Diebold Nixdorf Inc (DBD) 2003 Q2 法說會逐字稿

Welcome to the Diebold Inc. second quarter 2003 financial release conference call. (CALLER INSTRUCTIONS). At this time for opening remarks and introductions, I would like to turn the call over to Vice President of Global Communications and Investor Relations, Mr. Donald Eagon. Please go ahead.

Thank you Mark and good morning everyone. Thank you for joining us. With remarks on the quarter today are Wally O'Dell, CEO, President and Chairman, and Greg Geswein, Chief Financial Officer. Joining Wally and Greg is Dave Bucci, Senior Vice President of Customer Services Group.

A few notes before we report on our solid second quarter performance; a replay of this conference call will be made available today on our website as well as over the phone beginning at 1 PM. The phone replay number is 719-457-0820. That's 719-457-0820 and please use the passcode 513807. That's 513807.

As a reminder some of the comments today may be considered forward-looking statements and as precaution we refer you to the more detailed information on file with the SEC and while on that topic, in meeting SEC regulation G, this mornings earnings release has been furnished to the SEC on form 8-K and is on the EDGAR database.

With that, I would like to turn the conference over to Wally O'Dell for his observations on the second quarter and look ahead to the third quarter. Wally?

Thank you Don. Good morning. Thanks for being part of our call today.

We once again delivered strong earnings per share, even with the challenging global economic environment. Compared to last year, we grew EPS in the current quarter, overcoming an 8 cent per share unfavorable comparison in our growing business, as our core businesses performed well. Just as importantly, our free cash flow was significant with over $37 million free cash flow for the quarter compared to 9.2 million in the second quarter of 2002. This enabled us to move from a net debt position of 13.3 million at the end of the first quarter to a net investment position of 12.4 million at the end of the current quarter.

I'm also very encouraged by the strength in overall orders during the quarter. Financial self-service orders were up 10 percent led by the Americas, and Asia-Pacific while security orders increased more than 20 percent.

Turning to revenue, we are particularly pleased with our continued strong growth in the security business, which was up over 20 percent versus second quarter 2002. We continue to experience strong organic growth as we make inroads into the financial, commercial and government markets.

Our Voting business revenue decreased significantly from the second quarter of 2002 due to large product shipments to Georgia in the previous period and the new Maryland voting order being delayed until the third quarter this year. However, we remain confident in our ability to achieve our annual growth targets in this business as we look ahead to many opportunities in Ohio, and to finalizing a contract in San Diego and many other opportunities.

Our global self-service revenue was flat in the quarter. Asia-Pacific was up nearly 20 percent on a fixed exchange rate basis as demand in that region remains strong despite the recent SARS challenge. Revenue in Europe increased 7 percent on a fixed rate basis as we grew our share. The Americas decreased 5 percent on a fixed rate basis as shipments of large order to Brazil in the prior period did not repeat. North American revenue was off slightly but we are very encouraged by the acceptance of our new OPTEVA product line and strong order performance during the quarter.

In fact, this was the strongest order entry quarter overall for Diebold North America since I joined the Company. As a result, we remain confident that Diebold North America (technical difficulty) the third quarter we expect financial self service revenue to increase slightly, security revenue to be up approximately 15 percent and voting revenue to be down slightly, even including the $30 million revenue in Maryland. As a result, consolidated revenue is expected to increase 2 to 5 percent versus the prior year period. We expect earnings per share in the range of 62 to 67 cents, including pension expense of approximately a penny per share compared to pension income of one cent per share in the third quarter last year. We now expect full year earnings per share to be in the range of $2.35 to $2.45. This represents year-over-year earnings per share growth of 7 to 11 percent, which is very good considering today's economic environment. In addition, excluding onetime gains and pension impacts in both years, this represents earnings growth of 10 to 15 percent versus prior year.

This performance is a testament to our employees continued efforts to control costs, improve working capital, increase operational efficiencies and develop superior solutions and serve our customers.

On a more somber note, as you may be aware, we tragically lost our Chief Operating officer, Wes Vance, in a private plane crash on April 26. Wes was a great team member and a great leader who made great contributions to Diebold and is sorely missed. Our management team has done a fine job of pulling together and each has taken on additional responsibilities while we search for a new Chief Operating Officer.

In conclusion, thank you for your continued support and we look forward to another year of growth and remain confident in our ability to continue to deliver superior performance in 2003 and 2004.

Now I would like to turn the meeting over to Greg Geswein, our CFO.

Thinks Wally. Good morning everyone. I would like to begin by briefly reviewing financial highlights for the second quarter and provide you with our outlook for the third quarter and remainder of 2003.

Net income was $41.3 million or diluted earnings per share of 57 cents. EPS was in the range of the Company's previous guidance of 54 to 59 cents a share. This compares to second quarter 2002 net income of 39.8 million or diluted earnings per share of 55 cents.

On the order front, we're very pleased with the order flow we are seeing. Excluding Voting, fixed rate worldwide orders for products and services increased in the low double digit range. Financial self-service orders in the Americas and Asia Pacific both increased in the double-digit range. Europe, the Middle East and Africa orders decreased in the low double digit range. As Wally mentioned, security orders remained strong increasing by more than 20 percent.

Turning to revenue, total revenue was $481 million, down slightly on a GAAP basis and 1.1 percent on a fixed exchange rate basis. Voting revenue declined significantly due to the delay of a large previously announced voting contract that closed in the third quarter.

Financial teleservice revenue increased .4 percent -- or decreased .4 percent on a fixed exchange rate basis during the quarter.

Security revenue was once again very strong during the quarter, up 21.9 percent as a result of revenue growth in the financial, government and retail markets.

During the quarter, revenue continued to be impacted negatively by year-over-year devaluation of the Brazilian Real but was more than offset by the strength of the Euro and certain other currencies. The net positive impact in the second quarter was approximately $2.6 million versus the prior year.

Looking at gross margin, total gross margin was 29.6 percent, down from the 30.5 percent in 2002. Product gross margin increased slightly to 33.1 percent from 33 percent last year. Service margins decreased to 26.4 percent from the 27.8 percent due to some high margin service work performed last year that did not repeat in the current quarter.

Operating expenses for the quarter were 17.8 percent as compared with the 18.1 percent in 2002. The decrease in operating expense percentage was the result of tight cost control and was realized despite lower voting revenues in the current quarter and a higher year-over-year pension cost. The change in pension assumptions and the market downturn resulted in pension expense in the second quarter 2003 compared to pension income in the second quarter 2002. This resulted in an average impact of approximately $2 million in the second quarter 2003 versus 2002.

Operating profit was 11.9 percent of revenue, down from the 12.4 percent in 2002 driven by lower voting revenue and lower voting operating profits in the second quarter of 2003 as compared with the second quarter 2002.

Other income expense and minority interest improved by $5.2 million, moving from a net expense of 1.5 million in the second quarter of 2002 to net income of 3.7 million in the current quarter. This improvement was the result of reduced interest expense due to lower debt levels and reduced interest rates as well as a gain in the current quarter of approximately 3 cents per share from the early buyout of leased ATMs by a major customer. The majority of this gain resulted from the difference in the market value and book value of the leased equipment.

Net income on a comparable basis was 8.6 percent in 2003 versus 8.2 percent in 2002. The improvement in net income resulted in lower operating expenses and positive other income expense and minority interest.

We continued to maintain a very strong balance sheet, as a result of strong positive cash flow. Free cash flow improved by $28 million during the quarter and by 110 million on a year-to-date basis. As result, the Company improved its net debt position of 13.3 million at the end of the first quarter to a net investment position of 12.4 million at the end of the second quarter.

In the first 6 months of 2003, the Company improved its net debt position by 74.9 million, moving from a net debt position of $62.5 million at the end of (technical difficulty) 2002 to a net investment position of 12.4 million at the end of the current quarter. The improvement resulted from better managing of working capital.

Inventory turns improved to 5.1 from 4.9 while DSO improved by 9 days, going from 83 days at the end of the second quarter 2002 to 74 days at the end of the current quarter.

While we currently do not expense stock options, the impact to 2003 if we did so would be approximately 6 cents per share compared to the 4 cents in 2002.

Now turning to the outlook -- third quarter revenues are expected to grow 2 to 5 percent and we expect EPS in the range of 62 to 67 cents a share. Again, we will have an impact of approximately $2 million year-over-year for the negative impact from pension. We expect full year revenue growth of 5 to 8 percent with our financial self-service business expected to grow at 1 to 4 percent while security will continue strong double-digit growth of 15 to 20 percent with voting growth of 15 to 25 percent.

On the Voting front, we expect Q3 revenue for voting at about 45 to $50 million and Q4 revenue of approximately 67 to $72 million.

In North America, we remain optimistic about the upgrade and replacement growth from regulatory drivers as we move to advance function hardware as well as open software architecture. The continue to see strong growth in Asia-Pacific, especially in areas of China and India where we have built and invested in strong self service and manufacturing operations. Latin America outside of Brazil continues to be a challenge in 2003 as the economic and political environment remains uncertain there. We're optimistic about self-service business prospects in Brazil and encouraged about the improvement of political and economic growth there.

Moving to the security business, we expect demand to remain strong as we continue our strategy growing in the financial market while making additional inroads in the retail and government markets throughout the rest of 2003 resulting in double-digit growth rates.

Our tax rate should remain at approximately 32 percent for the year.

As noted earlier, we experienced strong cash flow year-to-date and expect to generate free cash flow in excess of 200 million for the year. Our earnings per share guidance for 2003 has been increased to $2.35 to $2.45 per share, up from the previous guidance of $2.32 to $2.42 cents per share. These EPS figures include the year over year negative pension impact of almost 8 cents per share.

In conclusion, we're very pleased with our results and cash flow generated in Q2 and on delivering earnings that we indicated to the street. In addition, we are encouraged by the opportunities for the rest of the year. Not only are we confident that we have the right strategies in place, we also have a great balance sheet to help us to continue to focus on additional growth opportunities to complement these strategies.

Thank you and I will turn it back to Don now for questions.

Mark, if you could begin the Q&A.

(CALLER INSTRUCTIONS). Kartik Mehta of Midwest Research.

Good morning.

Good morning.

Hey Kartik.

I wanted to get your thoughts on ATM hardware market in the U.S.. I know you don't break out numbers as to how that market is doing but maybe if you could Wally, talk about what you have seen so far in terms of sales in the U.S. for hardware and how you expect that to trend for the remainder of the year?

Thank you Kartik. The revenue has been very flat in the U.S.. I think the market has been flat in the U.S. for the first half but the orders have picked up substantially recently so now we expect pretty decent growth in the second half. I think that's partly due to market, certainly related to the branch expansions that we have all been reading about. It's also related to our new offerings and hopefully, a little bit related to market share but we have some great solutions, banks are investing and the economy is starting to improve. I see that yielding excellent results for us as we move forward.

A question for you on check imaging. We have heard a lot about the check 21 act of potential banks utilizing ATMs to take check image. What have you seen from an interest standpoint from banks? Has interest started to increase or is it about the same for them to take advantage of this technology?

I will answer a little of this and then turn it over to Dave, but I personally visited several banks who have expressed serious interest here. We are working with some. We have excellent at the ATM solution and we are going to have more offerings to talk about shortly and we expect the act passed in October and become effective over 12 or 18 months after that and there is tremendous financial savings for the banking institutions to adopt this kind of technology and so we see it happening. Dave?

Yes Kartik, I would just add that we see a lot of the larger institutions getting prepared to implement check imaging by starting to look at replacements and positioning themselves to be able to execute when the law becomes effective. I think they see great efficiencies in the ability now to image checks and pass that up, up to their archives.

Last question and I will let others ask here. On the security side it seems as though retail is becoming a bigger focus. Are you able to break out a percentage of retail security sales out of the total security sales you have there and maybe try to give color as to what type of retailers you're having the most success with?

Dave can talk about a couple of the retailers where we have placed product but we don't break out those numbers but I can tell you each area, government, financial self-service, retail have been very strong.

Yes Kartik I would add that we have been successful with major chains that we are just not in a position to be able to divulge at this point, but we have been very successful in security in both the monitoring aspects and in deploying electronic security across national chains because we have a national service and installation infrastructure so we're able to provide consistent performance for those guys across the footprint of North America and some of these as you know, are aggressive opening stores, one a day and we are able to pretty much keep pace with them. The other thing we do, provide for them is drive up in the pharmacy environment so much as we do with banks in terms of providing convenience, pharmacies are also looking at that and we've been pretty successful in providing drive up solutions for them in a pharmacy environment so broad national chain both in electronic security and our transaction solution business.

Thank you very much.

Matt Summerville of McDonald Investments.

Good morning guys.

Good morning Matt.

I've got a couple of questions. Wally, could you talk a little bit about, I think Kartik mentioned on the imaging side, some things, or asked a question related to some things you have going on. I was wondering if you can update us in terms of perhaps maybe the number of pilot programs you have out there for your imaging solution and how those are working out?

And secondly, Greg, if you could update us on CAPEX numbers for the full year and what we should expect from the rotatable spare number for the full year and also talk about why we've seen such a year-over-year increase in the rotatable spares number? Thanks.

Matt all I can say on the imaging side, we have a few pilots with the larger banks and they're going very well. We will have more to say on that over the next two or three months as the law passes and actually starts taking place but it will drive demand for all of us in our industry and we are thrilled about it.

From a CAPEX standpoint, looks like it will be somewhere in the high 50s by the end of the year. The rotatables as you know are service components. We have seen a pretty good uptick in Brazil in the first half of the year. Some of that's replacement, some of that is on the service side that these guys have been involved in with some of the outsourcing contracts we have so that should not affect a huge amount. You wouldn't think about that doubling over the year but that's where the uptick is going up from.

Okay and then just a question on the guidance, as far as the increase you're talking about today, does that include the onetime gain of 3 cents booked here in the second quarter or does that exclude that?

That includes it and if you would like to attribute it to it, I guess I would summarize our new guidance versus our old guidance as we are exactly on track with what we said, only basically two things have changed. One, Maryland slipped the quarter and two, we have this 3 cent gain.

Reik Read with Robert W. Baird & Company.

Good morning.

Good morning Reik.

Greg, can you talk about with the voting business having been down, what would the margins have been in the second quarter had that Maryland business been booked in the second quarter?

We are not going to talk about the Maryland margins for while for obvious reasons but what I think the question really behind this is how would we have done versus expectations and guidance if Maryland had been in and I can tell you, we would have without that 3 cents gain and with Maryland in, we would have at least made 57 cents, if not a little more.

Wally, that is partially what I am getting at but I guess what I want to understand is as you guys ramp this business up in the back half of the year and get towards 50 or $60 million --

You can't get to that answer with that question because a lot of the costs of Maryland are in the second quarter but what I think you want to think about is a 9 percent OP business in voting. We have said that before and we are still saying that but it moves around by quarter when you have huge swings in revenue so I would continue to assume that kind of margin in security and in voting and the 14 we talked about in financial self-service, until we give you any other numbers, those are still good numbers. We've been performing to that; we expect to perform to that.

But, but -- but, it's fair to say that it was not that in the second quarter but it was--

Clearly, it -- a good guess would be around zero.

Right.

I mean, we didn't have any revenue.

Right.

That's why I don't think when you have a lot of fixed costs and they sit in every quarter and the volume moves around, you can't really relate the OP rate by quarter in those cases. You've got to look at contribution margin and then you have to look at the whole year with everything in and right now, everything still looks on track for a 9.

Okay. So 9 for the year is what you're telling me?

Yes, that's what we said before and we are not changing that right now. It looks legit to me.

Can you also talk about, you mentioned Ohio as an opportunity. California certainly has been an opportunity out there. Are there incremental opportunities from a state viewpoint that you are working on right now? How close are they and can you give us an idea how much federal funding is actually flowing right now from the Help America Vote Act?

When you say incremental, you mean other than those?

Yes.

We are not counting on a lot of other kinds of revenue in the year. In the third quarter, we have 30 million for Maryland, 11 for California and about 7 plus or minus for other small things and that's all in hand. We thought we would have Maryland in the second and it slipped so we made a vow to ourselves, we are not going to count on anything in the quarter once the quarter starts unless we already have the order, so those are all booked solid. I think Maryland is already revenue. For the fourth quarter, we are counting on about 30-something million from Ohio, which that would probably be about a third of what they would really be awarding and we're hoping to get the lion's share of it but that's about the amount we are thinking that would be fourth quarter revenue. We're talking about 25 million for San Diego and then very small miscellaneous other items. No other big ones. There are things that are not in our forecast that are out there that could happen but that's how we get to our revenue guidance.

And just a quick comment on flow of funds from the federal government at this point?

Yes, the HAVA money has started to flow. I do not have the numbers but I think for instance in Ohio, they have about a third of what they are going to get and the money is definitely flowing but they are parceling it out step-by-step and you would have to ask a specific expert on the HAVA Act money to get a little more detail. I'm sure that is publicly available.

Great, thank you very much.

Alan Wickler of First Manhattan.

Hello, Allen.

Hello gentlemen. How are you?

Great. Couldn't be better.

I look forward to seeing you in a couple of weeks. I would hope that just maybe you ought to mention it to some of the people on the call because maybe some people aren't aware of it, if you wouldn't mind doing that. But anyway, looking out to Q4 if I could skip Q3 for a moment, when I look at what you are talking about relative to just guidance for the year and I do some quick arithmetic, most of the revenue gain as I see it would come from the voting business because last year you had a very small Q4 in Voting.

You are talking about fourth quarter growth, you are right.

Yes. So my question to you is in order to hit even the low end of your guidance on the EPS line, if you take voting, jumping, that would mean the rest of your revenues ex voting would be pretty flat just doing some arithmetic, and my question to you is if you are being conservative, meaning the low end of the guidance and you talk about orders and backlog, could you may be talk about when you think you are going to ship some of the backlog that you are referring to in the Americas, etc., because I just want to get an understanding of what an order backlog means, guys?

Allen, thanks for the question. I have revenue by quarter by segment right here in front of me which I am not sharing all the data but the financial self-service numbers are a little better in the third and then significantly better in the fourth which is exactly in line with our orders. Security, which has been growing at 20, we basically have growing more like $15 million a quarter compared to prior year because the comparisons are more difficult. Then we have voting like we said, Greg gave you the numbers already. When I do all of that, I get third quarter of around 540 or so and fourth quarter is somewhere over 600 and I've seen guys out there -- I've seen people giving revenue estimates of 2 billion-50 and that number looks pretty close to me.

Okay, all right. I hear you. So really, you're talking about quite a gargantuan Q4, if you do mind me saying.

Well, I do not see it that way at all. Security performance is 15 million in growth. Financial self-service performance is better in the fourth due to the market, the backlog and OPTEVA. And then there is a big swing in voting and if you remember, last year was an odd number year meaning-- I mean was an even number year, last year, which means there are a lot of elections. They do not like to buy a lot of voting equipment then and this year in an odd number year, there is a lot of voting activity taking place plus the federal money is rolling so yes, we are expecting an 8 to look like 60 something this year in voting and that relates to Ohio and San Diego. As we discussed last year all the voting revenue was in the second and third quarter. This year, it's in the third and fourth but that's logical expecting dates of elections.

Got it, okay. And lastly on an unrelated topic, the dividend. Everybody is talking about it these days. Would that be something Wally, given your financial strength that you would consider moving up on?

At the right time each year, we've looked at that and we have tried to keep it in line with earnings growth and maybe a little under earnings growth but we would certainly -- if we make this guidance and things are looking good, we would again, look favorably on it and recommend to our board an increase in the dividend. It might only been be a penny a quarter something, four cents for the year, but it depends on acquisition opportunities in front of us and other cash flow items but I would think if we can perform as we are saying here, there would be another increase.

We've had 50 straight years of increases.

No, I understand that but given where the world is these days looking more at dividends, I just throw that out. That's all.

There are changing trends every day. We will increase the dividend a little bit if we are continuing to do well but we are not going to overdo it.

Okay. Thank you very much.

You are welcome.

Mark, if I may, this is Don Eagon, I would like to make a comment to what Allen just brought up as far as our analyst conference. What he is talking about is we have let it be known that we're holding an investors conference here at our headquarters August 4 and 5. Beginning on August 4 in the afternoon we are going to have presentations highlighting some of our growth strategies and some of our product and service offerings and then the following day on the fifth, we will have more formal presentations and members of our executive committee. This is also going to be Webcast so I would encourage anyone that is interested to go to our website and they will find the information that they need or to contact either John Christoff or Michelle Greigy direct if you have an interest in attending.

Alright, Mark. We will go ahead with the questions.

Peter Thompson with Koho Partners.

Morning. I would like to follow-on with kind of the financial question which it really is pretty apparent that you are holding a lot of cash reserves --

Excuse me, can I interrupt, Peter? We can hardly hear you. Just speak up a little bit place.

It just seems to me as your financial position has improved every single quarter and how for about the last three years, which is wonderful, but now with a no net debt position and I would say a reasonable, kind of a low pay out relative to your growth rate, you clearly are husbanding cash for a deal and I guess I am just trying to figure out what is the magnitude of the deal opportunities out there that you would be willing to entertain? I just don't think of anything that is huge out there so if there are niche deals which is what I would suspect they are, I am confused as to why you are either not increasing the payout and or buying backstock opportunistically?

Peter, first of all, we do have an authorization to buy a little stock back and we will do that when we choose. It is an absolute opportunity rich environment, small deals, big deals. We have been the industry consolidator for some time. We will continue to be that. There are synergistic opportunities available to us. Cash is king. We also said that we would like to keep our net debt below 30 percent. You can do the math on that and figure out what our capability is to take on debt --

Are there deals that could get you to that debt to capital ratio?

Peter, we are not going to talk about individual deals here but take a look around, there are many many opportunities out there and we've proven that we can do them at the right price and that we can integrate them well and create value for our shareholders in doing that and we expect to continue to do that.

Fair enough. Thank you.

Owen Edwards of Dressner Bank.

Hi guys.

Hello.

Hopefully you can hear me. Just very briefly, I was wondering if you could outline your self-service market in Europe and sort of breakdown preferably if possible country by country and give me sort of trends going forward, if that's possible.

Owen, that won't be possible but we can talk about Europe in total. It's been a brutally difficult market for at least two years, if not longer. There are three if not four or five eager, aggressive competitors including ourselves. Some of the European markets have been in recession. We've had quarters where our constant currency or fixed-rate revenue is down year-over-year. We just had one that's up, which is really good news from our point of view but that market remains very difficult, very weak, with very aggressive competition and the right cost points and features win. We are performing reasonably well there but its ground zero in the competitive war.

How do you see down the line market going forward?

The market will be directly related to the economy and we're hoping to see some improvement in the economy. Our success in it will be a result of our own hard work and customer relations and our new product and software offerings. It's a daily tough battle.

You suggest actually no growth for the next six months possibly?

In the market?

Yes, underlying market, yes.

I would not see a strong market in Europe for some time.

Okay. Okay, that's great. Thanks.

Steve Cabb of Tokeville Asset Management.

Hi, I have a couple of questions. What are the significant differences that enable you to increase the quarterly profit from a year ago in earnings per share, was this cancellation by a customer? I would like you to give some color on this, why was it canceled, how was it arrived at, how much did they pay, how much longer was the contract? And after that, comment on how -- you were getting a number of outside long-term contracts to service banks. How does that situation look?

I will turn that question over to Greg.

On the buyout from the lease, it was a lease termination that the customer wanted for their particular reason. I guess they wanted to own the equipment so from that standpoint, they bought out the lease, they bought out the equipment. What you saw the gain on for the most part was the difference between the market value of that equipment today versus what we had it on our books for so for whatever reason they wanted, we do not know, but they wanted to do that and that generated a 3 cent a share gain for us in the quarter.

So they kept your equipment?

They kept the equipment.

The way I think of it, you make assumptions about depreciation on this equipment and in this particular case, we were depreciating it I guess reasonably fast but it turned out we had written it down to a value slightly below what it was truly worth and I think that ties back to our clean, honest, good conservative accounting that we employ and that's what happened.

I am happy to hear about that.

Good.

What about commenting on the outside contracting business from banks, that's a fairly big item there?

I think you must be talking about our outsourcing.

Right.

We've announced several major wins, maybe not in the last month or two but like with Bank of America, that has been going extremely well. They're very happy. We're very happy. Our outsourcing contracts that we have in place around the world, there are many, some in Europe and some in Brazil and elsewhere in Latin America, they're performing well now. There hasn't been a lot of action on new major outsourcing deals in the last few months and there are a number that are out there pending but this is a very emotional decision for a bank to make and they make them when they are ready. We have the interest and capability and offerings to support that work. We would love to have some new ones to announce in the near future but we do not have any today.

Alright. I have a couple of more questions. India -- the Asia-Pacific area has been growing very nicely. You bought out the remaining interest in your India --

Yes.

-- company. I am wondering if you could give -- what is the base from which this 25 percent growth comes? How much volume is there in Asia-Pacific? What do you see as the probable growth rates in this area, particularly in India and China? If you could give color in this whole area and start with the amount of business now so I have an idea of the base we're talking from.

In our release each quarter, we give the revenue by region and as you can see in this one, we had a 20 percent growth on a fixed rate basis, 25 percent growth on a GAAP accounting basis and we did $35 million in the current quarter. We've been growing in the lets say 25 percent range for a number of years and that starts with a 15 percent kind of market growth feeling. The fact that we were not there much and our share was low and we are very focused on it, we have been bringing ourselves up to fully representing the needs country and going after the accounts and gaining some share. We're very pleased with the Asian results this quarter because of the SARS problems which were very significant. We would have done even better without that problem and as far as India, the market is growing very rapidly. We had traditionally done well in that market but our joint venture was, let's say undercapitalized and maybe not located in the right spot and as the market grew, there was a need to expand the business and focus on the customers and invest there. A partner and us decided the best thing was for us to take that over and buy them out; we did that, a very small deal. And now, we are in a position to invest and grow in that market and we're doing exceedingly well there. We hired a new General Manager. We put our headquarters in Mumbai. We've had multiple visits to all the banks. We've got the right service and software offerings and we are very excited about the opportunity in India, China and all of Asia as we go forward and we've proven we can do extremely well there.

Do you have any plants there or do you import the merchandise from the other plants?

When you say there do you mean Asia?

Yes.

We have two plants in China, one for security products and one for financial self service. In India, we do not have our own manufacturing operation but we have a manufacturing arrangement with one of the largest industrial companies, a great company that we love to work with called TaTa and so we have our own sales, our own software, our own training and our own service and people throughout the country but TaTa manufacturers under a license for our exclusive use in India and around the region.

Alright, I have a few more yet.

No, I'm sorry. We are slowly running out of time. If you have any follow-up questions, we will try to catch those offline later.

okay.

We have to allow -- there are several more questions.

Thank you, Steve. Hope to see you soon.

Jay Stevens of Buckingham Research.

Yes, thank you.

Hi Jay.

How are you all?

We are doing great.

Great quarter.

Thank you.

Try to put some color on the SG&A expense line for us. I'm finding in my model that I am not getting close enough in my estimates and I think I could use a little help on how SG&A will flow quarter by quarter?

Are you high or low?

(laughter) High, way too high. Secondly, I would just like to make sure I'm hearing the message you're trying to send and it sounds to me and you will correct me if I am wrong, that we could be at 66 cents for Q3, a shade too high because that is towards the high end of the guidance range and then of course, for the year, we could be a shade too low. Would you be thinking at the end of this call that that's what will happen to the numbers Greg, that there could be a drifting down by a penny or two of the Q3 EPS and then of course, a pickup in Q4?

Before Greg answers that, let me give you what I like to do with guidance. What I start out the quarter, one, I like to feel comfortable that we are going to be in the guidance we have given. And two, the most highly likely number if I had to pick one, would be in the center of my guidance. So if I say 62 to 67 then I am probably thinking I have a really good shot to be at 64 or 65. For instance, I would like to get this San Diego order all closed out and get some of that revenue in the third. If that happened I would be closer to the top. If we get some windfall things happening, we are at the top but if we have something happen like Maryland slipped out of the second, then we would have been at the bottom but still in it. When I give a range I really mean the range and I'm thinking we've got a 90 percent chance of being in it and if everything remained unchanged, we should of sort of be around the center of it.

That's helpful Wally. In my own forecasting I am becoming more realistic about the states and after what happened in Maryland, I just am thinking that slippage is what we should anticipate with these things. Just pushback, not lost business, but pushback. But can we get back to my other question also on the SG&A?

Yes, on the SG&A you have to think about we just and not talk about in percentage of revenue basis. You have to think about something in the low 17s in Q3 and then in the fourth quarter, you have to think about something kind of in the mid to high 15s because of the higher revenue --

-- high 15 percent of revenue, I want to make sure I am hearing that right Greg. Mid to high 15 percent of revenue for SG&A?

Yes, become of the higher revenues we talked about in the fourth quarter.

Thank you both.

We have time for one final question. Matt Summerville of McDonald Investments.

A couple of follow-ups. Wally can you talk about the rollout -- how we should think about the rollout on a global basis of OPTEVA? When is it commercially available, North America, Latin America, EMEA and Asia-Pacific and at what point do you anticipate -- is it Q4 in fact, that you really begin to anticipate shipping quantity of that product? And then I also have a follow-up on Europe. It really did look like you guys had a pretty good quarter there. Could you give us a little more color in terms of what drove the positive comp even if you pull out the currency in the business? Earlier in the call you mentioned something about your marketshare position in North America. I was wondering if you could comment on how you feel that has faired year to date?

Before I answer the question, I would like to let everyone know we do have time for a few more questions. We are not ready to shut it down yet.

Matt, you may have to remind me of some of the pieces as we go through this but you started out with OPTEVA. It's going very well. It's being certified all over the place by switches and banks. It's in commercial production. Customers are buying it and using it. It's not a regional question because it's a global product but it is in fact, a country by country question and customer by customer question because of various functionalities, our software, whatever and we are going through each one of those and I see a ramp up of OPTEVA output a little bit in the third and more in the fourth. And then IX which is a prior generation probably has a life that goes out into '05 so you have a ramp up of one and a ramp down of the other, crosses over somewhere in '04 and somewhere in '05 IX really becomes a product that just you buy to -- put one more matching product in your group of ATMS or whatever. But by 2005 and six, OPTEVA is the vast majority of what we're doing.

Okay.

What was the next part?

If you could just talk -- Europe came up in the call and I was hoping to get more color as to why you feel your business performed at least a little bit better than what I have been looking for in the quarter and whether or not there are any signs of life at this point in the market and whether or not you think positive year-over-year comps on a fixed-rate business are achievable moving into the back half of the year? Was the second quarter maybe unusually strong?

Yes, I would say this stuff moves around quite a bit quarter by quarter and I would not -- one gulp does not make a meal and I would not start thinking that the third and the fourth quarter are going to be great. It's a brutal environment. We have a great management team there. We are working hard to do the job and served the customers but no, I would not expect strong third and fourth quarter year-over-year comparisons. I have not figured that in in my guidance.

You talk -- the last question was related to North America or the U.S. however you want to talk about it in terms of opportunities for you guys to maybe win some share, at least maybe in the fourth quarter, doesn't sound like maybe in the third period. Can you talk a little bit about how you feel your marketshare position has trended year-to-date in that business?

I think we have been doing fine. I think it was absolutely clear that we needed a new generation of solutions. I'm thrilled to have those in the marketplace. They are being readily accepted. They are excellent solutions. We have strong wonderful competitors too, so hopefully we will gain some share but for sure, with our new solutions and the things that are going on in branches, the overall demand is going to increase. So we have to wait until the final numbers settle out. Our competitors do not give regional revenues so it makes it a little hard for us to know exactly what's going on. But we feel really good about our relationships, about our service, about our new software and about our new hardware solutions. Let me tell you, we are eager to serve and win so we get up every day. loving this, going after it and I think banks appreciate that. I think we are going to gain some share particularly as we move forward but I'm sure our competitors have new solutions coming and new things are happening every day, so we'll take care of ourselves. We'll continue to deliver superior performance and serve our customers and -- but we have a great deal of respect for our competitors too.

As far as the, Greg, the outlook for financial self-service revenue growth of 1 to 4 percent, is that Q3 or the full year?

That's full year.

Did you give a number for the third quarter, in terms of what you expect in the ATM business?

We did not but we were down $3 million year-over-year in the first quarter and we were up $1 million in the second, if I have the numbers right and we are expecting a few percent growth in the third and nearly double-digit growth in the fourth.

Okay, the growth in the third, would that be related to an easy comp in the Real or underlying improvements in the ATM markets you serve?

I think it's related to our new offerings.

Underlying improvement.

Thanks guys.

(CALLER INSTRUCTIONS). Jim Rosenberger with Bernstein.

Hi guys.

Hi Jim.

I wanted to ask you about the Maryland order. I was very gratified to see that such a large portion of the order was in services and I wondered if you could describe what those services are and what the additional revenue should be, kind of evenly spread out over the four years or how that works?

It's basically 30 million right now and then 6 million a year for four years. Those are to help with supporting the election and the ballots and all the work associated with that and as you know, that's the kind of revenue stream that we are trying to develop. So the delay of the order by actually one month was a little disconcerting for us but the important thing was to win the order and get the right order and we have that and what I really love about this one is this is a repeat. In other words, Maryland bought 17 million from us last year to do four counties and after having that experience and running the election, they decided to move forward and gave us 100 percent of what they were doing. So it shows we are on the right track with the right solutions and the right support and it's a start on developing recurring revenue streams.

As a rule of thumb, would I apply that $6 million a year based on 11,000 units or is there any way I can think about what service revenue could be based on an installed base of machines?

We are just beginning to do that kind of calculation work ourselves and as you probably know, this is the first order that had multiple years of service on it. The other ones like the big Georgia order had the first election support included in the contract and so this is a first chance to get a good look at what might make sense. So I would say if you had to use something, I would use it but we'll develop a stronger feel of that as we move forward.

Okay and I would like to ask a different question on the services gross margin. You commented it was down year-over-year because there was some high margin business that did not repeat. It looked to me like you had high margins in the second half as well in services gross margins. The current level more of a run rate that we should expect?

Yes, I think the current run rate is probably appropriate Jim. Last year when you look at some of the specific projects and go back beyond it, there were a couple of projects in Italy and Germany, one here in the U.S., all high gross margins, build work type of projects that did not repeat and if you strip those out, do the math, you are basically right on, maybe even up a tick from last year's level.

It is also a difficult environment for service and service margins. Everybody competes on that. Banks are more aggressive at causing us to compete. Everybody wants to gain share so to make money in this business, you have to have the best cost points and the in-depth service base so you can support the team that has to be in the field to do a good job. So it's a tough environment and particularly in Europe.

Okay, thank you for the color.

You're welcome.

Thanks Jim.

Owen First Manhattan.

Just a very quick one, when you talk about SG&A Greg, I presume you are including R&D in that number.

We are.

Is there any reason for me to be asking you about 2004 guidance? I figured maybe you would give us a quick hit there, if you could muzzle Don.

(laughter)

I'll try but --

You must be one quarter off on your call. We are just in the third quarter.

Oh, okay. I can hold my breath. As long as I don't turn blue.

Don't do that.

We will take one more question, Mark.

There are no more questions in queue. Please go ahead sir.

Thank you Wally, thank you Greg and Dave for your spirited reports. On behalf of all 13,000 people and employees, we want to thank you for your continued support and thank you for being with us today. Have a great day.

Thank you.

(CALLER INSTRUCTIONS).

(CONFERENCE CALL CONCLUDED)