Diebold's CEO Discusses Q4 2011 Results - Earnings Call Transcript

Feb.13.12 | About: Diebold Inc. (DBD)

Diebold Inc. (NYSE:DBD)

Q4 2011 Earnings Call

February 13, 2012 10:00 am ET

Executives

Thomas Swidarski – President and CEO

Bradley Richardson – EVP and Chief Financial Officer

John Kristoff – VP and Chief Communications Officer

Analysts

Kartik Mehta – Northcoast Research

Matt Summerville - KeyBanc Capital Markets Inc

Zahid Siddique - Gabelli & Company

Gil Luria - Wedbush Securities

Paul Coster – JPMorgan Chase & Co

Roman Leal - Goldman Sachs Group, Inc

Dan Doliff - Morgan Stanley

Operator

Good day, everyone, and welcome to the Diebold, Incorporated Fourth Quarter Financial Results Conference Call. Today’s call is being recorded.

At this time for opening remarks and introductions, I’d 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, Tom. Good morning and thank you for joining us for Diebold’s fourth 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 with past calls, it’s important to note that we have restructuring, non-routine expenses, non-routine income and impairment charges 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 complete reconciliation of our GAAP to non-GAAP numbers, please refer to the supplemental material at the end of the presentation. In addition, all 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. As a reminder, some of the comments today may be considered forward-looking statements. Internal and external factors could significantly impact actual results. As a precaution please refer 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.

Thomas Swidarski

Thanks, john. Good morning, everyone. Thanks for joining our call today. We closed 2011 on a winning note with strong performance in revenue growth and profitability across most regions. Most importantly, we delivered on all our prior commitments in several key areas. First, we delivered on our top line revenue commitment by growing 7.5% in the fourth quarter despite a 2% headwind from currency. Second, we generated about $5 million in operating profit in EMEA during the fourth quarter. Third, we exceeded the top end of our EPS guidance even when excluding the tax benefit from Brazil. Finally, our strong free cash flow generation during the quarter enabled us to exceed our full-year free cash flow guidance by more than $10 million.

These results speak to the improving health in our markets as well as our strengthening competitive position and continued operational progress. Our strategy to leverage our capabilities in services, software and innovation is beginning to pay dividends and its meeting the needs of our rapidly evolving markets.

In addition, Diebold delivered significant growth in revenue and generated more than $250 million in free cash flow during the fourth quarter. Our global financial self-service orders grew 17% during the quarter, with growth in every region of the world. The North American market continues to grow an impressive rate as demand remains strong.

As we look to 2012, I’m encouraged by how our business is growing and we’re developing new innovations to help drive further growth. We will once again step up our R&D investments in new solutions in 2012 that will help financial institutions reduce their operating expenses while attracting new customers.

Along these lines we continue to roll out new industry innovations. During our last call, we talked about several key announcements, including the development of the worlds first virtualized ATM and the introduction of our Opteva Flex Performance Series. These developments will help build the foundation for the types of solutions we need to – in order to deliver value for our customers and investors over the next several years.

To that end, earlier this year, we introduced yet another innovation. In January I attended the International Consumer Electronics Show in Las Vegas, where we collaborated with Verizon to introduce a concept for the worlds first 4G LTE enabled automated teller machine. This ATM harness with the same technology used to provide high speed, secured connectivity of laptop computers, smartphones, and other mobile devices and applies it to the ATM.

We were pleased with the positive reactions we received at the show. Subsequently, I’ve personally met with a number of important customers who are very interested in the 4G ATM concept.

The application of 4G connectivity represents a giant step forward in the way financial institutions monitor and manage their self-service networks. The concept is a critical milestone on Diebold’s services roadmap, paving the way for advanced services functionality.

By being the first incorporate 4G technology with the ATM, we’re providing yet another innovation, another innovative means to increase efficiencies, enhance security and improve customer service. It’s critical that we continue to invest in innovations such as these at a time when financial institutions face intense pressure to find new creative and secured ways to lower costs while attracting new customers.

In addition, growth in service and services continue to add an impressive pace. The total contract value of integrated services contracts, we signed in 2011 alone exceeded half a billion dollars. This growth underscores the softness of our strategy to transform Diebold into a software-lead services provider.

Recently, we won the ATMs industry’s largest integrative services contract ever awarded in North America. Its part of a comprehensive integrated services agreement with TD Bank. We will provide a complete range of business process outsourcing services over the next five years. We’ll support TD's multivendor network of more than 4400 ATMs across the continent and provide an enhanced ATM-user experience.

One of the critical factors in TD's decision making process was Diebold’s security capabilities. As part of the agreement, we’ll deploy ATM endpoint protection by Symantec as well as our own software deployment services to provide the latest system patches and updates required by PCI Compliance Standards. These turnkey proactive technologies automatically analyze application behaviors and network communications to detect and block suspicious behaviors.

As we’ve communicated for many years, services are the key ingredients for long-term value creation in our industry. Our agreement with TD exemplifies a critical need banks have to focus on the cooperations. Likewise, it also demonstrates their recognition of the capabilities we’ve built in this space, our knowledge of our customer’s business processes, the breadth of our service organization and our growing electronic and logical security capabilities. We’re building up our success in Brazil and North America to bring integrated services to key regions across the globe and remain very optimistic about the scope and potential of this business.

Now, let’s take a closer look at our performance on a regional basis. In North America, demand for both products and services remains very strong. Total revenue during the quarter increased 13%, while overall product and service orders grew 14% in the region.

Looking at just product orders for financial self-service in the region, we saw an increase around 55% in total including nationals and regionals. And the growth in financial self-service orders does not include the impact from the recent IS wins at TD Bank. Most impressive is that this increase is against a very strong comparison in the fourth quarter 2010 when total FSS product orders in North America increased around 115%.

Customer demand continues to be driven by regulatory needs to meet new ADA and PCI requirements, and the need to provide high-speed, reliable and efficient automated deposit solutions at the ATM. While ADA requirements go into effect in March, we anticipate strong order entry to continue at least through mid-year as many financial institutions we’re working to meet compliance standards throughout the remainder of the year.

Additionally, deposit automation continues to be adopted at a healthy rate in North America. For example, excluding the three largest banks, we’ve already completed their deployments, our shipments for deposit automation in the U.S. nearly doubled during the quarter. This demonstrates underlying strength in the market beyond recent activity-related to compliance.

One such example we announced during the quarter in the regional space was Suncoast Schools Federal Credit Union. We replaced 94 of the credit union terminals with advanced deposit automation Opteva ATMs. We also replaced more than 100 cash dispensers and provided a variety of integrated services including advanced skimming detection. With this new ATMs and incorporate rapid processing technology, this progressive institution is again leading the pack and advanced ATM functionality, and we’re doing it with Diebold.

In 2011, we capitalized on a robust recovery in the ATM market in North America to achieve significant increases in orders and sales, and we expect these demand trends to continue in 2012.

In summary, we remain very optimistic regarding the state of the North America financial self-service market and our strong competitive position.

Looking at our security business, revenue decreased 6% during the quarter and orders fell 2%. While our physical security business remains hampered by weak branch construction, I’m encouraged by the increased order activity in electronic security, particularly in the financial market. In fact, if you exclude the $40 million order related to the World Trade Center that we booked in the fourth quarter of 2010, total security orders actually increased about 30%. This improved order book gives me confidence that we’ll begin to see revenue growth in the security segment in the second half of this year.

As I had mentioned in previous quarters, the security environment is changing very quickly. The necessary technology to tie together physical or logical security systems has grown very complex and it’s creating a compelling case for an outsourcing model similar to what we’ve built in our ATM business.

As I shared with you during our last call, we’re adapting to this need by building an industry leading IS offering within our security business. And we’re seeing some early results of our refocused efforts, not only did our security sales pipeline for electronic security continue to grow, we also closed a couple of multimillion dollar security IS agreements in the financial space during the period.

In addition, during the quarter we were named the 2011 Systems Integrator of the Year by SDM Magazine, an important trade publication in the industry. Earning this award is a testament to our consistent successful delivery of comprehensive security solutions to our customers. Our recent work on highly complex security projects has helped to augment our credibility and capability as the leading systems integrator.

So, the progress we’ve made in electronic security is encouraging and we believe we’ve had right strategy and infrastructure in place to more successfully pursue opportunities in this space. Our sophisticated security capabilities are also highly relevant and valued in a financial self-service industry as evidenced by our recent agreement with TD.

Moving to EMEA, fourth quarter revenue dropped 18% as the company continued to execute on its restructuring strategy, including existing some unprofitable segments of the business. It’s important to note, as a result of this strategies that we delivered on our commitment to turn a profit in EMEA in the fourth quarter. This gives me confidence that our restructuring strategy has generated meaningful results.

Orders for products and services increased nearly 6% in the period when we experienced strength in certain markets, in Western Europe and Africa. This was partially offset by continued weakness in some Southern European markets such as Italy. Eastern Europe remains a challenge for us as we work through build our business in Russia following our leadership restructuring there.

Notable wins during the quarter include the 1,000 Opteva units in South Africa, more than 500 cash dispensers, ATMs and other upgrades in France and 60 recycling units in Belgium. Given our improving results, I’ve growing confidence that we can achieve modest profit in the region for the full-year 2012.

In Latin America, including Brazil, revenue increased about 9% or orders decreased 13% in the quarter. However, excluding election systems and lottery sales, orders increased 8%. During the fourth quarter we signed a new contract with the TSE in Brazil that provides for the purchase of the 90,000 new voting terminals in 2012.

The TSE placed a firm order for 35 voting -- for 35,000 voting terminals in December in comparison to TSE ordered approximately 117,000 units in 2011. While we anticipate securing orders for additional units under this contract, we don’t yet have clear visibility to the final numbers of units that maybe ordered. This is reflected in our guidance range, which Brad will cover in his comments.

In the financial self-service space in Brazil, we continue to feel very confident with our market leading position. Most recently we won a bid to supply more than 3,800 ATMs to Caixa Economica Federal, the second largest bank in Brazil. Diebold was ordered 100% of the bid, which involves supply, installation, and on-site field services for the ATM. This win, as well as our recent agreement in November with Banco Santander for about 2000 cash dispensers are just the latest examples reaffirming our position as the clear market leader in Brazil. And we’re confident in our ability to win a number of other large opportunities as we progress through the year.

Looking to the rest of Latin America, the market remains very active throughout the region. During the quarter Mexico and Columbia were particularly strong in terms of winning new business. We continue to maintain solid leadership in Latin America and are well positioned to capture a significant amount of the growth expected to occur there in 2012.

Now moving on to Asia Pacific, revenue increased 14% in the fourth quarter, while orders increased 21%. Revenue growth in the region was especially strong in China, due primarily to expected year-end seasonality. While demand remains robust in the region, product margins continue to be pressured by increasing competition and price erosion. We recognize that the long-term value in this region and across the globe lies in services. Value added services, such as managing complex ATM networks and operations enables us to differentiate ourselves from the local hardware manufacturers prevalent throughout Asia.

Our strategy is to invest in building a sustainable service model to help ensure our long-term competitive position in the region. For instance, we continue to make strides in India, where we now monitor a 40% of the install base of ATMs in the country. So while the market landscape remains very competitive in Asia, particularly in China, we’re excited about our strategy to expand our services portfolio throughout the region. This is the foundation upon which we will build our competitive advantage in this challenging environment.

Given our growth and increased profitability as we close out the year, I feel optimistic regarding our prospect as we look towards 2012. We expect moderate top line growth overall with a higher growth rate in the Americas despite a drop in both revenue and earnings associated with the Brazil elections business.

As I mentioned earlier, we also expect to achieve modest profit in EMEA for the full-year and expect to see growth in the security business in the second half of 2012. Finally, we anticipate similar quarterly seasonality in revenue and earnings to what we had in 2011. Given all these assumptions, we expect total revenue growth of 3% to 6% and earnings per share of $2.30 to $2.50.

So to summarize, I continue to feel extremely confident in the direction we’re headed. We delivered on the commitments we made in 2011; I’ve not doubt in our ability to deliver in 2012 and beyond. Moving forward, the investments we made in our software and services capabilities will help us to build a more sustainable business model in terms of our competitive advantage, profitability, and top line growth. And the timing of our strategy is spot on, given the immediate need for financial institutions to optimize their retail banking channels and wisely invest our capital.

Our approach to the global markets in which we compete drive that results. It is the commitment and passion of Diebold’s people in geographies as diverse as Turkey, India, China, Brazil, that fuels our success in the dynamic and diverse markets where we operate. Their dedication and knowledge gives me great confidence that we’re on the right path to a thriving future.

With that, I’ll turn the call over to Brad.

Bradley Richardson

Thanks, Tom, and good morning, everyone. Before I get into the quarterly financial results and 2012 outlook, I’d like to walk you through our other key topics. We delivered on our commitments, improved margins and progressed on our restructuring efforts in EMEA. Earlier in the year, we had quite a steep hill to climb, given the backend loaded nature of our forecast and plan.

Looking back on the year, I’m pleased we were successful in delivering on the commitments we made to our shareholders in terms of earnings growth, free cash flow and 4Q profitability in EMEA.

Our improved margins this quarter are proof that our business strategies are continuing to resonate with the market as we continue to transform the company into a more software and services led business.

As proof of our restructuring efforts in EMEA, we generated more than $5 million in operating profit despite an 18% revenue decrease in the fourth quarter. This is the result of the improved quality of EMEA’s revenue providing us with continued confidence in our restructuring strategy in the region. We are on target to achieve modest profit in 2012, assuming a relatively stable banking environment.

Now to review our financial results; turning to slide 17. Total revenue was $850 million up 7.5% from the fourth quarter of 2010, with a 2% negative currency impact mainly driven by the Brazilian real. For the quarter product revenue increased 9.4% and service revenue increased 5.5% with solid growth in financial self-service especially in the Americas and Asia Pacific.

For the full-year revenue was up slightly from 2010 with a decrease in product revenue of 3.5% and an increase in service revenue of 3.9%. Excluding the cyclical Brazil Election Business, product revenue would have been flat. All-year revenue includes a net positive currency impact of 2%.

Slide 18, provides a year-end view of our product and service revenue breakdown, and the improvement in gross margin with an 80 basis point increase in product gross margin, and a 100 basis point increase in service gross margin. Looking at our financial self-service business on slide 19; fourth quarter revenue was $640 million up 7.6%.

For the full-year financial self-service revenue was up 4%. North America provided solid growth due to the strength in industry adoption of deposit automation and addressing regulatory requirements. In the security business on slide 20; fourth quarter revenue was $171 million, a decrease of 6.6%. For the year security revenue was down 4%.

As Tom mentioned, the strategy for the security business is to focus on growing our electronic security sales in the financial industry, along those lines we saw modest growth in our electronic security revenue for the full-year, which was more than offset by the decline in our physical security business.

We are also laying the ground work for what we believe will be considerable integrated service business within this space. We anticipate the security business will return to top line growth in the second half of 2012.

Turning now to slide 21; the total gross margin for the fourth quarter increased 2.8 percentage points from 2010. For the full-year gross margin increased 1 percentage points. The product gross margin for the quarter was up 2.5 percentage points. This increase was due to improved margins in EMEA, in North America as well as a more favorable customer and geographic mix. Service gross margin for the quarter was up 3.2 percentage points. The increase is the result of a mix-shift towards higher value added services and continued productivity improvement.

Moving forward, we have the opportunity for additional margin improvement in services through technology advances. One such example is OpteView Resolve, our predictive maintenance solution that predicts the failure before it happens. In many cases we can resolve the issue remotely, completely eliminating the service call which increases up-time and reduces cost.

Moving on to non-GAAP operating expense, as highlighted on slide 22; in the fourth quarter operating expense was down 40 basis points from the prior-year due to operating leverage on higher revenue. Full-year 2011 operating expense as a percentage of revenue was 19.5%, up 0.8 percentage points from 2010. This increase was primarily the result of higher selling and non-restructuring employee related expenses as well as research and development. In 2012 we expect full-year operating expense to be in the 18.5% to 19% range.

Now to slide 23; non-GAAP operating margin in the fourth quarter increased to 8.9% from 5.7% in 2010. The increase is largely due to the strong performance in North America as well as improved profitability in EMEA. Operating profit margins for the full-year 2011 was 7% compared to 6.9% in 2010. For 2012, we expect the operating margin to show a modest improvement.

Turning to the EPS reconciliation table on slide 24, as you can see on the chart non-GAAP EPS moved from $0.73 per share in the fourth quarter 2010 to $1.40 per share in the current quarter. Full-year of 2010 non-GAAP EPS moved from 2/3 – $2.33 per share to $2.74 per share in 2011. Both periods benefit from the release of a Brazil valuation allowance that I will talk to in a moment. Our non-GAAP tax rate moved considerably from 17.3% in 2010 to 10.6% in 2011.

On slide 25, you will recall we have previously estimated our 2011 full-year tax rate to be approximately 26%. Improved operating results in Brazil combined with a more favorable outlook for our core business in that country triggered the full release of a prior reserve on net operating loss carry forwards. This was the main factor behind the lower tax rate for the year.

Turning to slide 26, free cash flow for the full-year was $161 million compared with free cash flow of $222 million in 2010. Given our net cash used position at the end of the third quarter, I am very pleased that we were able to exceed our projection of $150 million free cash flow for the full-year by more than $10 million.

When looking at the elements comprising our 2011 full-year free cash flow, net income was $152 million, depreciation and amortization was $80 million, capital outlays were $55 million, and the change in working capital with a negative $24 million in support to the backend growth of the business. As a reminder, 2010 free cash flow benefited from a $75 million tax refund.

On slide 27, we anticipate 2012 free cash flow will be around $150 million. This includes $20 million increase in capital expenditures to about $75 million, reflecting an increase in R&D as well as IT infrastructure investments. In addition to our dividend, our primary uses of cash include a continued investment in the business through areas such as research and development, possible bolt-on acquisition, as well as an opportunistic approach to share buyback.

In 2011 we repurchased a total 3.6 million shares. Our Board of Directors have added an incremental 2 million share authorization to our remaining balance of roughly 400,000 shares. This standing authorization will enable us to repurchase shares opportunistically from time to time depending on market conditions.

Looking at slide 28 and 29, we improved our working capital position during the quarter. Day sales outstanding decreased by one day from the prior-year to 37 days. I am pleased with our DSO performance and I am confident in our ability to maintain DSO near these levels moving forward. Inventory turns increased by 0.1 turns during the quarter versus the prior-year.

Moving next to liquidity and net debt on slide 30, we finished the year in a net debt position of $7.7 million at December 31, 2011 compared to a net investment position of $35.1 million at December 31, 2010. I am pleased with this performance and the strength of our balance sheet.

To provide some additional context around our financial position, since 2007 we reduced net debt from $325 million to $7.7 million at the end of 2011. This was achieved even while we returned $343 million to shareholders in the form of dividends, invested $280 million in capital expenditures and acquisitions, spend $360 million on research and development, and a $140 million on share repurchase.

Turning to the full-year outlook for 2012 on slide 31, we expect revenue to increase 3% to 6%. Our expectation is that the financial self-service revenue will increase 5% to 8% while we expect security revenue will increase 1% to 4%. Finally, we expect Brazilian election systems and lottery revenue of between $60 million and $90 million. We expect our full-year 2012 non-GAAP EPS to be in the range of $2.30 to $2.50 per share. Within this guidance we have several moving parts and assumptions as highlighted on slide 32.

First, we expect a higher tax rate in 2012 of around 28%. We anticipate solid core revenue growth as the financial markets continues its recovery. Additionally, we anticipate achieving the full-year benefit from our profitability improvement efforts in our EMEA region to positively impact earnings between $0.10 and $0.15 per share. Items that will offset the benefits we anticipate from our core growth and improvement initiatives include higher pension expense and lower election systems revenue from Brazil.

On the FCPA front we have conducted a global internal review and will continue to monitor ongoing compliance with the FCPA. We also continue to cooperate with the DOJ and the SEC in their ongoing enquiries into this matter.

In closing, we’re encouraged by our position moving forward in 2012. We’re confident in the strength of our markets throughout the Americas, particularly, the United States and Brazil. Our restructuring efforts in EMEA are beginning to prove successful and we look forward to further reposition that business as the region continues to endure economic uncertainties.

Asia-Pacific continues to be challenging, but we’re confident in our strategy to grow services in the region and remain competitive. As we proved in 2011 by remaining committed to our planning process and executing consistently each quarter we improve progressively throughout the year. I am confident that staying true to this approach will allow us to deliver on our commitments in 2012.

With that, I’ll turn it back to John.

John Kristoff

Thanks Brad. Now, before we go to questions, I just want to take a moment to remind everyone that our Investment Community conference in coming up next week February 22nd, and 23rd in New York. So if you haven’t already signed up, I’d encourage you to do so now.

And with that, Tom if we could take our first question.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We will take our first question from Kartik Mehta with Northcoast Research.

Kartik Mehta – Northcoast Research

Good morning Tom and Brad. Tom, I wanted to ask you a little bit about the integrated services contract you recently signed, and I guess, I was more interested, now you’ve had some great success in Brazil, had great success in North America, and I’m wondering is this model to something that you can port to other countries or is this a model that only works in a few countries and that’s where you will focus on?

Thomas Swidarski

Kartik, we firmly believe this model works everywhere in the world. I think the adoption in different parts of world will be very different and as you see right now as the financial institutions in the North American continent were coming out of their financial crisis looking to take dramatic costs out of their operation. It’s begun to accelerate very quickly here. Likewise, I think there is opportunities in other parts of the world as we continue to build our infrastructure and we’ve begun to setup IS centers around the world. Even in a place like China where it’s very early on and we only have like – there are one or two relatively small customers there build our capabilities and hone that and for it to be a model that we used for our sales stand point, it’s important as well.

So we see a lot of advantages there. It’s also predicated upon a strong service organization in understanding how the service operation works. So for us that’s the key pillar that we’re putting across the world. And we think the backend systems that we’ve built in Brazil, in the United States and also have now in India can be applied everywhere in the world. So we feel very good about that ability and sustainability of that over the next 5 to 10 years.

Kartik Mehta – Northcoast Research

And then on the security side of the business Tom, it sounds like you’re having a good success on the electronic side. Do you see a need to acquire some companies, so you can continue the success and add some feature and functionality or are you at a point where you have enough of that and it’s just a matter of now executing on some opportunities?

Thomas Swidarski

I think the way I’d approach it is this way. The 2012 we look to be a breakout year for security. So the second half of the year we expect to see electronic security really to start to demonstrate some growth both on using the IS concept and the sales focus we have in the financial industry. We have won several, what I’d call, meaningful contracts to validate our approach there and that includes monitoring in all sorts of the services side of the business. As we do that I think we would be looking for some potential acquisitions maybe medium size or small $20 to $50 type acquisition to help accelerate that growth. But I feel regardless of we do an acquisition or not we’ve got our focus, we got the capabilities, and we are seeing early results in that regard and certainly when you look at the whole security category, the physical security piece continuing to come down masks some of that.

But underneath that, as we talk at the Investor Conference next week, you will see – you will understand a little more about the strategies and the kind of successes we’re having which gives us pretty good confidence relative to the security business. And then the last thing I’d add that I talked about on my script is don’t underestimate the power of the security and the sophistication of that, that help us on IS, on the ATM side. That was a big factor in the TD decision process in terms of our understanding of physical, logical, and electronic security bring those together and impacting both the network, but also other assets as well. So that’s how I think about the security space.

Kartik Mehta – Northcoast Research

And then just a last question Tom. Do you expect – revenue expectations for Europe, obviously that business is turning around and you’re going to – it’s going to be profitable for 2012. I’m wondering what that assumes in terms of revenue expectation?

Thomas Swidarski

Yeah, so Kartik, that really doesn’t have any real revenue growth in it. I mean, we’re looking at flat plus or minus one kind of thing, so relatively flat there. Our whole goal relative to the restructuring was to get ourselves organize better, to make sure that the revenue that we do get is more profitable and in the right places, and that we’re associated with the right institution. So that’s really the essence there. We think by doing that we’ll get better quality of revenue, better quality of earnings and we expect modest profitability in 2012 as a result of the continuation of that effort.

Kartik Mehta - Northcoast Research

Thank you very much.

Operator

And we’ll take our next question from Matt Summerville with KeyBanc.

Matt Summerville - KeyBanc Capital Markets Inc

Good morning, couple of questions. Tom you mentioned in North America you expect the order momentum you’re seeing that continues through mid-year or thereabouts. What are customers at this point, if anything saying about the back-half of the year, saying about their spend, post this ADA, I am going to call it a deadline for lack of a better word, but we all know its not really a deadline. What are they saying about their level of spend once we kind of get beyond ADA and I guess; how do your incoming order rates and revenue that you’re generating in the small bank market compare to the prior cycle peak?

Thomas W. Swidarski

Yeah, Matt, we’re spending as you might imagine a lot of time on that very question. We continue to feel very strong relative to the activity after the compliance ADA, PCI piece gets rolled out. As you say, it’s not a hard drop fast deadline there; so we expect really through the first half of the year to see continued activity relative to just those pieces as well. But I think the encouraging piece underneath that, that we’re seeing is, a lot of people have upgraded for ADA and PCI, but the deposit automation and IS activities, as I’ve mentioned. I mean we doubled shipments here in the fourth quarter compared to last year our order rates were exceedingly strong even compared to very high levels prior.

So we expect them to continue pretty well because that deposit automation activity, as we look at the space, we think has a lot of runway left in it, and all the regional bank activity and all the visits we have are very squarely focused on that. That then leads into the discussion on IS, and really IS takes us into all the services surrounding that; so I feel very good about all the level activity throughout 2012 from an order flow standpoint.

Matt Summerville - KeyBanc Capital Markets Inc

As we think about, you mentioned in Q4 having a favorable geographic mix, customer mix; as we think about 2012, is there any reason that, that doesn’t continued based on what you have in your order book now?

Thomas W. Swidarski

No, I’d expect that, that general trend to continue in 2012.

Matt Summerville - KeyBanc Capital Markets Inc

And then just lastly in Asia Pacific, is pricing actually getting worse of the magnitude of degradation that you’re seeing?

Thomas W. Swidarski

Yeah, I’d say Matt that, you would say, I think that the pricing environment we’ll kind of look at that every which way from Sunday, large orders anywhere in the world you see pricing. But you would say across the board in Asia, the pricing activity and the level of competition there on the hardware side continues to deteriorate. So we monitor that on a quarterly basis; we review it on our monthly reviews with each region of the world, but I’d say that trend has continued and hasn’t abated. At some point it will, and we’ll be thankful when we hit that point, but we haven’t seen it yet.

Matt Summerville - KeyBanc Capital Markets Inc

Thanks, Tom.

Operator

We’ll take our next question from Zahid Siddique with Gabelli & Company.

Zahid Siddique - Gabelli & Company

It’s on your guidance, you’re guiding to a range of $2.30 to $2.50; that compares against $2.31 if you exclude the valuation allowance in 2011. So my question is; why is that number $2.30 to $2.50 not $2.80 to $2.90 or $3; why such a low growth over 2011, what are the factors behind that?

Thomas W. Swidarski

Lets flip to the – what slide do we've that on?

Bradley Richardson

32.

Thomas W. Swidarski

Do you want to start?

Bradley Richardson

Yes, Zahid, I think, if you –

Thomas W. Swidarski

Slide, 32 I think is the -- good place to begin.

Bradley Richardson

I think on slide 32, what you can see is, again if you excluded the Brazil valuation allowance; but if you just normalize our tax rate to 28% and apply that to the 2011 earnings you get about $2.20 per share; so on a constant tax rate basis we’re expecting a growth from $2.20 to either $2.30 to $2.50. And you can see again on slide 32, there certainly are some positive things that we’ve talked about in terms of the revenue growth as well some of the mix issues that Tom, just spoke to, and certainly the positive impact of EMEA and all the restructuring that we’ve done there, which is paying dividends, couple of headwinds that we’re facing, that we’ve been upfront about is certainly our pension expense, just what's happened to the discount rate.

And then a significant variable on our guidance for next year is the level of orders that will come from the Brazil Election Authorities, as Tom mentioned in his remarks, we’ve got an order for 90,000 units, but a firm order was placed for 35,000 units, so there’s -- we're not exactly sure how much the Election Authorities will take, so that’s a variable in our overall guidance. So again strong tailwinds, two headwinds, one is being the pension expense and two, being the variability in the Brazil voting revenues and associated profits.

Zahid Siddique - Gabelli & Company

And the Brazil voting EPS can range between $0.05 and $0.15, assuming revenues will be $60 million to $90 million range?

Bradley Richardson

Yeah, that’s the decline versus – that’s the range of decline versus 2011 because 2011 we had roughly about $75 million in revenue from voting, just from the voting side, and a little over 115,000 units. So, again, we’re projecting the overall units and revenues to be down in 2012, having an EPS impact of between $0.05 and $0.15 per share.

Thomas Swidarski

And Zahid, if I can add on to where Brad kind of explained there, so if you think last year, we had 120,000 units in voting and you look at our guidance here, we’re assuming the 35,000, which is the firm order what we’ve is kind of in the low-end, the top-end would be the 90,000, that’s the possibility we could hit. So, it’s somewhere in there that its the difference in terms of how much we’re going to be below last year and that’s what the range of down $0.15 and down $0.05 on EPS, it relates to. So, it’s kind of pretty straightforward in that regard.

Zahid Siddique – Gabelli & Company

Right. Even if -- even then we exclude all of that, why wouldn’t the EPS be higher than the 230, I guess even the 222 number that you give out with the normalized tax rate?

Thomas Swidarski

Well, the -- I think as Brad was indicating, between pension, between the pricing pressures in Asia-Pacific and really you’ve got some unknown such as fuel and other things that really impact us, we think right now, we’re prudent in terms of the 230 to 250 and as we go through the course of the year depending up on the level of activity and there is a lot of orders yet we need to win, to achieve this, we would adjust accordingly, but we think this is the right place to start for the beginning of the year, for us.

Zahid Siddique – Gabelli & Company

Okay. And then, did you buyback any shares in Q4 and what’s the plan for 2012?

Thomas Swidarski

Yes, we did, we bought back about 200,000 shares in the fourth quarter. And as I mentioned, the Board authorized an incremental 2 million shares to our total outstanding authorization, right now, its 2.4 million shares. And what we’re going to do is as I put in my prepared remarks is we’re going to be opportunistic in exercising that share purchase program over multi-period. So, we’ll be opportunistic as we look at our alternatives for our cash and also look at potential discontinuity that might take place in the marketplace from time-to-time.

Zahid Siddique – Gabelli & Company

Okay. And last question on the security business of the $600 million in revenues, roughly, how much is electronic security and where are some of the products within that?

Thomas Swidarski

So, on the electronic security side, it’s probably about 60% or -- is it 60% or 55%?

Bradley Richardson

It’s about 55%.

Thomas Swidarski

Okay, 55% of the electronic, then 45% will the physical side, that includes both product and services. In terms of the product offering, there are probably some of the key anchors that I’d point you to, Zahid, when you think about it is really on the services side. So, we’ve got the monitoring center here in North America and several monitoring centers in other locations as well. What we in fact are monitoring, say, alarm, fire and other things that are attached to both enterprise-wide security as well as bank branch-based security.

The other piece I’d point to is, on the electronic security side, the integration piece is very important. So, we don’t necessarily manufacture any of the cameras or any of the access-control system, but we, much like an ATM network tie all that together either they monitor it or we monitor ourselves.

So, we pretty much focus on both the enterprise-wide system, which would be the big facilities like United Nations or World Trade Center and all the services that flow from that or in the banking space, it would be regional banks that have maybe 20 or 40 or 60 or 80 locations and possibly do all the monitoring for them as well as services and integration. And when we’ve the Investor Conference next week, we’re going to really have a breakout session to go into this in great detail to give you a lot of color on the capabilities there as well as the product offerings as well as the opportunities.

Zahid Siddique – Gabelli & Company

Thank you so much.

Operator

And we’ll take our next question from Gil Luria with Wedbush Securities.

Gil Luria - Wedbush Securities

Yes, good morning. You’ve given a lot of very useful metrics and numbers around the success in the U.S., but could you help us focus in what was revenue growth for the U.S. ATM business in the fourth quarter? What do you expect that to be in 2012?

Thomas Swidarski

Yes. So, Gil, the U.S. financial self-service revenues, excluding the security revenue grew at about 30%. The overall North American revenue was up about 13%, but with the decline in the security side, the FSS revenue was up about 30%.

Gil Luria - Wedbush Securities

For 2012?

Thomas Swidarski

No, I was answering your question for the fourth quarter.

Gil Luria - Wedbush Securities

Yeah. And what do you expect that business to do in 2012?

Thomas Swidarski

I just speak to the total FSS revenue for the corporation. We’re expecting 5% to 8% total worldwide growth. We don’t breakout the North American component.

Gil Luria - Wedbush Securities

Sure. And then on integrated services, it’s been a very good theme, and you took a big leap forward now with the TD deal, can you remind us when you look at a deal like that, the five-year – big five-year integrated services deal, what the increment on revenue is? So – how much more revenue you’re going to get over this five-years versus if you just sold the ATMs? And then, same thing about the margins, what – how did the margins compare over five-years and how do they trend over that five-year timeframe?

Thomas Swidarski

Okay, let me start with that Gil, and make sure I get to all the various pieces. So, yeah, let me start with the normal contract and then may be I’ll get to TD, why we think TD is so important.

In a normal contract, probably as part of the integrated services, you get a piece of hardware, you get service and then you get services, and on a normal contract the breakdown would be the services pieces maybe 15% to 20% of the total value of the contract.

Toronto-Dominion is slightly different. In Toronto-Dominion’s case, probably 50% of the revenue is associated with software and the services side. The hardware piece maybe only 20% of it and then you’ve a service contract that goes along with it.

So, some of the key factors there that I mentioned was, first of all, Toronto-Dominion have the split network, it’s not all Diebold technology, so they’ve other technology in there. So, the piece of a contract that we’ve relative to hardware is just on the Diebold piece. So, if there is an opportunity there, not in this contract that if we perform well, and someone else isn’t, it’s easier to replace someone else now because you’re in there for five years. We’re in the backend system using the OpteView Resolve tools managing the entire network and the performance of their network. So, it’s our desire to improve every aspect of performance. To do that, OpteView Resolve understanding what’s happening in the terminals and the software to manage that and the security around that is all our responsibility. Thus the outsourcing piece of the software and services being 50% is very encouraging to us.

Those are generally split over five years, but the software and services tends to grow in the latter years whereas the hardware is more upfront in terms of you’re going to place a 1000 terminals, you do that over the first two years, software and services as you grow the level of sophistication on security would grow in the latter years.

As you might imagine, the software and services margins are better than traditional product margins and the service margin. And as a matter of fact, in some of these I wont get into Toronto-Dominion, but in some cases you may have your margins affected a little bit on the front-end by one or two margin points for four or five-year contract.

So, in concept, that’s the way it is. It should mix as we move to software and services. It should mix our margin higher thus you see the movement in terms of service overall, which include services, which have been relatively small continuing to march upward and we’ve that kind of success this year. We’re pointing to get to our service margins in the 27% range for the full-year, next year. So, again, that will be a nice increase across the board, these kinds of contracts and movement to this capability not only in the United States, but elsewhere helps us get there.

Gil Luria - Wedbush Securities

That’s great. Thank you.

Operator

We’ll take our next question from Paul Coster with JPMorgan.

Paul Coster – JPMorgan Chase & Co

Yes, thank you for taking my question. First one relates to the seasonality of the business. You said that we should expect similar seasonality to 2011, though you also said that security will be a bit backend loaded. So should we just feel even more pronounced in our expectations around that segment with more backend loaded?

Thomas W. Swidarski

No, I don’t think it will be more backend loaded than this year. I think what we’re saying is the; we’ve come into this year, there’s a lot of activity that will happen in the first half, so our quarters will be slightly different, its just when you look at it overall you would say its close to more normal seasonality, where you’d say maybe the second half of the year it will 60%, first half of the year is 40% or 65%-35%. This year I think we were like 75%-25%. So even though security would be more backend loaded, we've a lot of activity going on in the first quarter and first half of the year from contracts that need to be fulfilled, so I think more in terms of 40% first half of the year EPS, 60% second half of the year.

Paul Coster – JPMorgan Chase & Co

Thank you. Tom, in your prepared remarks you talked about strong order activity even from nationals, so let me singled that – them out. What is the nature of the business you’re getting from nationals who, many of us would have expected to have completed their upgrades by now?

Thomas W. Swidarski

So the way we look at it; and the primary driver is really deposit automation and integrated services. So when we look at it, I really separate the top-three banks from the next 20 banks and you have kind of the next 1,000, you have the rest of them. But when we’re talking about the big players, it’s really the top 25 banks in United States, so when you start going down that list up to the top three, there’s two or three other major player’s right there that we think we’re in very good shape with and we’ve started to see some activity, so many of those have a long way to go relative to the deposit automation.

So we think there’s a lot of activity that it can take place there, as well as in the regional bank space over the next several years. So these won't be just 2012 rollouts, we expect these to happen over multiple years. We’ve been in heavy test mode and small pilot rollouts with several of these and we would expect that to really start to see some type of order activity in the second - third quarter and rollouts to begin in the fourth quarter into next year.

Paul Coster – JPMorgan Chase & Co

And my last question is, do you think the upgrade cycle for ATMs in North America, in particular, and for that matter the rest of the world, that the upgrade cycle has tightened somewhat and if so, can you sort of give us some sense of how frequently you expect it to be coming back to your customers now and upgrading either the whole piece of kit or modules within that?

Thomas W. Swidarski

Paul, I think the upgrade cycle is absolutely – continues to tighten. And the reason I’d say that, on the front-end is, for instance integrated services, one of the advantages they’ve in the integrated services is they’ve got a commitment to get new technology in a very refreshed, updated, periodic manner. So the more that goes to IS, the more that people are going to be upgrading around the 5, 7 year timeframe.

From an overall market standpoint, maybe I’d say up through last year, if you went back several, many years ago, upgrade cycles took place every 15 years, then I’d say it moved over the last 5 to 10 years in the neighborhood of 12 to 10 years, and now I see it coming under 10 years. And I think that’s globally as a result of deposit automation, the technology, then you talk about 4G and other things you can do to help improve or upgrade the capabilities or now that people are on deposit automation, you want to refine that like you did to dispenser over time.

So for me, I think the number is going to be under 10, the more we move to IS, I think that number gets closer to 7; so somewhere between 7 and 10 years I think becomes the more of the normal, I think the bigger banks might even be more aggressive than that globally. So that’s how we’re thinking about it.

Paul Coster – JPMorgan Chase & Co

Okay, thank you.

Operator

We’ll take our next question from Julio Quinteros with Goldman Sachs.

Roman Leal - Goldman Sachs Group, Inc

Good morning. This is actually, Roman Leal in for Julio. I guess, the first one on guidance, can we perhaps try to gauge how much the growth in FSS orders in North America could be, above and beyond the regulatory compliance? And maybe help us, I don’t know if you can share, just kind of a backlog number or how much of your revenue guidance for 2012 is kind of orders that you already have in the books and how much is coming from order activity there, you’re expecting in the first half 2012?

Thomas W. Swidarski

I can't give you that, as an effect, I don’t think I know that, because we’ve been trying ourselves to decipher between, if somebody’s placing an order for ADA, PCI, is this a moment on the upgrade cycle, so for me -- once the deadline passes and we see the order activity after that we’ll be in a much better position to distinguish between the two. Our sense is, that there are a lot of people that were moving, decided to move quicker as a result of having a deadline out there, but quite a few of those folks did not actually move to complete deposit automation or did a component of it. So then you get in a situation where we’ve got a lot of customers to be able to go back to and upgrade them to full deposit automation or potentially IS as kind of – as we move forward.

But my sense is there is a long runway yet for deposit automation in the regional bank space over the next several years, it has nothing to do with compliance. Compliance may have accelerated a little bit of the activity and decided to do everything at once, but as banks are getting little healthier in the United States, they’re deploying capital again relative to this network, this valuable network and the fact that they’re moving transactions off the teller line and changing that branch and allowing the ATM to handle cash, checks, and everything else. All of a sudden you’ve made a big dent in terms of the ability to really address their cost structure. So we see good underlying trends for 2012 and maybe by the middle of this year we will have a much better insight as to what that’s going to look like to the next 18 months after that.

Roman Leal - Goldman Sachs Group, Inc

Okay. And do you have – what the current mix of software and services revenue is? And what do you have – and do you have long-term target for where you want that to ultimately go?

Thomas W. Swidarski

Well, our long-term target relative to – it include service and services as to have the recurring revenue streams in the neighborhood of 75%. So when you look at our numbers today, they’re at slightly over 50%, somewhere in that range. So we know where we want to get to long term, we know how to get there. The good news for us is that number may not move as quickly if we got huge product orders. So we can live with that. But that doesn’t change the track of, for instance, in the TD kind of conversation more of its mix to services, and we see that across the board on all of our IS agreement.

Part of that has to do with the big change we’ve made over the last several years with our selling organization. Part of it’s improving, you’re selling organization your capabilities of your own folks, so that you are able to get out in front of this. And that’s why the security piece comes so important because that logical security both on the ATM and the security side is all based around services. So for us there is a lot of capability growing internally to enable us to do that and we are going to gain continued confidence, but our vision and our goal and very crystal clear as to what we’re driving to.

Roman Leal - Goldman Sachs Group, Inc

Okay and last one from me. The push to EMV or getting EMV adopted in the U.S., can you help us kind of understand how that potentially impacts you and have you had any conversation in those very early stages right now?

Thomas W. Swidarski

Yeah, those are very early stage. They have been so focused on ADA and PCI compliance. At some point you would think the U.S., one of the last bastions in the world need to be on EMV. But again there is a lot networks, a lot of people involved in that discussion, and the potential -- in regard to that really was similar to what we saw on other parts of the world where in terms of encryption and other things you need in the ATM and the way you handle certain data it needs to be upgraded. So it is not nearly the impact of deposit automation. But again it’s another step towards software and services, which fits very nicely with where we want to go.

Roman Leal - Goldman Sachs Group, Inc

Thank you.

Operator

Ladies and gentlemen, we have time for one final question today. It comes from Dan Doliff with Morgan Stanley.

Dan Doliff - Morgan Stanley

Hi. A quick question on Europe specifically. How much of the uptick in orders was from an uptick in the market versus an improvement in the competitive landscape for you actually versus NCR for example? Thanks.

Thomas W. Swidarski

Okay, so the way I’d do that is we see Europe has really been suffering in total. When we looked at the competitor results, I think they were all down relative to in order standpoint kind of going forward. I mean, we were up marginally in that regard on small numbers. So we feel good about where we’re at, that’s in spite of getting out of countries, then you’ve got for us because the numbers aren’t enormous in Europe relative to our total revenue. You’ve seasonality – you’ve fluctuations quarter-to-quarter, so I’m not too worried about the competitive piece in – from Europe. For us it’s a matter of us getting healthy on the cost structure, being focused in certain countries that we’re now focused on, returning profitability and revenue that drives profit. So for us it maybe different than other folks and if we exit a country, somebody else picks up that revenue, that’s not really my concern. So I didn’t see any numbers from anyone else relative to Europe in the self-service space that suggested anybody made any great progress there. I saw a lot of negatives and so I will stack up pretty well in that environment. I feel good about what we’re doing.

Dan Doliff - Morgan Stanley

Okay, great. Thank you.

Operator

And it was our final question for today. I’d like to turn it back to our speakers for any closing remarks.

John Kristoff

Thanks, Tom, and thank you all for joining us this morning. As always, if you have additional follow-up questions, please do not hesitate to contact myself or Chris Bast. Thank you and good bye.

Operator

This does conclude today’s conference. We appreciate your participation. You may disconnect at this time.

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