Diebold Nixdorf Inc (DBD) 2004 Q2 法說會逐字稿

Good day, everyone, and welcome to this Diebold, Incorporated Second Quarter 2004 Financial Results Conference Call. Today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn the conference over to Vice President of Investor Relations, Mr. John Kristoff. Please go ahead, sir.

Thank you, Lori. Good morning, everyone, and thank you for joining us for the Diebold Second Quarter Conference Call. Providing remarks on the call today are Wally O'Dell, Chairman and Chief Executive Officer, and Greg Geswein, Senior Vice President and Chief Financial Officer.

Also with us today and available to answer questions are Eric Evans, President and Chief Operating Officer; Mike Hillock, President, Diebold International; and Tom Swidarski, Senior Vice President, Strategic Development and Global Marketing.

Just a few notes before we get started on today's call. The replay of this conference call will be available today at 1:00 PM on www.Diebold.com, as well as via telephone. The phone replay number is (719) 457-0820, and the passcode is 509995.

Also, 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 that has been filed with the SEC.

And now with opening remarks, I'll turn it over to our Chairman and CEO, Wally O'Dell.

Thank you, John. Good morning, everyone. Thanks for being part of our call today.

I'm very pleased that we were able once again to report solid revenue and earnings-per-share growth, which was within our previous quarterly revenue and earnings-per-share guidance and expectations. I believe it is a testament to the firm understanding we have of our business dynamics that we were able to give meaningful quarterly revenue and earnings guidance and consistently perform well against those targets.

Our solid performance during the second quarter was led by continued strong results in our financial self-service and security businesses, particularly in the United States.

Total revenue in the second quarter increased 14.8 percent on a GAAP basis and 13.7 percent on a fixed-exchange-rate basis.

Diluted earnings per share were up 5.6 percent versus the prior year and 11.9 percent, excluding the gain of three cents in the prior-year period associated with an early lease termination.

Financial self-service product revenue grew a very strong 21.4 percent, or 19.9 percent on a fixed-exchange-rate basis, as global demand for the new Opteva line continued to strengthen.

Overall, growth was particularly strong in the United States, where we continued to make significant share gains and the market builds momentum. As a result of this outstanding performance, we have once again raised financial self-service revenue expectations for the year.

Security revenue grew 11 percent during the quarter, or 10.9 percent on a fixed-exchange-rate basis. This was due to a combination of continued growth in our base business, as well as the successful integration of two small security acquisitions in Australia. With our recent acquisition of government service provider, TFE, late in the quarter, we are poised to continue our strategy of growing this business through market share gains, new markets, and strategic acquisitions.

The election systems business continues to be challenging. In addition to having an adverse impact on working capital requirements during the quarter, we also took a $2m charge to increase our allowance for doubtful accounts associated with this business.

We have also reduced election expectations [and] revenue expectations for the year as a result of Ohio's decision to delay its purchase of election systems in four counties until after the November election. However, we recently received federal qualification on the entire system Ohio plans to implement, which has been updated with many new security features. We will continue to work with Ohio and other jurisdictions that plan to move forward in 2005 and beyond.

On a positive note, the California Voting Systems and Procedures Panel this week recommended that the Secretary of State certify the Accu-Vote TS system for use in the November election. This positive development affects Alameda, Plumas, and Los Angeles counties.

While current expectations for the election business have been reduced for the year, we have raised the bottom of our range of our overall corporate revenue and earnings-per-share guidance due to the strong performance of our financial self-service business, which has more than compensated for the issues we face in voting.

Looking forward to the third quarter, we expect revenue to increase 8 to 11 percent on a fixed-exchange-rate basis, led by continued strong performance in financial self-service.

Currency effect is expected to be slightly favorable versus the prior-year period.

Financial self-service revenue is expected to increase 12 to 14 percent on a fixed-exchange-rate basis, while we expect security revenue to grow by 16 to 20 percent.

Election systems revenue is expected to be 26 to $30m for the quarter.

Based on these revenue assumptions, we expect earnings per share to be in the range of 70 to 74 cents. This compares to 66 cents in the prior-year period.

For the year, we are planning on consolidated fixed-rate growth of 11 to 12 percent, with an additional 1 to 2 percent from currency.

We expect financial self-service fixed-rate growth of 12 to 13 percent, which will likely represent continued share gains.

We expect the security business to grow 14 to 16 percent on a fixed-exchange rate basis, and the election systems business to generate between 75 and 85m in revenue. This includes $35m in election systems revenue in Brazil.

Earnings per share are expected to be in the range of $2.59 to $2.66 versus $2.40 last year. This represents a 10- to 13-percent increase in earnings per share over 2003, excluding the impact of pension expense.

In conclusion, we remain confident in our ability to continue to deliver superior performance in 2004 and beyond despite the short-term challenges in the election systems business. The core financial self-service business remains very strong, and we are encouraged by continued market demand for Opteva and our ability to capture further share gains moving forward.

And now I'd like to turn the meeting over to Greg Geswein, our CFO.

Thanks, Wally. Good morning, everyone.

As Wally said, we are extremely pleased to report strong revenue and profit growth, with EPS of 60 cents per share, which was again in the range of our previous guidance of 58 cents to 62 cents per share.

For the fifth quarter in a row, we reported a double-digit increase for worldwide product and service orders, with particularly strong orders in the Americas and excellent performance from not only North America but from Brazil and Latin America as well.

Asia-Pacific financial self-service orders increased in double digits, led by continued strength in China, Australia, the Philippines, and Thailand.

EMEA decreased in the single-digit range, as this market remains very competitive and a prior-year period contained non-repeating EMV upgrade business.

Product orders for the quarter, including and excluding voting, are the highest in any quarter in Diebold's history, and Opteva has been a significant percentage of global ATM order entry, with over $80m in orders and approximately 45 percent of that amount coming from international locations.

As Wally noted, second quarter revenue was 552m, up 14.8 percent from the prior-year period. The positive currency impact in the second quarter was $4.5m, or .9 percent, and was a result, for the most part, of the strengthening of the euro and certain other currencies, which offset the weakening of the Brazilian real.

Financial self-service revenue grew 10.9 percent on a GAAP basis and 9.5 percent fixed rate. This was led by strong growth in the Americas up 18 percent and 18.6 percent fixed rate.

Asia-Pacific was up 5.5 percent and 2.9 percent fixed rate, as shipment of two major orders in China were delayed until the third quarter. As a result, we expect Asia-Pacific revenue to be up significantly during the third quarter. EMEA was down 7 percent on a GAAP basis and 12 percent on a fixed-rate basis.

Transition of [indiscernible] to product to Opteva and European certification has been occurring throughout the year, and with the recent launch of Opteva in Europe, we expect financial self-service sales to gain momentum as the year progresses, with positive fixed-rate growth by the end of the year.

The security business was up double digits for the 11th quarter in a row as a result of continued market share gains, growth in the financial industry, government and retail markets, and the recent acquisition of TFE Technology Holdings. This new acquisition, headquartered in Bountiful, Utah, will enhance Diebold's total security solution offerings and give additional channel access for Diebold's security products in the government market. TFE was neutral in earnings for the quarter and we expect will be neutral to slightly accretive for the year.

The voting business, as mentioned, increased from approximately 8m in 2003 to 27m this quarter as a result of approximately $16m related to the Brazilian voting contract.

On the gross margin front, the gross margins improved from 29.5 percent to 29.9 percent.

Product gross margins increased from 33.8 percent in the second quarter of 2003 to 35.4 percent in the second quarter of 2004. The increase was due to the higher profit margins from increasing Opteva sales and higher product margins in [indiscernible] systems business as a result of the voting business in Brazil. This increase in product gross margins was partially offset by profit margin declines, product margin declines, and security products.

Service gross margins decreased to 24.8 percent from the 26.1 percent reported in the second quarter of 2003. The decline was due to continued pricing pressures, which more than offset higher service margins in Brazil in the election systems business. We continue to roll out the productivity improvement initiatives on a global basis to target these pricing pressures.

Total operating expenses for the quarter as a percent of revenue was 17.9 percent, up slightly from the 17.8 percent in the second quarter of 2003. This increase was mainly due to the addition of $2m to the company's allowance for doubtful accounts for issues pertaining to election systems business.

Excluding this additional charge, total operating expense as a percent of revenue was 17.6 percent. Operating profit was 12 percent of revenue, up from the 11.7 percent in the second quarter of 2003. The increase was due to improved product gross margins.

Other income and expense -- [indiscernible] interest declined by 6.4m in the second quarter of 2004 versus the second quarter of 2003. This decline was primarily a result of a gain of approximately three cents per share from the early buyout of leased ATM equipment in the second quarter of 2003 and foreign exchange gains in the second quarter of 2003.

Net income was 7.9 percent of revenue, compared to 8.6 percent in the second quarter of 2003, and, again, the decline, net income as a percentage of revenue, was mainly due to the three-cent gain in currency exchange gains in the prior-year quarter.

The company's net debt was $167.1m at June 30, 2004 compared to a net investment of $12.4m at June 30, 2003. The $179.6m increase in net debt over the last 12 months was due to increased working capital requirements primarily in the election systems business, 54.5m for the repurchase of company stock, and 40m invested in acquisitions.

Day sales outstanding increased by 18 days, moving from 74 days at June 30, 2003 to 92 days at June 30, 2004. This increase was due in part to delays in collecting the California election systems contracts and the remaining Maryland election systems contract.

Due to state certification issues in California, the collection of the California receivable has been delayed and is now expected to be collected in early 2005. Payment of the Maryland contract receivable was received in July of 2004. In addition, we had $16m of receivables related to Brazil voting business outstanding at the end of Q2, which will be collected in the third quarter.

DSO did improve by four days sequentially from 96 days at March 31, 2004, and if you include the Maryland payment, DSO would have been 89 days.

I would also note that collections, in general, have been very strong thus far in July and far exceeded collections in the first two weeks of July 2003.

The 12-month moving average inventory turns decreased slightly from 5.1 to 5. This decrease was due in part to the impact of transitioning to the new Opteva product solution and the phase-out of legacy products, as well as the buildup on anticipated strong third quarter.

And as permitted under SFAS Number 123, Accounting for Stock-Based Compensation, we provide an annual disclosure of the impact of earnings per share if stock options were expensed. We estimate that if stock options were expensed in accordance with 123, the full-year impact in 2004 and 2003 would've been approximately six cents per share.

And as previously disclosed, in the interest of more directly linking associate rewards to corporate performance, in 2004, the company granted restricted stock units in lieu of stock options to a select group of key associates. The impact on this transition to grants of restricted stock units will adversely impact 2004 earnings by approximately one cent per share.

Wally has summarized the outlook for the third quarter and year, so I won't rehash it here, but just a couple comments.

We are expecting third quarter 2004 revenue to increase 8 to 11 percent on a fixed-exchange-rate basis, led by a double-digit increase in financial self-service revenue growth of 12 to 14 percent, which will mark the fourth straight quarter of double-digit increase here.

Security, for the 12th straight quarter, will grow double digits, in the range of 16 to 20 percent, both on a fixed-rate basis, and the election systems revenue is expected to be 26 to 30 million for the third quarter.

Currency exchange is anticipated to be neutral to slightly favorable versus prior year, and depreciation and amortization is expected to be approximately 19m, with an effective tax rate of approximately 32 percent.

Pension expense is expected to increase by approximately a penny per share in the third quarter of 2004, as compared to third quarter 2003, and as Wally noted, EPS in the range of 70 cents to 74 cents a share, and this compares to the 66 cents in the third quarter of 2003.

The election system business is expected to be neutral to slightly dilutive, the EPS in the third quarter of 2004, versus being approximately six cents accretive in the third quarter of 2003.

Expectations for the full year 2004 include double-digit revenue growth of 11 to 12 percent on a fixed-exchange-rate basis, again, led by double-digit growth in financial self-service revenue of 12 to 13 percent, and security revenue is expected to grow 14 to 16 percent on a fixed-rate basis; the election system revenue, now anticipated to be in the range of 75 to 85 million.

Currency impact is expected to be 1 to 2 percent versus the prior year.

Depreciation amortization is expected to be approximately $72m and an effective tax rate of approximately 32 percent.

The pension expense is expected to be four cents per share higher in 2004, moving from a penny of expense per share in 2003 to five cents of expense per share in 2004.

Research and development will be approximately 3 percent of revenue.

And as Wally noted, EPS should be in the range of $2.59 to $2.66, and this is up from our previous guidance of $2.58 to $2.66, and this would represent the 10- to 13-percent increase in EPS over 2003, excluding the impact of the pension expense.

Now, we have revised the free cash flow guidance. We expect free cash flow to be in the range of 185 to $210m, and this change in guidance is the direct result of the day in collecting the California receivable, which I noted should be collected in early 2005 now.

So, again, we are delighted with the results in the quarter and the prospects for the future. And with that, I'll now turn it back to John for questions.

Thank you. Lori, we'll open it up for questions now, please.

Thank you, sir. [Caller instructions.]

Our first question will come from [Cardik Mitta][ph] with Midwest Research.

Good morning.

Good morning, Cardik.

Looking at the results, it looks like North America, from an ATM demand, was very strong once again. You know, as much as you can see from the backlog, how long -- you know, what's your timeframe in terms of seeing this [rank][ph]? You know, can you see two, three quarters out, three, four quarters out? What's the outlook from the orders' backlog standpoint?

Hey, Cardik, Wally. As far as we can see, things look great. In other words, we have good continuing orders, good backlog, good plant loads, good prospects with the customers who seem to not only like what we do but their businesses are good and they're investing in the space. And, of course, there's a lot of dynamics out there related to, you know, ADA and [Check 21][ph] and all these things that should bode well for a considerable period of time. And the U.S. economy is strengthening, so we feel really good.

Cardik, also -- this is Greg -- you know, no surprise with the order entry that we have, the backlog from North America is the largest it's ever been.

And a follow-up question. Just a question on Europe. Is that down because of pricing pressure right now or demand, or a little bit of both?

Well, there's a lot of issues and very complex in Europe. One, very intense competition. Two, the markets are not as strong there as they are here. Three, we had some one-time stuff with EMV last year. You know, there's transitions to new products, which are not necessarily all spec'd in, and all the customers. You know, it's -- and as I've said many times, it's ground zero for the competitive situation out there, so it's a really tough situation.

Thank you very much.

We will now move to [Matt Sommerville][ph] with [Key Bank Capital Markets][ph].

Morning. Couple questions.

First, can you talk about, Wally, where you are in phasing out your legacy ATM products?

And alongside that, kind of talk about where you are right now with Opteva as a percent of your shipments on an aggregate basis.

And then if maybe you can talk about where you are in the U.S. versus Europe versus Asia, as well?

Right. Well, as you may know, the products that we acquired with the [Bulgeotronics][ph] acquisition we call 9X, and those are in the process of phasing out. I would imagine that our last production of 9X products will be later this year and that, you know, we'll support those products for a long period of time. But production of 9X product will be phasing out later this year.

IX will be with us -- that's our U.S. or our global product that we had before we acquired the European company -- will continue for quite some time. Certainly, we'll be producing IX products throughout 2005, and you know, a lot of customers like it, and so we'll be supporting IX production at least for another 18 months. And, of course, we'll be supporting that product for, you know, a decade after that.

So the transition is going very well. You know, I’m not sure of the -- let's say the quality of the numbers I’m looking at here in terms of the percentages, but in each region of the world and in total, the percentage that's Opteva is growing every quarter, and so in North America in the quarter that just ended for the first time, Opteva was more than half of our shipments. And internationally, it's in the range of 20 percent, which is up from the prior quarter, and so near 40 percent in total for quarter two in total, which was up. And that'll just keep ramping up.

As far as being at 40 percent sort of in the second quarter, where do you see that number then, you know, your run rate, I guess, as you enter '05, Wally?

As we enter '05, the run rate, you know, I’m just going to guess for you, would be something like North America 80 percent and international 50 or so.

Okay, and then, Greg, just a couple of housekeeping items. Can you let us know what the contribution was in your security business from acquisitions on a revenue basis? And then sort of talk about what your repurchase plans are through the remainder of the year and update us on how much you have left on your authorization. It looks like you were pretty active in the second quarter.

Well, the easy question, first, we think we have 100-something-thousand shares left from our old authorization on share buybacks, and then two million share new authorization.

On the securities side, if you look at the couple acquisitions in Asia-Pacific in the quarter --

We're digging data out here, Matt.

Sure.

Pretty small numbers. I know the TFE number was small. We didn't acquire --

Yeah, so it's been around 10 million bucks, Matt.

For all three combined?

For all three combined.

In the quarter.

In the quarter.

Okay. And then can you talk about what your share repurchase plans are in the back half of the year? Do you expect to be as active as you have been year to date?

Well, just depends on a lot of things. But we certainly like our stock, and we'll be buying back as appropriate. You know, I wouldn't want to comment on numbers. We certainly have stepped up to where we're at least buying back the number of shares that get issued for options and things. If you look at our fully diluted shares in quarter two, they were equal to the fully diluted shares in quarter two in the prior year.

Okay, great. I'll get back in queue. Thank you.

Thanks, Matt.

With Robert W. Baird, we will now hear from [Rike Reed][ph].

Hey, good morning.

Hey, Rike.

With the security business and the margin weakness that you talked about there, could you just talk about, you know, how much are you seeing from the two components that you talked about, one being materials and the other being pricing? And of those two, it seems like the one that maybe you have some control over would be the price pressure. What can you do at this point to mitigate any of that?

Well, Rike, thank you. I'd say almost all the issues that we face there have been material price related and particularly on steel, we -- you know, the margins by quarter can bounce around a little bit, and there's always some pressure out there, but we have announced the price increase in the security business. I think it may be -- on average, it's about 3 percent. And it varies by product, and we're hoping that that solves that issue on a go-forward basis.

Is there -- I mean I don't know how long ago you put that price increase through, but is there evidence that it is taking hold?

Well, you know, the first evidence was when we announced that we got a lot of good orders to feed it. And so now we'll see what happens as we move forward with continuing orders. But I'm highly confident it'll stick.

Okay. And then just second question from me. You know, in the voting business, you know, all the states here seem to be moving towards, you know, desiring a paper trail or a voter verifiable paper trail. Can you just talk about how well are you guys prepared to deal with that?

And I guess the other question is, you know, are the states willing to pay for that, and is there a negative margin impact if you have to go that route?

Thank you. Well, first of all, it's not quite true that all the states are going in that direction. It's a very important debate for this country as to what the right approaches are. There are those who think that a paper trail is an excellent thing, and there are those who think it's not. We are prepared to serve the market in either manner. We're waiting for the states and the federal government to decide what they want to do, and I believe if they decide they want paper trails, they will pay the appropriate cost to have those be part of the solution.

So just so I understand correctly, you don't think that that would have a negative margin impact? They'd be willing to pay for that value add?

Absolutely, they'll pay for it. The problem is that the debate has caused delays in action and concerns on individuals' parts about the safety of using electronic voting.

Okay, great. Thank you, Wally. That's helpful.

[Caller instructions.]

We will now hear from [Jim Rosenberger][ph] with [Bernstein][ph].

Thank you. I wanted to ask about the Brazilian voting business. What is your experience in the receivables cycle getting paid from the Brazilian government? And I’m also curious as to whether they've made any comments about all of the negative press with regard to the technology?

Thank you. As you know, about four years ago, we did -- 70 percent of the country of Brazil was 100m or so in revenue. We had absolutely no delays in receiving our money whatsoever, nor do we anticipate any delay this time. We just shipped the $16m in the second quarter in, I think, May and June. We expect to be paid in the third for that. We're going to have another $18m in the third quarter, and we'll be paid in the fourth or certainly not long after that. And they have entirely just a different system. They use picture and number. They have been using this for a long, long time, and I can tell you anybody who's been using equipment, like Georgia, Maryland, Brazil, or take your pick, their confidence levels have dramatically increased, and there haven't been any significant issues. And so I'll put the ranch on collecting that money.

Okay. A follow-up question on the bad debt charge for the voting business. Can you talk about what that was about and whether you expect to continue to add to reserves going forward?

Well, now we're in a very delicate area because you know, there are legal investigations underway in the state of California. We're very comfortable and confident about the progress of those. We thought that the two million reserve was the appropriate one at quarter-end. Obviously, we have eliminated any problem regarding Maryland because we collected those amounts, and we'll look at it as we go forward. But we believe what we've taken and what our balance sheet is is appropriate.

Okay, thank you.

With T. Rowe Price, we now move to John Wegman.

Gentlemen, two questions.

One is, Greg, how much money is currently -- or assets, I guess, are in the election systems business today when you look at the inventory, PT&E, and net receivables?

And the follow-up question to that would be to Wally. It's kind of a big-picture question. It's when we look to getting into this business, the voting business, in the early '90s, I was curious. The return on invested capital that we kind of thought would fall out of this business, and I believe we thought it was maybe a 10-percent margin when we got into it, and I'm curious, given the current state of the industry, which looks like it's going to require more lobbying expenses, more legal expenses, more design work, slower payments, looks like the economics have certainly changed for the worse over the last 12 months, you know, lower margins, lower returns. I'm just curious, how do you think return on invested capital has really changed for the business, or hasn't it? And with that, I thank you.

Well, Greg's got an answer to the first part of that --

Yeah, John.

-- and I'll step in then.

Yeah, the receivable in inventory for the election business, the U.S. election business is about seventy-three/four million dollars.

Okay.

Certainly, a lot has changed, amazingly so. And as far as the U.S. business, just the way you brought it up, the November 2000 occurred, we were not in the business in any way in the U.S. We had this one thing going on in Brazil, and there was a crisis created in this country because we couldn't elect a president. And I personally felt that Diebold had the technology, capability, and the responsibility to step in here, and I thought it would be good business. And we acquired this company that was doing $10m in business, we infused some technology, and we were successful beyond our wildest dreams. Instant total success. And we started to win every order out there. And then all of a sudden in July of last year, you know, a lot of people who had not been participating in the debate started to participate and talk about security and paper receipts and validation and political issues, and it did change dramatically, and certainly, it's been a very, very difficult situation for all of us, and we are going to have an unequivocally miserable year in voting. And how that moves forward, we hope that the debate is resolved in terms of how people are going to move forward. We hope to serve this country and the voting public, and we expect it to return to good business for Diebold after we get through this political environment that is so energized, that hopefully will change after November 2 when the election is behind us, and the cooler heads will then prevail, and the country will find its way forward, and I’m highly confident if it does move forward that we will be best-positioned to serve that market.

Wally, is there something, in particular, that you look at? I mean we kind of look at '04 here as kind of a transition year, and we're not sure where we're going, but what would determine whether '05 drags along like this and '06? I mean is there a certain thing that would have to happen in your mind for us to -- you know, a year from now, mid-summer next year, we actually talk about turning the corner here?

Well, the number-one thing that has to happen is states and the federal government need to decide what they want to buy, what specs, what security level, what receipts and verification aspects. And when they do that and they tell us what they want and they let us compete against our competition, I am highly confident of continued victory. But all vendors in this space are suffering dramatically this year as we go through this gut-wrenching process that this country's gone through.

And, of course, besides the difficult business situation, the worst thing about this is because of the debate, very little has happened, and two million people are going to go to the polls this November and vote on antiquated punch card and lever systems and not have their vote register. And so the country needs to sort this out, and when they do, we will serve that, and we'll do it profitably.

Great. Thank you, gentlemen.

Thanks, John.

[Caller instructions.]

We do have a follow-up question from Matt Sommerville.

A couple questions.

First, I think you guys mentioned steel costs obviously being a negative issue, at least up to this point ahead of implementing price increase, but you also hit on, at least in the press release, and I can't remember if you said in your prepared remarks, fuel costs. And I guess I was a little curious. I mean are those two items -- obviously, steel and security is very important, but on the fuel cost issue, is that that significant of a detractor for margins at this point? Is that something we need to watch more closely on a go-forward basis?

Well, I don't know how closely you want to watch it but when steel costs move 30, 40 percent, it has an impact on us. And if you look at compared to our 2.4b revenue number, it's not a very large percent. But when you're talking about one cent a share difference here or there in a quarter and three cents in a year, it makes a big difference. So we watch these things, and fuel and steel are not as significant to us as they are to, say, the auto industry, but they're important elements and problems that we face, and we do what we can to ameliorate those. And we have been able to do it. So you can be sure we worry about them.

What then, I guess, if you looked at your gross margins and service then would be the major year-over-year detractor? Is it utilization? Is it price? I would guess the fuel thing's probably pretty far down compared to those two, maybe?

Well, there's no question that the number-one issue on any business is always price, and price and service is bad.

Is it bad worldwide or in particular geographies?

Yeah, we've done some studies on this, and it's really fascinating, and it looks like it's about minus four percent per year for any number of years, including this year, and you know, if you look at any significant geography, it seems to fit that same 4- to 5-percent mold. And now I want you to keep in mind, though, that we are making the same level of margin in service that we make in product at the old P-line, which is north of 14.

Okay. Is that in both businesses or in your ATM business?

And that -- excuse me, and that answer on those margins, that was within financial self-service. Financial self-service margins on old P line --

Are north of 14?

Both product and service are north of 14, and our financial self-service margin, consolidated for both, combined for the whole year for the whole company, last year increased over the year before, and this year is increasing over the year before, and this quarter increased over the year before.

As far as the margin expansion on the product side that you saw in the quarter, in terms of rank ordering these things, would ATMs or the voting business have been more additive?

And then was the voting business -- and you probably said this in your remarks -- well, was it accretive, neutral, or dilutive in the second quarter?

Clearly, the financial self-service is a big deal, and the product margin improvement there was directly related to Opteva.

And the -- you know, it's hard to say about the voting. We didn't have hardly any voting business last year at all. It was only a $7m piece. And our U.S. voting business isn't good. Our Brazil voting business in the quarter, if you look at it pure incrementally, you know, was a decent margin. Yeah, so it was slightly positive versus being negative last year, Matt.

And then what would change in 2Q to 3Q to make the voting business dilutive?

Last, look at our voting revenue in Q3 and Q4 last year. It was huge. So the comparisons, voting, which were okay in quarter one and two, are very negative for us in three and four as the revenue levels flip in the opposite direction. So, for instance, we gave you guidance for quarter three. If you look at just financial self-service and security combined, I think our revenue would be up 15 percent fixed rate. And so last year we had Maryland in the third quarter and San Diego in the fourth. And with this being a voting year, other than Brazil, there's not going to be big numbers in this year's quarter three and four.

Okay, and then last question. With respect to Europe on the ATM side, you were down 12 percent. It sounds like by the end of the year you were pretty confident, as the Opteva rollout in that region gains a little steam, that you'll be able to reverse that, but should I take that to assume that third quarter you expect another down year-over-year comp?

And then, I guess, Wally, from your perspective, how is Diebold performing relative to the market there?

Well, it's fascinatingly difficult to compare ourselves to our competition by region since no one else gives region data, so we're on our own on that, but I am not happy with our performance in Europe from a margin point of view or a growth point of view or getting the certification job done, and we have a lot of work to do there. And I don't expect great compare -- we had good first quarter comparisons, for reasons we discussed then. Second and third, I don't think are going to be particularly good. We're going to have an awesome year over year in the fourth--

And [it's the] third in Asia, though, so you know, it's a tough measure to hold us every quarter in every region to always have great numbers every time in every space. So we are very proud with our global results for the quarter. Led by very strong North American results, we've put some good numbers out there for the third and the fourth, which we are going to make.

As far as then, if you look out relative to where you are with certifications, can you give us an update there on where you're certified now in Europe and where you expect to be by the end of the year? How much of the continent will you have covered at that point?

I think that request is too competitively sensitive, and given the number of people on this call, I’m not going to go into that.

Okay, thanks.

Okay, Matt.

With Shareholder Value Management, [Jeff Embersys][ph] has our next question.

Good morning. Could you give us a little more granularity on the win rate in the ATM business in the U.S. and Europe, I guess, in particular? You mentioned several times about gaining share both this quarter and last quarter, and was wondering how you're actually shaping up against NCR.

And then, secondly, on the service side, I was just wondering if the HP deal in Canada is indicative of some other opportunities to work with HP or large third parties as part of a channel?

Yeah, I'm not sure we can go into win rates. Certainly, you know, we have excellent competitors. We look at their results, and we look at ours, and we add it all up. That's how we know we've been gaining share. We'll have to wait and see how quarter two shapes up, but you know, we see consistent wins with our new solutions. Our customers love it. Our customers' customers love it. It's a very competitive world, but I think when the numbers are all in, our results will look good.

And the other thing that's going on now is the market has gotten stronger, so I think we'll see, you know, pretty good results all around the world from the major players in this space as the economies improve and a new standards require action and as new solutions available from our competitors and from us drive demand, and so, you know, I think we have really good numbers that we can be proud of. We have good solutions. We have good people. Our customers like our products and our service. And you know, when the final numbers are in, I think they'll show that we did really well, and of course, things do bounce around a little bit by quarter, and when the full year's in, then we'll look at everybody's numbers, and the results will be very clear.

Okay, and then --

Oh, yeah, I'll let Eric Evans, who's here, talk about that. I can tell you, as have our competitors been talking about outsourcing for many years and, you know, one by one around the world, major institutions are making these kinds of decisions, sometimes faster, sometimes slower, and it always requires partnering. HP is an excellent partner, excellent technology company, and we're very proud of the win. Eric?

Yeah, we're very happy about the agreement that was announced with HP. It's going to dramatically increase the size of our Canadian business, which is something we've wanted to do for some time, and we are actively pursuing similar deals in other parts of the world.

Next question, please?

We have a follow-up question from Rike Reed.

Just a quick question for Eric. You were talking on the analysts' day about the $500m in direct/indirect costs that Diebold has, that, you know, really haven't been investigated for cost-reduction purposes, and that's one of the initiatives that you had underway. Can you give us a status update in terms of, you know, where things are with that initiative and when we might see some improvement along those lines? Thanks.

Yeah, we are pursuing our enterprise spend management initiative. We have several new sourcing initiatives underway, which we'll find out what's going on with those in the third and fourth quarter of this year, but we're moving ahead with that, and we still see that there's great potential in that whole part of our cost structure.

Yeah, I'd like to add a little comment, too. So often we talk about product cost reductions or operating expense, productivity initiatives, or various things, and we're always asked, "When are we going to see those in the P&L?" And I think it's important we keep in mind there's always a lot of things going the other way -- compensation costs, fuel costs, energy costs, price reductions. And so many, many things need to be done in a very positive way to hold good, good margins because customers are always trying to get the prices down. Competition's always tough. Everybody's always improving everything they do. And so, you know, we won't one morning find all of this just showing up on the OP line. It's every day this kind of stuff has to get done in order to maintain 14-, 15-percent operating profits in financial self-service. So there's a lot of initiatives, and they should serve us well.

Great. Thank you.

And we have another follow-up question from Jim Rosenberger.

Yeah, I've got one more for you. On the accounts receivable side, if we were to pull out San Diego and Maryland, which I think was 41 million at the end of the quarter, accounts receivable still were up 27 percent year over year versus a 15-percent increase in revenues. Can you talk about what else is going on there that's dragging out those receivables?

Well, first of all, I'm not sure of your math. If you'd pull out all of California and Maryland, it would've been about 55 million.

Yeah, and don't forget the Brazil voting.

And Brazil voting was 16, so you're talking $71m right there.

Yeah, and also, I think it's important that you look at more than one data point than June last year. Our receivables at the end of March last year were 90, into March this year were 96, they were 92 this period, 89 if you take out Maryland, which has been collected. So I think our receivable performance, with the exclusion of Maryland and California, is pretty much in line with what we would've expected, although I challenged Greg to get us a little lower number at the end of September. He's accepted the challenge.

Oh, good!

So I'd say our receivables are in good shape. They'll show good trends, with the possible exception of some of the issues in California, as we discussed.

As I mentioned, Jim, you know, July collections in the first two weeks have been significantly higher than last year's July first two weeks, so we're very encouraged by that and gave us confidence in the number we put out there on our free cash flow, you know, excluding, of course, the California receivables that are out there. And who knows? Maybe we'll get a break and get some of those in before year-end, too.

Okay, great. Thanks again.

Mr. Kristoff, it appears that we have no further questions at this time. I will turn the conference back to you for any closing or additional comments.

Okay, thank you, Lori.

Thank you for joining us today, everyone, and if you have any follow-up questions, please feel free to call me directly. Thank you again.

And thank you, everyone. That does conclude today's Diebold Second Quarter Earnings Call. You may now disconnect your lines.