Diebold Nixdorf Inc (DBD) 2010 Q1 法說會逐字稿

Welcome to Diebold Incorporated's first quarter 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 and Chief Communications Officer, Mr. John Kristoff. Please go ahead, sir.

Thank you, Jessica. Good morning and thank you for joining us for Diebold's first quarter conference call. Joining me today are Tom Swidarski, President and Chief Executive Officer; and Brad Richardson, Executive Vice President and Chief Financial Officer. Just a few notes before we get started. In addition to the earnings release, we've provided a supplementary presentation on the investor page of our Website. Tom and Brad will be walking through this presentation as part of their comments today and we encourage you to follow along. We have included non-GAAP financial measures throughout our presentation this morning. Specifically, I refer you to slides 26 through 32, which provide GAAP to non-GAAP reconciliations, as well as our rationale for the use of non-GAAP measures.

A replay of this conference call will be available later today from our Website. And as a reminder, some of the comments today may be considered forward-looking statements. Internal and/or external factors could significantly impact actual results. And as a precaution, we refer you to the more detailed risk factors that have previously been filed with the SEC. And now, with opening remarks, I'll turn it over to Tom.

Thank you, John. Good morning, everyone. As you've seen this morning, we delivered solid operational results, despite a difficult comparison to the same period last year, in which we had particularly strong earnings. In fact, we exceeded our internal expectations during the quarter, as some business closed sooner than expected and we benefited from a more profitable segment mix. As a result, we have gained more confidence in the full year outlook we provided during our last call and we are reaffirming our guidance for both earnings and revenue for 2010.

I am particularly pleased with the continued positive gains in our service and services businesses, as we have put a great deal of focus on this area. As the product business begins to stabilize, growing and improving our services business further is paramount to our overall success. Our continued investment in infrastructure for services, particularly in the Asia-Pacific region, enabled us to improve service profitability, once again, during the quarter. We are on track to our goal to achieve our goal to improve service gross margin for the third consecutive year.

Our competitive advantage lies in our unmatched ability to deliver the full range of service, support and software solutions that work reliably at lower costs and with the flexibility to meet diverse customer demands. That's the driving force behind our service strategy emphasis in our core businesses and is the key to our future success. Finally, our net debt position improved by over $100 million from March 31, 2009. Brad will expand on this during his comments but from my perspective, we'll continue to focus on working capital improvements throughout the year.

Now, let's look at our performance during the quarter and the market environment in the geographic regions. You'll note, that we are now breaking out North America in our revenue disclosure. North America remains a key market for us and we believe this new format will provide investors with more transparencies and better understanding of our overall business. Brad will discuss this in more detail during his remarks. In North America, revenue declined 17% and orders fell 9%. This expected drop occurred primarily in the national bank segment, where the completion of large deposit automation deployments by major national banks created a very challenging comparison.

From a profitability standpoint, however, we benefited from a more favorable mix of business within this segment during the quarter. I'm also encouraged by the year over year increase in financial self service orders we saw at the regional bank level. If fact, first quarter regional bank orders also improved compared with the fourth quarter of 2009. And it was the highest order entry period we've had in the regional bank space in five quarters. While one quarter does not constitute a trend, this is the first increase in orders we've seen in this space in quite some time. We'll continue to monitor order activity in North America but our expectations remain that total revenue will decline modestly for the full year.

On the services side of the business, revenue declined in the mid single digits, as a result of lower installation revenue. Services revenue outside of installation grew during the quarter, as we continue to increase our focus on the value added segments of our service business. Along those lines, I continue to be encouraged by customer activity and the level of interest we have been receiving in the integrated services portions of our business.

I recently visited with two important regional customers in the is US and the information they shared with me underscored the validity of our strategic direction in integrated services and equally important, our ability to execute. Because of our track record over the years, we have developed a great deal of trust within this segment of the market. As these customers refocus on their core banking business, they have confidence in our ability to take on aspects of their operations. While we can drive improvements in technology, efficiency and costs.

In addition, we are continually building credibility within the industry, as a result of our performance in this space. Last week, the International Association of Outsourcing Professionals announced its list of the top 100 global outsourcing companies. We ranked 15th on the list, moving up from 35 on last year's list. Their selection process mirrors much of the criteria a financial institution considers when evaluating service providers. Placement on this list, as the highest rated global financial self service Company, is a reflection of the time and resources we have committed to this area. During the quarter, we added more than $20 million in new integrated services contract to our existing base. Of which, we had approximately $100 million of remaining revenue at the end of Q1. While we're still working from a relatively small base, I'm very encouraged by the rate at which we are growing this business.

Looking at our security business in North America. Our outlook and the market environment remain largely unchanged. The financial security market remains depressed, as new branch construction continues to lag behind previous norms. Although global revenues and orders are down from the previous year, we're encouraged by some of the recent developments we're seeing in security. For example, in the enterprise security space, we're working with the National Oceanic and Atmospheric Administration, or NOAA, to set the groundwork for streamlining identity, credential and access management across that Agency's entire enterprise. This initiative will help NOAA develop a viable solution for managing universal identities and access to federal facilities and systems. We hope that these efforts will result in best practices for addressing security credential needs across multiple agencies and help the federal government jump start its credential management initiative.

In another development, we have partnered with Verizon Business' network-implementation services to provide comprehensive security solutions to its customers. Working with Verizon Business enables us to offer a managed security solution, that includes hardware, software and network services, all under one umbrella. Diebold's industry leading managed security solutions have been backed for years by strategic alliances with hardware providers to supply best in class equipment that help secure the assets of our customers. Integrating Verizon's Business' networks into these solutions will provide even more value. Looking ahead, we feel that enterprise security and other growth initiatives, we have outside the financial space, particularly in security monitoring, retail and commercial markets, will help us build growth.

Looking at Asia-Pacific. As we mentioned during our prior call, we anticipate the region returning to its historic seasonality, where revenue is more back end loaded to the second half of the year. For an orders perspective, we saw a significant decline against the difficult comparison to the first quarter 2009, when orders increased in excess of 30%. In addition, orders in Asia were up more than 50% in the fourth quarter. This lumpy order entry activity is typical in this region and not an indication of any particular trend. So, the year over year drop in orders was in line with our expectations. For the full year, we still expect to grow in the region, even compared with our very strong performance in 2009. Our service business in Asia experienced some healthy gains during the quarter, with strong contribution from our managed services business. This contributed to the gross margin improvement during the quarter.

In India, our integrated services business is having success, as many customers in the market are beginning to see the benefits of working with us on a total outsourcing business relationship. Our total service revenue grew more than 35% during the quarter and now represents more than 50% of our business in India. We will continue to invest resources in this space throughout the region, as Asia-Pacific remains one of our key growth markets.

In EMEA, We saw an increase in revenue during the quarter, as we began to work through our strong order book from the fourth quarter of 2009. We're having success in areas where we are well positioned, such as France, South Africa and the Middle East. And plan to invest resources to capitalize on other high potential markets within the region, such as Turkey. Yesterday, we announced a multi-year ATM outsourcing and go deployment agreement with ZAO Citibank, one of the leading banks in Russia. Thanks to our outsourcing service, Citibank will obtain a single point of contact for its ATM related operations, including both the network's management efficiency and its client services. Citibank's decision to choose us, for this integrated services agreement, confirms our commitment to continue investing in our services infrastructure in the region.

The rest of the region, as a whole, remains challenging as the overall economic environment is still relatively weak. As discussed during the previous call, we are expecting revenue growth in EMEA for the full year. And I anticipate year over year growth to accelerate over the next couple of quarters. Yet, much work remains in EMEA for Diebold to be positioned as strongly as we are in other regions of the world.

In Latin America, business remains strong. We completed some business sooner than expected. This drove increased orders and revenue during the period throughout the region. We expect the market for self services in Latin America to remain very healthy. In Brazil, we continue to strengthen our competitive position as the clear market leader in financial self service solutions. If fact, our production facility in Manaus recently shipped its 100,000th ATM unit to the Brazilian market. We will continue working to maintain our leadership position in Brazil, based upon the competencies we've built over the last two decades in design, engineering, software and services. Additionally, we are on schedule to begin production very soon on the Brazil elections systems order and still anticipate completing this project by the end of the third quarter.

On the operational front, we're on track with our Smart Business 200 initiative and are delivering savings to the Company. Based on the steps we've taken to date, on a number of important operational initiatives, I'm confident we'll continue to execute on those elements of our business that will have a significant impact on our performance moving forward. Importantly, as I stated previously, we are reinvesting some of the savings we're generating from our operational improvements and are putting them back into our business.

While achieving cost savings remains important to us, we understand the critical nature of bolstering our competitive position and developing new services and solutions that generate top line growth. That's why we've increased our investment in R&D for service infrastructure, as well as product development. An increased commitment to R&D spend will be an ongoing focus for us, as we plan for future growth. We feel confident enough in the market and our ability to keep executing on our plans that we will continually increase our investment in this area.

In closing, I feel we're off to a good start in 2010 and am confident in our position in key markets, especially, North America and Brazil. As well as the progress we're making to become a stronger, fitter organization. As a result, we are reaffirming our outlook for 2010, in both revenue and earnings. While I'm pleased with our performance during the quarter, along with some positive indicators to the market, visibility to the remainder of 2010 remains some what limited. Thus, we remain cautious on our near term outlook.

We continue to see a number of great opportunities in key areas to capitalize on our technology and services expertise. Therefore, we will continue to work to deliver our total value proposition, particularly as it relates to deposit automation, enterprise security and integrated serves. I am confident that the path we are traveling entails the right strategy to deliver sustained success and shareholder value for 2010 and beyond. With that, I'll turn the call over to Brad.

Thank you very much, Tom and good morning, everyone. I am pleased with the steady progress we have made on a number of fronts. We did a good job of continuing to improve our working capital position and we also made solid progress on improving our gross margin during the quarter, particularly in the service business. You will also note that in today's earnings report, we have added more disclosure around global orders and are providing additional detail related to orders and revenue in our North American business. We believe this will provide additional detail behind one of the most important business segments.

We are also now providing a more detailed breakdown of other income and expense. This is consistent with my philosophy of open disclosure and transparency. Finally, you will see that during the quarter, we repurchased 337,000 of the Company's shares. There are 2.6 million shares remaining on our existing Board authorization. As I mentioned during the last call, we feel our shares are an excellent value and we will continue with a measured approach to our share repurchase program.

Before we discuss our first quarter results, as with past calls, it's important to note that we have restructuring charges, nonroutine income and expense in our financials. We believe that excluding these items gives an indication of the Company's baseline performance. As a result, many of my remarks will focus on non-GAAP financial information. For a reconciliation of our GAAP to non-GAAP numbers, please refer to the supplemental material at the end of the presentation, provided on our Website. In addition, all results of operations reported today, including prior periods, excludes discontinued operations.

Now, let's turn to our financial results. First, I'd like to refer to slide 12, which focuses on first quarter revenue. Total revenue was $619 million, down 6% from the first quarter of 2009 or 11% on a constant currency basis. For the quarter, product revenue dropped 14%, primarily in North America, where the completion of large deposit automation deployments, by major national banks, created a very challenging comparison. On the other hand, service revenue increased 1%, with strong performance in Asia-Pacific offsetting the reduction in installation revenue, as a result of lower product sales in North America.

Looking at our financial self service business, on slide 13, first quarter revenue was $472 million, down 5% from the first quarter of 2009. This decease was mostly attributable to the decline in North America. In the security business, on slide 14, first quarter revenue decreased $13 million or 8% from the same period in the previous year. This decrease was due primarily to continued weakness in the US financial markets. Especially, in the segment of our business which relies heavily on new bank branch construction. However, as Tom mentioned, we are encouraged by opportunities developing in the enterprise securities space.

Looking at slide 15, total gross margin for the first quarter increased 1.8 percentage points from the first quarter of 2009. The increase was attributable to improved profitability in the Company's service operations. Product gross margin for the quarter declined 0.1 percentage points due to a significant decrease in revenue, partially offset by favorable segment mix. In service, the gross margin grew by 3.5 percentage points during the first quarter, as some abnormal costs in the prior year period created a relatively easy comparison. In addition, margins benefited from improved productivity and favorable mix. The mix was positively impacted by higher integrated service revenues in North America and Asia-Pacific.

Moving now to non-GAAP operating expense. As highlighted on slide 16, in Q1, 2010, operating expense as a percent of revenue increased 2 percentage points from the comparable period of 2009. Operating expense in the first quarter increased $5.3 million from the prior period. However, excluding the impact of currency, operating expense would have declined by approximately $1 million. Also, included in operating expense is an increase of $2.1 million, currency adjusted, in research and development, as well as certain costs associated with the previously announced job reductions in our North America operations. As Tom noted, we've increased our investment in R&D for services infrastructure, as well as product development.

Now, turning to slide 17. Non-GAAP operating margin in the first quarter 2010 was flat, compared to the first quarter of 2009. While I am pleased we were able to maintain consistent margins on significantly lower revenue, the 6.1 percentage point operating margin falls well below our expectations and what I believe this Company is capable of achieving. We will continue to be aggressive in generating global growth and managing operating costs in our efforts to reach our stated operating margin goal of 10%.

Turning to the EPS reconciliation table on slide 18. GAAP EPS from continuing operations, in the first quarter of 2010, was $0.37 per share, compared with $0.13 per share in the first quarter of 2009. Excluding restructuring charges and nonroutine income and expense, our first quarter non-GAAP EPS was $0.34 per share, compared with $0.46 per share in the first quarter of 2009. I would note, our non-GAAP tax rate in the first quarter of 2010 was 28.6%. In the first quarter of 2009, our non-GAAP tax rate was 5.5%. If you apply the 28.6% tax rate to the first quarter 2009 results, the non-GAAP EPS would be in line with what we reported this year. For 2010, we do expect the full year tax rate to be approximately 28%.

Looking at free cash flow on slide 19, we define free cash flow as net cash from operating activities, less capital expenditures. Free cash use in the first quarter of 2010 was $66.6 million, compared with free cash flow of $7 million in the first quarter of 2009. The first quarter was adversely impacted by approximately $50 million in accounts receivable that were scheduled for the first quarter but it ended up being received in December of 2009. Excluding these early payments, free cash use would be in line with prior years, as noted on the slide. Given the normal back end loading nature of our cash flow, I remain confident we will generate free cash flow in excess of $100 million in 2010.

Looking at slides 20 and 21 on working capital metrics, our balance sheet remains strong and I am very pleased with the year over year working capital improvements we made during the quarter. Day sales outstanding improved four days, while inventory turns improved 0.3 turns. We anticipate continued improvement in our working capital metric, particularly inventory turns, as we complete our global plant realignment and warehouse consolidation efforts. George Mayes and I are working closely together to drive additional improvement and sustainable improvements in inventory turns as we move forward.

Turning next to liquidity and net debt, on slide 22. Net debt, at March 31, 2010, was $178 million, a decrease of $108.1 million from March 31, 2009. Our net debt to capital ratio was 15% at March 31, 2010, compared to 24% at March 31, 2009. Versus December 31, 2009, our net debt position increased by approximately $112.7 million. On slide 23, we have provided a net debt bridge, along with a year over year comparison chart. The main reasons for the net debt increase, in the first quarter of 2010, relates to the early accounts receivable payments I mentioned earlier, average increase in net debt seasonality, increase in Brazil inventory relating to our voting machine production, our share repurchase program and other items.

Turning to our full year outlook on slide 24. As Tom mentioned in his remarks, we are on track and reaffirming both revenue and earnings guidance for 2010 that we established in February. In conclusion, we've done a good job of maintaining focus on the key initiatives and strategies that will put us in a position to deliver 10% operating profit and 15% return on capital employed. As shown on slide 25, we've provided a bridge to our operating profit goal. The key components to this bridge are top line growth, additional volume against our fixed manufacturing and service costs, tight control of general and administrative expenses and continued leverage of our SB-200 cost savings initiative. I am confident that we can achieve these goals through continued investment and discipline in these areas.

In summary, my priorities remain to help drive the strategic transition of the Company, support the improvement of our operational performance and drive further improvements in our financial controls, processes and systems. I remain confident that the focus on ongoing initiatives for working capital improvement will continue to generate gains through the remainder of the year. And increase our ability to invest in growth opportunities and return value to shareholders in the form of dividends and modest share repurchases. Based on the results we've delivered to date, I feel confident that we continue to move in the right direction on all those areas. I'll now turn it back to John.

Thank you, Brad. Jessica, before we take our first question, in order to enable everyone to get their questions in today, I would ask you to please limit yourself to one question and one additional follow-up. And then, if you have further questions, please feel free to get back in queue and we'll do our best to get through everyone this morning. So, with that, Jessica, let's take our first question.

(Operator instructions). We'll go first to Reik Read with Robert W. Baird.

Tom, just on your comments on North America, could you maybe just go through the year and talk about the offsets out there to the large deposit automation programs that have rolled off? And if you can give us some magnitude in when these kick in? And I think about it in terms of, are there other deposit automation incremental services from these large players? Are there some larger bank refreshes that may kick in at some point? And then, maybe a little bit more color on when the regionals start to kick in from your order commentary?

Okay. Let me try and break down a few pieces, Reik, because you asked quite a few things in there. First of all, is I think of it in three large buckets that make it, maybe, more understandable for everyone. The first would be, we've had three aggressive players in North America moving forward with deposit automation. And obviously, for us, that gave us very tough comp as several of those began to slow down, if not complete their rollouts in the third quarter and a little bit in the fourth quarter of last year. If I get below that group and say the next group of the major players that are out there, that would maybe constitute the next 20 institutions. So, now you're talking about institutions number four through 20. I would say that the level of activity has increased significantly. And from that I mean, most institutions last year, regardless of whether they are rolling out deposit automation or not, at this tier bank, was experimenting in their labs.

So, they may have had a couple units and were testing various suppliers. We've actively engaged in several rollouts that are beginning, as well as pilots, that constitute in the terms of 50 to 75 units. So, that's much more than just a couple in a lab or one or two in the cafeteria. So, to me, that was a pretty solid movement forward. Some of those actually want to begin rolling out. Several hundred in the second half of the year. Some want to begin their pilots in the second half of the year. But the fact that we've moved from what I would call the lab and prototype environments and the testing and certification, the software and writing all that software into the second half of the year, with people beginning to rollout meaningful numbers in that tier institution; I think is a positive sign.

I think the third way I would comment then, it's really the remainder of the institutions, which is thousands of mid-tier community banks throughout the country. Certainly, there's still a backdrop of a lot of institutions that are not yet healthy. There are some institutions that are closing. But we are seeing more activity from this group than we've had in a long time, which was in my comments. Our order entry activities, specifically, within that group was up significantly over fourth quarter and meaningfully over last year at this same time.

So for us, as we tap into the size and scope of our North American operations, deposit automation, is an important area of focus and an important area of decisioning. And we're seeing that not just in one or two regions, we're seeing that really across the United States beginning to take hold. I think it's taking hold for a couple of reasons. Number one, because you have the big three that have been out there and now they're advertising on TV. If you are in those markets, you've got to be able to compete and compare yourself. So, in some cases, they're getting swept along to say, "Well, I may not like the ROI but I've got to get there and there's other things I can use."

I think the second thing that we're seeing now is, with this tier of institutions, those that are below the top 100, you have a different decision criteria. And I think it plays much more into the sweet spot of Diebold. So, the decision criteria no longer is, "I just have to have an expensive deposit automation device that has bulk check and bulk note." We have the capability of providing single check, with bulk note. We have the capability of providing single note, with bulk check. And any combination there. And as you get into that, we can take an institution, that may not have the volume of some of the bigger players, into an ROI calculation that makes much more sense.

We're the only ones with all four varieties, that you can mix and match with, as well as being able to upgrade any single check to a bulk check or single note to a bulk note. And have the capability of doing rapid processing, meaning, you can do both of those transactions at the same time. So, not only do I believe we have the infrastructure that makes sense, I think we also have, as you get into this tier, a technological advantage and a cost advantage that makes a whole lot more sense for us going forward. Again, we're going to be very intelligent in terms of how we continue to compete here. But I think as it moves to institutions that have different cost points and different value propositions, it plays much more into our capability.

And with the deposit automation, with these larger players, does that suggest there's a bigger services backlog, just from that alone?

Yes, somewhat. Yes, it does. It also, on the bigger players, would mean -- all institutions, as they move into the technology, generally refresh their technology every say seven years. With some of the biggest players, they began this rollout five years ago. And so, as such, you're coming up on certain ones that are -- it's not going to be the massive rollouts that we just experienced but there will be some sites that need to be moved, some sites with new software, some sites with new technology.

And if you'll recall, we developed new technology last year in terms of handling the notes. That was the one area I was most uncomfortable with our capability. And while -- in deposit automation, 75% of all the transactions are check transactions, being able to handle notes is important. Well, that's a Diebold-developed, a Diebold-delivered, now capability, which I think puts us in much better technological steading, as well as cost points in terms of being able to work with suppliers. So, as you deal with the biggest players, there is just the regular routine business that they have to do and that they will do to keep their fleet fresh. But it certainly won't be of the size of magnitude that we experienced over the last four to five years.

Thank you, Tom, for the comments.

We'll go next to Matt Summerville with Keybanc.

Morning, a couple of things. First, with regards to EMEA, Tom, you mentioned your ATM orders were down 9%. And I thought that was against a fairly easy comparison the prior year, recognizing though sequentially, you had a pretty good order input quarter in Q4. Can you just kind of circle back on that and kind of reconcile how that is supportive of an outlook for growth in the region this year?

Sure Matt. EMEA, particularly, our order growth in the fourth quarter of 2009 was significant. So, what happened, as you might expect with timing issues, some of the fourth quarter of 2009 was originally forecast to be in 2010. That got pulled ahead. So, from our standpoint, that's nothing but good news, even though from a comparative standpoint, it puts us down. When you look at the two quarters combined to the two previous fourth quarters and first quarters. On an aggregate level, we would be up in a pretty good position. So, we feel very good about the backlog and the opportunities we're seeing there going forward.

Having said that, as I said in my comments, of all regions of the world for us, from a competitive standpoint, that's still the area we have to do the most work in. And so, while I'm confident in terms of our revenue generation for this year and it will be up over last year, from an overall standpoint, we still have a lot of work to do in that region. And we're strong in particular areas but we can't say that we're strong across the board in EMEA. So, we've got a lot of work to do in various western European and eastern European countries. By the same token, given where we've come, we now have a better product set, we now have a better organizational structure, we have now better service infrastructure. And much like this order with the Citibank Russia, we're finding ourselves at the table and winning some meaningful opportunities here.

So, I feel good about the path we are on. Certainly, nowhere near comfortable with the situation we have or how much opportunity we have to grow in that region. And I think you'll continue to see us investing heavily in EMEA.

Got it. Just one follow-up question. With regards to something Reik had mentioned. When you look at, or your answer to his question, the next two buckets beyond the big three players you kind of have, as you mentioned, at institutions four through 20 and then, literally hundreds if not thousands of smaller banks. Where are you finding they are at with regards to getting the back office technology in place to be able to effectively facilitate the sharing and clearing of the check images?

Yes, okay, Matt. Let me, again, answer that in the two buckets because both are different. The bucket I was most concerned about was really the smaller players, the regional players. Because they are so dependent upon processors and networks and then us writing the software that links in. And as you might recall, in 2009, I mentioned that repeatedly. That a lot of the deposit automation, even if someone was interested, they didn't have the ability. They could buy the technologies from us or someone else but they couldn't actually get it to run in the fashion they wanted they wanted.

A lot of that infrastructure has been addressed throughout 2009 and will be addressed in 2010. And we see it first in terms of the software that we're asked to write. So for me, you need to have the software written before you can utilize the terminal in a fashion that's advantageous. So, that's where we're seeing activity and giving me good hope that that infrastructure is going to be pretty much complete, with most of the networks here in 2010. Thus, that supports the kind of beginning level of order entry that's giving us some hope kind of going forward.

If I move up to the tier right below maybe the top three, I would say that those folks are prepared. They've done a lot of work, both in the labs in terms of the software of what was being done, as well as the routing of and connectivity into their back office systems. And I have confidence in that, in that these -- you're moving from the lab environment, as I indicated, to now what they're calling pilots. But when you're piloting 75 or over 100 ATM's, you're now feeling like that's the beginning of a rollout. And so, I feel good about that beginning here in the second half of 2010. And I think it also speaks to really 2011 and 2012, with both of those buckets.

Appreciate the color, thanks, Tom.

We'll go next to Paul Coster with JPMorgan.

Yes, thank you. Good morning and thanks for taking my question. Tom, in your prepared remarks, you clearly sound very confident about the full year guidance. But as you signed off, I think you said that you're a little bit more cautious on the near term outlook. Can you clarify that statement? I may have misunderstood it.

Sure, no, I think that's accurate. I think for us, in terms of the full year, in terms of both guidance and revenue, we are confident in terms of what we can deliver. The first quarter revenue was in line with our expectations. So, our expectations were slightly below what was out in the marketplace. And certainly, from a revenue standpoint, when you don't have the sheer volume of some of the major players rolling with deposit automation, that means you have lots and lots of other folks that have to make up that mix to fill that bucket.

And the other thing I would say is, certainly in the US bank market, as I mentioned, the bank branch construction, which has a big impact on our security business, is still very weak. So, we're trying to balance those out, which gives us confidence in what we're going to do. But also, it means that we still have a long way to go here relative both to revenue and earnings performance, as we come through the first quarter.

The other thing is we still do our forecast calls and we're trying to gain confidence again after five quarters of not having a lot of confidence in the forecast calls and say, "Here's what's really going to happen." And have the kind of visibility we would like into the system. So, I would say, we're comfortable with how we've positioned that, given the backdrop that both the United States and other regions of the world. There's still some financial crisis and economic crisis issues that people are working through. Even though, from a general economy standpoint, it feels a whole lot better than it was certainly six and nine months ago.

Thank you. And Brad, I really welcome the disclosure on the orders, which is helpful. But of course, it's relative to last year. How do we interpret it relative to what I believe was a pretty strong order quarter last year? But also, can you give us some sense of the book to bill or some kind of absolute number here?

Certainly, the comparison that you do see that we have provided is versus the prior year quarter. And I would just reinforce the point that, in the fourth quarter of last year, Paul, we did see very significant order improvement, again, versus the previous year's fourth quarter. In excess of 40% in the financial self services. So, it's that combination of a strong fourth quarter, a moderate performance in the first quarter, that ultimately we think positions the Company for a second half decent, overall revenue growth performance.

Can you share the book to bill, by any chance?

No, I don't think we can provide that at this point, Paul.

Okay. Thank you.

We'll go next to Zahid Siddique with Gabelli & Company.

Hi, good morning. I have a couple of questions. First, last week, NCR, your competitor, reported and what they said was that the orders in Asia-Pacific were up roughly 25%. And I think you said, down 25%. And they also said, Europe orders were up 15% and you said down roughly 9% or 10%. I am trying to see where is the disconnect? Do you have a feel? Are you possibly losing share? Do you have a feel why there may be this disconnect?

Yes, I think, first of all, you're comparing apples and oranges, would be the first. And that what we're talking about really is the self service. They're talking about kiosks and entertainment and retail and a whole bunch of other things. So, the real issue that we're talking about is -- and I can explain our issue relative to self service but certainly, can't compare it to something that's kind of amorphous in that regard. From our standpoint, in terms of self service, again, I think the answer is more focused on the fourth quarter. You need to look at our fourth quarter and our first quarter kind of combined because our fourth quarter was so large. I think Asia-Pacific alone was up over 50%. EMEA was up up 20% some or 30%. And the America's regions was up in like fashion.

So, when you combine that with the first quarter, it gives you a little more smoother, kind of alignment comparison. So again, I think we're comfortable with kind of where we're at, given how big the fourth quarter was and how much of our fourth quarter was actually in the first quarter forecast originally, that moved on us. And again, I view that as positive news, even though it makes it a little lumpier when you look at it.

And I think the numbers that NCR gave out and the ones that I shared would be ATM orders. But you're saying it's mainly timing and you're not seeing any sort of shares lost to NCR or other competition?

No, I think when you look at kind of our results or you look at, again the fourth quarter, combined with our first quarter, we're very confident in our position in all those markets.

Okay. And then, my next question is on new products. You have talked about deposit automation. Are there other products that the nationals and regionals could go to next, once -- as this thing ramps up? And so, what's next after deposit automation?

Okay. So, I would say the first issue relative deposit automation, deposit automation is probably still another four or five years from completion. So, there's a lot of work yet to do on deposit automation, all around the world and specifically, in the United States. Because as I mentioned before, really, you have maybe three institutions and maybe a total of 35,000 ATM's in the United States have deposit automation. Our expectation is that somewhere between 50% and 75% of all these bank owned ATM's may have deposit automation over the five year period. So, there's still 100,000 or a very large number that deposit automation is going to impact.

I'd say the second thing would be really the movement in terms of integrated services. And by that, I mean, not every big bank wants everything that we talk about relative to outsourcing. But the ability to monitor, the ability to understand remotely what's happening, those are all key issues, where those are very complex software solutions that I think we're well situated for as we move forward. So I think those would be kind of the immediate areas people are going to be evaluating and looking at. As you roll-out the sophisticated technology, up time becomes that much more important. The reliability is that much more important. And if you have down time, you need to have that minimized and being able to remotely diagnose it or fix it, it's critical. So, everything we've built in kind of what I would call Brazil, relative to those competencies and capabilities, we're bringing to the United States and other parts of the world and think we have world class solutions.

Okay. And lastly, what are you seeing on pricing across your various regions?

Okay. From a pricing standpoint, my general comment would be, it's, I think, fairly stable. I'd break it into two buckets. You've got product and you've got your service and services. The product bucket is more sensitive to pricing than service and services, on a grand scale standpoint. In that, a lot of times, the -- you have a major bank or a significant player in any region of the world. When they go out to order 2,000 or 3,000 or 4,000 ATM's, it is a price competitive situation. And I think we all face that in most regions of the world.

Probably the region that has always been the most price sensitive is the Asia region. You've got the India and Indonesia and other regions there. But I haven't seen any shift or change in that makeup here. And then, I think the good news is, with our strategy, relative to outsourcing and integrated services, as you add and bundle services together, there's less focus on the hardware price and more focus on the total value proposition. Which really again, plays to our capability and our competency. So, that's where we would want to continue to move the market to and that fits certain institutions and we feel good about that.

We'll go next to Gil Luria with Wedbush Securities.

Thanks for taking my question. Could you give us a little bit of a more detailed update on the cost cutting on the $200 million program? Where are we at today? How much do we still have left in 2010, 2011? And you're talking more about reinvesting it. What percentage of the gains that we still have will be reinvested versus flow to the bottom line?

Okay, I'll start on this and Brad can fill in if I miss certain pieces. In essence, Gil, for the year, we had, I think, about $35 million in our sites relevant to Smart Business 200. It has been kind of our perspective all along that probably about 50%, give or take 1% or 2%, in terms of reinvesting versus dropping the savings and I think we're on track for that this year. We feel good about the pipeline of projects we have in place. And we are working both spaces in terms of direct and indirect spend, in terms of what we're what were focused on and taking costs out. When you talk in terms of R&D, I would say the two primary areas we've got focus on have to do with continued development with deposit automation technology and services infrastructure and software. And they kind of go hand in hand. And you may see, Gil, the number would probably be in the neighborhood of $5 million to $7 million through the course of the year in terms of R&D. Is that about right?

$2 million in the first quarter.

So, yes, about $5 million to $7 million, somewhere in that range, $7.5 million in terms of probably increased focus on R&D and those would be kind of the primary areas. It would be software, specifically, EmPower software. The second would be the services infrastructure, of which, the software helps facilitate. And also, monitoring kind of software that goes within the services infrastructure. And then, really deposit automation, the continuing development of those solutions and build out of improvement, in terms of quality and taking costs out of that.

And then, for 2011, how much do you have left?

I think it's $30 million, Gil. Is somebody able to check that or do we know? Okay. It's $30 million.

And that will get you to the 200 overall?

That get us to 200, that's correct.

Great. Thank you.

You're welcome.

We'll go next to Michael Saloio with Sidoti & Company.

Hi, thanks for taking my question. Can you hear me?

Yes, Michael.

Okay. The growth you're seeing in integrated services sounds encouraging, especially internationally. You said you had $100 million base. You added $20 million this quarter. Could you just give us a little more detail about maybe which -- what one of these contracts is worth, like the one you announced in Russia, as far as revenue contributions and margins? And how much of the growth in that business is coming from North America versus international?

Yes, I'll try and answer that in some pieces because I think we can give you some dimension to it. The size of these contracts varies dramatically and it varies by how big the network is, how many units you're talking about. And the other thing here is, when we talk about these contracts, we call them total contract value because, generally speaking, these are three to five year contracts. Most are tending to be toward the five year level.

So, even though you may have a contract value, pick a number, say it's $20 million or it's $10 million, that's spread out over five years. Because the services that we are rendering, we're going to render those for five years. Thus, we recognize the revenue over that period of time. Depending on if they refresh their hardware piece, more of that may come in year one. But we think about it in terms of a five year bucket. Thus, you end up with some of that from every quarter being a backlog and future quarters in the future years. So, that's why we like the business. It's very recurring, it's sticky and it allows us to really help the bank focus on really improving their overall operations and how they run that and solve bigger problems. Rather than getting into a price discussion on the price of two ATM's.

So, most of the business today, in the United States, let me start there, is with smaller institutions. So these are institutions, maybe, with anywhere from three or five ATM's, up to 50 or 100. That's kind of the sweet spot that we're after, relative to this. Outside the United States, they tend to be larger. So, the institutions in Brazil were very large. Some of the ones in India are very large. And probably, the split between that is that we were -- probably began this larger outside the United States, clearly, than we were inside the United States, because this really began to take hold inside the United States over the last two years and almost coincided with some of the issues that the industry was facing. So, I would say, right now, that's getting closer to 50/50 but it's still weighted greater outside the US.

In terms of margins, we report this within the service category. This will help our service margins long-term. Again it's a small piece. So, we've got $1.5 billion in service and services. So, it's going to take awhile to have the kind of impact we want. But again, we think that bodes well for 2011, 2012, 2013, as this starts to build into serious venue. Which is why in the past, when I've commented on a service margin improvement, some of it's productivity on traditional service, some of it is adding services with a little bit higher margin mixed into it.

Okay thanks, that's helpful. And second question, could you just go into a little bit more detail about uses of cash? With over $450 million right now, do you have any plans for debt reduction? And just a little bit more detail on what you mean by "modest share repurchases over the next two years"?

Yes, Michael, I'd just point out again, go back to our priority uses for cash and for our free cash flow, which again, we think this year will exceed $100 million. And certainly, our priorities for that cash is to reinvest back into the business in terms of our capital investment, which is somewhere in the neighborhood of $50 million to $60 million. We certainly are looking at modest, if you will, bolt-on type synergistic acquisitions that can help us grow. We're very focused on then returning monies to our shareholders in the form of our dividend, which is over $70 million a year and then, modest share buybacks.

So, as we look at the environment today, again, we feel confident about the guidance that we have provided but yet, there are still uncertainties out there. And therefore, we're going to continue with the share buyback program but at a modest rate. I can't project what that is but you can see, in the first quarter, we repurchased about 337,000 shares. So, again, that's the priorities and the reason that we're being modest here is because, again, we want to preserve our powder, if you will, for reinvestment back in the business. As well as maintaining a high level of liquidity, given the uncertainties that we have in the marketplace.

Great. Thank you.

(Operator Instructions) We'll go next to Kartik Mehta with Northcoast Research.

Good morning, Tom. I wanted to ask you a little bit about your service margins and your thoughts on how sustainable they are for the rest of the year. Obviously, you had a really good quarter and I'm wondering if this particular percentage is sustainable throughout 2010?

Yes, Kartik, I would say that it is sustainable. First of all, the increase over last year is not sustainable at that level but the absolute number is sustainable. We had some easy comps last year and you had some one time things that hit. So it made the gross margin improvement significant. But I think when you go back and look at the last 16 quarters of service gross margin, you see a steady climb in the right direction here.

A lot of that has to do with productivity, training and kind of the investment we continue to make in that, which we are doing. Some of it has to do with a little bit of influence now in terms of services starting to play a little bit of a role in terms of that mix. But overall, I feel pretty good about our ability to increase, for the third consecutive year, somewhere in the neighborhood of 1 percentage point increase. So, we are confident that, while you won't see a 3% variation compared to quarter over quarter, we think mid 25% is achievable and doable as we move forward in the space.

And then, Tom, I think you said that some business closed sooner than you expected. But then, I think you also said revenue was kind of in line with expectations. And I'm wondering, how you're referring to that or was there a different type of business you expected to close sooner than you thought?

Yes, I think you had a couple of issues in that regard. First of all, when we kind of look at the size of that, that came earlier, it was probably in the neighborhood of -- we probably had $0.04 to $0.05 improvement relative to orders coming in a little bit sooner. When you compare that then, with what happened to us with the devaluation of the currency, I think that number was about $0.04. So, it kind of impacted or kind of offset one another there. But again, from an overall standpoint, feel good about what that meant for the first quarter. Still think we end up with very strong kind of underlying performance and stronger activity levels, which we've said for a couple of quarters now. Then, activity doesn't automatically turn into orders. But the comfort level of that activity now in some of these long lead time discussions leading into something meaningful, we're gaining some strength there, specifically kind of in the US. It gives us good confidence relative to the outlook, both from a revenue and the earnings standpoint this year.

Great, thanks, Tom. I appreciate it.

You're welcome.

This does conclude the question and answer session. At this time, I would like to turn the call back to Mr. John Kristoff for any additional or closing remarks.

Thanks, Jessica. And once again, thank you all for joining us this morning. As always, if you have additional follow-up questions, please feel free to reach out to me.

This does conclude today's conference. We thank you for your participation.