region.

Lastly, we are now at the Silicon Bank [ph] in Moscow chose us to provide more than 200 Aptiva ATMs for its network. The installation process is expected to be completed within the next few months. As a result of this most recent deal, there will be more 450 Diebold ATMs within the bank’s network. Other notable successes in EMEA include a competitive win in Saudi Arabia for a distributor for nearly 400 ATMs, a part of which includes deposit automation technology; orders from two banks in South Africa totaling nearly 800 ATMs and a order from a major financial institution in Italy to replace nearly 400 of our competitor’s ATMs over the next two years.

While the improvements we are seeing in the region are encouraging, it’s a slow rebuilding process in Russia and Eastern Europe as a whole. We still have a lot to accomplish to reach the level of profitability we expect from EMEA. The process of restructuring our operations there is well underway and is being addressed swiftly and aggressively. This is evidenced by the substantial restructuring charge we took in the first quarter and has also resulted in our raising restructuring guidance for the full year.

Given the improvement in orders we are seeing in the region, as well as cost improvement actions we are undertaking, I remain optimistic in our ability to bring EMEA to a breakeven point by the end of the year and return to profitability in 2012.

In Latin America and Brazil, business remained solid, with revenue up 2% in the region. Excluding elections and lottery, revenue was down slightly. In Brazil, we anticipate a particularly strong second half of the year with all the elections revenue coming in the third and fourth quarters. In addition, two of the largest ATMs orders of the year are expected to be awarded in May. While we are in a strong competitive position to garner our fair share of those orders, the associated revenue would come in the second half of this year.

We continue to feel very good regarding the capabilities we’ve developed in our Brazilian operations, both from the technology and services perspective. In fact, we recently received a Best in Show award from Intel at the Intel Solutions Summit 2011. Intel recognized Diebold for providing advanced technological solutions for the Brazilian market. The two companies have worked together since 2009 to provide advanced features, including lower power consumption and stronger security. Outside of Brazil, we saw growth in several markets as we continue to maintain the leading market position throughout Latin America.

In Mexico, we won an order for 200 Aptiva ATMs from one of the largest Spanish banks. And in Columbia, we won an order for 120 Aptiva ATMs as part of extension of the integrated services contract won in 2009.

Looking at Asia Pacific, as anticipated, we started the year slowly in both revenue and orders. This is largely due to the clients in China where we anticipate a strong second half. Like Brazil, many of the large ATM orders for the year are expected to be awarded during the second quarter. Again, these are orders that would revenue in the second half of this year.

Elsewhere in Asia Pacific, we continue to grow our presence. In India, we won a deal with one of the largest government owned banks to provide close to 1,500 new ATMs and dispensers. As part of the same deal, we also won a managed services contract for nearly 9000 of the bank’s units.

In Indonesia, we won separate agreements to provide 1,000 terminals to two different financial institutions.

In addition, we are seeing traction in our services business in the region. During the quarter, we announced the signing of a two-year managed services agreement with Axis Bank, India’s third largest private sector bank. We’ll manage more than a 1,100 of the bank’s ATMs and provide services such as, ATM monitoring, vendor management, site maintenance and cash forecasting and replenishment services.

Due to the importance of Asia Pacific and the tremendous growth opportunities the region provides, I am pleased with the progress we have made in building our services business. We remain committed to focusing on our services offerings and disciplined cost management which we believe will be key to our continued success in Asia.

From an operational perspective, we are very excited to announce plans to construct the new consolidated world headquarters which will remain in the Akron/Canton region. When complete, the new headquarters will help drive our needs for a truly world-class facility that stimulates process efficiencies, enhances our ability to recruit and retain top-tier talent. As part of our agreement with the State of Ohio, we are receiving about $100 million in financial incentives over the next 18 years from state and local governments which remained in the area.

This was the culmination of a two year strategic process in which we considered many factors and many locations and actively engaged other states where we currently have operations. In the end, Ohio’s offer was competitive with these states and presented us with far less operational risk and expense than the alternative moving out of state. We believe this is very exciting news for our company, shareholders, associates in Northeast Ohio.

Another recent initiative that may be on our mind is the devastating earthquake and tsunami that struck Japan in March. Although this has had no immediate impact on Diebold’s employees or facilities, as the company has no direct operations in Japan, our sympathy goes to those people who were affected in the country of Japan as a whole.

In terms of our supply chain, however, we have discovered some risk of mid to long-term disruption from certain second and third-tier component suppliers. One component in particular using our currency recycling products and passbook printers is a manufacturer to a supplier’s plant in the area affected by the Tsunami. As a result, we are extending lead times to our customers for those affected products.

Diebold’s procurement organization is working directly with the supplier to determine current inventory levels and plans for getting the plant back on line. In addition, we are also working with our engineers to consider the feasibility of substituting the current components with that from another supplier. We are completing our complete assessment and working with key suppliers to identify any other potential risks to our supply chain. We will provide updates on any developments as quickly as possible.

As we look at the rest of 2011, I remain very confident about the market growth in North America, as well as the orders in backlog for supporting our strong second half forecast. We have experienced unprecedented seasonality given timing of the major pending orders in China and Brazil in addition to the voting business already slated for the third and fourth quarters. As a result, we remain optimistic in our position for the remainder of the year and are maintaining our non-GAAP earnings guidance of $2 and $2.20 per share.

Despite the relatively weak first quarter results we reported today, the markets we serve are very active. While the timing of our business this year is quite unique, I am confident given the elements of business within our control, we will capitalize on the opportunities that stand before us and deliver the results we expect. With that, I’ll turn the call over to Brad.

Brad Richardson

Thanks, Tom, and good morning, everyone. There are a number of key topics I’ll discuss this morning, including our progress in the restructuring of EMEA, the second half seasonality of our forecast, our operating expense outlook and working capital and free cash flow.

Regarding our restructuring efforts in EMEA, we are planning a thorough comprehensive set of actions through all elements of our operations. We are reengineering to free up more resources for core markets where we compete most effectively. Further, we are also reviewing our profile in the region and weighing our legal and compliance risk against our profitability in certain countries. In addition, we are planning changes in our manufacturing, supply chain, logistic and administrative functions.

During the first quarter, we’ve made progress identifying actions necessary for specific areas and planning needed to execute on those actions. This has resulted in restructuring charges of $0.14 per share in the quarter. Given our adherence to various European labor laws, we are limited in terms of details we can provide at this point. We can’t say this work will essentially take much of this year to implement and the associated costs are anticipated to continue into 2012.

We have an aggressive plan to get our EMEA operations to a breakeven point by the end of 2011 and after spending some time in Europe recently, I remain confident in our ability to deliver on that plan. Regarding the seasonality of our 2011 forecast, on slide 15, as Tom indicated, there are several factors that have led to a very heavy second half of the year from an earnings perspective.

First, our product order backlog in the US regional bank space has increased dramatically since the first quarter of 2010. We anticipate much of this backlog will be converted to revenue in the second half of the year which creates positive profitability.

Second, as we have previously communicated, all of the revenue from the Brazil election business in 2011 is expected to be recognized in the second half of the year with approximately 45% coming in the third quarter and 55% in the fourth. As you know, there is very little OpEx associated with this business which creates further positive profitability mix.

Third, several of the major orders we anticipate in China and Brazil are expected to be awarded during the second quarter. Our business in China and Brazil is mostly driven by a handful of large banks which lead to a very lumpy sales profile. While, we don’t provide quarterly guidance, I feel it’s important to put some quantification behind our expected second half earnings seasonality. Based on all these factors I just described, we expect approximately 75% of our 2011 EPS to occur in the second half of this year with more profits coming in the fourth quarter than the third.

Now, to review our financial results for the quarter, turning slide 16, total revenue was down 1% from the first quarter of 2010 with 2% positive impact from currency. For the quarter, product revenue declined 3%, while service revenue was up 1%.

Looking at our financial self-service business on slide 17, first quarter revenue dropped 2% from the first quarter of 2010. Growth in the Americas was more than offset by revenue decline in Asia Pacific due to timing of pending large orders in China, revenue also declined in EMEA.

In the security business on slide 18, first quarter revenue decreased 1% from the same period in the previous year. Growth in services revenue was more than offset by a drop in product related revenue. As Tom mentioned, the growth in the overall security services was driven by the enterprise security segment, which grew in revenue by approximately 20% during the quarter.

Looking at slide 19, total gross margin for the first quarter was essentially flat compared to the first quarter of 2010. Product gross margin for the quarter was down 90 basis points. Product margin improvements in North America was more than offset by greater losses in EMEA, which remains extremely price competitive, especially in Eastern Europe.

Service gross margins increased 30 basis points driven by productivity improvements in North America and Brazil, partially offset by higher fuel cost. We expect increased fuel cost to be a headwind throughout the year and as a reminder, every $0.10 movement in the retail price of gasoline here in the United States increases our annual expense by approximately $700,000.

Moving now to non-GAAP operating expense, as highlighted on slide 20, in the first quarter, operating expense increased $8.7 million or 1.5 percentage points of revenue from the comparable period in 2010. This increase was the result of several factors.

First SG&A in our international operations increased $3.5 million. This is related primarily to some one-time cost benefits in the first quarter of 2010 that did not repeat in 2011.

Second, we have foreign and currency exchange impact of $1.9 million, and finally, 401(k) reinstatement, R&D and other costs make up $3.3 million of the increase. We anticipate second quarter OpEx will be similar to what we’re reporting for the first quarter. However, we expect OpEx for the full year will decrease on a percentage basis to approximately 18.5%, as we anticipate significantly higher revenue in the second half of 2011.

Now, turning to slide 21, non-GAAP operating margin in the first quarter decreased to 4.3% from 6.1% in the first quarter of 2010. We do expect full-year operating margin will be in the range of 7% to 7.5%.

Turning to the EPS reconciliation table on slide 22, non-GAAP EPS moved from $0.34 per share in the first quarter 2010 to $0.23 in the current quarter. Our non-GAAP tax rate moved considerably from 29% in the prior period to 40% in the current quarter, negatively impacting EPS by approximately $0.05 per share. We still expect our full-year tax-rate to be approximately 28%.

Turning to slide 23, free cash use for the quarter was $101 million compared with a free cash use of $67 million in the first quarter of 2010. Please refer to the bridge chart for an overview of the quarterly change in free cash use. We anticipate normal seasonality with strong free cash flow later in the year. I remain comfortable that free cash flow will exceed a $150 million at year-end.

In addition to our dividend, we expect share repurchases to be a primary use of cash in 2011.

During the first quarter, we repurchased 523,000 shares. Due to the timing of the authorization, we began repurchasing shares later in the quarter. However, we still intend to execute on the full 4 million share repurchase authorization in 2011 barring any developments on the acquisition front or dramatic changes in the business environment.

Looking at slides 24 and 25, DSO increased from the prior year by two days while inventory turns decreased slightly. Working capital remains a top priority, and we anticipate improvements by year-end. However, as Tom noted, we face some supply chain risk relative to Japan, as well as the backend loaded nature of our forecast.

Turning next to liquidity and net debt on slide 26, net debt was $85.9 million, a decrease of $92 million from March 31, 2010. Our net debt to capital ratio was 8% at March 31, 2011, compared with 15% in the prior period. We have made substantive reduction to our net debt since 2007 while at the same time returning more than $300 million to shareholders in the form of dividends and share repurchases. As I mentioned in the past, most of our cash exist outside the United States and we continue to implement the most tax-efficient methods to access that cash.

Now to slide 27. We’re continuing the global review of our FCPA compliance. There had been no material developments in the review since our previous earnings call. Our expectations remain that it will be done by year-end. First quarter costs on the FCPA review were approximately $6 million, in line with the fourth quarter and we expect a similar run rate in the second quarter tapering off in the second half. We’re excluding these costs from our non-GAAP operating results to provide a better overall understanding of our underlying operational performance.

On slide 28, we’re reaffirming our full-year outlook for 2011. We expect revenue to increase 3% to 6% with no guidance changes in any other segments. Given our aggressive plans in EMEA, we have increased our anticipated restructuring charges for 2011 to be in the range of $0.23 to $0.28 per share. We still expect our full-year non-GAAP EPS to be in the range of $2 to $2.20 per share.

In conclusion, we’re extremely encouraged by the momentum we’re seeing in the key North American markets. Our balance sheet remains strong. We’re aggressively addressing our business challenges in Europe and we expect our full-year operating expense as a percent of revenue to improve over 2010. We know that we have a very aggressive forecast for the second half of the year, but this outlook is based on several concrete market and financial indicators that give me confidence we will be able to deliver our expected results. With that, I’ll turn it back to John.

John Kristoff

Thanks, Brad. Ardra, we’d like to open the call for questions at this point.

Question-and-Answer Session

Operator

(Operator instructions) We’ll go first to Kartik Mehta at Northcoast Research.

Kartik Mehta - Northcoast Research

Hi, good morning, Tom and Brad. Both of you talked about, obviously, the challenges you’re facing in EMEA, especially Europe. And I’m wondering if you could, maybe, give some numbers as to the income or loss that region generated for you in 2010 and the first quarter of this year, so maybe put some perspective around how much of restructuring is going to help you as we move forward?

Tom Swidarski

Okay. So, I would say that, in essence, the delta between the two years is approximately $10 million. So, you’d say last year was more or less a breakeven situation. This year, we lost about $10 million in EMEA for the first quarter.

Kartik Mehta - Northcoast Research

And what about for the year, Tom, for 2010?

Tom Swidarski

So, Kartik, you’re asking comparison what our – what we did last year?

Kartik Mehta - Northcoast Research

Yes, so I understand first quarter, obviously, a really bad quarter out of EMEA and it looks like you are going to make a lot of progress at least by the end of the year. I’m just wondering in 2010, what did EMEA generate income for even – I don’t know if there was a loss, perhaps you -- ?

Tom Swidarski

Okay, so we had – yes, we did have a loss last year in EMEA. Just call it around of the $5 million to $7 million, $8 million range right in there.

Brad Richardson

That was in 2010.

Kartik Mehta - Northcoast Research

And so, Tom, in the past, you’ve had some restructuring in Europe. I remember when you had a plant in France and you tried to shut that down and that took a little – probably a little bit longer than, maybe what everybody expected. It seems like you’re being more aggressive this year or this time around, I apologize, in Europe. And I’m just wondering are there any similarities between the two restructurings or is this completely different and won’t be as difficult or as time-consuming as the last one?

Tom Swidarski

Well, I think, anytime you do anything in Europe, it is always time consuming because you’re working through the World Council and the whole bid. I think the big differences here compared to last one is the kind of strategic objectives of what we’re trying to accomplish and one of the key things here is putting more of the resources in the market that we can make the biggest difference; the Frances, the Italy, the Spain, UKs and make sure we allocate our resources there and address some of the service and logistical infrastructure issues. Back in when we made those first changes, while we made some other changes, really the focus of that was really the manufacturing piece. Now, we’re talking about really the guts of the operation and putting ourselves in a much better position there to compete effectively. And I think as you saw from the orders, when we focus on specific countries that there are so many countries there, we don’t have the presence we do in other parts of the world and we tried too many things in too many countries with so many distributors, we’ve been ineffective and it’s been frustrating and disappointing for all of us.

So, we’ve really turned our attention from a senior level standpoint to one of the more strategic things we’re going to accomplish this year and in essence, make the decisions this year. So while some of the restructuring costs may actually leak into next year just because of the timing of the (inaudible) accounted for. And my expectation is Brad and I and the leadership for EMEA will have made all the important decisions this year and as you see how fast we’re making those, we we’re able to take some additional visibility to increase our restructuring charge for the year.

Kartik Mehta - Northcoast Research

And, Tom, just turning to the US, obviously there is lot of debate about deposit image-enabled ATMs that whether you should have a dual throat [ph] or a single throat. And I know you’ve gone with where as of now the dual throat technology, and I’m wondering as you competed for business if that has been a headwind at all or what type of experience you’re having with your customers as you talk about their technology needs?

Tom Swidarski

Okay. I think as we said all along for us, the technology conversation is really a second, third type of conversation. So, first of all, the evidence in terms of what we’re seeing at the regional bank space with orders up 30% again for the second consecutive quarter and momentum growing there, we said all along that as the deposit automation takes hold into the next tier players, we felt very well positioned there/. So just that you understand from our standpoint, our first conversation is about technology, about integrating services, about the complexity of their business and how we off load that.

And the other pieces that we talk about, when they do want to talk in terms of technology, because that’s always important, is certainly speed, availability, reliability, cost of ownership and then you get into the ability to repair and talk about the service organization. So, we feel very, very confident in our ability to move down this path and think that really the table starts tilting in our favor. And it’s pretty evident really when you look at the last six months and you see the backlog that’s growing relative to that.

The other thing I would comment on is from the integrated services standpoint, again, they get the integrated, the services because of the deposit automation conversation, where you’re solving bigger issues, then something is – when you ask the question about single or dual throat, that really is not the issue. They want to solve compliance issues. They want to solve ADA issues. They want to solve PCI issues. They want to solve the whole infrastructure complexity issue which is really what we’re offering. That’s why, again, our integrated services order book in the first quarter was at a record high, coming off a record high from the fourth quarter. So, we did $50 million. And when you do that, then you start getting into the operations of the bank and can really improve the efficiencies.

The other thing I would say there is again as we talked previously that backend system to be able to monitor, improve the work flow and process, again, it’s from a service’s standpoint, a key point that we point out. So, we’re not feeling – we’re feeling like very good, very confident that the momentum we’ve created is going to continue in the second quarter.

Kartik Mehta - Northcoast Research

Thank you, Tom. Thank you very much. I appreciate it.

Tom Swidarski

You’re welcome.

Operator

Next, we’ll move to Matt Summerville of KeyBanc.

Matt Summerville - KeyBanc Capital Markets

Good morning. Just I have a follow-up question on EMEA. I guess I’m a little surprised by the magnitude of operating losses in the first quarter of $10 million, more than you lost for the entire year 2010. I mean, can you kind of walk through in a little more detail how things sort of added up to get to that destination? And I guess, in your plan or in your $2 to $2.20, just so unclear, does Europe move to a breakeven position for the full year or move to a breakeven run rate exiting the year, if you could clarify that please?

Tom Swidarski

Okay. So, I’ll start and then Brad, feel free to jump in as we deal with this.

Brad Richardson

Sure.

Tom Swidarski

First of all, Matt, in the first quarter as compared to last year, as always, you run into certain factors. The biggest are product gross margins were significantly lower this first quarter as compared to the other quarters of last year which relate to certain specific opportunities or deals that you end up revenuing in the first quarter.

The second thing is because of our lack of density there, our service gross margins don’t increase like we have in other parts of the world. So, while service gross margins overall when you look at it, you’d say, gee, service gross margins, we’re growing overall. They actually decreased on us in the first quarter because lack of product volume impacted installation, which impact our service, our service margins there in the first quarter as well. That worked against us.

Then the last thing was tying those two together is really the mix issue. So, those were probably three of the primary factors. The other thing is while we’re moving on the restructuring activities, we still get here with all that expense here in the first quarter. And as a matter of fact, that escalated somewhat in that we’ve got some outside help helping us, so your costs are a little bit higher here in the first quarter. So, for the first quarter, the $10 million versus kind of where we ended up last year, again, it was in line with our expectations. So, from our standpoint, as we thought about the whole year in math, the $2 to $2.20, this first quarter is absolutely in line and was factored into kind of overall guidance and kind of reaffirmed today.

Brad Richardson

Yes, Matt, let me just kind of reinforce and then answer kind of the second point of your question. I mean, it certainly is, as Tom pointed to the product margins in the first quarter being down substantially from the prior year, it certainly is. We’re moving into Eastern Europe and rebuilding Russia. Certainly, that has put pressure. That’s a more competitive marketplace. Our manufacturing operations in Hungary, we’re running at a lower rate, just as you can see, based upon the overall revenue levels for the business. So, those are the things that ultimately grow the product margin. As we look at kind of where we’re focusing the business is to get the business to breakeven by the end of the year. So, I would think of that as more on a run rate basis versus being able to offset completely the $10 million loss that we had in the first quarter.

Matt Summerville - KeyBanc Capital Markets

Okay. And then just in terms of the China dynamic, you guys have kind of talked about that, Brazil sounds like – it maybe a little bit more backend loaded than maybe you originally thought heading into the year. I guess, as you’re having these discussions more real time with these banks, I guess I just want to get more comfort with the timing on when these things come in because I was thinking if you started getting these things, these things don’t come into until June, July, August, that’s not going to revenue this year. So, I guess I just want to try and put some sort of probability around being able to execute on these potential awards.

Tom Swidarski

Okay. So, I’ll talk about Brazil first and then we’ll move to China. We have pretty good visibility here, if not really good visibility here. The issue you faced in Brazil this year, every year when they have the election, the big government banks – so they just had the Presidential election last fall, the Presidential elections affect the big government banks as they start shipping around different players in those banks. So, we actually are at a meeting as we speak here with one of the big government banks that’s doing the public hearing this morning which will be letting the order out. Thus, the information we had uptil this morning was basically that these decisions will be made here in the May timeframe – May, early June timeframe which would allow us the revenue. And their expectations, what they’ve been indicating to us is, they looking to have all this installed this year.

Same thing with the private banks we’re dealing with in Brazil as well that the May timeframe really is when decisions will be made, orders will be let and they are going to move very quickly. So, we’ve got I think excellent visibility here into Brazil.

If you move to China, it’s the same scenario. It’s just the banks are different, both the big government banks and what’s occurring there and the information we have directly from the banks is several will be moving here in the month of May; decisions made toward the end of May, beginning June; deliveries, third and fourth quarter. So, from an internal standpoint, while we know what’s going to be backend loaded because of the timing of these, it’s definitely all third and fourth quarter, whereas it begins the year with May, of course, there will be something towards the second half of the second quarter. But, I think from a visibility standpoint, a probability standpoint, they’re both very high in terms of what’s going to occur. The only variability could be is we had Intel saying they were going to look for 8,000 and they do 7,000 or 6,000. That could be a sling factor, but again we should know all of that well into the second quarter and we’ll also know where we stand relative to that and what we’ve got in our forecast.

Matt Summerville - KeyBanc Capital Markets

Okay. And then just – thank you for that comment, Tom. And then just one final question. I know you guys don’t want to necessarily get into the habit of giving quarterly guidances, so Brad, I appreciate talking about 75% back half of the year as far as far as earnings that implies 25%. In the first half, if you use the midpoint of your range and just do kind of simple math that implies an EPS of around $0.30 or so in Q2 which is still fairly below kind of where you guys were at last year. I guess, sequentially, I’m trying to understand some of that dynamics as I would assume your tax rate is not as high going forward in Q2. Your losses in Europe maybe come down a little bit off that $10 million rate. I guess why we’re not seeing a little bit more of a bounce off Q1?

Brad Richardson

Well, Matt, I think you – again, I appreciate your preface there right at the beginning of giving the quarterly guidance. Certainly, we are doing the $0.23 in the first quarter, there is a sequential improvement implied as you just factored in. So I do think we actually are showing sequential improvement driven by again starting to see the EMEA turn and certainly the losses in EMEA is what drove the higher tax rate. So we would expect our tax rate to start to also drop. So I do think we are actually seeing the sequential improvement.

Tom Swidarski

Matt, the other thing I would say is, if we went back and looked last year, you would see for instance, Brazil at the big banks, they made their decisions earlier in the year. So that’s the big swing factor because of the importance of Brazil for us in particular and certainly, we had communicated all along all of the voting was going to be in the second half of the year which is consistent, but really the big swing between two years would be Brazil big bank decisions which have a big impact on us. So, again, because they got out of the gate slower this year than they normally would have because of the election with the government banks, that has really moved a lot of that now into really the third and fourth quarter. So, I think that would be the biggest variable that has changed year over year.

Matt Summerville - KeyBanc Capital Markets

Thanks, Tom. Thanks, Brad

Brad Richardson

Yep.

Operator

And next from Gil Luria at Wedbush Securities

Gil Luria – Wedbush Securities

Yes, good morning. Thanks for taking my questions. First of all, on your orders in the US, it sounds like there is a mix shift almost apples to oranges between orders of ATMs and integrated services contracts, could you help us understand the difference in math here, so I know there is no exact numbers, if a median typical ATM is a $20,000 order, how much is an order for a five-year integrated service contract ATM? Is it different order of magnitude, even if you just have to talk about a typical scenario here, what’s the difference in kind of the order rates for those two different scenarios.

Tom Swidarski

So, Gil, let me try and frame it up, because in essence there is, the difference between the two is not the price of the technology or the contract of service. What it would be with the IS order, we get additional services that would come along with that. So, for instance, they may be having us monitor the ATMs, we may be doing patch management, currency forecasting, so it is a whole suite of services they choose between, and again, what we are seeing over time is that as we get them on an IS deal over five years, sequentially they begin to pick other services once they have confidence and the ability to deliver. And these are not like $1000 a month type of services. In many cases, these could be $5000, $10000, $15000 [ph] unit type of services, but as you begin to spread that and build that out which is what it’s building for us; it has given us really big confidence in not only the business model, which is really taking that order off the street and giving us five years to work specifically with an institution. It is also allowing us to help them improve their operations and being in there with them. So, an order of magnitude, the ATM is going to cost the same and the service contract is about the same. That really doesn’t change it all, it is just the ancillary services that come along with that over the five year period.

Gil Luria – Wedbush Securities

Well, let me ask you this slightly just to make it more specific maybe, so if you had a small bank that was going to buy 10 ATMs from you this year, that would be a $200,000 order, so if you had the same bank sign a five year integrated service contract with you for 10 ATMs with some of those upsells that you are talking about, let’s say a typical level of upsells, what would that – how big would that five-year contract be?

Tom Swidarski

Maybe, it moves up 5% over the course of five years, because we only revenue the managed services pieces in the current year and that’s kind of the building effect. So, say it was an additional $5000 in this hypothetical situation, maybe you are one that’s only additional $1000 in services revenue. Is that clear?

Gil Luria – Wedbush Securities

Maybe, I’ll just take it offline. Let me just then kind of translate it to what I’m trying to get to which is, how much do you expect the US regional revenue to grow this year over last year?

Tom Swidarski

I would say that first of all the order entry certainly is the case to solid growth. I don’t think we are giving out specific relative to the growth in regional versus the big guys. What I would say is, in essence, our mix is changing whereas the last several years, you would have seen the mix being heavily weighted by the national accounts or strategic accounts. It’s now shifting more back, especially second half of the year to being influenced by the regionals which is very good news for us. And the other thing it also suggests is, as we are not only able to hold the revenue, we are growing, that means we are filling up pretty big buckets from strategic accounts or national accounts with a lot of smaller accounts. So I think for me that’s the overriding message that you’ve got. A lot of activity, we have 450-plus customers now using deposit automation, you have a 100 – I don’t what the number is, 110 or 50 customers that have 10-plus deposit automated terminals out there within their network. So we are starting to see that. What we have talked about for a long time coming is the regional bank space really beginning to take off, deposit automation is a key driver. Deposit automation decisions lead to this IS capability and for us, that’s a good sequence to occur.

John Kristoff

Hi, Gil, this is John. Just one more point on the IS, you used the example of a bank that was going to replace 10 ATMs, one of the dynamics we are seeing is they typically would replace all their ATMs. So, maybe, this a bank that did two ATMs a year over a five year period, now they transition to an IS contract and they want to replace all 10 ATMs, because we are taking over management for that.

Gil Luria – Wedbush Securities

Got it. And then my second question is kind of following up on some of the guidance questions. So if we are saying three quarters of the profit in the second half of the year more than the fourth quarter, that’s a 40% of the profit that you expect to come in in the fourth quarter, how much of that is in or you’re marking for December and how much of that has the risk of slipping into January.

Tom Swidarski

Gil, I mean that’s a good question. And that’s something that we are looking very closely at. I don’t know if we have that exactly here marked, but I can assure you this much that the installation ability and the ability to revenue and because it’s backend loaded, there obviously is risk associated with that. But we certainly think that the – we certainly think we have the ability and capability of hitting exactly what we are lining up and we’ve got our organization geared up for it. And the point is, as long as we get the orders in and we can schedule them here in the May, June, July timeframe, we are very, very confident in our ability to be able to deliver and meet that, and while some may slip, I think within our guidance we have that factored in appropriately.

Gil Luria – Wedbush Securities

Got it. Thank you.

Operator

(Operator instructions) We will go next to Paul Coster at JPMorgan.

Paul Coster – JPMorgan

Thank you. Good morning. A couple of questions. First of all, regarding the European restructuring, it seems like it’s quite complicated, can you talk a little bit about the organizing principles around it? And specifically, how you protect your incumbent customer accounts over there, specifically those customers that might be more than country specific, maybe regional and even have operations in emerging markets, is there any risk associated with this restructuring there?

Tom Swidarski

Yes, I’ll start and then ask Brad to comment as well. I would say the driving is exactly what you hit, I mean the reason EMEA so strategically important to us and the reason we are putting resource back into or additional resource into specific locations and maybe, not putting as much resource in other locations has to do with the large strategic accounts that or residents there that are morphing into global banks, it doesn’t take you long to figure out between Spain and France and the UK as you’ve got a lot of the single, a lot of the players that impact other parts of the world.

So, in essence we are putting more resource there and maybe, looking at some of the other areas that are less important than small geographies, whether it be in Africa or little parts of Eastern Europe where there is complexity and now with the compliance, I mean the guideline are saying, you know what, it’s really not worth it, we are not going to drive much profitability there and it doesn’t give us much benefit globally, why do it?

In terms of the complexity part of it, we’ve basically broken it down into seven discrete projects and it’s being run by specific managers, the things like service and logistics, there is one specific tranche of work that is being done, it’s being evaluated; shared services. We take a look at that, our country’s focus activities, manufacturing you go right down the line. We don’t believe this is complex. The complexity comes in terms of dealing with the work councils and making sure that we dot all the i’s and cross the t’s.

So, again, I think I’d reiterate we are – Brad and I feel confident we can made the decisions this year, some of the cost maybe into next year, but our goal is, we are taking cost out immediately because there is something, whether it be shared services and logistics that – those are not discussion points.

There are other things that are more strategic that will be heavier discussion points, but we feel pretty good and have a lot of clarity in terms of leading that, likewise, we’ve added some resource to help us make good decisions to manage these projects over in EMEA to support the existing EMEA team.

Paul Coster – JPMorgan

Do you think you have the right products for EMEA at this time?

Tom Swidarski

I’m sorry, would you say that again?

Paul Coster – JPMorgan

Do you believe you have the right product lineup in Europe?

Tom Swidarski

Yes, I think the – the thing we can’t do is, try and be all things to all people. And that’s why I think when you look at our order entry, when we focus on specific markets, we can do exceedingly well. So, order entry is up 40% in the quarter. Again, these things are lumpy, but what that proves to us time and time again is we are focused on specific accounts, specific countries, we can do pretty darn well on EMEA. We are nowhere near where we want to be in EMEA, we don’t have the same influence and have the same capabilities we do in Brazil or Latin America or North America or in Asia Pacific, we understand that which means we have to be even more focused to make sure that we start building some density within these countries to drive our business model, which is services and recurring revenue stream in these key countries and with these key customers.

Paul Coster – JPMorgan

As you pursue these service opportunities in emerging markets, you cited the example of India, is there any compromise to your margin structure?

Tom Swidarski

I would say overall, I mean if you look at India, in general, there absolutely is, the services is much better than the product margin. So, the key there for us is, as we build density, much like we have in the United States, if you look historically over the last maybe five, seven years in the United States and look at our service margins, I mean, there we can see the two improve through efficiencies, through density, through the technology, the backend systems that we are deploying to be able to take calls out the system, the quality of the products. Once we have the density, it is very advantageous. Right from the get-go in India, that was the business model we went to. And so, we recognized on that early and everybody has been there, everybody wants to be in India, local guys are in there, all the global players are in there. So, on the product side, that’s going to be very, very competitive and very challenging. So as such, building – the first thing we did several years ago was build an IS center there and begin to manage the products. And as such, we are very happy with the growth, we are very happy with the profitability we have moved to -- in India, whereas three or four or five years ago, we didn’t have the density, we were nowhere near where we are today. So, it’s a good business model, it seems to make sense and on top of that, as you can see from some of the comments today, we’ve been able to secure some pretty significant orders, so people are confident in our ability to deliver as well.

Paul Coster – JPMorgan

My last question relates to the domestic business, I think you and your main competitor in the US have both talked about order intakes in excess of 20% year on year growth in the last few quarters, and yet the revenue growth is modest, is this just simply because the order intake relates to just such a small subset of your business, or is there – it seems to be a delay between the order intake and the actual revenues, can you talk about the cycle time there and what is that I’m missing?

Tom Swidarski

Yes, so – I mean I think you hit on the head. There is an increased delay between orders and revenue, absolutely. There is couple of parts there; one is, you are no longer just talking about an ATM, because the impact of deposit automation, the bank itself has much more to do to be prepared for deposit automation in either a process or a network to be able to handle the more complex transaction to build, but handle that deposit free ATM. They need to have the right technology infrastructure with (inaudible) making sure they’ve got their IT pieces in place. And then third, they have work flow issues within the bank branch facility. So, I think for anyone when you deal with the complexity of deposit automation outside of the big – five or ten national banks, once they have that in place, you can just move very quickly. With a lot of the smaller players, it takes a while for them to be prepared even after they order it. So, as such, you see the delay relative to self service, it has extended.

The other thing that extended is really the IS piece, because again IS is more complex than just a simple ATM. Again, both of those work in our favors long-term and they also change the dynamics from a competitive standpoint and really prevent a lot of the kind of the low-end providers to just come in and compete. It’s very, very difficult and complex when we had IP, add software and you have the technology piece to it and the ability to manage that. So, you are exactly right, it takes much longer as you move to the tier banks, the smaller tier banks which is the phase we’re in and where our orders have increased significantly over the last six, eight months.

Brad Richardson

Hey, Paul, I – also – I mean, your question was certainly in the order entry and I think if you go back and kind of look at the discussion and the pattern of our order entry in North America, certainly, it began to strengthen significantly in the fourth quarter of last year. We’ve had another strong quarter, the first quarter and therefore, kind of a proxy of six months to revenue, that’s why it’s now coming in the second half, that’s what is contributing to back-end loading nature of our earnings performance for the corporation, one of the factors.

Paul Coster – JPMorgan

Thank you very much.

Tom Swidarski

Ardra, we have time for one more question please.

Operator

Alright. And we will take that question from John Williams of Goldman Sachs.

John Williams – Goldman Sachs

Hi, guys. Thanks for (inaudible) A couple of questions, you’ve seen couple of orders a couple of quarters in a row, pretty order growth from the US regionals, I was just curious if you could give a few more specifics on when you expect to see those translate into revenue and I know you just gave a little bit more color on that, but just in terms of – I know that with the extended self cycle, is this something that should probably continue into early 2012 or should we see the full impact of what you’ve seen in the last few quarters over the rest of 2011?

Brad Richardson

Yes. Well, certainly, John. I mean, what we saw in the fourth quarter and what we’ve seen in the first quarter, the vast majority of that should revenue here in the second half, obviously as we continue to strengthen the order book and we certainly have seen continued strength in April; if that continues, then obviously that revenue will be in 2012 to support the continued momentum.

Tom Swidarski

The other thing is, John is that we have, again, we talk about IS, remember that those are five years, so we’re going to get to the point here within this year or next year where that additional revenue begins to kick in as well. So we’re expecting IS to start contributing really in a meaningful way in the second half of this year as well. And again, as that goes over time, our backlog in that space alone has continued to grow rapidly. So, that again will yield – impact or begin impacting third and fourth quarter, but have begin to have a material impact in 2012.

John Williams – Goldman Sachs

Great. Just in terms of clarity on the growth that you’re seeing, is there something specific from the regionals that continues to be driving this or is it just the fact that there is probably some backlog on their side in terms of upgrading and ordering?

Tom Swidarski

I think there’s two things, one would be that, as we said, there’s pent-up demand and you have ADA and PCI compliance issues hanging over them. The other thing is we began five years ago really with an education of theory that have carried on for five years out in the field where we take in essence this entire solution out to the market. This year alone we’re going to be running, I think it’s like 35 or 40 seminars and generally, have 20 to 25 banks attend. Most banks, from what we’ve seen, end up attending these over a two or three year period before they make a big decision relative to IS, but deposit automation maybe brings them in the door and they may see the whole suite of solutions in security and logical security and that really is a big factor.

So, we’ve been building toward this and the marketing and the development of the capabilities as well as the product capability, I mean, Kartik asked the question earlier. We’re the only ones with the flexibility of letting someone have a single check, or a single note. That’s a huge issue for a small credit unions to begin down this path. If you want a single check and a bulk note, you can have that. So, the flexibility becomes much more important to this segment which is why we designed the terminals the way that we did and as such, I think we’re enjoying the success of that right now, and that’s going to continue.

We see nothing to prevent that with the issues of reliability and availability. We get the cost of ownership, again, with the kind of the service infrastructure and with the capability. It’s not just now we have been talking to them, we’ve been talking to them for two or three years. It’s just now that they have begun to move in a serious manner.

And I think the other thing that’s impacted them is, you probably have about 35,000 deposit ATMs deployed by the top three or four or five banks in the United States. We are starting to see them everywhere. We’re starting to see ads on TV, so they have a need to really move.

John Williams – Goldman Sachs

Got it and that’s good to hear. One other question, I guess just quickly on capital allocation. You guys obviously buy back some shares on the quarter. You’ve got a pretty good cash position. You got what seems like a decent 3.5 million share block left under your authorization. What are you thinking now in capital allocation, would you consider sort of an enhanced buyback or at least, really ramping it up given, the stock option today is down a little bit, but what are you thinking here?

Brad Richardson

I think, John, we’re still focused on the 4 million share authorization that was authorized in February. Again, we will continue to look at this, and I’d just continue to point to you that as we look at our overall capital allocation or we look at the balance sheet, certainly a lot of our cash is offshore at this point. And so, we’re accessing that cash to fund the share buyback program and we’re trying to do that in a tax efficient way. So we’ll just continue to kind of execute on the current program, look at our tax repatriation strategies and we will take a look at this as we get through 2011 for 2012.

John Williams – Goldman Sachs

Got it. Thank you, guys. I appreciate it.

Operator

And that does conclude the question-and-answer session. I will turn the conference back over to management for any closing remarks.

John Kristoff

Thanks, Ardra, and thank you everyone for joining us on the call today. As always, if you have any follow-up questions, please don’t hesitate to reach down for myself or Chris Bast. Thanks again.

Operator

And that does conclude today’s conference. Thank you for your participation.

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