Diebold Nixdorf Inc (DBD) 2004 Q3 法說會逐字稿

Good day everyone and welcome to the Diebold Incorporated Third 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 call over to the Vice President of Investor Relations, Mr. John Kristoff. Please go ahead, sir.

Thank you Cynthia. Good morning everyone and thank you for joining us for the Diebold third quarter conference call. Providing remarks on the quarter today is Wally O'Dell, Chairman and CEO and Greg Geswein, Senior Vice President and Chief Financial Officer. Also with us today and available to answer questions are Eric Evans, President and COO; Mike Hillock, President, 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 on today's call. The replay of this conference call will be available today at 1 PM on www.diebold.com as well as via telephone. The phone replay number is area code 719-457-0820 and the pass code 619180. Also as a reminder some of the comments today maybe considered forward-looking statements, as a precaution to refer you to the more detailed information that has been filed with the SEC. And now with opening remarks I will turn it over to Chairman and CEO, Wally O'Dell.

Thank you John. Good morning everyone. Thanks for being part of our call today. I am very pleased that we were once again able to report solid revenue and order growth and earnings, which were within our quarterly earnings per share guidance and expectations, excluding the previously disclosed costs associated with the Diebold Election Systems civil suit in California. Total revenue in the third quarter increased 7.6% on a GAAP basis and 6.4% on a fixed exchange rate basis. Diluted earnings per share were up 1.5% versus the prior year and 18.3% excluding the Election Systems business.

We are also encouraged by record third quarter total order levels, which increased in the double-digit range, which included approximately 110 million in dollars and new Opteva orders. Financial self-service product revenue grew 12.9% or 11.1% on a fixed exchange rate basis compared to a very strong third quarter in 2003, as demand for the new Opteva line continues to expand. Overall growth was particularly fast in Asia Pacific where we secured a very significant order in China and the market continues to grow rapidly.

Security revenue grew 17% during the quarter or 16.9% on a fixed exchange rate basis. This was due to a combination of growth in our base business as well as the successful integration of two recent small security acquisitions in the United States; TFE and [inaudible]. As expected Elections Systems' revenue decreased significantly as we neared the U.S. Presidential Election.

Total gross margin declined 1.4 points in the quarter due to the Election Systems business as well as some continued margin weakness in Western Europe. Excluding Election Systems, both product and service gross margins in the United States increased, despite a significant year-over-year rise in both steel and fuel costs. We continue to benefit from the higher margin of Opteva as well as the productivity improvement initiatives under way in the U.S. service organization. Additionally, as I reported during last quarter's call, we continue to make progress in achieving customer certification of Opteva in Western Europe with several new approvals in the third quarter and we remain optimistic about our opportunity to increase market penetration there during 2005.

Looking towards the fourth quarter, we expect revenue to increase 9-11% on a fixed exchange rate basis led by continued strong performance in financial self-service and security. Currency effect is expected to be slightly favorable versus the prior year period. Financial self-service revenue is expected to increase 11-14% on a fixed exchange rate basis while we expect security revenue to grow 23-26%. Election Systems' revenue is expected to be $7-10 million for the quarter. Based upon these revenue assumptions, we expect earnings per share to be in the range of 87 cents and 92 cents. This compares to 81 cents in the prior year period. For the full year we expect total fixed exchange rate revenue growth of 11-12%, with 11-12% growth in financial self-service, 16-18% security growth, and Election Systems revenue of 83-86 million. Based on these assumptions earnings per share is expected to be in the range of $2.54-2.59.

Looking forward to 2005, we have not yet finalized business unit forecast, and visibility is somewhat difficult given uncertain global economic conditions and commodity pricing. In addition, our current expectations for 2005 do not include the potential impact of any future mergers, acquisitions, disposals, or other business combinations, restructurings, or the expensing of stock options. Given these factors we have the following expectations for 2005: revenue growth of 10-12%, depreciation and amortization in the range of $75-80 million, pension expense will be approximately 8 cents per share compared to 5 cents per share this year. In 2005 earnings per share expected to increase 18-20% compared to 2004. In conclusion, we believe that through continued focus on speed global efficiencies and creative solutions to customer needs, we will continue to achieve superior results in 2005 and beyond. 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 another solid quarter with EPS of 67 cents. Included in the third quarter 2004 EPS was a previously disclosed cost associated with the pending civil actions in the State of California, which adversely impacted earnings by 5 cents a share. Excluding the stock Diebold would have reported 72 cents per share in the middle of our prior guidance of 70-74 cents per share.

For the sixth quarter in a row we reported a double-digit increase in worldwide product and service orders on a fixed rate basis with particularly strong orders in Asia-Pacific. Asia-Pacific financial self-service orders increased in the mid double-digits led by continued strength in China, Australia, India, and Thailand. The Americas had modest growth compared to a very strong 2003 third quarter. EMEA decreased in low single-digit range as this market remains very competitive and Opteva is not fully certified by our customers. For a certification is completed in EMEA, Opteva orders have been strong with significant orders in Eastern Europe and Russia. Product orders for the quarter including and excluding voting of the second highest quarter in Diebold's history -- and a highest third quarter in Diebold's history.

Opteva has been a significant percentage of global ATM order entry, with 110 million in orders in the quarter with approximately half of that amount coming from the international locations. As Wally noted second quarter revenue was $630 million up 7.6% on the GAAP basis and 6.4% on a fixed exchange rate basis. The positive currency impact in the third quarter was $6.1 million or approximately 1.1%.

Financial self-service revenue grew 8.6% on a GAAP basis and 7% fixed rate. This is led by a strong growth in Asia-Pacific of 23% fixed rate. The Americas were up almost 8% while EMEA was up 3.6% on a GAAP basis and down 3% on a fixed rate basis. The security business is up double-digits for the 12th quarter in a row as a result of recent acquisitions and internal growth.

The Election Systems business decreased from approximately $48 million in 2003 to $34 million this quarter. Of this amount the Brazilian voting contract represent approximately $19 million in the quarter.

On the gross margin front, gross margins declined to 29 -- to 20-- from 29.4% in third quarter of 2003 to 28% this quarter. Product gross margins decreased from 33.1% in third quarter of 2003 to 31.1% in the third quarter of 2004. The majority of this decline was due to the Election Systems business, which is adversely impacted by low volume in the California issue as well as continued margin pressure in Europe. We are pleased that product margins in the U.S. excluding Election Systems improved. This improvement in the U.S. margins was a result of increased Opteva sales, which carry a higher margin more than offset continued increases in fuel and steel prices.

Service gross margins decreased to 25.1% from 25.5% reported in the third quarter of 2003. This decline was a result of continued pricing pressures and higher fuel cost. This negative impact is partially offset by improved service margins in the U.S. where we benefit from product as the improvement measures. We achieved excellent leverage on the operating expense line. Total operating expenses for the quarter as a percent of revenue was 15.8% down significantly from the 16.9% in the third quarter of 2003. This decrease is achieved despite its higher legal and other expenses relating to the pending civil actions in the State of California.

Operating profits was 12.2% of revenue down slightly from the 12.5% in the third quarter of 2003. The decrease was due to lower gross margins in Election Systems partially offset by the positive leveraging of operating expenses in the financial self-service and security businesses. Without the cost associated with California issue we would have reported slightly up operating profit margins for the quarter. In addition, excluding the Elections Systems businesses the operating profit margins would improve significantly to over 13% from the third -- from a 12.5% in 2003.

The financial self-service business improved operating margin slightly in the quarter while the security business margin showed marked improvement. Other income expense and minority interest increased by $3.8 million of additional expense in third quarter of 2004 versus the third quarter of 2003. This increase is primarily due to cost incurred as a result of the pending civil action in the State of California and higher expenses resulting from increased -- higher interest expense resulting from increased debt levels.

Net income was 7.9% of revenues compared to the 8.5% in the third quarter of 2003. The decline in net income as a percentage of revenue was mainly due to the lower operating profit in the Election Systems business and higher expense [worldwide] again related to California offset by lower operating expenses as a percent of revenues.

The Company's net debt was $210.9 million at September 30, 2004, compared to net debt of $53.2 million at September 30, 2003. A $157.7 million increase in net debt for the last 12 months was due to $72.9 million for the repurchase of Company stock; $58.7 million invested in acquisitions, and higher working capital requirements given the growth in the business.

In the third quarter free cash flow improved by $92.4 million, moving from a cash use of $39.9 million in the third quarter of 2003 to free cash flow of $52.5 million in the third quarter of 2004. We saw improvement on the collection side, with day sales outstanding at 83 days at September 30, 2004, a 9 days sequential improvement from the 92 days at June 30, 2004. The 12-month moving average inventory returns decreased slightly from 5.2 to 4.9 turn. 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 fourth quarter.

We estimate that stock options were expensed in accordance with SFAS 123, the full year impact in 2004 and 2003 would have been approximately 6 cents per share, and as previously disclosed in the interest 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 grant the restricted stock units will adversely impact 2004 earnings by approximately 1 cent per share.

Wally has summarized the outlook of fourth quarter and year, and just a couple of additional comments. We are expecting fourth quarter 2004 revenue to increase 9-11% on a fixed exchange rate basis led by again double-digit increase in financial self-service revenue of 11-14% again on a fixed rate basis. And security, for the 13th straight quarter, will grow double-digit in range of 23-26% both on a fixed rate basis, and the Election Systems revenue is expected to be $7-10 million for the fourth quarter.

Currency exchange is anticipated to be slightly favorable versus prior year. Depreciation and amortization is expected to be approximately $19 million, with an effective tax rate of approximately 31-32%. Pension expense is expected to increase by approximately a penny per share in the fourth quarter of 2004 as compared to the fourth quarter of 2003.

As Wally noted EPS in range of 87 cents to 92 cents a share as this compares with 81 cents for fourth quarter of 2003. The license system business is expected to be 3 cents dilutive, the EPS in the fourth quarter of 2004 versus been approximately 3 cents accretive in the fourth quarter of 2003.

The expectations for the full year 2004 includes double-digit revenue growth of 11-12% on a fixed exchange rate basis, again led by double-digit growth from financial self-service revenue of 11-12% and security revenue, which is expected to grow 15-18% on a fixed rate basis. The license systems' revenue now anticipate to be $83-86 million for the year.

Currency impact is expected to be 1.5-1.8% versus the prior year and depreciation and amortization is expected to be approximately $72 million, with an effective tax rate approximately 31.5-32%.

The pension expense is expected to be 4 cents per share higher in 2004, moving from a penny of expense per share in 2003 to 5 cents of expense per share in 2004. Research and Development will be approximately 3 cents, 3% of revenue, as Wally noted EPS should be in the range of $2.54-2.59. This would represent a 7-10% increase in EPS over 2003, excluding the impact of the pension expense.

On the cash flow guidance, we now expect free cash flow to be in range of $170-200 million for the year. This change in guidance is a result of the cost associated with the pending civil action in California and slightly higher working capital given the growth that we expect. Wally has given the high level of guidance for 2003, that our expectation is 2005 that our expectations are for another solid year with double-digit growth for both the top and bottomline.

In closing, we are delighted with the continued strong order growth and the acceptance of Opteva. We believe we are extremely well-positioned for the future and with that I will turn it back to John for questions.

Thank you, Greg. Okay, Cynthia we'll take our first question, please.

Thank you, sir. Today's question-and-answer session will be conducted electronically. If you would like to ask a question, please press the "*" key followed by the digit "1" on your touchtone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, if you would like to ask a question, please press "*" "1" at this time. We will take our first question from Matt Summerville with Key MacDonald (phonetic). Please go ahead.

Oh, yeah, couple of questions Greg, first, can you do just a walk through on the voting expenses, you know, if I look at what the pre-tax number look like, it is probably between 5 and 5.5 million, how much of that was in cost, how much in SG&A, and then how much below the line?

Well, below the line was just slight under [$3 million] and I think it was about a $1 million in cost-to-good sold and the rest that would have been in SG&A.

Okay, and then Wally on Europe, if you can talk about that for a minute. Can you talk a little bit -- in a little bit more detail about how you're progressing there with certifications and if there's a timeline in which you think, you will be fully wrapped up sometime early '05 and then moving into the fourth quarter here, how you think the comparison will look relative to last year?

Thank you, Matt, why don't I take that question is, to give me a little opportunity to talk about the third and fourth -- as you can see from our numbers, our revenue in financial self-service in the third quarter was slightly under what we had previously thought it was going to be and now that's -- we were expecting two large orders in China and that we expected the bulk of revenue in the third. We got one of them in a [bid] revenue, the other one, the order was official and final in early October, and so it will be fourth quarter revenue. So we are very happy with the way that turned out, but -- that slid a little business from our third to our fourth.

Europe, we are having a difficult year. We laid out for you what we needed to do. We are making real progress there. There were three or four major accounts that we completed certification in the third quarter, we expect a very flat year-over-year in Europe. I don't have a number for fourth quarter revenue in Europe that I want to share, it is pretty flat, but the -- for the fourth quarter in total we will have good growth in financial self-service certainly lead by the U.S. and Asia. And as we go into 2005, we should progressively see more and more completion of Opteva certification in Europe and should all look forward to excellent year-over-year comparisons in Europe in financial self-service for Diebold.

And then just one last question and then I will get back in queue --

Well, actually to comment on one another thing about Europe and --.

Yeah.

To help answer your question, we talked about the phasing-out of the legacy product 9x in Europe and that was largely complete at the end of September. There, you know, maybe a 100 more units to make in the third -- this fourth quarter to finish the job but that is basically completed project at this point.

Okay, and then one last follow-up on the commodity and fuel cost question Greg.

Yeah.

Can you give us some color on year-over-year basis in perhaps millions of dollars how much those two line items are up in aggregate?

Yeah. If you look just at the third quarter Matt it's up over 2 million bucks, you know, fuel and steel cost us, you know, probably about -- all I would say maybe 2.5 million bucks in the third quarter, if you look at the total year that's some around $9 million.

Is that year-to-date or for all of '04 estimated?

All of '04 estimated.

Okay, great. I will get back in queue. Thanks.

We will take our next question from Reik Read with Robert Baird. Please go ahead.

Hi, good morning. I just wanted to go back to the voting business that we occurred in, can you guys just talk again about how much equipment that you have related to -- how much election equipment that you have on your books right now, and also talk to, you know, there seems to be a trend out there as the state developing more and more standards, we are certainly seeing some states go for the paper trail, is the equipment that you have in inventory today usable or is there -- given those standards is there the risk that it needs to be written down at this point?

Reik, this is Wally. Our voting inventory is in the $15 million range, some optical stand, some touch screen, some parts of -- we don't want to make a prediction about what the U.S is going to want to buy, we would like to wait until after November 2nd. We are doing everything that we're supposed to be doing to help each of the jurisdictions run excellent elections. We're confident that our equipment will perform well. We're waiting to see how everything turns out on after November 2nd, we should update everybody after that. But I believe that our inventory will definitely be used in 2005 and in, you know, the country going forward with either with voting -- with paper receipts or without or some combinations.

And then can you guys also give us an update on the receivables and how much remains out there and to talk about what are the specific requirements that the counties are giving you in order to get paid for those?

You know I'll let Greg cover California, but let me talk about Brazil voting equipment. We are happy to tell you that more than 90% of that receivables has been collected what everything is being paid on time and it will all be collected during this quarter. So every -- in the elections went exceedingly well in Brazil, so we have happy customers who are paying in full. We are thrilled about that, and as you know, Maryland has paid their receivables and all of our receivables for voting are in pretty good shape with the exception of California, which is involved in this litigation, which as we've announced is progressing; we are working with the Attorney General in California and we feel confident that he will help the country and California and us all move forward. So with that Greg you can talk about the specifics of the California receivables.

Hi Reik.

Hi Greg.

First, about $37 million bucks related to California with majority of that coming from San Diego. What we talked about last time around was that it would be a '05 event. There's some requirements in terms of given the TFX re-certified out there in California. Once that happens then we will get some payment related to those receivables and once they were on the election on that we will get the rest of payment related to that. So, we are looking for that as in '05 and in my mind, we certainly didn't close the San Diego and [inaudible] Counties out there and from that standpoint we still expect to collect those receivables.

And what would be the timetable in terms of the re-certification of the TFX machine?

You know Tom Swidarski is on this call, so Tom, could you answer Reik's question please?

Certainly, the -- we are tied to the California panel that does the certification process. We will be taking it to the panel, obviously, they are not meeting through remainder of this year, but they have a schedule set-up beginning of next year. So we fully expect to be in front of that panel in the January-February timeframe to go through re-certification process like we did with [TF] units. So that in the first quarter of next year my expectation would be that we would have a TFX system that is fully certified by the State of California.

And well Tom would an election also likely be run after that in the first quarter?

No, the -- as it stands right now, California does not have a planned election in the first or second quarter of next year. Generally, there are elections in half year or in the third quarter timeframe.

And we would like to give everybody an update on voting after November 2nd, when everything would be much clear, but I can tell you, we are making good progress. The issue with the Swarthmore students has been settled. The issue with the State of California is about to be settled. The election will -- where our equipment is involved, should run well and we are not heavily represented in the largest win state, so we should be in pretty good shape there and then I wanted to emphasize, that our overall orders for security and financial self-service and our overall business is running very, very well.

Okay and just one last question from me on election business. I just wanted to make sure I am clear on this. Last quarter you guys thought that elections would be really neutral, you said slightly dilutive year. You might have been forced in to dilutive. Were there -- what was the things beyond the slightly dilutive that caused it to be more?

Yeah, right this is Greg. Actually because of the charge that we took, that came against the loading business. So that's what made us force this to little bit more [inaudible].

Okay, great.

And we had said so clearly and so many times that the issue with the State of California was not included in our guidance and when we had understanding of what it might be, we would let you know and that's exactly what we did and so we feel that we communicated well on that.

That's helpful. Thank you.

You are welcome Reik.

We will take our next question from Tony Minocchio (phonetic) with Midwest Research. Please go ahead.

Good morning, couple of questions. Number one, on European certification; the certification issue, if you can help me out, is that something that, obviously, you may have gone through in Asia to get a few certified there and just that exactly what kind of timeframe did you see from certification to eventually getting orders and revenue on that? And then on security issue -- security solutions, what kind of success you are having domestically in getting it into other marketplaces and internationally as well, it looks like some success there in Asia Pacific, is that some kind of a trend that we can expect to see, you know, going forward near term or was that a one-time event?

Thank you Tony. The certification of the new product like Opteva can be more or less difficult depending on the customer and the legacy situation and I can say it was fairly easy for us in North America and Asia to get Opteva certified and we moved ahead very rapidly there. In Europe there is a large number of state banks with complicated proprietary legacy systems, which we have to work our way into, where we didn't have a particularly strong position in the past and that has been a challenge for us, but we're making a lot of progress there. And the Asia-Pacific comment on security you mentioned, what you are looking out there is two very small acquisitions, Vangren and Cardinal that appeared in the numbers that didn't -- weren't part of our Company in the third quarter of prior year, but that business is going very well and that's what you see.

Those are two Australian security companies that we bought late last year, Tony.

Very small.

Okay. Thanks. What kind of -- on security, what kind of a benefit are you getting or seeing from expanding into other markets here domestically, you know, government, retail you may have mentioned in the past any kind of meaningful successes there?

Yeah. Tony, we're in the lot of success their and Dave Bucci is in the room and he can talk about how that's moving forward and how that will be very helpful as we go forward.

Yes, Tony, this is Dave. The couple of recent acquisitions we've made have expanded our capability now into the government market allowing us to more effectively handle Department of Defense in various branches in military in terms of providing their excess control and security requirements. [Inaudible] was a company we acquired that gives us now strength and capability in the commercial markets and the ability to handle complex security projects and high rises, matter of fact they do some security work for a lot of companies down in New York City; so we think that they gives us good strength now to expand into the commercial market and into the government market as well as our continued strength in the financial markets. So we'll continue to leverage and expand our security business and the integration with our service business will be key there also because we are a systems integrator in the security side and our service footprint gives us great strength now to be able to support those customers across the U.S.

Okay, thank you.

You are welcome.

If you would like to ask a question at this time please press "*" "1". And we will go next to Alex Mitchell (phonetic) with Sulfex Asset Management (phonetic). Please go ahead.

Yes, can you describe some of the market share shifts in the U.S. I guess somebody has a comment today about Banc of America in particular and just going forward how you see the market share sorting out in the U.S. and in Europe as well?

Alex this is Wally. I haven't seen the particular announcement that you are talking about, but first of all we are very good, very strong competitors who are always trying to serve the customers; well but our solutions are being very, very well accepted, the numbers will speak for themselves when the year is over. We feel we are absolutely gaining share in the product area and then in around the world and with the exception of the Europe but certainly in total in the world we are gaining share this year. We can -- all of our competitors announce their numbers and so we can look at them, but our -- if you go back four years and you look at our fixed rate growth, we have been out-performing and we continue to do that. Certainly Banc of America likes our solutions and they have been buying a lot of our ATMs, and they are one of our favorite customers. We have a lot of great customers.

Any specific projections you have going forward for market shares?

We have said repeatedly that we are gaining share this year. Certainly the first six months show that and -- but these things bounce around a little bit by quarry, you have to look at them when the year is over. We have gained, I think 3 or 4 points of global share over the last few years and I would say, this year, you know, our friends in Daytona are doing a great job and making a lot of progress and I imagine we'll both wind up gaining a little share.

Okay, thank you.

We will take our next question from Barry Laffer (Phonetic) with Laffer (phonetic) Management. Please go ahead.

Good morning, thank you. It's a follow-up to the last -- could you describe the competitive pressures that you are seeing in the North American marketplace in a little bit more detail? I mean, where is it happening exactly, regionally, is it happening with the regional banks over the larger banks?

Well, I guess it's hard to answer just like that, but certainly all of our customers are very interested in solutions and cost ownership and pricing and getting the best deals that they can possibly get on the products and on their service and -- our competition is aggressive as are we, you know, and so -- but we have been gaining share and holding our improving margin in financial self-service and we expect to continue to do that and our solutions are excellent. Our cost points are excellent, our customer relationships are excellent and those are things that are required in today's environment.

And as a follow-up. You indicate that you had a low single-digit decline in EMEA in orders for the quarter, do you see that stabilizing flattening out and what type of growth can we expect there over the next six quarters perhaps?

Well we haven't projected orders by region; by quarter; by product set, but I think our orders year-over-year are going to be okay; in Europe in the fourth quarter and as I said on multiple occasions, we expect an excellent year in '05 in Europe based on, you know, I consider that what we are offering in Europe to be two generations ahead of what we have been offering in Europe, because 9x, as far as I was concerned was a generation behind ix, and Opteva is a generation in front of that, so we are going to make it quantumly forward in '05, and we'll just have to wait to see the numbers.

I think that from that standpoint when you look at -- as Wally mentioned Western Europe, little bit more difficult in terms of getting all the certifications, because of the some of legacy infrastructure, when you go outside in the Eastern Europe and Russia, for instance, as we've talked about for that certification process isn't as cumbersome; orders for Opteva have been really spectacular.

Thank you very much.

We will take our next question from Allen Bickler (phonetic) with First Manhattan (phonetic). Please go ahead.

I thought you forgot about me.

Hey, Allen, we have been waiting to hear from you. Allen, how are you doing?

I am on a boat in Bermuda.

Oh. You didn't invite us.

After the election, Wally.

I can only wait and pray.

Anyway, can we talk a little bit about the service business for ATMs and just if we look at it on the worldwide basis, we haven't talked about this in quarters, you know, whether it would be outsourcing, whether it be, you know, all these new machines going in, I mean what -- could we get a little flavor for how that business is going on a worldwide basis and what your expectations are, you know, once you get all these machines in, I mean if you gives us a flavor for how these things is going to play out based on what you seeing now?

Well, we can talk about a little bit. We have an excellent service offering with our new products and of course, we are getting a big surge in new product revenue, which has a negative early impact on service revenue and, you know, so our service growth rate hasn't been particularly brisk; but it's certainly positive. There has been continued significant downward pricing on service and we have many, many productivity activities under way that are being done to -- not only serve our customer but to offset those pricing problems and we have, you know, pretty well done that. Moving forward, you know, we haven't projected service growth rates but they would be mid single-digit I would think and also our service profitability is about the same as our product profitability, the OP line and so we do not have like a profit quagmire in this service business, so our service is a very supportive piece of our overall business. Our customers love us because our service is excellent and, you know, we feel good about our service business, it's one of our key assets.

Okay and so not withstanding the gross margin degradation in service you are mixing it up on SG&A, if I am hearing you right?

Absolutely, yes. You know, we often talk about, you know, the gross margin because we track that, but I think everybody get squeezed there a little bit, something you do when you can -- you know, in cost of sales line, but you expect to get it back at operating expense in terms of leverage and productivity and we have in fact been doing that in both products and in service and that's why our financial self-service margins have been increasing slightly every year for the last four including this year; including service. You know, we were -- not by much but we went from the low 14 to the high 14 over the last four years; product and service combined fully absorbed all expenses for the whole company. And, you know, that's always a treadmill, you know, you got prices going down, you got some cost going up, and then you have to be doing these other things right to close the equation in whole to increase margin and we have been doing that.

And the same question in the security business. Are you -- it looks like that line is pretty robust, is that -- obviously, there is some acquisitions in there but if you look at it internally are you also getting a lift on security that the service end of the security business; you may be elaborate on that a little bit?

Yeah, the growth rate for the year excluding acquisitions will probably be mid single-digits in security. The most encouraging thing is this particular quarter our security OP margins improved and now that has to do with the price increase that we did announce and it apparently is sticking and it did help us this quarter on our security margin.

And are you seeing good service, I mean, when you are installing some of these products in the security business, is there -- like the ATM business, is there a service component or is it just, you're making, you know, you're selling a product, I mean could you --?

First, definitely traditional security service but in addition to that you are seeing more services and more professional service activity particularly related to the way we have been repositioning our business in security and Dave, if you would you like to comment on that.

Yeah, Allen, we do a fair amount of integration, we have lot of monitoring business that we are continuing to expand. So as we expand into the various markets we are able to leverage additional professional services and services as well as traditional service, like Wally mentioned. On the government side, our acquisition of TFE will allow us to expand into additional areas of the government for service, particularly around areas of security and some areas of IT in routers and hubs and things like that. But, we do expect the continued service both in the security business.

Thank you.

You are welcome, Allen.

Once again, to ask a question, please press "*" "1" and we will go next to Collin Campbell (phonetic) with Brookside (phonetic). Please go ahead.

Hi, thanks, I have got a couple of questions. First, a clarification and just following up on the previous set of questions, I think I missed a comment earlier on in the commentary about what are the gross margins or operating margins in the financial self-service and in the security solutions division did, so separate from the voting systems business, was there a comment made on what they did?

Yeah, Wally.

Let me, -- if Greg wants to add to this too. But what we've said is if you take out the one-time aspects of the voting business, but you leave voting in; our OP for the quarter improves slightly year-over-year. Of course if you take voting out entirely, our OP for the quarter improves very significantly.

What would that number have been, the operating margin?

We don’t disclose that by quarter, but we --.

Sorry, I just meant that total company excluding --.

The total Company was, -- I think without the special voting charges, it would have been up 1/10th year-over-year and without voting entirely it would have been up, like a half point and the -- both financial self-service and security improved year-over-year. What we generally try to do is at year-end, give for the year our OPs on each of the three business segments and we will do that again this year.

But in the current quarter, financial self-service and security, each independently, operating margin improved year-over-year.

They did.

Yes indeed.

Okay.

And together they did and they even improved including voting, if you exclude the special charges.

Got you. Can you give some additional detail on the size of the China ATM deal that slipped into Q4, because looking at Q3 standalone financial self-service looks a little light; but given your guidance for Q4, if I looked at Q3, and Q4 combined, revenue is actually higher than my expectation, so -- are there any other moving parts and can you help us understand what may have slipped from Q3 to Q4 in terms of actual dollars?

Well, roughly, there were two very significant orders in China: CCB, which is China Construction Bank; and that order we received and shipped as expected. There was another significant order, ICDC, which we expected to get into second, excuse me, in the third, but the customer for its own reasons having nothing to do with us didn't complete the large agreement, which it needs to with each of its vendors until early October, so that became -- becomes a fourth quarter revenue item and it's equal to what we thought it was going to be, if not larger. And, you know, if you look at the third quarter, I think we are about 15-20 million, let say like of what one might have expected in financial self-service that is that order and it is 100% certain that it is in the fourth now, so --

Sorry, so you are saying that one order was that -- was all of that revenue, 15-20?

I am indeed.

Well.

In China, you follow it there are several large banks who give very large orders and they have an annual process and you never know exactly when it's going to be completed, but we are very happy with our efforts and our team and our progress in China.

And then the last question just on the free cash flow guidance change, so I understand $5 million of the reduction is for the settlements, or if you just understand is the 170-200 does that include to $5 million for the California settlement.

It does indeed.

So $5 million of the debt is due to that. The [last] you said due to working capital, is that for revenue that's going to end up hitting in Q4?

I think the first thing we ought to take into consideration is those numbers are a little more volatile than some of the other numbers, so we consider the guidance, basically, to be the same as it was before with the exception of making that change. You know these are ballpark kind of numbers; it's harder to predict those exactly. And Greg do you want to answer that?

I think that's right. I think if you look at, you know, pretty strong quarter that we have, you know, obviously, you got, you know, slightly higher working capital level; so we are just trying to find in that range for the market.

Great, thanks very much.

We will take a follow up question from Matt Summerville with Key MacDonald (phonetic). Please go ahead.

[Co-versus] first I'll have [inaudible]. What was the percent mix of shipments in the U.S. that went out the door that they were in fact Opteva and then you have kind of a ballpark number you can throw out there for Asia as well?

Well I keep it in general track by domestic and international and in total and certainly the North-American numbers have reached the 50% level or so and will head, you know, significantly higher now as we move into '05 and international, which was zero until late last year, you know, the numbers have gone like 4%, 15%, 20%, 30% so, you know, we are in mid 30s and heading for 40 on the international piece right now and we expect, you know, by the time we get to the end of next year, these numbers would be in the 90's.

Okay, and then, a follow-up on voting -- I know it's difficult to talk about ahead of the election but within the guidance that you are providing for 2005, I would think that at least you have an assumption penciled in, in terms of whether voting is going to be additive or dilutive. Can you just kind of walk through your thought process around that?

Yeah, I really don't want to talk about making predictions about how things are going to go on November 2, and then what that means for us, etcetera, but what I will say is that, we have suffered severely in '04 as everyone knows, as let say mistakes were made as well as the country had to decide what it wants to do and many people [guided by us]. It's clear to us that in '05, lacking any kind of progress, the results would still be better than ' 04 for us and if things go well and the country can decide whether they want printers or they don't want printers, are the -- both are acceptable. We feel very confident that we have the right technology and the right solutions to serve our customers very, very well and serve this country and serve our shareholders with good profit, good result; and so right now, though, our focus is to do everything that we are supposed to do to serve our customers so that they can run good elections on November 2, and while we are all anxiously awaiting that, I can tell you, I have confidence that our team is doing the right thing, working very, very hard to take care of all the issues so that we are not part of any kind of difficulties that may or may not occur on November 2. And as soon as that's over and the dust settles, we will be able to give you and everyone a better view of what's going to happen. But clearly the country needs to spend a couple billion dollars to replace the punch cards and lever systems in old equipments that are out there and clearly we have excellent solutions.

Great, Okay. One last follow-up on the ATM side, as Col (phonetic) was talking about, it sounds like that China order got pushed from Q3 into Q4, but you still took down your full year ATM guidance modestly. I was wondering if you could talk about that.

Yes. We -- the old guidance for financial self-service was 12-13% and the new guidance was 11-12%, so you could say that's a 1% move on last year's revenue that $15 million change and I would attribute that, you know, there is lot of puts and takes, but I would attribute that to Europe; new expectations versus old expectations.

Okay great, thank you.

Okay, Matt.

Gentlemen at this time there are no additional questions. Mr. Kristoff, I will turn the call back over to you for closing comments, sir.

Thank you, Cynthia and thank you everyone for joining us today and as always if you have follow-up questions later today and later in the week, please contact me directly.

Once again, that will conclude today's conference call. We do thank you for your participation and you may disconnect at this time.