Diebold Nixdorf Inc (DBD) 2002 Q3 法說會逐字稿

This is Premier Conferencing. Please stand by. Good day everyone and welcome to the Diebold, Inc. third quarter 2002 financial results conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the Vice President of Global Communications and Investor Relations, Mr. Donald Eagon. Please go ahead, sir.

Thank you, Melinda. And good morning everyone and thank you for joining us at our third quarter 2002 earnings conference call. Wally O'Dell, our Chairman, CEO and President and Greg Geswein, our Chief Financial Officer, will report on the quarter. Attending as well is Wes Vance, our Chief Operating Officer. A replay of this conference call will be made available today on our website as well as on the phone replay beginning at 1:00 p.m. And for those of you, who do not have the replay phone number, let me give it to you now. It is 719-457-0820. And, of course, you need the pass code, which is 726435. And as a reminder that some of the comments today may be considered forward-looking statements and as a precaution, we refer you to the more detailed information that has been filed with the SEC. And now to start our phone conference I'd like to call on Wally O'Dell, our Chairman for opening remarks. Wally.

Thank you, Don. Good morning. I'm very proud of the Diebold team and extremely pleased with our third quarter results, especially considering the continuing difficult global economic conditions we face. And I remain optimistic about our ability to continue to capture market share and grow our business producing sustainable superior performance and creating shareholder value. We again delivered on several fronts, record revenue and earnings coming in at the high end of our previous EPS guidance. Our elections systems business had a big quarter, contributing significantly to revenue and earnings. Security continued to produce strong revenue growth, up year over year and compared to the second quarter. We experienced excellent growth in Asia and in North America, even without voting and security. European results improved significantly compared to first and second quarter performance. We achieved gap and fixed rate double-digit order growth on a global basis.

Now with the upcoming elections in two weeks, I'd like to take a moment to talk about where things stand with our voting business. As you are probably aware, our voting systems performed extremely well in the recent primaries in Georgia and Maryland, as well as the recent election in Brazil. I want to assure you we have worked closely with states and counties to take every possible step in preparing for the upcoming elections on November 5. Some 38,000 Diebold voting systems will be used simultaneously in various locations across the country from the State of Georgia to Montgomery and Prince George's County in Maryland; El Paso County, Texas; Johnson County, Kansas; and the Bay Area in Alameda County, California. In Georgia alone, for example, we have trained thousands of poll workers and tested and retested every piece of equipment in preparation for Election Day. On November 5, we'll have on hand more than 360 service, support, and field technicians throughout 159 counties in some 3,000 precincts across the State. This same level of preparation and intensity is taking place all across the country. Given the dedication and attention to detail of Diebold, and State and County representatives as well, as our strong performance in the primary election, I'm confident that things will run smoothly on Election Day wherever Diebold solutions are used.

Now looking forward to the fourth quarter, we will have no material revenue from the voting business. This is due to the normal election cycle. For 2003, we expect the voting business will grow approximately 20 percent to around 130 million. We continue to focus not only on capturing hardware business, but building a reoccurring revenue stream by offering ongoing related services. This includes all aspects of election management, such as electronic voter registration systems, ballot design, equipment delivery, maintenance, and set up.

We expect the security business to be up significantly again in the fourth quarter, and to grow approximately 15 percent in 2003 as we see continued strong demand in financial retail and government markets.

Overall, for the fourth quarter, we expect total revenue will increase in the mid single digit range versus prior year. Earnings per share in the range of $.0.66 to $0.72. Therefore, full year earnings per share, before the effect of the cumulative accounting change, will be in the range of $2.19 to $2.25 a share, which represents 12 to 15 percent earnings per share growth over 2001.

Looking at 2003, we expect continued share gains, revenue growth of 8 to 10 percent on a fixed rate basis, pension expense to negatively affect the impact earnings per share by approximately $0.08 or $0.09 versus this year. This results in our preliminary 2003 earnings per share guidance of $2.32 to $2.45. This represents a 10 to 13 percent underlying increase in earnings per share versus 2002 excluding the pension impact. We'll have much clearer 2003 guidance in January.

In conclusion, I'm very pleased with our performance in the quarter and despite significant economic pressures, we remain confident in our ability to deliver sustained superior performance in the fourth quarter and in 2003. Now I'll turn the call over to Greg for his comments.

Thanks, Wally. Good morning, everyone. As Wally said, we are very pleased to be reporting another solid quarter in a very challenging environment. I reviewed third quarter financials and now look to the fourth quarter in our initial view of 2003. So the quarter ended September 30, Diebold reported net income of $44.1 million or diluted $.061 per share on record third quarter revenue of $530 million. This compares to previous guides of $0.57 to $0.61 a share for the quarter. Included in the results was a $0.01 per share gain from the previously announced sales of owned and operated cash dispenser assets to Cardtronics. We will continue to service these units under Cardtronics ownership.

In comparison to third quarter 2001 for net income excluding realignment special charges and goodwill amortization was $38.4 million or diluted $0.53 per share on revenue of $445 million. When you include the realignment, special charges, and goodwill, third quarter 2001 net income was $14.3 million or diluted $0.20 per share.

On the order front, as Wally mentioned, we are very pleased with the orders booked in quarter. Worldwide orders for products and services increased in the low double digits. The Americas increased in double-digit range and Asian Pacific orders increased in the high single digit range, while Mia (phonetic) orders decreased in the low double digits. Security orders remain strong, increasing well into the double digits, and also this is the highest quarter of ATM orders so far this year.

Turning to revenue. As we've mentioned, total revenue for the quarter was $530 million, up $85.2 million or 19.2 percent. Now on a fixed exchange rate basis, revenues grew 21 percent. Financial self-service revenue increased one percent and three percent on a fixed exchange rate basis, while the security segment increased sharply up 31.7 percent as a result of increased penetration in the financial security market. Total financial self-service and security increased 7.3 percent and 9 percent on a fixed exchange rate basis.

On a geographic basis, total financial self-service for the Americas was down 3.5 percent, but up 1.7 percent on a fixed exchange rate basis, given a significant devaluation in Brazil, while security solutions were up 31.2 percent in the Americas. Asia Pacific financial self-service revenue showed solid growth reaching 31.7 percent. In Europe, Middle East, and Africa financial self-service revenue was up 5.2 percent, but down 2.9 percent on a fixed exchange rate basis.

Turning to margins. Total gross margin was 30.1 percent down from the 31.8 percent reported in 2001, excluding special charges. Product gross margins decreased to 31.1 percent from the 34.6 percent in the third quarter of 2001 do to the geographic and product mix, including higher security and voting which carry a slightly lower gross margin.

Product gross margins in self-service and security were stable versus the prior year. Service gross margins were at 28.9 percent compared to the 28.7 percent reported in 2001. In total operating expenses, those percents fell 17.4 percent in the quarter down from the 18.4 percent reported in 2001. Again, excluding realignment and special charges.

Operating profit for the quarter was 12.7 percent down from the 13.5 percent reported in 2001, excluding special charges and this decrease was caused by the rapid growth of security and voting, as there was no margin erosion in the core business. Net income was 8.3 percent this quarter, compared to 8 percent recorded in 2001, again excluding realignment and special charges in 2001.

We continue to maintain a very strong balance sheet with a net debt to total capital of approximately 11 percent. And we've made some improvement on the working capital side in the quarter. DSO was 79 versus the 86 at the end of the second quarter. And inventory terms were 5.4 versus the 4.8 reported during the same period. Net debt for the quarter was $113.7 million, up from the $105 million reported at June 30. Net debt was impacted in the quarter by the previously announced company life insurance payment of approximately $20 million in July and significant regular tax payments in September.

In July of 2002, the company entered into a multiyear information technology outsourcing arrangement with Lloyd Consulting, to transform specific business processes, administer application development, and provide related project management, maintenance, and support.

As part of this arrangement, the company purchased an Oracle Global Information Technology platform and the fastest (phonetic) will be reported in property plant equipment and other long-term liabilities on the balance sheet.

While there has been a lot of discussion on expensing stock options, the number of alternatives considered, we will continue to review these proposals and at present have no plans to begin expensing stock options. We will continue to provide pro forma stock option expense disclosure on a quarterly basis. We estimate that if we expense stock options in accordance with the current rules, the four-year impact in 2002 would be approximately five cents per share.

The company is also in the process of reviewing key assumptions for its pension plans for 2003. The company anticipates that we will be lowering pension plan assumptions from the previous year. The long-term rate of return on plan assets and the current 9.5 percent to a range of 8.5 to 8.75 for 2003, the discount rate on the current 7.25 percent to a range of 6.75 to 7 percent in 2003, and the rate of increase in compensation levels from 5 percent currently to a range of 3 to 4 percent in 2003.

Based on these anticipated lower assumptions, as well as the stock market downturn this year, the company expects pension income to decline from approximately $5 million in 2002 to a net expense position in 2003 in the range of approximately $3 million to $4 million. The pension plan remains adequately funded and we do not anticipate the need for any additional funding at this time. Pension income excludes retirees' medical expense, which is considered to be part of normal operating expense and is approximately $3 million in 2002.

Briefly, as Wally mentioned, the outlook for the fourth quarter, sales growth will be in the mid to single digit range. We expect EPS in the fourth quarter to be in the range of $0.66 to $0.72 per diluted share. Depreciation amortization should be approximately $17 to $18 million for the four-year expected (phonetic) revenue growth of approximately 10 percent. For 2002, operating profit margin excluding pension income for the self-service business will be approximately 14 percent, while the security and voting business operating profit margins will be approximately 8 percent. The four-year EPS in the range of $2.19 to $2.25 per diluted share before the effect of cumulative of counting change. This represents a 12 to 15 percent EPS growth over 2001. And for the full year, our effective tax rates will be approximately 32 percent.

Looking to 2003, our initial view is to revenue growth of 8 to 10 percent on the fixed-rate basis. Depreciation, amortization in the range of $70 to $75 million, and, as previously noted, pension expense will be negatively impacting earnings per share by approximately $0.08 to $0.09 versus 2002. So 2003 EPS should be in the range of $2.32 to $2.45, which represents a 10 to 13 percent increase in EPS, excluding the pension impact, and we expect a 32 percent tax rate in 2003 as well.

This concludes my remarks on the financials. Again, we're very pleased with what we have been able to deliver in the quarter. I will now turn it back to Don for questions.

Thank you, Wally, and thank you, Greg. Melinda, we will now open it up for questions.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touchtone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal us, and we'll take as many questions as time permits. Once again, please press star, one at this time if you do have a question. We'll take our first question from Jay Stevens with Buckingham Research.

Yes, Thank you. Greg, could you give us some additional color on how this gross margin on product number that you reported, how should we handle that for Q4 and maybe some color on '03. And also could you repeat that operating margin commentary that you just gave, because my line is all fuzzy and I didn't quite hear it.

Okay. Well, at fourth quarter, as you know, Jay, that's the highest gross margin quarter of the year, so we expect, you know, that in the fourth quarter as well and so gross margins will be high for that period.

Well, I meant just on product, Greg, not the total company.

Well, as I mentioned on the product side, when you look at the core business, Jay, we had no erosion year over year. So really, when you see--and the comment that you probably didn't hear was, in fact, the decrease was really caused by the rapid growth of security in the voting business, which carries a lower gross margin than the core business. So we had no erosion in, for instance, the ATM business, we had no erosion in the, you know, overall security business.

Yeah, I probably dropped out and didn't hear that.

Right. So that's the comment.

And, Jay, we were very pleased with our margin results. I mean margins are under a lot of pressure. They've been under pressure around the world. They continue under pressure. But with cost control, the key point was in security, in voting, and in financial self-service, we achieved both product margins, gross margin, and operating profit margins that did not erode versus prior year, and we were thrilled about that.

And when you say "prior year," you mean year-on-year comparisons (inaudible).

Absolutely.

Okay.

Third quarter comparing back to third quarter last year, which for us, is the relevant comparison. As you try to compare sequentially by quarters, you've got a lot of seasonality issues that affect that. So we think the right way to look is versus prior year in all cases.

Okay. And, Greg, I heard a 14 percent and an 8 percent mentioned on operating margins, but I didn't hear the editorial commentary. Could you repeat that just quickly?

Sure. That the 14 percent--again, these operating margins, excluding the impact of pension, 14 percent for the ATM business and then 8 percent operating margins for security and voting.

Got you.

And that's consistent with prior year, and that's the point--is each of those businesses are holding margin, but because we're growing quickly in security and because we've entered voting in a major way, you see some mix-caused erosion in our margin.

I got you and I think I'm hearing it all now, but my line has a lot of static on it. It must be at my end. But thank you very much.

You're welcome, Jay.

Thanks, Jay.

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

Good morning.

Good morning, Kartik.

Good morning. I wanted to get some more color on the security business. You know, you've had a great year for the security business in 2002, or will have a great year, it looks like, for security in 2002, and you're expecting a fairly significant growth in `03 at 15 percent. Is that the result of you expanding out into the retail and government market, or is that also a continued result, in `03, of gaining market share?

It's both of those. You know, as Mosler faded away and as we stepped in, we've been ramping up our business quarter over quarter, and certainly for the first half of next year, we should see very solid growth rates. But trending down, I would think, quarter by quarter, so that over the year they average 15.

Okay. Okay. And if you look at the core ATM market, Asia Pacific had a very strong year in `02; Europe seems to be picking up again. If you could just look at it from a regional perspective, what would your expectation be for '03 for Asia Pacific and Europe, just from an ATM standpoint.

Yeah. First of all, this is very preliminary.

Right.

In other words, we're not ready to really do that. But in general we would expect sort of more of the same: Asia remaining very strong, Europe sort of muddling along, difficulties in Latin America and pretty good business in the U.S.

Okay. And kind of a last question. You know, there's been a lot talk in the industry about the Check Truncation Act and its potential on many of the retail delivery channels, one being the ATM. And have you started to have conversations, or have you had interest from financial institutions here in the U.S. concerning that act and possibly upgrading their machines to take advantage once that act passes?

We have had many conversations. It's the hottest topic in our whole industry, and we have excellent solutions there. We look forward to it passing and having an impact. And, yes, many institutions are actively looking at our solutions and our competitor's solutions. And we see it driving demand for everybody going forward.

Well, thank you very much.

We'll take our next question from [Ray Green] with Robert (inaudible) Company.

Good morning. Can you guys talk a little bit about the expectation, not necessarily the expectations, but what you have as an assumption for the real in terms of the guidance that you've given for the fourth quarter and for '03? I'm not asking you to forecast, but what is your expectation?

Well, you know, it's sitting around 390 this morning. We typically when we make forecasts like we've been making, we think of rates being where they currently are. You know, the real is such a volatile issue. You know, they're having a run-off election on Sunday. There are wide discrepancies in projections there. What we hold ourselves accountable to is making the most out of the situation that occurs. You know, for planning purposes we would be thinking just roughly of slight erosion from here over the short term. But as far as making our fourth quarter, we have to do what we said we're going irregardless.

Okay.

Yeah. So, you know, everybody expects Lula to win on Sunday. You say--and like 60 to 38 percent or something against Serra. So that's a foregone conclusion. He's modifying his positions to get in line with the IMF and global economic requirements. So we'll have to wait and see. We have to, like I said, we have to make sure the way we do business, the way we price our contracts, the way we hedge our international sourcing, that we have decent results no matter what happens on that.

Okay. And then also on the SG&A line, as I recall last quarter, the SG&A bumped up for you as the elections business really started to ramp up. This was obviously a very good quarter from that standpoint. Yet, the SG&A didn't bump up as much. Can you add a little bit of light on that?

Yeah, our SG&A increased in both periods compared to prior year because of investment in engineering, because of spending to ramp up the voting business, and, of course, our volumes in this quarter were such that we leveraged that a little bit. So we have a lot of pressure on those numbers to, you know, control our expense so that we could do well even in a tough environment. I think in the fourth quarter our year-over-year numbers in operating expense will look great.

And then lastly, Wally, from a voting perspective. You know, a lot of good things have happened. You're pursuing, you know, some contracts that are, you can argue, California and Ohio alone are worth $200 million. You've got the new legislation that's coming on-line. But you've given a pretty conservative assumption. Is that just you guys being conservative and is there some upside there?

Well, we've taken our share from last year of 9 percent of the market to this year, 33. And our basic assumption is the market's going to grow a little bit next year, and we're going to take our share to about 35, you know. And there's no penalty for overachievement. And so, you know, we are very aware of the legislation that's passed both Houses. It's getting ready to be signed by the President. Things could go very, very well for us there. There's also the question at what rate the states put in the new equipment. You know, this can stretch out between 2003 and 2006. And, of course, one of the things that is sort of counterbalancing all of this is many, many states are in very, very tough budget conditions. So thank goodness for the federal money, and we expect to have a good year. And we'll let you know as we win orders in the states, in fact, states and counties move ahead.

Great. Thanks a lot guys.

You're welcome, Ray

And as a reminder, press star one to ask a question now and with McDonald Investments, we'll hear from Matt Summerville.

Hey, good morning, guys.

Good morning, Matt.

A couple of questions. I believe Kartik had talked a little bit about the security business. I was hoping maybe you could expand on some of the initiatives you've taken now that Mosler is out of picture to capitalize in a more meaningful way on the retail and government sides of the business as opposed to the core financial services arena. And maybe, if you could also along those lines, talk about the growth rates you're seeing in those newer areas versus, you know, the more core bank type of business.

Well, you know, the underlying things that happen there, of course, Mosler stepped out of the market and then the increase interest in security not only in financial institution but retail and government environments has definitely helped us. As we said earlier our Chief Operator Officer, Wes Vance, is here this morning and he has a couple of comments he would like to put in here on that one, Matt.

Great.

Matt, great question. I think that the points that we would raise in terms of our response to the market. We have become more active in the government sector with the acquisition of some of the Mosler assets. We acquired some electronic surveillance capability that we use at some of the military bases. We also were able to pick up some capability to penetrate into GSA kinds of activities. So we're seeing some growth in that space. We've actually brought on some additional sales people to help bolster our penetration into that space.

Additionally, in terms of the retail space, we are focusing there as well with our electronic security and winning some pretty significant opportunities in that particular area as we consider use of security in difference ways in order to meet commercial kinds of environments. And of course, along with both of those and the other activities that we picked up through the Mosler acquisition and our general growth in security, our service business has growth considerably. And so, we're really pleased with that performance on that front.

In terms of margins, the margins are pretty consistent in that space with what we've reported in the past.

Okay. Follow-up question. We've talked a little bit about the ATM market. Wally, I was hoping maybe you could provide a little bit of color, maybe contrast, what you're seeing on the hardware side of things in Europe as well as the United States and also talk about whether some the competitive pressures that were discussed, I believe at least last quarter, if not thus far in all of '02 that you've been seeing out of the European market.

Well, you can tell from our results, our service business has been a lot stronger than our product business. We have a strong competitive skill there in serving customers that's really helped us a lot. In terms of competition, we have excellent strong competition and everybody is going after the market. It's a real dogfight in Europe right now with the weak economies and the three or four major players there all trying to gain share. And of course the weak market in Germany that everyone knows about. So Europe's been really, really tough. We had couple really serious down quarters, the first two in Europe this quarter. We had revenue increasing versus prior year. We had better orders in the first two quarters in Europe. Orders were not that good in the third quarter in Europe, as we mentioned. I'm not sure if that answers your entire question, but those are some of the things that we've seen.

Yeah, I guess the only follow-up I would have to that in Europe you did get 5 percent growth, obviously helped a little bit by currency, but if we could maybe break that down a little bit, again, was the growth there driven, it sounds like more on the service side than the hardware side?

Yeah, that's correct statement around the world. You can see our service versus product results. Our service numbers are substantially better. That holds true in Europe as well.

With respect to your preliminary look, then, at the ATM market for next year, are you sort of assuming more of the same or would you expect a more meaningful pick up on the hardware side of things, in particular in the United States?

Well, as I said a couple times earlier, it's too early to really have substantial answers there and what we are assuming in the preliminary numbers is reasonable business levels in the U.S. and continuing slow market with tough competition in Europe, continued weakness in Latin America, and continued strong market in Asia, and, you know, reasonable market conditions in the U.S. That's sort of what's behind the preliminary guidance. And in January, we'll try give you clearer views on each of those markets in what we expect to accomplish.

Thanks a lot, guys.

You're welcome.

We next have a question from Kevin Merritt with Fiduciary Trust.

Good morning.

Good morning. (reply from all)

Congratulations on the quarter.

Thank you. (reply from all)

Wally, I was just wanting to follow up on the voting side. Could you give us an update on the competitive dynamics in the market and also are there any other major opportunities that have come into the pipeline that you could make us aware of? Thanks very much.

Well, first of all, you know, there's good competition out there and the states and counties are very careful about evaluating everything. The reason we have been able to win in many cases is our strong financial base, the trust and confidence that's associated with the things that we do, our ability to provide service across the country in depth, our software capability, our U.S. owned company and our U.S. manufacturing.

For instance, when the State of Georgia wanted to do the entire state and they wanted to have all their units in three months, there was no way that any of our competitors could have done that. So our scale, you know, the trust that comes with 150 years of solid performance and keeping commitments, you know, our ability to reach out and work on these issues and keep our commitments, they've helped us. They've helped us a lot.

We also feel really good about what we can do in this marketplace in terms of, you know, blind access, ADA access. For the first time in the history of the world, people can vote privately, secretly with 100 percent assurance they voted the way they wanted, even if they're blind. And that's our technology that's making that happen. So those are the things that--plus everything we've touched in this area we've done well and that word spreads fast. So that's the background.

Great, and just one quick question in regards to Latin America, specifically Brazil, you talk about the election and seems like business continues to do pretty well there, you had a nice sized deal with one bank, could you comment qualitatively what kind of commentary you've been hearing when you meet with customers down there? Are they less inclined to move forward on things? Have you see the pipeline evolve?

Yeah, yeah I was there just a couple of weeks ago and I met with many of the banks and some of the top economic people in the country. I was impressed that business continues on despite all the political things that are happening and the weakness in the currency and so, you know, the economy has not shut down and there are many projects still in the pipeline. But it is a very, very difficult and very competitive environment. So we have done reasonably well in Brazil. We could have done a lot better had the currency been stable, and the economy stayed stronger. But again, we hold ourselves to sustainable superior performance, which means no matter what happens out there, we've got to out perform and we've done well in Brazil, given everything we've had to face. And we've gained a lot of share there this year. There were only two or three big orders in the country this year. We got them all.

Great. And, Wally, just a final question. Any write-offs in that part of the world?

What do you mean by that?

In regards to receivables, or--

You mean any future write-offs?

Anything that you've had to do in the last quarter.

Nothing out of the ordinary. You know, these are not surprises that there are exchange rate movements in things, and we're used to dealing with banks around the world and I don't know of any unusual problems that we've faced.

Great, congratulations. Thanks again.

Thank you. (reply by all)

We'll next hear from Alan Wickler with First Manhattan.

Hi, guys.

Hello, Alan (reply by all).

In your comments the next unit of voting of 130 is there any service component in there and just a second question on a different subject, anything new on bank outsourcing, either in the U.S. or internationally?

Well, certainly there is a service element in voting. I think it's a couple million dollars this year, probably four or five million next year. That's a part of the business that we're encouraging and trying to develop a real business model in that phase, and, you know, over the next five or six years, after all this major buying in electronic voting equipment has taken place, then we really need to have in place an upgrade service software election management registration updating kind of business in order to make that continue to be an excellent performer for us. Outsourcing, I'll let Wes help me with that in a minute, but I can tell you that a couple of things that I know about is the outsourcing project that we previously won I've been pleased about our improved performance on those contracts. In other words, better financial results and so the things that we have won are going well, and then I'll let Wes talk about things that we've recently accomplished.

Yeah, Alan, we continue to work with our primary customers in terms of outsourcing. We have a number of proposals or opportunities that are in the hopper. We have not closed on anything specifically in the last quarter that's noteworthy or significant. But that continues to be an area of focus and our customers continue to evaluate their positions and how they want to use our outsourcing capabilities, and so we're very active in that space.

Okay, thank you.

You're welcome, Alan. (reply by all)

And we'll take a follow up from Jay Stevens.

Yes, thank you. Could one of you put some color on the campus security products of the past, haven't heard much about that recently, but it strikes me that your campus security experience can easily be translated over to corporate campuses. And then secondly, I just want to make sure I've got the pension plan commentary down correctly. It looks like pension plan added $0.5 in earnings to '02 and will be negative $0.035 or so in '03.

Yeah, yeah, that's right, Jay.

That's absolutely correct.

Okay, do--

You might, you might remember Jay, from 2001 as we talked about earlier, as you know we, at about $0.09 in 2001 going to $0.05 in 2001, we're not.

Right, and then it's likely to swing negative of $0.03 plus in '03.

Yes, yes, and we have taken a very careful look at that. We've been following it all along. And although we, we don't like this $0.08 to $0.09 swing, we feel that that is smaller by far as a percentage of earnings than many, many companies are going to face and so, you know, we all have to face up to that issue. And we're doing it. As far as campus, one of the reasons why you haven't heard about it too much it no longer is the painful experience that it used to be. It's grown nicely. It has reasonable margins now. It fits in well with what we're doing and we are optimistic about our future in that space. But it also is a very small part of what we do; I guess about one and a half percent of our consolidated revenue.

I just thought that in this environment that that capability and your skills in campus could be carried over to corporate and that you know that would enhance your security position at a corporate campus.

Jay, you're right. This is Wes. In terms of our ability to--in order to leverage our electronic security and our campus capabilities we are continuing to try to grow that. We stabilized the software platform in that campus space and it's worked out very well for us and we continue to press that, not only in the university environment, but in the commercial area as well. In addition, looking at smaller institutions and being able to leverage that card capability in smaller institutions where our predominant focus has been in the very large universities and institutions for higher education.

Got you. And, Wally, your voting machine growth rate was very conservative I'm assuming, with so many states yet to do anything. I've been assuming a higher rate of growth in your dollars of revenue in '02 to '03. It seems like you know the overwhelming majority of the states have done practically nothing. Am I missing?

No, you're not missing anything. I think the market this year is about 330 and we're expecting the market to be about 400 million next year. There are a lot of different assumptions that come into that. And, you know, we make our commitments on what we can do and what we're committed to do and then we try not to need excuses because the economy did this or then some customer didn't do something. So we're trying to make commitments that we can keep. You're free to put in a higher number for voting for us if you'd like.

Well, no, I'm just trying to understand what you're doing and look ahead to '04 which is a federal election year and there we'll certainly have more states moving in the direction of new machines. But we're not yet talking '04.

Well, we first of all view this as the process that will go through at least '06, if not '08. And states will all move at different paces. We've seen some who made a decision and bought. We have others who have been thinking about this for years and still don't seem to be ready to move forward. So we certainly expect some action in California and in Ohio in 2003. And we'll see what happens after that. And when we win these things we announce them.

I understand. Thanks very much.

You're welcome.

and we have a question from Jim Rosenberger with Bernstein investments.

All right, thank you. I have a question about your expectations for '03. You've given us guidance of 8 to 10 percent revenue growth, but 15 percent in security, 20 percent in voting, which by my calculations implies a mid single digit self-service revenue growth. You've also said that your margins in self-service are 14 percent but 8 percent in the other two businesses. So if you had no margin expansion you would get contraction just by the mix and I'm curious that you're implying some margin expansion overall, where are you most optimistic about seeing that growth next year?

Well, certainly we should get some underlying margin improvement as we integrate these businesses. Certainly like in voting we won one very large order this year at very tight margins. So if we could win many smaller projects that should help. And we need to demonstrate integration of these acquisitions and cost reduction in our offerings and operating expense control to perform and that's what we expect to do.

And in the competitive environment that you've described in self-service with modest growth next year, are you optimistic that you can at least hold margins in that business?

I am. In fact my definition of a good company is one that can hold or improve margins while reducing prices.

Great, thank you.

You're welcome.

And we have a follow-up from Matt Summerville.

Hey, Greg, two follow-up questions. On the pension we're sort of running this through our models for next year. Just to make sure we're all on the same page, numbers including the pension and we kind of range in the 223 to 236 based on the preliminary analysis you guys have put together?

No, no. The numbers we've given include--

Include the pension impact, Matt.

--include that expense.

A 232 to 245 includes the pension impact.

Okay. Now, if you look at the split between the ATM business and the security business, how should we be modeling that? Do you have any thoughts on that, Greg?

For what revenue or margin or what?

I'm sorry, the pension impact for next year.

We do not stick pension income or pension expense in the margins by business unit.

Okay.

Leave that out. Put the income below the business units in 2002 in the expense below the business units in 2003.

That's in the paragraph there that, Matt, talks about those margins, those operating margins of 14, 8 and 8 for ATM security voting.

Right.

Excluding pension impact.

Okay. And then the last question--

So in other words if we're counting that, our margins would be higher in 2002.

Right, exactly.

Exactly. As far as that $0.01 gain then, Greg, how would we pull that out of our models to get the $.60 operating number for the third quarter?

Start with $0.61 and subtract $0.01.

Well, right. What I was more hoping for is perhaps the pretax and after tax amounts that I either would pull out of other income or SG&A where it may appear--

That's another income.

Okay.

And, Mr. Eagon, it appears that there are no further questions at this time.

All right. Before we sign off, Let's make sure that there are no further questions. If you do have a question before we sign off, would you please let Melinda know now through the electronic means?

And I'd also like to thank everyone for their time, attention, for their questions. We really appreciate it.

Melinda, Do you have anymore?

No one has queued up.

All right. May I offer my thanks and we'll be talking with you. Have a great day.

Thanks a lot.

That does conclude today's conference. We thank you for your participation and have a great day.