Diebold Nixdorf Inc (DBD) 2010 Q2 法說會逐字稿

Good day, everyone, and welcome to the Diebold, Incorporated, second 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 John Kristoff. Please go ahead, sir.

Thank you, Christine. Good morning, and thank you for joining us for Diebold's second quarter conference call. Joining me today are Tom Swidarski, President and CEO, and Brad Richardson, Executive Vice President and CFO.

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

Finally, 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. As a precaution, please refer to the more detailed risk factors that previously filed with the SEC. Now, with opening remarks, I will turn the call over to Tom.

Thanks, John. Good morning, everyone. As you have seen this morning, we once again delivered solid core operating results during the quarter, despite a market environment that remains challenging. I'm very proud of the continued efforts of our associates around the world. Diebold is successfully maintaining leading market positions and gaining increased traction in others. Our focus on customers is a core competency that will continue to help us prevail in a challenging and competitive marketplace.

I am particularly encouraged by the sustained improvement and profitability we are driving in our services business. Diebold's key value proposition lies in our ability to deliver unmatched service, support and software solutions that surround our security and financial self-service offerings. A perfect example of the value our customers place on these elements can be found in the recent announcement with US Bank. In May we announced our partnership with the bank for our Agilis EmPower ATM software solution, a multi-vendor software application that will run across the bank's expanding ATM network. We developed a custom software solution for the bank built on our cross-vendor Agilis EmPower application. As we roll out this solution to US Bank, we will achieve a milestone, more than 500,000 ATMs around the world will be running Agilis software and cross-vendor framework components.

We announced another key accomplishment earlier this week . The International Quality & Productivity Center awarded us a Call Center Excellence award for deploying innovative call center solutions for rapid response to customer inquiries and service needs. The Call Center Excellence awards honor the individuals and companies whose focus on customer service and efficiency that are setting the standards in their industry. Recognition such as this is not indicative, not only of the investment we are making to raise the bar for our customer service expectations, but also of the ongoing commitment to improve our service capabilities. Our strategy to expand our Company's skill set in software and services is having a real impact on our business.

Our customers recognition of the value we are adding in this area and our ability to continually improve our operational efficiency is enabling us to achieve sustained profitability improvement in our services business. As a result, we once again increased our service gross margin during the second quarter. In addition, a more positive global product mix, particularly in the United States, resulted in notably higher product gross margin during the quarter. This profitability improvement came despite lower than expected revenue in our financial self-service business, which was driven primarily by weak performance in our EMEA operations and the declining euro.

For the full year we are reaffirming our outlook. The additional Brazil elections business, strong July orders in Asia and EMEA, and improved outlook in North America give us further confidence in the second half of the year. Finally, our net debt position improved by nearly $50 million from June 30, 2009, and I expect we will continue to gain ground on working capital improvements throughout the year.

Now look at the performance during the quarter and the market environment in the geographic regions. In North America revenue declined 11% during the quarter, as a completion of large deposit automation deployments by major national banks created a very challenging year-over-year comparison. Despite the dropoff in the deposit automation related activity, orders held steady with the prior year period as we experienced order growth in the regional bank space. I mention the during the first quarter call that we experienced the highest order entry activity we have had in the regional bank space in five quarters. We are encouraged that this activity continued in the second quarter. However, it is important to note that we had relatively easy comparisons based on a very weak prior year, and we are now just entering the beginning stages of recovery. We anticipate demand in this segment will continue to grow, but at a measured pace.

The shift in mix in this segment clearly had a positive impact on our product gross margin during the quarter. Looking to the second half of the year we expect product revenue mix in North America to be slightly less favorable, as we anticipate increased activity within the large national account segment. We are also seeing some increased demand for deposit automation in the regional bank and credit union space. Excluding the effect by active activity of the three largest US banks, shipment of deposition-automation equipped ATMs more than doubled during the second quarter. As interest in deposit automation builds within the regional bank space over the next several years, we believe we have unique solution that put us in a superior competitive position with those customers. Our technology offers unparalleled flexibility, including bulk note, bulk check, single note, single check or a combination there of as a variety of competitive price points. No other come competitor offers this level of flexibility.

In addition we have the largest most responsive and experienced direct service and sales infrastructure support in the industry. And through our integrated services business model we offer complete outsourcing solutions. This provides smaller financial institutions an avenue to quickly convert their ATM fleets for deposit automation without a large capital outlay. As an example during the quarter, we announced that Bellco, one are the nation's largest credit unions, chose Diebold for a comprehensive ATM outsourcing solution. This includes the implementation of 50 advanced deposit automation terminals across its fleet of 65 ATMs. Our partnership with Bellco provides them with a single point of contact for their ATM delivery channel, allowing the credit union to reduce costs, improve efficiencies, and more importantly, attract new members.

Finally, in regard to financial reform legislation, it is too early to determine what effect it will have on purchasing decisions, based on our recent conversation with many customers. We will, however, continue to closely monitor the situation as it evolves, but do not anticipate any impact on our 2010 business.

Let's now look at our security business. While our outlook in the macro environment remains mostly unchanged, especially as it relates to bank branch construction in North America, we have seen encouraging signs within the enterprise security space. We won a number of solid enterprise security projects during the quarter. Orders for security are up 7% from last year. Driven by substantial increases from segments outside of traditional branch security.

Recently I took the opportunity to meet with our enterprise security team, which is headquartered in White Plain, New York. In March of this year we consolidated sales and operational teams in this space to better address all government, commercial and retail sales opportunities. This reconstruction was designed not only to drive efficiency improvements, but also generate synergies and accelerator ability to spawn new orders for our security solutions. I believe we have the right leadership and focus to significantly grow this business.

An important recent win was the contract to provide a comprehensive security system for the new North American headquarters of a major global financial institution based in Europe. I visited this state of the art facility, and customer feedback about the capabilities of our security team was universally favorable. Until now we have not been a provider of ATMs to this institution, but the success of our security installation has built new relationships that we believe can be leveraged in ways that benefit other segments of Diebold's business. This exemplifies the synergies and opportunities that exist in our business. Looking ahead, we feel that enterprise security and other growth initiatives we have outside of the traditional branch space in select markets in the US and abroad will help us generate 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. From an order perspective we dropped 11% against a difficult comparison to the second quarter 2009, when orders increased in excess of 50%. These variations in seasonal order entry are not unusual in this region and not indicative of any trend. In fact, revenue in Asia grew 8% during the quarter, in line with our expectations, driven primarily by service growth in China and continued increases in both product and service revenue in India. Given the significant order strength in the region in July, we are confident in our outlook for the second half in Asia. As a result we expect single digit full year revenue growth in the region, coming off very strong performance in 2009.

In EMEA I'm disappointed in our financial performance during the second quarter. The makeup of our footprint in EMEA, with relatively high exposure to the weak Eastern European market, continues to present challenges to our growth strategy in the region. We are, however, experiencing success in certain area of the region and anticipate revenue growth in EMEA to accelerate in the second half of the year, particularly the fourth quarter.

We expect areas such as Turkey, Spain, Italy and the Middle East to generate significantly higher second half revenue. For example, we recently won an order for more than 500 ATMs from the world's largest global financial institutions located in the region. The entire order is expected to be installed and the revenue recognized by the end of the year. This is an account where we historically had no presence, and this win represents the progress we are making in improving our competitive position in key areas of EMEA. So while we are encouraged by the results we are seeing in some pockets of the region, much work remains in EMEA for Diebold to be positioned as strongly as it is in other regions of the world.

In Latin America, business remains strong, with orders up 29% and revenue up 13% during the quarter. As we disclosed during the quarter, we were awarded an order for an additional 30,000 voting terminals in Brazil, which will revenue in the third quarter. This brings the total number of machines that will be delivered in 2010 to 195,000. We are planning our production schedules and are on track to complete the order as planned. While the Brazil election business clearly had a positive impact on our order entry during the period, business in Latin America remains brisk. Excluding the Brazil elections contract, orders grew nearly 20% in the region.

Our strong leadership position in Latin America, particularly in Brazil, puts us in a prime position to capitalize on growth in the coming years as banks in the region begin to deploy deposit automation. During the quarter I traveled to Brazil to visit our operations and meet with several key customers. I met with the CEO and senior management team of Bradesco, Brazil's second largest bank. We have more than 70% of their [installed base]. They shared with their experience of extensive deployment palm vein biometrics throughout their ATM network. With nearly half their network of 38,000 ATMs now equipped with biometrics, this represents perhaps the largest use of biometrics for financial self-service anywhere in the world. Diebold played a key role in implementing this technology, and I'm pleased to report the project has gone extremely well.

I was also able to meet with top executives of TecBan, a shared ATM network that during the last three years increasingly turned to Diebold for their solutions. Today our products constitute about half of their network. I spent time with other industry leaders as well. These conversations provided strong confirmation that our Brazilian team has developed an enviable competitive position through unmatched development and engineering capabilities, as well as industry's largest nationwide service infrastructure. We will continue to build on our leadership position in Brazil based upon the competencies we developed over the past two decades in design, engineering, software and services.

Brad will be providing an indepth update on the financial remediation effort, but I wanted to comment on the voluntary disclosure we made in the earnings release regarding FCPA compliance. While our findings reveal we still have work to do in strengthening our financial controls, our decision to make this disclosure demonstrates the commitment to be open, transparent and accountable in everything we do. We have raised the bar significantly in terms of our financial reporting standards, and I'm confident we are putting the right pieces in place to compete our financial remediation plan.

In closing, we are where we thought we would be at this point of the year in terms of overall financial performance and operational results. The additional visibility we have gained gives us increased confidence in reaffirming our outlook for the full year. Moving forward, we will continue to direct all our energy and focus toward the essential work of transforming Diebold into a more competitive enterprise that creates maximum value for all our stake holders. Simultaneously we will maintain focus on implementing and sustaining effective financial controls within our global processes. Our focus is on the future, and I'm certain we will reach your objectives. With that I will now turn the call over to

Thank you very much, Tom, and good morning, everyone. There are a number of key topics I would like to discuss this morning. First I will comment on our revenue picture for the quarter and full year, and then discuss our strong gross margin performance. I will speak to our working capital and balance sheet, and then walk you through the details behind our guidance assumptions for the remainder of 2010. Finally, I will discuss our financial control environment, including the voluntary disclosure in our release this morning regarding FCPA compliance.

Let's turn to our financial results. I'd like to refer to slide 12, which focuses on second quarter revenue. Total revenue was $665 million, down 4% from the second quarter of 2009 or 7% on a constant currency basis. For the quarter, product revenue dropped 8%, primarily in North America and EMEA. In North America the completion of large financial self-service deployments by major national banks created a very challenging comparison. In EMEA, a large-scale branch transformation project in Belgium in the prior year period also created a tough comparison.

Service revenue was essentially flat, with performance in international markets, particularly Asia Pacific, offsetting a reduction in installation revenue as a result of lower product sales in North America. Looking at our financial self-service business, on Slide 13, second quarter revenue was $469 million, down 12% from the second quarter 2009. This decrease was mostly attributable to the drop in product revenue in North America and EMEA.

In the security business, on slide 14, second quarter revenue decreased $3 million or 2% from the same period in the previous year. This decrease was due primarily to continued weakness in the US financial market, especially in the segment of our business which relies heavily on new bank branch construction, which continues in the range of approximately 1,500 new branches a year, down from a peak of nearly 4,500 in 2007. However, as Tom mentioned, we are encouraged by opportunities in the enterprise security space.

Looking at slide 15, the total gross margin for the second quarter increased 2 percentage point from the second quarter 2009. The increase was primarily due to improved profitability in the Company's service operations. Product gross margin for the quarter was up 1.2 percentage points due to more favorable segment mix than the prior period. In service, gross margin grew 2.5 percentage points during the second quarter, primarily due to continued improvement in product reliability and productivity. In addition, we benefited from a vehicle fleet rebate and some other items during the quarter that resulted in a higher than normal service gross margin. For the full year, we expect the service gross margin to be around 26%.

Moving now to non-GAAP operating expense. As is highlighted on slide 16,in 2Q 2010 operating expense as a percentage of revenue increased 1.3 percentage points from the comparable period of 2009, largely due to the drop in revenue. Operating expense in the second quarter increased $3.9 million from the prior period. However, excluding the impact of currency, operating expense was relatively flat. For the full year, we expect operating expense to be in the mid-17% range.

Now turning to slide 17. Non-GAAP operating margin in the second quarter 2010 was up 70 basis point compared with the second quarter of 2009. This is the highest quarterly operating margin we have reported since the financial downturn began and is indicative of our ongoing efforts to reduce cost, increase productivity and pursue profitable revenue growth.

Turning to the EPS reconciliation table on slide 18,GAAP EPS from continuing operations in the second quarter 2010 was $0.46 per share, compared with $0.48 per share in the second quarter 2009. Excluding restructuring, impairment charges and nonroutine income, our second quarter non-GAAP EPS was $0.52 per share, compared with $0.51 per share in the second quarter of 2009. Our non-GAAP tax rate in the second quarter of 2010 was 28.8%. For 2010, we still expect the full year non-GAAP 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 flow in the second quarter of 2010 was $23.6 million, compared with free cash flow of $50.7 million in the second quarter of 2009. Free cash flow in the second quarter includes the effect of the $25 million payment to the SEC and more than $60 million in temporary working capital associated with the Brazil voting business. Given the normal back end loading nature of our cash flow, we are targeting free cash flow for the full year of roughly $150 million.

Looking at slide 20 and 21 on working capital metrics. Our balance sheet remains strong, and I'm pleased with the year-over-year working capital improvements we made during the quarter. Days sales outstanding improved to 48 days, while inventory in -- turns modestly by 1.1 turns. We anticipate continued improvement in our working capital metrics for the remainder of the year, particularly inventory turns as we complete our Brazil election rollout.

Turning next to liquidity and net debt on slide 22. Net debt at June 30, 2010, was $194.1 million, a decrease of $46.9 million from June 30, 2009. Our net debt to capital ratio was 16% at June 30, 2010, compared to 19% at June 30, 2009. The strength of our balance sheet gives us the flexibility to reinvest as well as return moneys to our shareholders in the form of dividends and share buyback.

In regards to repurchasing our shares, I mentioned during our first quarter call we continue to believe our shares are an excellent value and will take a measured approach to our repurchase program. You will see that during the quarter we prepurchased 310,000 shares for a year-to-date total of 647,000 shares repurchased for approximately $20 million. There are 2.3 million shares remaining on our existing Board authorization.

Next, turning to our full year outlook on slide 23, as Tom mentioned in his remarks, we are reaffirming our outlook. As you can see, we have narrowed our revenue guidance range to 5% to 8% growth as we have gained additional confidence in the balance of the year while also receiving the additional Brazil election systems order. The center of our revenue guidance range implies third and fourth quarter revenue in the neighborhood of $800 million per quarter. I'm comfortable that we have the orders and backlog to support our significant revenue growth expectations for the second half of the year.

From an EPS perspective we are on track with our previous expectations. We have raised the bottom of our range by $0.05, which reflects our increased confidence in the business and the additional Brazil elections systems order.

Now I would like to address our financial control environment and remediation efforts remediation efforts on slide 24. As you are aware, the Company has been working for some time to remediate material weaknesses that resulted from the extensive internal accounting review, which began in 2007. By the time I joined Diebold in November, five of six material weaknesses that had been identified at that point had been either fully remediated or in the process of validation for remediation. A tremendous amount of time and effort went into this process, and we've made significant progress in improving our financial control environment.

However, we still have a good deal of work in front of us to reach the best-in-class standards for financial controls that we set for ourselves. Earlier this year, we reported a new material weakness related to our income tax control deficiencies that resulted in errors requiring out-of-period adjustments in our 2009 tax provision. Our tax teams have taken significant steps to improve our processes, and we anticipate this area will be fully remediated by the end of this year.

The other material weakness we are still working on to remediate is in the area of accounting policies. To fully remediate this issue, we must strengthen our control procedures related to the application of the revenue recognition policy to multiple element arrangements, which involve contracts with bundled product and service components. This is a highly complex issue that involves a good deal of time-consuming tedious work across multiple geographies. However, we are confident this area will be fully remediated by the end of this year. We will continue to communicate our progress to you and disclose any key updates in a timely manner.

You will also note that our press release this morning includes a voluntary disclosure regarding the Foreign Corrupt Practices Act. As many of you are aware, FCPA compliance is an important issue facing all multinational companies. During recent due diligence efforts in connection with a possible acquisition in Russia, we observed some payments and transactions relating to our Russian subsidiary that we feel may raise FCPA issues. Particularly the books and records provision of this act. Our current assessment indicates that the activities in question, which occurred primarily between 2005 to 2008, do not materially impact or alter the Company's financial statements.

We also voluntarily contacted the US federal agencies with responsibility for looking into FCPA matters, the Department of Justice and the Securities and Exchange Commission. We will provide all of the relevant facts to these agencies, and we will cooperate fully with them in any review. We take seriously the government's many pronouncements encouraging companies to self-report any potential issues regarding the FCPA , and that is exactly what we have done here. We view this as the continuation of our commitment to transparency and full disclosure after the conclusion of our recent settlement of the long standing inquiry with the SEC.

In this spirit, we are taking a look at our global FCPA compliance and will continue to enhance and strengthen our FCPA compliance programs. As we face the challenges presented to us in 2010, we will continue to embrace the highest principles of values and ethics in our relentless effort in sustaining a sound financial control environment.

In conclusion, I am pleased with the progress we have made in rebuilding our operating margins. We remain focused on tight control over expenses and continue to leverage our SB 200 cost savings initiative. I'm very confident with our ability to deliver revenue growth in the back half of the year, given the strength we have seen recently in our order book.

Finally, communicating difficult issues, such as those we are working through in terms of our financial control environment, is not easy. However, I am very comfortable and proud to say that we are doing the right things to not only address our current material weaknesses but to elevate our financial control environment to best-in-class levels. And I have the utmost confidence in the people we have in place managing this process. I remain personally committed to maintaining the highest levels of transparency with all of our stakeholders. Based on the progress we have made to date and our expectations for the rest of the year, I feel confident that we continue to move in the right direction. Now, I will turn it back to

Thanks, Brad. Christine, we will now open the call up for questions.

(Operator Instructions). We do ask that you please limit yourself to one question and one follow-up, and then if you have any additional questions please re-enter the queue. (Operator Instructions). Our first question comes from Kartik Mehta from Northcoast Research. Your line is open.

Thank you. Good morning, Tom and Brad. I wanted to ask you a question, Tom, you said regional bank spend in the US is increasing. I know the last year the market was probably down significantly. If you compared 2010 to 2009, what kind of market increase would you anticipate this year out of the regional and community banks?

Kartik, are you talking about total revenue comparison, or orders?

Yes, I guess I meant revenues. I guess I'm trying to relate it to how the overall market looks, and I'm assuming the overall market should be similar to what you would witness.

So I think as we take kind of in its entirety you have two factors playing out here. One is Security. What is happening with security in the regional bank space. And the other is self-service. So on the security side we are still challenged in the regional bank space with branch builds dropping from 4,500 level to 1,500. We are expecting that to continue so as such the first part of 2009 had some benefit still built in from the security side of the business. And really this year I think the expectations are that is going to be kind of at a constant level of 1,500 going forward.

Self-service is a stronger story, and we are starting to see, as I mentioned, deposit automation activity. The first and the second quarter both significantly improved from last year both in terms of revenue and in terms of orders, but again they were relatively weak last year as a result of what happened with the financial reform and assessments that people received in February. So it is encouraging. And certainly the order entry is encouraging at the regional space compared to quarter over quarter, and as I said our first quarter was the highest it had been in five or six quarters, and this quarter continued. But gain it is early stages. I think measured kind of improvement here, and we expect this deposit automation trend to continue. But I think it as long-term moving train, and again I think we are cautiously optimistic that we are starting to see some real signs of life here in the regional space.

And then just a second question, Tom. Your EPS guidance for 2010. Why not raise the high end considering you just received the extra Brazilian election order? Is there something else that is happening in a couple of the other businesses that just are -- as a reason for not increasing the high end?

No, I think, Kartik, from our standpoint, it is kind of a measured view of where we are at. We certainly have some signs of optimism. By the tame same token you still have a lot of headwinds in terms of banks that are still closing in the United States. The financial crisis that has hit, the financial reform that is out there, again, creates a little more uncertainty when we thought there was going to be more clarity here. And those certainly impact us.

As we look forward in terms of North America and the other regions, while you see optimism happening in the regional bank space here in the US, you have the three major players where you won't be seeing activity. And then you have for us EMEA , which is -- while we were happy to get some of the order we did in July, EMEA is an area where kind of across-the-board we still have a long way to go to get the competitive position we are in and enjoy in Latin America, Brazil and the Americas. I think with that all weighed together we are feeling like it is not appropriate at this

Thanks, Tom, I appreciate it.

You're welcome.

Our next question comes from Reik Read with Robert Baird & Company. Your line is open.

Good morning. Could you guys just talk a little bit on the service margin side of things. Brad, as part of your comments you talked about 26% for the year. Now, that you are at that level, do you think getting back to the 2002 levels of 28%, 29% is doable? And can you talk a little bit about how the expansion of the international markets, particularly China and India, might impact that, and then also the integrated services component of that?

Reich, I will start with that, and then maybe Brad can fill in certain aspects. But certainly for us, when I think of service and services, it is kind of the key strategic battleground or platform that we differentiate ourselves on. So the progress we are seeing we are encouraged by it. If you go back a few years, we were at the 18% or 19% level. And now coming into the year our expectations were in the 25% range, and now we think we could really achieve 26%. The second quarter had some unusual benefit in it, so I think the number is above 27%, but we don't expect that to be the real run rate. The real run rate is closer to the 26% level. So the improvement is measured. It is part productivity improvement, part cost out, part a stable pricing environment, and all those variables have to remain intact. So we see continued improvement there.

Mixing in integrated services, and again we have got the beginning stages of success there, helps that. But I can't see 28% right now. But I certainly would think, as we reset new goals and think about 2011, 2012 and 2013, my expectation is we are going to achieve near 26% this year, and we are going to be pointing toward 27% over the next 18 months after that. But I want to make sure we hit 26% this year. That would be a market improvement over the past several years. And again, as the integrated services ramps up, it gives me expectations that we in fact can continue to walk this up, and it helps certainly offset the fluctuations you have in product gross margin.

So for us it is the quality of earnings, it is the stability of the recurring revenue, and we are going to make sure that the business we take there is accretive. So there are cases when you look at certain contracts or certain environments where we have walked away. But I think overall we are real happy with both the revenue side of the picture on service and services as well as the margin side.

Tom, I will just add one more point which is part of Reich's question, which again I think you gave -- your question, Reich, was also how the international mix might impact this, and certainly that has been another enabler, if you will, because of the quality of our international service business. As that continues to expand that also gives us the additional ability to grow our overall service gross margin over time.

Does it have a near-term impact, Brad, one way or the other? Or is that just slow and steady, and it just increases over time?

I would absolutely kind of leave you with the impression, which I think Tom did too, of slow and steady over time.

And then could you guys maybe just comment on the international opportunities out there? I mean China has historically not used much of a national service presence. They seem to be more concerned about uptimes. Can you talk about what that may be leading to you guys in terms of growth opportunities?

Yes, certainly. And it clearly differs by region of the world, but certainly you picked a big country in terms of China where our service presence or presence of the OEMs is much lower than it is in most other developed countries. Again, I see that long-term as opportunity, short-term as those are not big opportunities here in the short-term, but that is a low ship that is going to turn over time, which I think puts it squarely in our sweet spot, that we think we have got opportunities there. But in that case I view that as much more demand creation than it is in other parts of the world.

So China is, with the install base that is growing there, will provide huge opportunity relative to service, but it is very small right now and small comps. That is why your percentages can be exciting, but really it is still a very, very small base. We are working hard there, Thailand, India, Indonesia, all those growing countries, because we do think long term they will end up with a model that is much closer aligned to North America and Western Europe, where they are looking for the most efficient, most effective way to get there. Right now they use brute force of internal manpower to do it. I see that changing, but that is a long haul change.

Okay. Thanks, guys.

Thanks, Reik.

And our next question is from Matt Summerville with KeyBanc. Your line is open.

Good morning. A couple of questions. First, Tom, can you maybe comment on the magnitude of order growth you have seen in July and what the year-over-year comparison looked like? I guess I'm trying to get a sense for kind of what has really changed outside of North America. It sounded like EMEA and Asia-Pac driving that in the last 30 days.

Yes, a couple of things. One is a lot of it has to just do with timing and when they occur. So something occurs the first part of July could have been in June and all of a sudden the picture looks different in the quarter. In the EMEA case there were a couple of small orders and a major order that just happened in July. I also attribute that some what to the fact that in August there is going be no activity in the EMEA region, or a lot of Europe doesn't really have their heads down in August.

In Asia's case, it was expectations. We had known the second half of the year really was -- or Asia was going to go back to more historic seasonality, and so we were just happy that we got this confirmation here in July rather than further out. And again it gives us -- both of those give us confidence relative to both the revenue and the EPS guidance for the remainder of the year. But I think EMEA was much more timing in terms of June, decisions happening in July, and Asia Pacific was much more second half of the year decisions that came early in the second half, which bode well for us.

Sticking with Asia, you were flat in the first quarter, up 8% in the second quarter. Still talking about single digit growth this year against low single digit growth in '09. How does that kind of reconcile with this strength you are seeing in the back half of the year there, I guess? Why isn't the outlook for Asia more robust than single digit?

I think some of that has to do with certain contracts that occurred last year that certain institutions won't be ordering this year. So for us, the comps going to continue to get tougher as we go forward. But based on the opportunities we see out there, and how we think we are positioned there, we think, again, the second half is going to bode well and being up single digits is going to be solid performance there for us this year.

Again, because we don't have the large service recurring revenue base there like we do in maybe North America, it becomes much more of a product focus type of revenue game, and in that case you are depending on who is letting out what orders. You have got much more lumpy kind of is scenario. But again, I think we are satisfied with our outlook here with Asia for the remainder of the year, and as we get positively surprised that would be great, but we are pretty confident in what we can deliver.

Then just one more question, and I will get back in queue. With regards to, Tom, I think you mentioned it a moment ago and Brad mentioned it in his prepared remarks. Kind of an unusual one time -- whatever the right term is -- benefit you saw in the service business in the quarter. How much was that in dollars would you say?

Matt, let me respond to that. I mean roughly we saw about a percentage point benefit in our service margin from fleet rebates as well as some other items. So a percent would equate to a little over $3 million.

Thanks, Brad.

And our next question comes from Paul Coster with JPMorgan. Your line it open.

Thank you for taking my question. Tom, in your prepared remarks you said in the second half of the year your margins will probably come down a little bit owing to a shift towards sales, international accounts. How do we -- First of all, have I got that right? And secondly, does -- how does that reconcile with the fact that the national accounts seem to have largely played out?

So a couple of things there. The product margins, certainly in the first half of the year, the second quarter, were impacted a lot by the regional bank activity here in the US. Part of the issue in terms of product margins, the second half of the year in the US we will have, besides the big three, there are a lot of other large strategic accounts here in the US. There is going to be activity in those that impact kind of our outlook for margins. And then secondly the international ones, based on the orders that we have taken in July, we're pretty clear in terms of that the margins will be low what we enjoyed here in the second quarter. I think we have got pretty good visibility in terms of the impact relative to those product gross margins, both in the US and also the international orders that we have coming.

Got it. Okay. And then the enterprise security businesses is a bit opaque to many of us. Can you just give us a little bit of a sense of the size of the deals, how long it takes to land a deal, what the duration of the contract is, and any other color that you think will kind of help us kind of get a grasp on this business?

Sure. The way I would -- maybe first let me describe enterprise security so everyone has a similar understanding. Historically, Diebold did a lot of security business in small retail outlets like bank branches and other things that look like bank branches. And monitored those, and we put in physical and electronic security into those type of environments. We made an acquisition several years ago where we wanted to take our capabilities to what I would call a much more critical infrastructure type facilities, and whether that be high rise buildings in New York City or port authorities and water treatment facilities. But it is a much more sophisticated type of security capability that needs to be delivered.

So as such, when we talked about reorganizing our security group outside the bank space, we basically said for government, retail and this commercial critical infrastructure group we have a sales organization and we have design infrastructure piece there. And that is helping us in that regard. Many of these are large orders. The one I referred to in terms of the European bank that built a headquarter here in the US, these are $3 million, $4 million, $5 million type of projects. That would include 30 or 40 or potentially 50 floors of security type of capabilities designing it, and then putting a monitoring center right in the facility.

This one is sophisticated enough that when you put your access control -- so you have badge to get into different floors -- it also points you to certain elevators. Writing the software and tying all that together, each of these is unique, but the skill set of project management, of implementation fits into our capability in the acquisition we made relative to this organization three or four years ago. We are much better able to integrate those.

So we have opportunities to win significant contracts from the tune of $5 million to $10 million. You compete against a different set of players than we historically have in the securities space. It has taken us a few years to kind of get ourself grounded there, but much like when we won the United States Postal Service contract, I think we have on the horizon the ability to win significant multi-year contracts in the $5 million, $10 million, $15 million range going forward.

In terms of how long it takes these, because of the size of the contracts, they can be six month type of RFP processes. They are very technical in nature. But also then the revenue stream will be spread out over probably 24 months, or in some cases some of these facilities take two or three years to build. So it bodes well for us in terms of building that competency.

The other thing is we are taking that then back to the financial sector where we know all the banks. And now we look at their operation centers, we look at their high rise main office facilities. It gives us an opportunity to take that back to banks and put ourselves in a different stead from a security standpoint that helps us on the IT side, and helps them logical security as well as physical and electronics as we have been doing previously. So it is a good story. It is just beginning to unfold for us and timing is very good given our outlook relative to the branch construction quote business and the electronic security tied to branches in the US.

Thank you that was helpful. I have got one last question. Regarding the Brazil electoral systems business. Is there any chance of seeing any follow-on business next year, or do you feel like it kind of comes to a conclusion?

On the last call I was indicating there was some expectation that we would see some additional business in 2011. The order that they recently placed in 2010, I was a little bit surprised by that. Our expectation was that was going happen next year. And while it may not completely come to a close, because they still can order an additional 30,000 or 40,000 units from the original RFP, the comparison will be much larger now in terms of what we deliver this year in terms of revenue as in terms of next year. While we don't have any confirmation of that, the fact this they ordered this year takes a lot of what we thought could happen in 2011 off the table. So we will be working with them closely. And this is no guarantee on this, but certainly the gap will be much larger than maybe we anticipated on the last call.

Okay. Thank you.

Yes.

And our next question comes from Gil Luria with Wedbush Securities. Your line is open.

Thank you. First, just to wrap up that point. So if this year195,000 units, $130 million, by most estimates about $0.30 a share this year, what you are saying is that next year, at most it will be a quarter of that size just because of what is left on the order?

Yes, Gil, I think that is excellent math. And again, while there is no guarantee in terms of them ordering the additional units, our thought was originally there it would be a lot more revenue opportunity. Now we are thinking the revenue might be in the neighborhood of $25 million to $30 million next year. So a big difference from Q1, or from our last call.

Great, thank you. Then in terms of operating expenses, in our presentation is says that year-to-date operating expenses are flat excluding currency. Does that mean that we are no longer getting gains from Smart Business, or does that mean that we are taking all those gains and reinvesting them in the business?

Gil, I was just going to respond to that. Certainly I would just remind you, some of the SB 200 does come through the operating expense line, but also the majority of it comes through the cost of goods sold line. So just kind of remind you on that. I think you are right from the standpoint of the reinvestment, and we signaled -- and certainly it was covered on the slides, but we also had signaled that part of the savings that we have had from some of the reduction in force activity is being reinvested back into our R&D activity.

I think also on the slides, when you look at it, Gil, you will see that our expectation at the second half of the year is that the percentage changes dramatically. I think for the full year talking in the neighborhood of 17.5% so.

Right, with the added revenue. I mean certainly we will be in the low 16% OpEx as a percent of revenue in the second half, but giving us the mid-17.5% for the full year as Tom just mentioned.

Got it. And then just on the -- to ask another question a little differently about the US regional banks and the US market. Could you give us the cut of year-to-year expectations for the year for just for the financial self-service business just in the US? Are the US regional -- is the new pickup in US regional bank activity enough to offset the business that you had last year from the larger banks?

Okay, so your question is with the large banks slowing down, are the regionals able to kind of fill that bucket, is that in essence it?

Yes, just a year-over-year revenue comparison financial self-services in the US, 2010 versus 2009.

Okay, at the regional space?

Total US.

So in essence from the total we will probably be down slightly from a revenue standpoint year-over-year, which I think when you mix it all together, suggests that the regional bank performance is going to be pretty strong, and we have experienced that the first half of the year both in terms of revenue and in terms of orders. And we expect that to continue into the second half, but not completely offset the large three in terms of revenue. But certainly the flip side of that story is, that is a good story on the regional side plus see the benefit from the margin expansion.

Got it. Thank you.

And your next question comes from Michael Saloio with Sidoti & Company. Your line is open.

Hi, thanks for taking my question. Tom, I was wondering if you could quantify a little bit about the type of growth you possibly saw in integrated services in the quarter? I think last quarter you mentioned that you had added about $20 million in revenue to the $100 million you had in remaining contract value, if I'm understanding that correctly. Could you give us an update there?

Yes, I would say that, again, I'm pretty pleased to report that we saw similar growth in this quarter as well. And that the level of activity that is occurring relative to integrated services is nice. It is complementary to what is happening in deposit automation. I would expect that trend to continue on a regular basis and possibly begin to ramp up as more of the smaller institutions get involved in integrated services or look at PCI compliance and security issues. That kind of leads them right to an integrated solutions offering. So for this quarter, it is very much like it was in Q1.

Okay. And secondly, still seeing good order growth in Latin America, even excluding Brazilian elections. Could you give us a sense of how margins are holding up? In particular, in Brazil with some of the increased competition you are seeing there now?

Yes, I think the -- our margins are the same in Brazil as they have been historically. As I mentioned, I mean you can pick most customers, but because of kind of our large relationship there and the unique capabilities of what banks are looking for I mentioned the palm vein simply because no one else in the world was able to kind of accommodate that. So we worked with them, developed that, and they will deploy that across their whole network. So it is that uniqueness that allows us to maintain I think a pretty solid competitive position relative to the Brazilian competitors and others that are in market as well.

Thanks.

Our next question comes from Reich Reed with Robert Baird & Company. Your line is open.

Just a quick point of clarification on Asia. When you were talking about single digit growth, was that for the year or for the back half of the year?

No, that is for the full year.

Okay. And then if I could just go back and follow-up on the integrated services. Can you tell us what the remaining total contract value is for all of the integrated services at this point?

I'm not sure I have that right in -- maybe we take that offline, so we get that correct. The way we do that in terms of total contract value, and most of these are five years contracts. In essence you will see about 40% of the revenue year one, so I would have to go back and look at the previous years to make sure I'm giving you the information correctly. But in essence, if every contract is spread over five years, you get 40% in year one, then you are looking at the remainder from a services standpoint over the subsequent years. So kind of to your point, as we move into this business, it gives us more and more recurring revenue in outlying years, and at some point starts becoming a meaningful number. We are still at the early stage there's, but I don't think I have an exact number to kind of --

I can follow up, Tom.

Okay.

A follow-up off of that. I mean you have got this nice set of offerings that you created, and you pretty much talked about that being focus the on a lot of the smaller banks. Are you finding any larger banks are interested in a portion or all of those offerings?

Yes, I'm I guess more than pleasantly surprised in that regard in that the -- in essence, we have built in through Brazil and through our efforts in development in the US and deploying this, that basically the infrastructure that we are building, the ability to manage, operate, comply, security, all the aspects of managing a complex network and being able to take cost out, we have had more than a few of the very largest banks in the world taking a look at this. And I wouldn't be surprised in the next six, nine months that several want to actually begin thinking about deploying some of the aspects of this.

So again, it is surprising in that regard that that wasn't intent, but we are happy with the robustness of the solution when they compare it to everything else in the marketplace. By the same token that infrastructure is what we are using for all of the folks that we would manage their network for them. So it would cause us to rethink whether we can manage every network, because every bank doesn't want that. But a our goal was to manage it from a services standpoint. We may find ourselves creating some product out of this that we sell and let people utilize themselves. We are working our way through that, but it's as a result of interest expressed.

So that is not necessarily a real near-term opportunity, but the trend is that in 2011 you will probably see more of that than you otherwise might?

Yes, I think that is right.

Great, thank you.

Our last question comes from Matt Summerville from KeyBanc. Your line it open.

Just a follow-up question on your -- just your ATM strategy in Europe. You are obviously a distant third player. You have a strong presence in France, Italy, Belgium, maybe some other area. You recently kind of withdrew a more direct presence from Germany. I'm not sure how the FCPA thing changes your strategy with regards to how you build out Russia. But as you think about Europe longer term, do you re-engage some of the tier 1 markets like Germany and the UK where you don't have a big presence right now? And I guess kind of going forward, how does this change your strategy with Russia, if at all?

Okay, so I think, Matt, we absolutely re-engage in certain select markets where we think we have offerings that can differentiate us. Some of those offerings are more services oriented than they are kind of the product. You mentioned some of the countries. Some additional ones like Turkey and parts of Africa and the Middle East are critical ones. So we got have solid presence in certain area. Spain we have a presence; we don't have enough of a presence. So Spain is an area that is strategically important, because those banks influence Latin America, and those banks are ones we engage with through Latin America, but don't do a lot of business in Spain. We expect to change that in the coming years.

UK is certainly a target country for us to gain traction in and move in there. Again, I don't view moving in there in terms of trying to give them a cheaper ATM, because they have ATM suppliers. I look at unique things we can do either on the software side or some combination of managing a network to solve a problem that no one else has been able to solve there. So we are going to approach each of those slightly differently. But we have -- we are going to be up in revenue in Europe this year, and we will do $450 million, so we do have a solid presence, it is just certain markets we don't have the infrastructure there yet, but we will be building that over time. So, yes, we are investing in EMEA.

As far as Russia and Eastern Europe, we will continue to work our way through the issues there, but first and foremost we have to address kind of the issue on the table and make sure that we have got the controls in place there. And short term, that does impact us. I mean, there is no question about it. We are retrenching. We are looking at the leadership team there. We are looking how that is organized and whether structurally we need to do something different. So I expect that impacts us in Eastern European region here in the short-term, but it is the right thing to do for the long-term health of both the Company and sending the right signal to how we operate around the world. If someone does something that is inappropriate or accidentally, it doesn't matter. We are going to up front address this and, regards to the business implications, deal with it. I'm confident we can deliver our results despite what we are going to be faced with in Russia and the other uncertainties we have kind of around the world.

Appreciate the perspective. Thanks, Tom.

Yes.

And now I turn the ball back to Mr. John Kristoff for any closing remarks.

Thanks, Christine. Thank you for joining us this morning. But before we go I wanted to mention the upcoming Diebold Investment Community Conference, beginning of evening of September 14, which will take place at our headquarters here in North Canton, Ohio. We will begin with a reception with our entire management team at our customer Global Solutions Center. Then on September 15 we will hold the main presentation portion of the event, and we will also conduct some breakout sessions on topics such as North America market review with our North American management team; deposit automation with some of our top engineers, with tours of our labs here; and also integrated services and more. So we will be sending out information on that shortly, but I wanted you to mark the dates on your calendars. Again, that is September 14 and 15. And as always, if you have follow-up questions, please don't hesitate to reach out to myself or Chris Bast following the call. Thank you very much.

That concludes our call for today. Thank you for your participation.