Diebold Nixdorf Inc (DBD) 2003 Q3 法說會逐字稿

Good day, everyone, and welcome to the Diebold Inc. third-quarter 2003 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, Madonia, and good morning, everyone. We are pleased you could join us today. With remarks on Diebold's record third quarter are Wally O'Dell, Chief Executive Officer, President and Chairman, and Greg Geswein, Senior Vice President and Chief Financial Officer. Also with us are Dave Bucci, Senior Vice President, Customer Service Group, Mike Hillock, President of International Operations, Tom Swidarski, Sr. Vice President and President of Diebold Election Systems.

Just a few notes before we get started on the third-quarter report. The replay of this conference call will be made available on the Diebold web site as well as over the phone beginning at 1 PM. The phone number is 719-457-0820. And use pass code 593985. That is 593985.

Lastly and as a reminder, some of the comments today may be considered forward-looking statements. As a precaution, we refer you to the more detailed information on file with the SEC. This third-quarter earnings release has been furnished to the SEC and Form 8-K, and is on the EDGAR database.

With that, I would like to turn the conference call over to Wally Odell for his observations on the third-quarter results and his look ahead for the (indiscernible) and beyond.

Thank you, Don. Good morning. Thanks for being part of our call today. I'm very pleased that we once again delivered excellent quarterly results, reporting earnings per share near the high end of our previous guidance and beating expectations. Diluted earnings were 66 cents compared to 61 cents in the prior year. This represents earnings growth of 9.5 percent compared to last year, overcoming a 2 cent per share unfavorable comparison due to pension expense impact. I am particularly pleased with the continued strong performance in orders, as we recorded the highest order quarter in the Company's history. This is the result of continued share gains, market acceptance of Opteva, strong demand for our security products and winning the Maryland Election Systems contract. Financial sale orders in the Americas, Asia-Pacific and EMEA all increased in the double-digit range and security orders increased in the high-single digit range compared with a very strong third quarter in 2002.

Turning to revenue, we were very pleased with the performance of each of our businesses. Total financial self-service revenue increased 8.3 percent on a GAAP basis and 4.2 percent on a fixed-rate basis as a result of increased demand for upgrades and replacements and continued market share gain due to terrific acceptance of our new Opteva Agilis platform. Security revenue increased 15.4 percent, as demand for security solutions remains strong and we continue to gain share. Election Systems revenue was off 13 percent compared to the prior year quarter due to the timing of large shipments in Georgia in the prior period and Maryland in the current period. However, this business is typically comprised of a small number of large contracts. So, quarter-to-quarter comparisons can fluctuate widely.

Looking forward to the fourth quarter, we expect financial self-service revenue to increase 10 to 15 percent on GAAP basis and 5 to 10 percent on a fixed rate basis. Security revenues should be up approximately 10 percent.

In the Election Systems business, we have experienced slight delays in Ohio caused by an independent security review of all the selected vendors' products. Therefore, we have revised our Election Systems revenue expectations in Ohio for the fourth quarter to approximately 10 million, down from 30 million previously expected, with the balance of $20 million now expected in early 2004. Therefore, Election Systems revenue for the fourth quarter is now expected to be approximately 47 to 52 million, which is still up dramatically from 8 million in the fourth quarter last year. As a result, consolidated revenue is expected to increase 15 to 20 percent versus the prior year. This will be one of the strongest revenue growth quarters we have ever experienced. We expect diluted earnings per share in the range of 78 to 83 cents versus 67 cents in the fourth quarter of 2002. We now expect full year EPS to be in the range of $2.37 to $2.42. This represents earnings per share growth of 8 to 10 percent compared to 2002, and overcomes a negative 6 cents impact from increased pension expenses. We are very pleased to be able to deliver these results considering today's difficult economic environment. These results will represent all-time records for both the fourth quarter and full year in revenue, profits, and earnings per share by a wide margin. This performance is a testament to our employees' continued efforts to control costs, improved working capital, increase operational efficiencies, develop superior solutions and serve our customers.

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 consistent superior performance in 2003, 2004 and beyond. And now, I'd like to turn the meeting over to Greg Geswein, our CFO.

Thanks, Wally. Good morning, everyone. I would like to begin by briefly reviewing financial highlights of the third quarter and provide you with our outlook for the fourth quarter, totals for 2003 and a first look at 2004.

Net income was a record $48.3 million or diluted earnings per share of 66 cents. EPS was near the high end of our previous guidance of 62 to 67 cents a share. This compares to third quarter of 2002 net income of $44.1 million or diluted earnings per share of 61 cents. Last year's number included over a penny per share gain from the sale of our retail ATM business.

On the order front, as Wally mentioned, we are extremely pleased with the order flow we are seeing. Excluding voting, fixed-rate worldwide orders for product and services increased in the double-digit range, with the highest total product orders in the Company's history, this coming off very strong orders in Q2. Financial self-service orders in the Americas, Asia-Pacific and Europe all increased in the double-digit range. North America orders were the highest in history, after setting the previous record in Q2 of 2003, and Asia-Pacific was the third highest in history after recording the highest in Q2 of 2003. As Wally mentioned, security orders remained strong, increasing in the high single digits.

Turning to revenue, total revenue was a record $570 million, up 7.6 percent on a GAAP basis and 4.9 percent on a fixed-exchange-rate basis. Election Systems revenue declined by 13 percent. 2003 has a large Maryland contract, but 2002 has the significant Georgia revenue.

Financial self-service revenue increased a strong 8.3 percent and 4.2 percent on a fixed exchange rate basis during the quarter. Security revenue was once again very strong during the quarter, up over 15 percent as a result of continued growth in the financial, the government and retail markets. We also completed the acquisition of two security companies in Asia-Pacific, as we look to expand this segment globally. And while security related, these acquisitions also helped to solidify our relationships with major banks in this market. During the quarter, revenue was positively impacted by year-over-year strength in the Brazilian Real and the euro and certain other currencies. The net positive impact in the third quarter was approximately $14 million versus the prior year or 2.7 percent.

Looking at gross margin, total gross margin was 29.4 percent, matching the third quarter of 2002. Product gross margin increased to 32.2 percent from 30.1 percent last year. Service margins decreased to 26.1 percent from 28.6 percent due to increased pricing pressure in North America and Europe, as well as a higher mix of installation revenue which carries lower margins. Installation revenue had increased as a result of higher product revenue, and is included in the service revenue category.

Operating expenses for the quarter were 16.7 percent, unchanged from the third-quarter 2002. Reduced operating expenses in the core business were offset by higher operating expenses in the voting business as well as increased pension costs. This change in pension costs adversely impacted the third quarter of 2003 by approximately $2 million. Excluding the pension impact, operating expenses as a percent of revenue would have increased 0.4 of a percent. Operating profit was 12.7 percent of revenue -- decreased that 0.4 percent. Operating profit was 12.7 percent of revenue, matching the 12.0 (ph) percent in 2002 despite a higher mix of security business, which carries a lower overall operating margin.

Other income expense and minority interest improved by 600,000. This improvement was a result of reduced interest expense due to lower debt levels and lower interest rates, improved interest income and neutral foreign exchange impact compared to a loss in the third quarter of 2002. These improvements more than offset the year-over-year increase in minority interest and the non-recurring gain of $1.5 million resulting from the sale of the retail ATM business in the third-quarter. Income was 8.5 percent in 2003 versus the 8.3 percent in 202. The improvement in net (technical difficulty) as a percent of revenue resulted from the positive swing in other income expense and minority interest.

We continue to maintain a very strong balance sheet, with a net debt to total capital ratio of approximately 4 percent. The Company's net debt was 53.2 million at September 30, 2003 compared to net debt of 62.5 million at December 31st, 2002, and net debt of $140.7 million at September 30 of 2002.

In the third quarter, the Company used free cash flow of $35.6 million, due primarily to an increase in outstanding accounts receivable, resulting in part from the large voting contract recorded in the third quarter. The Company fully expects a substantial amount of this increase in the fourth quarter.

Days sales outstanding increased by three days, moving from 76 days at the end of the third quarter 2002 to 79 days at the end of the current quarter. Excluding the impact of the large voting contract in the third quarter 2003, DSO would have remained at 76 days.

Inventory turns declined from 5.4 turns to 5.2 turns at the end of the third quarter 2003. The decline in inventory performance relates to the seasonal demand in the business, and increases in inventory required to service a strong fourth-quarter revenue forecast. Inventory turns at the end of the year are forecasted to be approximately six versus the 5.7 in 2002.

Free cash flow for the nine months ending September 2003 were 75.9 million, an improvement of 78.1 million versus the comparable period in 2002. While we currently do not expense stock options, the impact in 2003 if we did so would be approximately 6 cents per share compared to the 4 cents in 2002.

Now let's turn to the outlook. Fourth quarter revenue is expected to grow 15 to 20 percent, and we expect diluted EPS in the range of 78 cents to 83 cents a share versus 67 cents per share reported in 2002. Again, we will have the impact of approximately 2 million year-over-year from the negative impact from pension. We expect full-year revenue growth of 6 to 8 percent, with our financial self-service business expected to grow 4 to 6 percent, while security will continued strong (technical difficulty) growth of 15 to 18 percent, with flat to (technical difficulty) revenue. As Wally mentioned, we had previously anticipated the fourth-quarter voting revenue from the State of Ohio of approximately $30 million. Due to delays caused by an independent security review of all the selected vendors' products, Diebold has revised its revenue expectation from Ohio for the fourth quarter to approximately $10 million, with the balance expected to come in 2004. As a result, voting revenue for the fourth quarter is expected to be approximately 47 to $52 million versus approximately $8 million in 2002; and year-over-year voting revenue is expected to be essentially flat.

Our tax rate remains 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, collecting a significant amount of the accounts receivable generated at the end of Q3, including the Election Systems business receivables.

Full year earnings per share guidance for 2003 is now $2.37 to $2.42 per share versus the previous guidance of $2.35 to $2.45 per share. These EPS figures include the year-over-year negative pension impact in excess of 6 cents per share.

Looking forward to 2004, while business unit forecast is yet to be finalized and visibility is difficult, given uncertain global economic conditions, we believe that through continued focus on speed, global efficiencies, and creative solutions to customer needs, the Company will continue to gain market share. The following expectations do not include the potential impact of any future mergers, acquisitions, disposals or other business combinations, as well as the impact from any possible changes in the rules surrounding the accounting for stock options. Given these factors, we have the following expectations. 2004 revenue growth of 8 to 10 percent on a fixed-rate basis. Depreciation and amortization in the range of 68 to $73 million; pension expense will be approximately 4 cents per share compared to 1 cent expense per share in 2003, an effective tax rate of approximately 32 percent. 2004 earnings per share are expected to be in the range of $2.58 to $2.70. This represents a 10 to 12 percent increase in EPS excluding the pension impact.

In conclusion, we're very pleased with our results in Q3 and again delivering earnings on the high-end of our guidance. In addition, we are encouraged by the strong order entry and about the opportunities for the fourth quarter and for 2004. Not only are we confident that we have the right strategies in place; we also have a great balance to help us continue to focus on additional growth opportunities that complement these strategies. Thank you. I want to turn it back to Don now for questions.

Madonia, I don't know where you are now -- prepared to take questions from the folks who called in.

Certainly, Mr. Eagon. (OPERATOR INSTRUCTIONS). Kartik Mehta with Midwest Research.

Good morning. I wanted to -- Greg, I wanted to ask you a couple of questions on the service margins. I know you said a little bit had to do with installation revenue. But I just want to understand a little bit better what's happening in the marketplace. Are you seeing any more competition in the marketplace as far as the servicing aspect is concerned? Or is this just anomaly in terms of the installation revenue?

This is Wally. Things vary a little bit quarter-to-quarter. There's no doubt that there is very severe continued pricing pressure in North America and Europe. As Greg also pointed out, the installation revenue carries low margin. We have a lot of actions under way to reduce costs to improve margins in service. But it's a tough environment out there. And we're just very proud of the fact that when you take our total business and look at our total gross margin, we were able to hold that -- also at the operating expense line overcoming pension expense. So pieces fluctuate, competitors are eager, customers want the lowest prices they can get. We are doing the best we can with that, and I think we should be very proud of what we were able to accomplish, and we have got to continue working on technology implementations and productivity benefits so that we can hold and improve margins while -- either holding or reducing prices. And that is the way it is in the world today. And we feel in that kind of an environment, we can excel and will continue to do so.

Kartik, I don't think we're seeing a ton more people coming into the market to compete. I think it's just the folks within the market that are competing as well.

All right. Order growth was again strong. Could you give a little bit maybe color on order growth as it applies to North America, maybe sequentially what happened from the second quarter to the third quarter? Specifically on the ATM side, as you say Opteva is getting more and more acceptance?

Kartik, Wally again. We don't want to give the exact numbers. But North American orders were awesome and remained so. And Opteva is being very well accepted. And we're certainly talking growth rates north of 20. And we're very, very gratified by any number of institutions that are adopting our solutions. We're getting very good feedback. We are seeing all the large institutions move to do upgrades, replacements, there is just a lot going on that I'm sure is helping everyone, but it is certainly helping us, and we have the right solutions at the right time in the market. We feel really good about that.

Maybe just another way to ask that would be Wally -- when was the last time you saw this type of order growth at Diebold, especially on the ATM hardware side?

Never in my experience. So it would probably be in the mid '90s.

One last question. As you look at your mix of ATMs from Opteva in the old line, what is the mix now? I know Opteva isn't everywhere. But if you could just kind of talk about that.

We can get onto that more as the quarters go on. But in North America, it's really starting to move. Around the rest of the world, it's a country by country thing with certifications, particular software, particular applications. That absolutely is happening now. We would expect Opteva to be 100 percent of our output in '06, and most of our output in '05, and certainly half, maybe, next year.

Reik Read with Robert W. Baird.

Good morning. I just wanted to ask a few questions on the voting business, and maybe let me get them all out and you guys can go at it. I guess, first off, what we have seen recently is to have appropriations seem to be one-half of what the authorization is. And then on top of that, we have got all these security concerns that are out there. And real or perceived, they seem to be taken seriously by the state. So you've got a couple of negatives out there. Can you talk a little bit about how that is affecting your business? And then secondly, can you talk a little bit about San Diego? Has that equipment been certified? Are you booking the revenue? And then third, there re some opportunities out there with voter registration. We haven't heard much about that from you guys. What are the opportunities there in voter registration?

All right, well, Reik, I'll handle some of this, and Tom Swidarski, who is here with me can chime in, because there's a lot of things going on there. First of all, we have been outstandingly successful in this space. The only states that have gone really statewide are Maryland and Georgia; we have won both of those and performed exceedingly well. Rightly, everyone worries about security and accuracy and integrity and obviously, there were questions raised on this topic by people outside of the system. The people who are buying this equipment heard those questions and rightly said, we should take a look at those kind of issues. Maryland has done so; and in any review, there's improvement and recommendations come out, we were giving a very strong endorsement and the system, when used right, with knowledgeable poll workers and good election systems was found to be awesome. So, that has all moved ahead.

In the state of Ohio, they are doing the same review. And they're doing companywide reviews as well as hardware, software reviews in the election space. So, the end result will be a little slower uptake, but a higher confidence in the integrity and security of the systems. So we feel really good about that. We feel we are uniquely postured to have a strong positive case in these spaces because of our background and size and scope. San Diego is moving ahead. We have the federal approvals we need for our new system. There is a state California approval that is still required. It is due in the next couple of weeks. And so we feel really good about San Diego. Voter registration, we are doing a lot of work in that; it's a small business area for us. Sometimes it ties into the voting space. We feel we have excellent solutions there. But we don't generally talk about it in these earnings calls because they're pretty small numbers. By the way, our revenue is just now passing 2 billion; and our voter registration revenue is certainly under 10 million, which is probably one of the reasons why we haven't talked a lot about it in the call. Tom?

A couple of other points that I would add, and maybe I'll start with voter registration. To give you a sense of the importance of that, for instance in Ohio, Cuyahoga County will not consider anybody that cannot supply a voter registration system as part of their overall solution. So while you see Diebold well-positioned is, in many cases, a result of voter registration. Most of the states have a requirement of a of the HAVA to move to a statewide voter registration system, but they're approaching it from different venues. In the state of Ohio, each county is going to make a voter registration decision. As such in Ohio, it becomes an important part of the overall election system decisioning process. And that's why I think we're well-positioned in Ohio. In certain states, like the state of California, there are already voter registration systems that need HAVA requirements in each county. What the state's going to do there is just build a database and tie those in -- your system's going to have to tie into that. It really is a state-by-state basis. But this acquisition from voter registration standpoint is real important for us to help position us in various accounts.

And maybe going back to the other issue in terms of security, I am sure you have all seen Maryland's press release, and they're talk of what SCIC did. The vast majority of issues they identified happened in procedural issues that really had nothing to do with the system. But there were three important improvements they wanted to make to the security of their system, which have already been made. They're going through certification now and they will be applied. We were just down with the folks in Maryland yesterday, meeting with all the counties in terms of rolling this touch-screen system out. Again, they are very enthused and excited about this; and I think it positions us very well in terms of going forward. In terms of maybe the first item that you mentioned, which was HAVA dollars. The appropriated amount in this year was 1.5 billion. Next year, that number may be 500 million. But the way we are viewing this is, it puts us in a better competitive situation if the states maybe struggle a little bit with HAVA dollars, because in some of the counties and states we deal with, they need leasing; but they need help making up the difference between what the HAVA dollars are and what their requirements are. So in that case, again, Diebold's financial wherewithal and our credit corp. helps position us into meeting the solutions in particular counties and states. So while the overall dollars -- I don't know if it will ever approach 4 billion or it will only amounted to 2 or 2.5 billion, I think what will happen is the momentum created here and the success from Georgia and Maryland and other touch-screens -- and look at what happened in California -- it is extremely successful here on the touch-screen system versus punch card -- will create additional momentum and we will be able to step in. So, the 2006 requirement, in terms of meeting HAVA, people have asked for extensions there. And we think people are on pace.

That was extremely helpful. Thank you. Greg, I just wanted to ask one more quick question on the gross margin. It was pretty much flat sequentially. And I guess I'm trying to understand this. With revenues being up so much, particularly in the voting area, why would we have expected to see that be a little bit stronger? And what might we expect directionally to happen in the next couple of quarters with the gross margin?

You have a mix issue going on there too, Reik. You had a big sluggish security, strong growth there carries lower gross margin than the core business. The voting business is a more margin business as well. Going forward, as we talked about in the analyst conference, clearly, we think we'll get some gross margin improvement from Opteva, as we start to roll that out. As Wally mentioned, 2004, we think about half of the offerings will be Opteva versus the Legacy product, as we get into 2005, a larger percent; and by 2006, we expect Opteva to be the only thing that we are producing of course, as we have talked about improved gross margins from that area. As we also talked about, we continue to improve margins on the security and the voting side as well, as you can remember that slide from the analyst meeting.

(OPERATOR INSTRUCTIONS) No gentlemen, it appears there are no more questions at this time. I'd like to turn the call back over to Mr. Eagon for any additional or closing remarks.

Thank you, Wally, Greg, Dave, Tom and Mike for your comments --

I'm sorry. I'll just make a couple of closing comments since we have the time. We feel really good about what we are doing here. We have a great team. We're winning in the marketplace. Our revenue is growing more rapidly recently, and now we are projecting even better growth rates as we move forward. As I mentioned, for the first time in history, our revenue is about to cross $2 billion, which is a good milestone for us. And we feel really good about our company and our team and our prospects. And we are proud of what we have been able to accomplish together over the last two years. And we're very excited about the future. We thank everyone for their interest in us. Don?

Thank you, Wally. Greg, Dave, Tom and Mike, thank you for your being with us. And on behalf of Diebold's 13,000 associates, we thank you for your continued support. And thank you, all, for being with us today, and have a great day.

That concludes today's conference call. Thank you for your participation.