Diebold Nixdorf Inc (DBD) 2003 Q4 法說會逐字稿

Good day everyone. Welcome to the Diebold Incorporated fourth quarter year-end 2003 financial results conference call. As a reminder, today's conference is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to the Vice President of Investor Relations, Mr. John Christophe. Please go ahead, sir.

Thanks, Peter and good morning everyone. Thank you for joining us for the fourth quarter and year-end 2003 conference call. Providing commentary today is Wally O'Dell, Chairman and CEO and Greg Geswein, Executive Vice President and Chief Financial Officer. Also with us on the call today is Eric Evans, our new President and Chief Operating Officer, Mike Hillock, President of Diebold International, Dave Bucci, Senior Vice President, Customer Solutions Group and Tom Swidarski. Senior Vice President, Strategic Development and Global Marketing. Just a few notes before we get started.

The replay of this conference call will be available today at 1:00 P.M on the Diebold Web site as well as, over the phone. The telephone replay number is 719-457-0820 and the pass code is 112320. As a reminder, 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. Now with opening remarks, I'll turn it over to Chairman and CEO, Wally O'Dell.

Thank you, John. Good morning, everyone. Thanks for being part of our call today. Before I review the quarter and the year, I'd like to take this opportunity to thank the entire Diebold team for all their contributions. It is their combined effort to continually improve processes and improve efficiencies that helped us once again achieve record performance, despite very challenging global economic and market conditions this past year. These are the reason that we again increased share in each of our three businesses, made guidance in each and every quarter and ended the year near the high end of the range of the annual guidance we gave at the beginning of the year. Few companies have performed this well and our worldwide employees deserve the credit. This is the third year in a row that we have done this and I'm very pleased that we were once again able to report record results for the quarter and year. It will take continued effort and sacrifice to extend this great performance.

Our revenue for the fourth quarter increased 23.3% on a GAAP basis and 16.7% on a fixed rate basis. Excluding the effect of (inaudible) expense in the prior year period, earnings were up 20.8% to an all-time record of 81 cents per share. As once again, we met our previous revenue and earnings per share guidance for both the quarter and the year. Financial self-service revenue grew a very strong 19.3%, our 10.9% on a fixed exchange rate basis, as the upheaval roll out continues successfully and we sell the markets in North America and Asia-Pacific strengthening significantly.

Security revenue grew 13.4% while election systems revenue grew nearly 400% as we fulfilled the significant order in San Diego. For the full year, our revenue increased 8.7% on a GAAP basis and 6.5% on a fixed rate basis. While earnings per share grew 9.1%, excluding the effect of the (inaudible) expense and goodwill impairment from the prior year results. Financial self-service revenue for the year was up 7.4%, or 4.4% on a fixed rate basis. Just as importantly, our operating margin for financial self-service increased to 14.6%. You should also note that when we disclose operating profit margin by business segment, we include product and service results and all expenses, including pension expense are fully absorbed.

Our security business also grew significantly. While maintaining operating profit margin, as we continue to grow in the core banking market and expand in retail and governed markets. The elections systems business proved to be challenging in 2003 as delays in implementation caused revenue to be down $11 million versus the prior year. Diebold election systems successfully completed security reviews in Maryland and Ohio and implemented several suggestions as a result of those reviews to make our elections systems even more secure than before. However, the roller revenue and increased costs resulted in lower operating margins for the year. Our touch screen elections systems continue to significantly outperform traditional punch card and lever system in real world elections and as a result, we are confident this technology will continue to be implemented. I'm very pleased to bring Eric Evans on board as our new President and Chief Operating Officer. Eric brings to Diebold a strong sense of strategy, great business judgment, financial knowledge and broad global operations experience. He had a stellar track record at Emerson and his people skills and solid operating experience will serve us well as we continue to grow our business. Additionally, Eric believes in and is committed to full and clear disclosure, openness and integrity. The addition of Eric to the Diebold team successfully completes a thorough search to replace Wess Vans (ph), who died tragically last year. Eric is here with us today and will be available to answer questions you may have about his background and experience later in the call.

We look forward to the first quarter of 2004 with confidence. We expect consolidated revenue to increase 10% to 13% on a fixed rate basis versus the prior year with an additional, 3% to 4% from currency. EPS are expected to be in the range of 38 to 42 cents. We will be achieving these superior results by continuing to provide excellent solutions for our customers in tightly controlling costs. For the year, we are planning on a consolidated fixed rate growth of 8% to 12% with an additional 1% from currency. We expect financial self-service fixed rate revenue growth of 6% to 8%, which would likely represent further share gains and we'll it do it without sacrificing our profit margins.

We expect the security business to grow 10% to 14% and the elections systems business to grow substantially to between $138 and $170 million. This includes approximately $75 million in expected revenue from the state of Ohio, $37 million for a voting contract in Brazil and assumes $30 million in recurring revenue from existing installations and up to 30 million in additional opportunities in several other states.

In conclusion, thank you for your support and we look forward to another year of growth and remain confident in our ability to continue to deliver superior performance in 2004. Now I'd like to turn the meeting over to Greg Geswein, our C.F.O.

Thanks, Wally. Good morning, everybody everyone. Let me echo Wally's sentiments of how pleased we are to report record revenue and profits with ESPN of 81 cents per share, which is near the high end of our previous guidance of 78 cents to 83 cents per share. These results were achieved without any Ohio voting revenue profits in the fourth quarter, which is part of our original guidance for the quarter. The 81 cents per share for the fourth quarter is an all-time record fourth quarter and surpasses the previous record, which was set in the fourth quarter of last year by 21% excluding the impact of COLI in last year's fourth quarter.

On the revenue side, we reported record revenue for the quart at $648 million, up over 23% in the fourth quarter of 2002 and surpassing the previous sales record in Q3 of this year by 14%. We also sur paused the $2 billion revenue level for the first time in the company's history. It took us 137 years to reach the $1 billion mark and an additional seven years to add the second billion dollars in revenue. For the third quarter in a row, we reported double digit increases for worldwide orders excluding voting for product and services with strong orders in the Americas, with excellent performance not only from North America but Latin America and Brazil as well.

Asia-Pacific financial self-service orders increased by more than 30%, led by continued strong orders from China, India and Australia. Europe, the Middle East and Africa while off versus last year's strong fourth quarter had their highest order quarter of the year. And as Wally mentioned, up tea has been a significant percent of global ATM order entry and shipments exceeded our expectations for this new platform. Revenue was noted as $648 million up 23% on a GAAP basis and almost 17% on a fixed rate basis. The positive currency impact on the fourth quarter was approximately $30 million, or 6.6% and was a result of the most part of the strengthening of the Brazilian Real and the Euro.

The financial self-service business showed solid growth with GAAP growth at 19% and fix rate growth at almost 11% and one of the highest quarters in the company's history. This was led by strong growth for the Americas, up 21%, and almost 15% fixed rate in Asia-Pacific, which was up 18% and 12% fixed rate. Europe, Middle East, and Africa while up 15%, was basically flat in the quarter fixed rate. The security business was again up double digits for the ninth quarter in a row and the highest quarterly revenue in the history of the company. We continue to leverage our North American strength on a global basis with the acquisition of Cornell Brothers and Vandgreen technology in Australia.

The voting business was up almost $30 million versus Q4, 2002 with a large order from San Diego, county, California, representing the largest piece. The Ohio business has been delayed until this year. Gross margins declined slightly from 30.1% to 29.7%. Product gross margins improved slightly with the improved international financial self-service and elections systems gross margins in the quarter, while service grows margins decreased to 27.8% from the 29.2% in the fourth quarter of 2002. We continue to see pricing pressures in both North America and Europe. In addition, selection revenue was up 17% in the quarter, which carries a lower gross margin.

We continue to develop and implement productivity improvement measures to target the pricing pressures including call management, wireless applications and improved diagnostics. We continue to have a strong capture rate on our own equipment. We continue to leverage the areas, which we can control with operating expenses improving to 15.6% of revenue, from the 16% reported last year excluding the impact of pension, operating expenses would have been 15.6%, versus 16.2% in the fourth quarter of 2002. Operating profit was 14.1%, passing the fourth quarter of 2002, despite a higher mix of security business, and higher pension cost. For the year, operating profit improved to 12.5%, from the 12.4% with higher margins in the financial self-service business, steady margins and security, offset in part by lower operating margins in the voting business which is impacted by lower revenues, year over year.

Excluding the impact of the coal settlement last year, other income and expense was unfavorable for the quarter by approximately $1 million, principally the result of the gain on the sale of facility last year. Net income was 9.1% of revenue, compared to approximately 9.2% last year, again, excluding the impact of the (inaudible) settlement.

The balance sheet continues to be strong, with a net debt to total capital ratio of approximately 2%. In the fourth quarter, the company generated free cash flow of $61.2 million, versus 115.3 million in the fourth quarter, 2002. The decrease in free cash flow during the quarter was due primarily to higher accounts receivable levels resulting from significantly higher December 2003 sales versus December 2002 and the $31 million in receivables for the Maryland voting contract, which remained outstanding in the year-end.

Free cash flow for the year-end ending December 31, 2003 was a $137.1 million, in improvement of $23.9 million, or 21.1% versus the comparable period in 2002. Days sales outstanding increased by five days, moving from 68 days of December 31st, 2002 to 73 days at December 31st, 2003. The delay in collecting the Maryland contract receivables negatively impacted the DSO by five days. Inventory turns were centric flat moving from 5.8 turns at December 3, 2002, to 5.7 turns at December 31, this year.

On the pension side, Diebold has finalized the key assumptions related to it's pension plans 2004 and basically the assumptions for the long term rate of return is the same year over year at 8.5%, compensation levels remain the same at 3%, with a discount rate moving to 6.25% from 6.75% last year. Based upon these assumptions, the company expects pension expense to increase by approximately $4 million in 2004, increasing from approximately 1 million in 2003 to approximately $5 million in 2004. Diebold's pension plan remains adequately funded and the company is not required to make any additional contributions in 2004.

Pension expense excludes retired medical expense, which is also included in the operating expense and is approximately $2.8 million in 2003. These expenses are expected to be approximately $3 million in 2004. As permitted under FSAS number 123, accounting for stock based compensation, the company provides quarterly and annual disclosures of the impact earnings per share or stock options to expense. The company estimates of stock options to expense in accordance with FSAS 123, the full year impact in 2003 would have been approximately 6 cents per share compared to approximately 4 cents per share in 2002.

In the interest of more directly linking associate rewards to corporate performance, the company's planning in 2004 to grant restricted stock units in leaving stock options to a select group of key associates. The impact from this transition to grants of restricted stock units should adversely impact 2004 earnings by approximately 1 cent per share.

Now turning to the first quarter and fall year, 2004 outlook. As Wally mentioned, first quarter revenue is expect to increase in the 10% to 13% range on a fixed rate basis versus prior year. Depreciation and amortization be approximately $17 million and our effective tax rate of approximately 32%. And the increase in pension expense of approximately 1 cent per share in the first quarter of 2004 as compared to the first quarter of 2003, and EPS in the range of 38 cents to 42 cents, which represent an 8 to 19% increase over 2003 excluding the impact of pension expense.

For the full year, revenue growth of 8 to 12% on a fixed rate basis holding our commitment to grow the top line at 8% to 10% on a long term basis, financial self-service revenue growth of 6% to 8%, security growth of approximately 10% to 14%, and the voting business growth of approximately $138 to $170 million. Pension expense of 4 cents per share higher in 2004 moving from 1 cent per share of expense in 2003 to 5 cents per share of expense in 2004.

Research and development expense will be in the range of 3% to 3.5% of revenue and depreciation amortization of approximately $70 million and effective tax rate for the year of approximately 32%. EPS stand in the range of $2.58 to $2.70. This represents a 9% to 14% increase in EPS over 2003 excluding the impact of pension expense, and again, holding to our commitment to grow earnings 10 to 12% on a long term basis. Free cash flow is expected to be in the range of $225 to $250 million.

With that, I'll now turn it back to John for questions.

Thanks, Peter. We'll open up the call to questions now.

[OPERATOR INSTRUCTIONS] Our first question will come from Kartik Mehta with Midwest Research.

Good morning.

Good morning.

You look at the financial self-service growth and it's been fairly strong and it looks like the Americas are strong indicating North America is strong as well and now we have had two quarters of that. It seems as though the replacement cycle in North America is starting. Would you agree with that, and if so, how long do you think the replacement cycle could last?

Thank you Kartik. First of all, the replacement cycle that you talk about has started. There are things outside of, you know, what we and our competitors do driving that, like triple DES and ADA and check 21 and all of those things. Then in addition to that, you know, when new technology and new functionality comes to market, that drives the demand as well and drives replacements. So, yes, I believe there is a lot happening now, and as you said, we have all seen it for the last couple of quarter and we expect it to continue.

When you look at your new orders, especially for the ATM, what percentage would you say are now Optiva orders versus the older technology?

Yeah, roughly in the U.S., we're already at the 50-50 mode. And going into -- internationally, it's really just beginning, because it will take all of '04 roll out all of the functionality and all of the switch approvals, all of the bank certifications, all of the specific software requirements. So, in full swing in the US, and I would say in full swing in '04, you know, really ramping up in international markets.

One last question, you know, I saw your free cash flow guidance that's going to improve again in '04. What becomes priority for that free cash flow in '04?

Well, of course, we -- you know, we will pay down our debt a little bit. I'm sure we'll do some share buy-backs. We look at the acquisition opportunities that are in front of us, and we'll, of course, look at our dividend policy.

Great. Thank you very much.

Next, we will hear from Matt Summerville with McDonald Investments.

Good morning, guys. Couple of questions. Wally or Tom, can you talk about you know, what you are seeing in the voting business out of Brazil, and when you expect the timing of that order to come through, and Tom, could you then also highlight some of the other opportunities you're seeing out there? You know, to get from that 138 to 107 for the year?

The first part of the question, Brazil order is not 100% finalized. We do expect to have it finalized very, very soon. The revenue is split between the second and third quarter, largely. I don't believe there's any revenue in the first quarter. And it's -- you know, mostly in the second and third, a little bit in the fourth.

Wally, is that pro comp technology or global elections systems technology?

It is Diebold Brazil technology. If you remember, we won a $106 million order a few years ago, and we did very well with that, and this is upgrade and replacement of some of the things that weren't done at that time. As far as other international opportunities come, you want to -

I think Matt, the other part of your question was what else is happening in the States. Certainly Wally highlighted Ohio and it's been an important operation for us. We are well positioned there for some of it between the $70 million to $80 million revenue range. We have recurring revenues streams that we are building up steadily with this organization. So, we have printing of ballots, absentee ballots that will always be required even as people move to touch screens, you have voter registration systems. We made that acquisition last year of the organization called DIMF.

That's now starting to provide some opportunities we think we would be able to reel in this year. On top of that, there are a lot of small jurisdictions throughout the various states making decisions. So, the combination of that gives us a pretty good confidence looking at 2004 for the whole elections system operations.

You brought up a good point, Tom, with the recurring revenue base. How big do you expect that to be for voting in 2004 as a percent of total revenue?

Yeah. We're looking for about $30 million in total revenue from recurring revenue stream for that business in 2004.

And then a follow-up question. As far as Wally, I'd like you to comment in a little more detail in terms of what you're seeing in your service business with respect to the margin pressure there, and then can you also talk more about -- I think, Greg may have hit on a couple of things or you did in your prepared remarks, but when do you see the tide turning there, and when do you see yourself as being able to once again expand your service margins? I would imagine that, you know, seeing 100 basis points a year over year contraction is somewhat disappointing to you?

Well it's a brutal marketplace, as you can tell by reading anybody's releases on this topic. And the ground zero on that price competition is really in Europe. And you know, we don't expect market pricing for service to improve any time in the near future. Very competitive, very aggressive customers, very aggressive competitors, and so, you know, I have always said good companies have to be able to hold their improved margins even when giving on price.

And so, we have many technologies cost reduction efficiency steps that we're focusing on to -- you know, move our costs in line with available pricing. There's also been a few little competitors fall out that might help a little bit in some markets on price. But it's a pretty tough -- tough environment, and we're taking a lot of actions that should give us, you know, 4% or 5% kind of year over year cost reductions on non-going basis and should give as you chance to hold our improved margins from here.

For '04, you expect service margins to be relatively flat to maybe up just a little bit?

The guidance that we're giving is pretty much a hold margins scenario.

OK. And then you know, one final one on security. Very strong growth in that business throughout 2003, and obviously, you are looking for that to moderate somewhat, which makes sense, but I guess the thing that strikes me is that you really didn't get a lot of margin leverage out of that growth. Can you talk about that a little bit?

Sure. If you go back about four years, we are growing 2% to 3% in that space. And then we have the Mosier Leffobeo (ph) collapse and then we had 9/11 and violence in the country moving to rural America. So, all of those things -- plus, we gained some share, of course, because of the competitors' departures. So that drove a series of quarters of about 30% growth. And we have said all along that as, you know, you get further and further into that, that starts to come down a little bit and that's what you are seeing. If you look at our numbers on a quarter-by-quarter basis for security, you will see that. And the margin issue, it is amazing how competitive the world is. You know, when -- if a competitor goes away, a new one comes in. Banks and our customers are very interested in price, and cost, and so, it's always a challenge. And you have a lot moving against you with, you know, employee costs, and various other kinds of costs. It's always a struggle, and in this particular year, we are able to hold margins.

Remember, we overcame some pension expense problems, so all of those things come into play, and after that struggle and security and for the company as a whole, we were able to hold margins for the year, and given the fact that our margins were fairly reasonable to begin with, I think that is a pretty solid performance.

Also, Matt, in that security business, there's a large service component to that as well, and that's service pricing has been impacted just like it is on the financial self-service side of the business as well.

Great. Thanks for the insight, guys.

(Operator Instructions). We'll take our next question from Reik Read with Robert Baird & Company.

Hi, good morning.

Hi Reik.

I just want to ask on the clarification on the voting guidance. When you say flat, do you mean sequentially or comparatively.

Are you talking first quarter '04 being flat?

Yeah.

That's compared to first quarter '03 and the numbers were only 7 million last year and 8 million in '04. That's the basically, which you know, that's up, but they're such small numbers, it's pretty irrelevant. The lion's share of '04 revenue will be in second and third quarter.

Can you just talk little about Ohio? You got $75 million that you are expecting in the year. Why would you not expect more in the first quarter at this point?

Because Ohio is not yet ready to move forward. If you have been reading the papers and following the announcements and the security reviews and the contract negotiations and the discussions and remember they're not going to be doing anything in what town is it May election.

Right.

The May election will not include new equipment, according to Secretary of State Blackwell. So the need do something in January, February, March has been removed. They're trying to get ready for August and November. And it is still possible that some of that revenue will be in the first. But I am not willing to live like that and count on that in the first quarter guidance or plans or forecast we use.

And so, I have said we're not going to count on any of that in March. Remember, January is almost over. We don't have an order. I don't like to have voting business in the quarter I'm in, if when I'm making the forecast, I don't even have the order. So, we have had indications from many, many of the counties that as soon as they're allowed to go forward, they're going to buy our equipment. And so, we will get 70% to 80% of all the Ohio revenue. I feel highly confident about that, but the timing of what Ohio will do is a little bit outside of our control.

And when you say the counties allowed to go forward, does that mean that it still needs to be certified or what?

Yeah. You know, this has been well discussed in the press, but there were certain vendors certified to sell. We were one of the ones in that. Then there was a security review where all vendors were found to come up short on various measures. All vendors are addressing those issues and getting re certified. We are highly confident that our solutions are certifiable, and will be, and that Ohio will move forward in a large way with us, but it doesn't look like there's any March revenue in this picture at this moment. It could be as much as $10 million in March, but I would count on zero at this point.

Wally, if I may add one comment to that.

This is Tom Swidarski again. Relative to Ohio, we are working closely with all the counties in terms of preparing them, so the hurdle occurs at the state level. The state and the counties are working closely together as you might imagine, and the state has finalizing, you know, agreements with each of the vendors, plus they want to make sure when they release this that all vendors are ready to go, that they have certified and passed all the hurdles.

So, while we may be ready earlier if the state doesn't give the county authorization to move, we can begin doing some things with the county, but we really can't count that as revenue until we have the state's authority to proceed with each of the counties. We're going to work with the counties to do voter registration types of training. We're going to do voter outreach programs. They may actually have equipment but we still have to wait. It's the state's pacing versus the counties, because the counties would like to move sooner.

Can you guys just talk with all of the security issues that have been out there, and the incremental fixes that you have to do in the responding that you had to do, how much incremental cost has that created within the voting area, and would you expect that to diminish going forward?

There are very little ongoing costs from these changes. In other words, you know, a higher level of encryption or longer delayed pin codes, or various things like that do not really add much in terms of underlying costs, but they definitely add a lot of costs in terms of rewrite certification, re certification and these sorts of things.

So, on the other hand, you know we have also added some expenses to make sure that we're communicating well, and dealing with a lot. You know, all the issues that are out there, so we see margin improvement somewhat in voting in '04 but not dramatic. If you wanted a number for '03, I wouldn't be surprised if the number was $1 million or $2 that we spent, to, you know, try to satisfy various states, various counties, various secretaries of state, and various other issues that have been raised.

I can tell you we sincerely want to do the right job for this country, and to have an open environment where people can look at what we're doing, and judge for themselves that we're doing the right thing. And you know, this has been a learning experience for all of us.

Just a quick question on the margin then. Given the fact that the business is lumpy, can you just talk at least in terms of how we should think about modeling going forward? Can you give us a sense for the strata of revenue and what the margin impact might be, and I mean by that, if you did $10 million in the quarter, you know what would be the margin there and if you did 50, what would be the margin at that level?

Well, I probably can't do that for you in this phone call, but certainly, we have a significant amount of fixed cost every quarter, and it would be a safe assumption that we're not going to make anything when we're at the lower level volumes that you discussed, and when you make, you know, you have a $50 million quarter, you are going to make a lot more.

So, on average for the year, 9 might be a good number for OP but the contribution margin is higher than that, and you have to cover your fixed. So, you know, I would expect significant profitable contribution from voting in the second and third quarter. But on the whole year, maybe 9% would be a good operating profit expectation.

Great. Thank you.

Next we will hear from Michael Grossman with Essex Investment Management.

Hi, guys.

Hi.

My question relates to the free cash flow guidance and there's a significant jump over this year which I'm presuming relates to the reversion of working capital to being a source of cash. I was wondering if you can comment on those receivables in the fourth quarter that are still out there and when you would expect those to flow back through into the free cash flow.

I think you hit nail on the head. I mean, the receivables will be collected. I think you will see a pretty strong first quarter. We talked about Maryland, San Diego counties out there as well. Those are two large ones coming out of the election systems business. And as I talked about in the comments, I mean, we did a significant amount of revenue, in December of this year, versus December last year. We had an unbelievable December.

So, those receivables are out there as well. You will get a lot of leverage out of collecting receivables. We're also going to be working expensively on inventory turns. So, you will see a good pop out of the working capital side to reach those levels.

The higher December sales, were those mostly related to Optiva?

They were related some to Optiva, yes?

So, in your guidance for '04, are you expecting that that acceleration continues or is that not -

For Optiva?

Yes.

Or just for the -- whatever -- wherever the higher sales. You said Optiva and something else.

Mike, I'd like to add a couple of things here. You know, these improvements in costs don't happen in a vacuum. It's a global competitive marketplace. One must always be improving just to hold steady. So, we are not going to sit here and make all kinds of wonderful promises about margin improvement. It's a brutal war out there, and we want to win in that war.

You need to do the right things on cost. Our competitors are doing a lot of positive things on cost as well. And you have to do that. To just -- to just hold your place and we have been gaining share, and holding margin and we're very, very proud of our results. And Mike, to go back to your original question, you know, I think we did a really good job in '03, but we did not make the progress on working capital measures that I would have liked to have made. And I have to say that part of the reason for that is, you know our Chief Operating Officer died tragically.

All of us worked very, very hard to cover that gap, and we in large measure did. But we did not make real strong on days or inventory turnover. And that was one of the reasons that our team and I clearly agreed that we needed to go back and get a strong Chief Operating Officer in place, and we are proud that Eric joined us on Monday after -- I guess it would be about a nine-month search, and I am positive with his focus that we will now again make progress in those spaces. And that is a very, very important part of the cash flow that you are seeing going forward, and a very important part of our overall relatively superior performance that we intend to deliver.

OK. Then my last question is, on the pension, how much has the increase and expense is due to the discount rate versus may be more people than expected retiring?

None of it is related to the second point.

About $1 million is related to the change in discount right rate, Michael.

The other part would be these layered in of prior gains and losses and how they flow out.

Great. Thank you very much.

We will take our next question from James Rosenberger with Bernstein.

Thank you. I was wondering, is there an outstanding issue in terms of the collection of the Maryland receivable?

No. There's not.

its just timing of cash?

Just timing of cash.

I hate to go back to Ohio one more time -

We love it in Ohio.

What?

We love Ohio.

All right. Well -- I didn't mean to physically go back there. Coupled by the way, I did enjoy that meeting there. I'm a big Packer fan, so that was a lot of fun. As of the couple of weeks ago, the urban counties in Ohio had declined to name a vendor. Have those issues been resolved?

They have not. And it's a fascinating debate, you know, which we are pretty much out of the debate, but given the fact that the Secretary of State is determined that the -- none of the competitors had everything that he wanted in the systems, some of the counties are saying, well how can you make us choose before you tell us that they're all as they should be -- in other words, they're afraid they might choose something that wouldn't get approved.

And you know, that -- A, that's being debated, and B, I'm sure all of the things that we needed to do have been done and will be approved. So, you know, everybody has an opinion on this topic from the newspaper writer to the politicians to the county election officials. And we're just trying to do a good job for all of them. And I believe when those big county do choose, that the vast majority of them will choose us.

OK. Thank you.

We will take a follow-up question from Matt Summerville with McDonald Investments.

Hello, couple of follow-ups. Tom, one of the things that I was hoping might be you could provide a little perspective on is if you have seen again with respect to voting, any material changes in the competitive environment out there. And what you see in that respect in '04?

OK. Certainly, smaller companies Cekoya (ph) aligned itself with Celaru (ph) in the marketplace, trying to give themselves a bigger company they can lean upon, but I don't see Cekoya having any traction anywhere outside of California, which is where they traditionally have been operating. Hart has aligned with a number of different folks and sometimes they're the primary, sometimes they're a subcontractor in some of these and they bring in a Hewlett-Packard or someone else or UNISYS, and at one point, they were affiliated with Dell.

They are out there trying to align themselves with someone. ESNS has had the longest standing relationships with folks in most of these jurisdictions. But you can see the results of that even in Ohio, in that how many counties that have moved in our direction.

So, I'm very confident in terms of our software architecture. I'm confident in terms of these security reviews, actually playing our favor and the way our software is written, we can add a layer of security right on top of the way that software is architected, much more seamlessly than I think a lot of the competitors, certainly, if you have seen the hardware and the way our interaction and the results from Georgia or any other elections.

Consumers think this is very intuitive and we have got a very nice design, it's lightweight. With the major jurisdictions that I'm talking to in relative to '05 and '06, I think we're well positioned for some of the biggest ones in the country. While the competition certainly is escalating, I think that our core strength of what Diebold brings and we're applying that to this business, puts us in good positions for the largest jurisdictions in the U.S.

OK, great. Thank you for that. And then, you know, Wally, can you talk about this -- this is a different way of asking the previous question. In the fourth quarter, what percent of your shipments were Optiva, and how do you expect that to ramp over the next couple of quarters, and then may be throughout, you know '04-'05, and then can you also comment on how you're seeing the margin progression fare on the new machines versus the IX? Well, what I'm trying to get at is whether or not you are seeing any of the margin leverage of Optiva manifest itself through the P&L at this point?

That is a very complicated question. I would separate the US from international. In your attempt to understand, this and you will have a better chance. In other words, don't lump them together. In the US, I would say we are about the 50-50 mark on Optiva versus IX. In internationally, it would be more in the 10% range, and that is a compilation of many different countries.

But, some countries -- Optiva has a still zero, because it's not certified and in other countries, it might be 100% already. So, you know, the -- this year in '04, I think you will see op tea have a in the U.S. going from 50-50 to maybe 90-10, and internationally going from maybe 10% by the -- at the beginning to more like 60% or so at the end and going up into the 90's by the end of '05. The margins are better --excuse me, the costs are definitely better on Optiva than IX.

But again, it's a very competitive market out there and we did see some improvement on Optiva have margins. But you know, there are many parts to what delivers margin besides the cost. You know, you have the price and all lot of other things going on. So, we expect that it will significantly help us with share and with cost, with margin, and in the war to win in the marketplace and serve the customers.

OK. Greg, on free cash flow, he just -- I want to revisit that. Can we back up and what was your original forecast for free cash flow in '03?

We thought it would be right around $200 million.

And it came in at 140 or there about?

Yes.

So, we're really only talking then, if we boil that down to a $60 million Delta in accounts receivable that works against you?

Exactly.

So, there's really not -- are there any inventory issues?

No, the issue really, amazingly, Matt, is the tremendous spike in our revenue in December.

OK. And Wally, with respect to your acquisitions strategy, you guys have kind of gone through the last 12 months or so, picking off some small companies and folding those into the portfolio and I'm not -- you know, I am not alluding to win-corps or anything like that, but what I am trying to get is how do you see your accusation strategy changing, if you see it changing from what you have done in the past year. And, you know, what does that mean to the company? I mean, is there an opportunity to add another leg to the stool here?

Well, we would never think that you were trying to find out information about any of our specific acquisitions, Matt. The sure thing that we have been doing is small incremental additive synergistic acquisitions. And you know, a little service company here, a security company they're all small numbers. By the way, we did some math that the benefit of -- to 2004 versus 2003 to a full year effect of 2003 acquisitions is about $20 million. So, these are all small deals. They do all help us, and they're slam-dunks in terms of integration and achieving of synergies.

As far as the big deal that are out there, you know, it's --is it's sort of like the good wine, we'll do no deal before it's time and before it's right. If the economics and values are not right, if the seller is not willing, you know, these things stay on hold. And all I can say is every deal anywhere near our space, we have a serious look at and we evaluate whether we want to do it or not. If we want to do it, at what price we are willing to do it.

OK.

We have the balance sheet, and the team to do any deal out there.

Yeah. I mean, the balance sheet is obviously in terrific shape. No doubt about it. You have done a fantastic job in managing that. How much of the cash next year, and, you know, I heard a new theme I think, in one of the questions that you mentioned that you might be looking to do more share buy-backs than you have in the last few quarters. Is there a dollar amount that you have earmarked, or is there an authorization that you have outstanding that you could talk about?

Matt, I didn't use the word 'more', but I did say share buy buy-back is one of the uses of cash. I believe we have open authorization of $1 million - 1.3 million shares. It's just like anything else on weakness if someone would be showing lack of confidence, we are always prepared to step up and show that we believe in this company and the management team and, I wouldn't be surprise at all if we bought a few more shares in '04 than we bought in '03.

How much did you buy back in '03?

Probably around a 100,000. So, it all depends on market conditions, acquisition opportunities. We revisit that like every month.

Great. Thanks a lot, guys.

OK, Matt.

And our final question will come from Barry Leibovitz with Alison Capital.

Hi, guys.

Hey, Barry.

A couple of quick questions. Can you touch on the guidance. It looks like the EPS guidance, the 38 to 42 cents in the first quarter is a bit below. I know there are only two analysts covering you guys. Analysts have 50 cents. Can you talk about where that Delta is? Does it have to do with the voting business being out compared to what you originally expected?

First of all, the 50 cents had nothing to do with us. OK. We give one quarter out, and one year -- full year guidance. We have never given two quarters out. When I look at what is out there, it makes me think maybe we ought to, so people don't just make up things without any help from us. So, I cannot speak for the 50 cents. Our numbers make good sense that we have given. They're consistent with the full year that we have given. They recognize the year-over-year pension problem of a penny. They seem to make sense based on everything we know, and if I had to guess about the 50 cents that others had in there, they probably had significant voting revenue assumptions that are not correct.

OK. Can you touch on why -- I mean it, looks like -- why is your business as seasonal at it is?

In the summer and the fourth quarter. If you look back through the history, the first quart is always the weakest quarter. The fourth quarter is always the biggest, especially in Europe. So, we do -- it is seasonally weak in the first quarter.

We always hold ourselves to year over year performance as opposed to sequential. If you are going to go with sequential, you have to do seasonally adjusted sequential, and it gets so complicated that the right way to look at our business is year over year.

OK. And you mentioned share buy-back. Are these levels -- given the stock weakness of the last two days and again today, are these levels that would you consider to be accretive and would be buying stock if you can?

If I had the authority to buy on earnings release today, I would be buying.

OK. Can you touch a little bit on Europe and everyone knows about the ATM opportunity in the US. Are there similar upgrade opportunities in Europe? Do you anticipate that business accelerating as well?

Yes. But I'm not sure of the timing. EMV has been delayed a little bit. The demand that would be caused by our new functionality hasn't kicked in yet because of certification issues. So, yes, I -- the way we talk about it here, David Bucci runs our US business. I tell him that 2004 is his lucky year. And Mike Hillock runs our International business, I tell him, 2005 is his lucky year.

OK. And then just a final question on the voting side. Do you feel that we have seen the worst politically? I know this is obviously hard to measure. But what can you do as CEO of the company to assure us as shareholders that given how well your other businesses are doing, that there isn't management distraction and there isn't management mis-focus on a business that is truly a really small business for you guys, but in terms of press and news and what seems to be a lot of focus, gets a lot more than its share.

So A, what can you do to reassure us on that in terms of what are you doing within the company, and B, given everything that's happened, and the question mark is going forward, can you walk us through the theory as to why it's really important to keep these two businesses together, meaning ATM security and voting?

Thanks. Well, certainly, we all live and learn as we go through this process. The scrutiny on political issues and voting has been an amazing thing for me. If we had the time for this, I would guess I would start with November 2000. America had a big problem. And we were not in the voting business at all. You know, none of us were disenfranchised as citizens of the United States at that time. We thought we could help.

We bought the smallest company in the country in the electronic voting, infused technology, and had to do a lot of things to improve their security, their firewall, you know, all of those kinds of things. And then, you know, there is a very political nature to this whole business. Democrats have different opinions than Republicans and various other kinds of things like that. We have tried, and I have personally tried to dramatically lower our political profile.

So, that doesn't seem to be something that people readily accept, and they keep bringing up the fact that, you know, sometime in the past we were pretty -- pretty involved politically. So, we tried to tone that down. We have told everybody that our voting business is a small portion of our overall business that it's headquartered in McKinney, Texas, by a totally non-party affiliated person. We have allowed openness to anyone who wants to come and talk to us and look at what we're doing. And you know, it has become a pretty big issue. It certainly has gotten us a lot of attention, and I-I don't know whether it will settle down or not.

The people who are involved in this business and think about it logically have asked for serious security reviews and protections and those things are all either in place or will be in place. But you know, there are still those who think Elvis is alive. You know, so, you know, you're not going to satisfy everyone, but we're trying to do the right thing. We're taking a lower profile politically. We have a transparent company. We have tried to participate in the debate on these topics. On many -- there's good synergy between the businesses and it certainly brought us out of the woods from a company that nobody ever heard of in the security business to a high-tech company that's involved in transforming America. So, you know, there's been some good as well. Basically, we saw that America had a problem, and we tried to help and we have helped and I hope it stays on that track.

OK. Thank you.

Thanks, Barry.

Operator, before we close up, I want to make sure that if there are any other final questions out there that they get answered.

Absolutely, Sir. [OPERATOR INSTRUCTIONS] Gentlemen, there appear to be no additional questions for you at this time.

Thank you very much.

Thanks, Peter. All of us here at Diebold want to thank you for joining us today. If you do have follow-up questions, contact John Christophe or myself. Have a great day.