Diebold Nixdorf Inc (DBD) 2011 Q1 法說會逐字稿

Good day everyone and 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 Vice President and Chief Communications Officer, Mr. John Kristoff.

Please go ahead, sir.

Thanks, Audra.

Good morning and thank you for joining us for Diebold's first 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 results, as with past calls, it's important to note that we have restructuring and non-routine income and expenses 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 our 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 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. Thank you for joining our call today.

As you see in our earnings report this morning, we got off to a slow start in the first quarter. However these results do not come as a surprise to us as we anticipated a slow start to the first half of the year. While we don't provide quarterly guidance, we have communicated 2011 will be heavily back-end loaded from an earnings perspective.

We slightly exceeded our expectations for the first quarter, despite heavy losses in Europe and a higher tax rate. Increased order activity in the North American market continues to drive the business on a macro level. And given strength in our North American backlog, our outlook for the year remains intact.

Let's review our results in North America during the quarter. Revenue increased 3% while orders grew about 5% in the region. Most encouraging is that financial self-service orders within the regional banks space, where we enjoy competitive advantage, increased more than 30%. This marks the second consecutive quarter in which financial self-service orders in the regional banks space has increased over 30%. As these orders convert to revenue in the second half of the year, we expect a significant uptick in operating profit.

The increasing demand in the space continues to be driven by three primary factors. One, pent up demand in the marketplace. Two, industry and regulatory requirements such as ADA and PCI compliance. Three, increased deployment of deposit automation enabled ATMs, as more regional and community banks are implementing this technology to compete with their larger rivals. As depicted on the graphic on Slide 6, we now have over 20,000 deposit automation terminals deployed across the country and that number is rapidly growing.

These factors have also contributed to significant growth in our integrated service business. During the quarter, we brought in approximately $50 million in additional IS contracts, significantly exceeding the prior period as well as our own forecast. By comparison in all of 2010, we signed $150 million in IS contracts.

One such example of the type of customer we're signing on is Union Square Federal Credit Union in Texas. As part of our contract, we'll deliver monitoring, remote services, and enhanced security for its network of 20 ATMs over the next 5 years. The powerful combination of these services enhances Union Square's ATM uptime and security, while enabling the credit union to minimize its operational infrastructure and equipment investments.

Union Square was one of the many great success stories we had in the IS space in the quarter. We remain the only company in the market that offers a complete outsourcing solution for integrated services business model which continues to grow at an impressive rate. This is what truly separates us from the competition, especially the new competitors that have recently tried to enter our space in the US. Our capabilities in this area are not easily duplicated as it was time-consuming and expensive to develop this expertise and infrastructure over the past several years. When you combine our strong market position with our unparalleled capabilities and services, we clearly stand to benefit most from ongoing resurgence in the North American market.

In summary, we're very optimistic regarding the state of the North American financial self-service market, our strong competitive position, and our expectations in this space for the second half of 2011

Let's now look at our Security business. Orders for the quarter declined 6%. Revenue decreased slightly as growth in services revenue was essentially offset by a drop in product related revenue. Growth in overall Security services was driven by the enterprise security segment which grew in revenue of approximately 20% during the quarter.

We're excited about the opportunity this segment brings as we continue to win major projects, such as the new World Trade Center transportation hub in New York City. Diebold's integrated system will include the installation of video surveillance, access control, and alarm devices throughout the hub.

In addition to our work at the transportation hub and Tower Four at the Trade Center site, we anticipate additional security integration opportunities will arise moving forward. I feel confident in our ability to win additional business related to this project. Keep in mind given the size and complexity of these types of projects, revenue is generally recognized over a multi-year period.

In addition, security product revenue decreased in the financial space which is more product-centric and dependent upon new branch construction. However we expect the activity around branch refurbishment to pick up in the second half of the year.

Again, I am extremely encouraged by the recovery in North America and the progress we're making in growing our integrated services business. The region remains our most important and profitable market. Our brand is the strongest and we have an unmatched service capability. As such, North America will serve as a primary catalyst for earnings growth in 2011.

By contrast in Europe, we continue the significant undertaking in restructuring our business to obtain acceptable profitability. Our operating loss in Europe was substantial during the quarter as our cost structure remains out of line with the revenue we generate in the region. Revenue for the period was down approximately 5%. However, I am encouraged by the growth in orders during the quarter which illustrates our ability to effectively compete in the region.

Last week, we announced that Sovcombank in Moscow chose us to provide more than 200 Opteva ATMs for its network. The installation process is expected to be completed within the next few months. As a result of this most recent deal, there will be more than 450 Diebold ATMs within the bank's network.

Other notable successes in EMEA include a competitive win in Saudi Arabia through our distributor for nearly 400 ATMs, a quarter which include deposit automation technology. Orders from 2 banks in South Africa totalling nearly 800 ATMs. And an order from a major financial institution in Italy to replace nearly 400 of our competitor's ATMs over the next 2 years.

While the improvements we are seeing are encouraging, it's a slow rebuilding process in Russia and Eastern Europe as a whole. We still have a lot to accomplish to reach a level of profitability we expect from EMEA. The process of restructuring our operations there is well underway and is being addressed swiftly and aggressively. This is evidenced by the substantial restructuring charge we took in the first quarter. It has also resulted in our raising restructuring guidance for the full year.

Given the improvement in orders we're seeing in the region, as well as the cost improvement actions we're currently undertaking, I remain optimistic in our ability to bring EMEA to a breakeven point by the end of the year and return to profitability in 2012.

In Latin America and Brazil, business remains solid with revenue up 2% in the region. Excluding elections and lottery, revenue was down slightly. In Brazil, we anticipate a particularly strong second half of the year with all of elections revenue coming in the third and fourth quarters, in addition to the largest ATM orders of the year expected to be awarded in May. While we are in a strong competitive position to garner our fair share of those orders, the associated revenue will come in the second half of this year.

We continue to feel very good regarding the capabilities we've developed in our Brazilian operations, both from technology and services perspective. In fact, we recently received a Best in Show award from Intel at the Intel Solution Summit 2011. Intel recognized Diebold for providing advanced technological solutions for the Brazilian market. The 2 companies have worked together since 2009 to provide advanced features, including lower power consumption and stronger security.

Outside of Brazil, we saw growth in several markets as we continue to maintain the leading market position throughout Latin America. In Mexico, we won an order for 200 Opteva ATMs from one of the large Spanish banks. In Columbia, we won an order for 120 Opteva ATMs as part of an extension of an integrated services contract won in 2009.

Looking at Asia-Pacific, as anticipated we started the year slowly in both revenue and orders. This is largely due to declines in China where we anticipate a strong second half. Like Brazil, many of the large ATM orders for the year are expected to be awarded during the second quarter. Again, these are orders that would revenue in the second half of this year.

Elsewhere in Asia-Pacific, we continue to grow our presence. In India, we won a deal with one of the largest government-owned banks to provide close to 1500 new ATMs and dispensers. As part of the same deal, we also won a managed services contract for nearly 9,000 of the bank's units.

In Indonesia, we won separate agreements to provide 1,000 terminals to two different financial institutions. In addition, we're seeing traction in services business in the region. During the quarter, we announced the signing of a 2-year manage services agreement with Axis Bank, India's third-largest private sector bank. We'll manage more than 1,100 of the bank's ATMs and provide services, such as ATM monitoring, vendor management, site maintenance, and cash forecasting and replenishment services.

Due to the importance of Asia-Pacific and the tremendous growth opportunity the region provides, I am pleased with the progress we have made in building our services business. We remain committed to focusing on our services offering and disciplined cost management which we believe will be key to our continued success in Asia.

From an operational perspective, we are very excited to announce plans to construct the new consolidated world headquarters which will remain Akron-Canton region. When complete, the new headquarters will help drive our need for a truly world-class facility that stimulates process efficiencies and enhances our ability to recruit and retain top-tier talent.

As part of our agreement with the state of Ohio, we are receiving about $100 million in financial incentives over the next 18 years from state and local governments to remain in the area. This was a culmination of a 2-year strategic process in which we considered many factors and many locations and actively engaged other states where we currently have operations.

In the end, Ohio's offer was competitive with these states and presented us with far less operational risk and expense than the alternative of moving out of state. We believe this is very exciting news for our Company, shareholders, associates, and Northeast Ohio.

Another recent issue that may be on your mind is the devastating earthquake and tsunami that struck Japan in March. Although this has had no immediate impact on Diebold's employees or facilities, as a Company has no direct operations in Japan, our sympathy goes to those people who were affected and country of Japan as a whole. In terms of our supply channel, however, we have discovered some risk of mid- to long-term disruption from certain second- and third-tier component suppliers.

One component in particular, using our currency recycling products and passbook printers, is manufactured at a suppliers plant in the area affected by the tsunami. As a result, we are extending lead times to customers to those affected products. Diebold's procurement organization is working directly with the supplier to determine current inventory levels and plans for getting and plant back online. In addition, we're also working with our engineers to consider the feasibility of substituting the current component with that from another supplier. We are conducting a complete assessment and working with key suppliers to identify any other potential risk to our supply chain. We will provide updates on any new developments as quickly as possible.

As we look at the rest of 2011, I remain very confident about the market growth in North America as well as the orders and backlog for supporting our strong second half forecast. We are experiencing unprecedented seasonality, given timing of major pending orders in China and Brazil, in addition to the voting business already slated for third and fourth quarters.

As a result, we remain optimistic in our position for the remainder of the year and are maintaining our non-GAAP earnings guidance of $2.00 to $2.20 per share. Despite the relatively weak first-quarter results we reported today, the markets we serve are very active. While the timing of our business this year is quite unique, I'm confident, given the elements of business within our control, we'll capitalize on the opportunities that stand before us and deliver the results we expect.

With that, I'll turn the call over to Brad.

Thanks, Tom, and good morning, everyone. There are a number of key topics I'll discuss this morning, including our progress in the restructuring of EMEA, the second-half seasonality of our forecast, our operating expense outlook, and working capital and free cash flow.

Regarding our restructuring efforts in EMEA, we are planning a thorough comprehensive set of action through all elements of our operations. We are reengineering to free up more resources for core markets where we compete most effectively. Further, we are also reviewing our profile in the region and weighing our legal and compliance risk against our profitability in certain countries. In addition, we are planning changes in our manufacturing, supply chain, logistics, and administrative functions.

During the first quarter, we've made progress identifying action necessary for specific areas and planning needed to execute on those actions. This is resulted in restructuring charges of $0.14 per share in the quarter. Given our adherence to various European labor laws, we are limited in terms of details we can provide at this point. We can say this work will essentially take much of this year to implement and the associated cost are anticipated to continue into 2012. We have an aggressive plan to get our EMEA operation to a breakeven point by the end of 2011 and after spending some time in Europe recently, I remain confident in our ability to deliver on that plan.

Regarding the seasonality of our 2011 forecast, on Slide 15, as Tom indicated there are several factors that have led to a very heavy second half of the year, from an earnings perspective. First, our product order backlog in the US regional bank space has increased dramatically since the first quarter of 2010. We anticipate much of this backlog will be converted to revenue in the second half of the year which creates positive profitability.

Second, as we have previously communicated, all of the revenue from the Brazil election business in 2011 is expected to be recognized in the second half of the year, with approximately 45% coming in the third quarter and 55% in the fourth quarter. As you know, there is very little OpEx associated with the business which creates further positive profitability mix.

Third, several of the major orders we anticipate in China and Brazil are expected to be awarded during the second quarter. Our business in China and Brazil is mostly driven by a handful of large banks which leads to a very lumpy sales profile.

While we don't provide quarterly guidance, I feel it's important to put some quantification behind our expected second-half earnings seasonality. Based on all the factors I just described, we expect approximately 75% of our 2011 EPS to occur in the second half of this year, with more profit coming in the fourth quarter than the third.

Now to review our financial results for the quarter. Turning to Slide 16, total revenue was down 1% from the first quarter of 2010, with 2% positive impact from currency. For the quarter, product revenue declined 3% while service revenue was up 1%.

Looking at our financial self-service business on Slide 17, first quarter revenue dropped 2% from the first quarter of 2010. Growth in the Americas was more than offset by revenue decline in Asia-Pacific, due to the timing of pending large orders in China. Revenue also declined in EMEA.

In the Security business, on Slide 18, first quarter revenue decreased 1% from the same period in the previous year. Growth in services revenue was more than offset by a drop in product related revenue. As Tom mentioned, the growth in the overall security services was driven by the enterprise security segment which grew in revenue approximately 20% during the quarter.

Looking at Slide 19, total gross margin for the first quarter was essentially flat compared to the first quarter 2010. Product gross margin for the quarter was down 90 basis points. Product margin improvement in North America was more than offset by greater losses in EMEA which remains extremely price competitive, especially in Eastern Europe.

Service gross margin increased 30 basis points, driven by productivity improvements in North America and Brazil, partially offset by higher fuel costs. We expect increased fuel costs to be a headwind throughout the year. As a reminder, every $0.10 movement in the retail price of gasoline here in the United States increases our annual expense by approximately $700,000.

Moving now to non-GAAP operating expense, as highlighted on Slide 20, in the first quarter, operating expense increased $8.7 million or 1.5% of revenue from the comparable period in 2010. This increase was a result of several factors. First, SG&A in our international operations increased $3.5 million. This is related primarily to some one-time cost benefits in the first quarter of 2010 that did not repeat in 2011.

Second, we have a foreign currency exchange impact of $1.9 million. And finally, 401K reinstatement, R&D, and other costs make up $3.3 million of the increase. We anticipate second quarter OpEx will be similar to what we were reporting for the first quarter. However, we expect OpEx for the full year will decrease on a percentage basis to approximately 18.5%, as we anticipate significantly higher revenue in the second half of 2011.

Now, turning to Slide 21, non-GAAP operating margin in the first quarter decreased to 4.3%, from 6.1% in the first quarter of 2010. We do expect full year operating margin will be in the range of 7% to 7.5%.

Turning to the EPS reconciliation table on Slide 22, non-GAAP EPS moved from $0.34 per share in the first quarter of 2010 to $0.23 in the current quarter. Our non-GAAP tax rate moved considerably, from 29% in the prior period to 40% in the current quarter, negatively impacting EPS by approximately $0.05 per share. We still expect our full year tax rate to be approximately 28%.

Turning to Slide 23, free cash use for the quarter was $101 million, compared with free cash use of $67 million in the first quarter of 2010. Please refer to the bridge chart for an overview of the quarterly change in free cash use. We anticipate normal seasonality with strong free cash flow later in the year. I remain comfortable that free cash flow will exceed $150 million at year-end.

In addition to our dividend, we expect share repurchases to be a primary use of cash in 2011. During the first quarter, we repurchased 523,000 shares. Due to the timing of the authorization, we began repurchasing shares later in the quarter. However we still intend to execute on full 4 million share repurchase authorization in 2011, barring any developments on the acquisition front or dramatic changes in the business environment.

Looking at Slides 24 and 25, DSO increased from the prior year by 2 days while inventory turns decreased slightly. Working capital remains a top priority and we anticipate improvements by year-end. However, as Tom noted we face some supply chain risk relative to Japan, as well as the back-end loaded nature of our forecast.

Turning next to liquidity and net debt in Slide 26, net debt was $85.9 million, a decrease of $92 million from March 31, 2010. Our net debt-to-capital ratio was 8% at March 31, 2011, compared with 15% in the prior period.

We have made substantive reductions to our net debt since 2007, while at the same time returning more than $300 million to shareholders in the form of dividends and share repurchases. As I mentioned in the past, most of our cash exist outside the United States and we continue to implement the most tax efficient method to access that cash.

Now to Slide 27, we are continuing the global review of our FCPA compliance. There have been no material developments in the review since our previous earnings call. Our expectations remain that it will be done by year-end. First quarter costs from the FCPA review were approximately $6 million, in line with the fourth quarter, and we expect a similar run rate in the second quarter tapering off in the second half. We are excluding these costs from our non-GAAP operating results to provide a better overall understanding of our underlying operational performance.

On Slide 28, we are reaffirming our full year outlook for 2011. We expect revenue to increased 3% to 6% with no guidance changes in any of the segments. Given our aggressive plans in EMEA, we have increased our anticipated restructuring charges for 2011 to be in the range of $0.23 to $0.28 per share. We still expect our full year non-GAAP EPS to be in the range of $2.00 to $2.20 per share.

In conclusion, we are extremely encouraged by the momentum we're seeing in key North America markets. Our balance sheet remains strong. We are aggressively addressing our business challenges in Europe and we expect our full year operating expense as a percent of revenue to improve over 2010.

We know that we have a very aggressive forecast for the second half of the year. But this outlook is based on several concrete market and financial indicators that give me confidence we will be able to deliver our expected results.

With that, I will turn it back to John.

Thanks, Brad.

Audra, we'd like to open the call for questions at this point.

Thank you.

(Operator Instructions)

We'll go first to Kartik Mehta with Northcoast Research.

Good morning, Tom and Brad.

Both of you talked about obviously the challenges you're facing in EMEA, especially Europe. I'm wondering if you could give some numbers as to the income or loss of that region generated for you in 2010 and the first quarter of this year to maybe put some perspective around how much restructuring is going to help you as we move forward?

Okay.

I would say that in essence the delta between the two years is approximately $10 million. So, last year it was more or less a breakeven situation. This year we lost about $10 million in EMEA in the first quarter.

What about for the year, Tom, for 2010?

Kartik, you're asking, comparison, what we did last year?

Yes. I understand first quarter obviously, a bad quarter out of EMEA and it looks like you're going make a lot of progress at least by the end of the year. I'm wondering in 2010, what did EMEA generate income -- I don't know if it was a loss last year?

Yes, we did have a loss last year in EMEA. Call at around $5 million to $7 million, $8 million range. Right around there. That was in 2010.

So, Tom, in the past you've had some restructuring in Europe. I remember when you had a plant in France and you tried to shut that down and that took probably a little bit longer than what everybody expected.

It seems like you are being more aggressive this time around in Europe. Are there any similarities between the two restructurings? Or is this completely different? And it won't be as difficult or as time-consuming as the last one?

Anytime you do anything in Europe it is always time-consuming because you're working through the work councils and the whole bit. I think the big difference here, compared to the last one, is the strategic objective to what we're trying to accomplish.

One of the key things here is putting more of the resources in the market that we can make the biggest difference. So France, Italy, Spain, UK, and to make sure we allocate resources there and address some of the service and logistical infrastructure issues.

Back when we made those first changes, while we made some other changes, really the focus of that was the manufacturing piece. Now we're talking about the guts of the operation and putting ourselves in a better position there to compete effectively.

As you saw from the orders, when we focus on specific countries -- there's so many countries there. We don't have the presence we do in other parts of the world and we're trying to do too many things in too many countries with so many distributors, we've been ineffective. It been frustrating and disappointing for all of us.

We have really turned our attention from a senior-level standpoint to one of the more strategic things we are going to accomplish this year and in essence make the decisions this year. So while some of the restructuring costs may actually leak into next year just because of the timing of the (inaudible) have to be accounted for. And my expectation is, Brad, I, and the leadership from EMEA will have made all of the important decisions this year and as you see how fast we are making those, we were able to take some additional visibility to increase that structuring charge for the year.

And Tom, turning to the US, obviously there's been a lot of debate about deposit image-enabled ATMs, whether you should have a dual throw or single throw. I know you've gone with, as of now, the dual throw technology. And I'm wondering, as you've competed for business, if that has been a headwind at all? Or what type of experience you were you having with your customers as you talk about their technology needs?

I think as we've said all along, for us the technology conversation is second or third type of conversation.

First of all, the evidence in terms of what we're seeing in the regional bank space orders up 30%, again for the second consecutive quarter and momentum growing there. We said all along that as the deposit automation takes hold into the next tier of players we felt we're well positioned there.

Just so you understand from our standpoint, our first conversation is about technology. It's about integrated services. It's about the complexity of their business and how we offload that. The other piece we talk about, when they do want to talk in terms of technology -- because that's always important -- is certainly speed, availability, reliability, cost of ownership. And then you get into the ability to repair and you talk about service organizations.

So we feel very, very confident in our ability to move down this path and think that really the table starts tilting in our favor and it's pretty evident really, when you look at the last six months and you see the backlog that's growing relative to that. The other thing I would comment on is from integrated service standpoint, again, they get the integrated service because of the deposit automation conversation but you're solving bigger issues than when you asked the question about single or dual throw, that really is not the issue. They want to solve compliance issues. They want to solve ADA issues. They want to solve PCI issues. They want to solve the whole infrastructure complexity issue which is really what we are offering.

That's why, again, our integrated services order book in the first quarter was at a record high coming off a record high from the fourth quarter. We did $50 million. When you do that, then you start getting into the operations of the bank and could really improve the efficiencies. The other thing I would say there is, again, as we talked previously, that back-end system, to be able to monitor, improve the workflow and process, from a services standpoint, is a key point that we point out.

So we're feeling very good, very confident that the momentum we've created is going to continue in the second quarter.

Tom, thank you very much. I appreciate it.

You're welcome.

Next we will move to Matt Summerville with KeyBanc.

I have a follow-up question on EMEA.

I'm a little surprised by the magnitude of operating losses in the first quarter, $10 million, more than you lost for the entire year of 2010.

Can you walk through in a little more detail how things sort of added up to get to that destination? And in your plan, or in your $2.00 to $2.20, just so I'm clear, does Europe move to a breakeven position for the full year, or move to a breakeven run rate exiting the year? If you could clarify that please?

I will start and then Brad, feel free to jump in.

First of all, Matt, in the first quarter as compared to last year, as always, you run into certain factors. The biggest are product gross margins were significantly lower this first quarter as compared to the other quarters of last year which relate to certain specific opportunities or deals that you end up revenuing and the first quarter.

The second thing is, because of our lack of density there, our service gross margins don't increase like we have in other parts of the world. While service gross margins, overall, when you look at it, you say, service gross margins were growing overall. They actually decreased on us in the first quarter because lack of product volume impacted installation, which impacted our service margins there in the first quarter as well. That worked against us. Then the last thing was tying those two together is really the mix issue.

So, those were three of the primary factors. The other thing is while we're moving on the restructuring activities, we still get hit with all the expense here in the first quarter. And as a matter of fact, that escalated somewhat in that we've got some outside help helping us so your costs are a little bit higher here in the first quarter.

So for the first quarter, the $10 million versus where we ended up last year, again, it was in line with our expectation. So from our standpoint, as we thought about the whole year and mapped the $2.00 to $2.20, this first quarter is absolutely in line and was factored into overall guidance and reaffirmed today.

Yes Matt, let me reinforce and answer the second point of your question.

It's certainly, as Tom pointed to the product margins, in the first quarter being down substantially from the prior year and certainly as we're moving into Eastern Europe and rebuilding Russia, certainly that has put pressure. That's a more competitive marketplace. Our manufacturing operations in Hungary was running at a lower rate, as you can see based on the overall revenue levels for the business. So, those are the things that ultimately drove the product margin.

As we look at where we're focusing the business is to get the business to break even by the end of the year. I would think of that as more on a run rate basis versus being able to offset completely the $10 million loss that we had in the first quarter.

Okay. In terms of the China dynamic, you guys have talked about that. Brazil sounds like it may be a little bit more back-end loaded than you originally thought heading into the year. As you're having these discussions more real time with these banks? I guess I just want to get more comfort with the timing on when these things come in. Because I would think, if you start getting these things, these things don't come in until June, July, August, that's not going to revenue this year. So I just want to try and put some sort of probability around being able to execute on these potential awards?

I'll talk about Brazil first then we'll move to China. We have pretty good visibility here, if not really good visibility here. The issue faced in Brazil this year, every year when they have the election, the big government banks -- they just had a presidential election last fall -- the presidential election effects the big government banks as they start shifting around different players in those banks. We actually are at a meeting as we speak here with one of the government banks. It's doing the public hearing this morning which will be letting the order out. Thus the information we had up to until morning was basically that these decisions will be made here in the May timeframe, early June timeframe which will allow us to revenue it. Their expectations and what they've been indicating to us is they're looking to have all this installed this year.

Same thing with the private banks we're dealing with an Brazil as well. The May timeframe is really when decisions will be made, orders will be let and they're going to move very quickly. We've got excellent visibility here into Brazil.

If you move to China, it's the same scenario. It's just that the banks are different. You have the big government banks and what's occurring there. The information we have directly from the banks is, several will be moving here in the month of May, decisions made towards the end of May, beginning of June, deliveries in the third and fourth quarter.

From an internal standpoint, while we knew it was be backend loaded because of the timing of these, it's definitely all third and fourth quarter, whereas at the beginning of the year, we may have thought there would be something towards the second half of the quarter.

From a visibility standpoint, a probability standpoint, they're both very high in terms of what's going to occur. The only variability could be is, if we have Intel saying they will look for 8,000 and they do 7,000 or 6,000, that could be a swing factor. But again, we should know all of that well into the second quarter. We'll also know where we stand relative to that and what we got in our forecast.

Thank you for that comment.

One final question. I know you guys don't want to necessarily get into the habit of giving quarterly guidance. So Brad, I appreciate you talking about 75% back half of the year, as far as earnings, that implies 25% in the first half if you use the midpoint of your range and you just do simple math, that implies a EPS of around $0.30 or so in Q2 which is still fairly below where you guys are at last year.

Sequentially I'm trying to understand some of that dynamic. Because I would assume your tax rate is not as high going forward in Q2. Your losses in Europe maybe come down a little bit off that $10 million rate. I guess, why are we not seeing a little bit more of a bounce off Q1?

Again, I appreciate your preface there right at the beginning, in terms of giving the quarterly guidance.

Certainly doing the $0.23 in the first quarter, there is a sequential improvement implied as you just factored in. I do think we actually are showing a sequential improvement driven by, again, starting to see the EMEA business turn and certainly the losses in EMEA is what drove the higher tax rate so we would expect our tax rate to start to also drop. I do think we are actually seeing the sequential improvement.

Hey Matt, the other thing I would also say is if we went back and looked last year, you would see, for instance, Brazil with the big banks, they made the decisions earlier in the year. That's a big swing factor because of the importance of Brazil for us in particular. Certainly we had communicated all along all of the voting was going to be in the second half of the year which is consistent. Really, the big swing between the two years would be Brazil, big bank decisions which have a big impact on us.

Again, because they got out of the gate slower this year than they normally would have because of the election, with the government banks, that has really moved a lot of that now into the third and fourth quarter. That would be the biggest variable that has changed year-over-year.

Thanks, Tom. Thanks, Brad

Next we'll move to Gil Luria at Wedbush Securities.

Good morning. Thanks for taking my questions.

First of all, on your orders in the US, it sound like there's a mix shift, apples to oranges, between orders of ATMs and integrated services contracts. Could you help us understand the difference in math here?

I know there's no exact numbers but if a median typical ATM is $20,000 order, how much is an order for a five-year integrated services contract per ATM? Is it a different order of magnitude? Even if you have to talk about a typical scenario here, what's the difference in the order rate for those two different scenarios?

Gil, let me try and frame it up.

In essence, the difference between the two is not the price of the technology or the contract of service. What it would be with the IS order, we get additional services that would come along with that.

So for instance, they may be having us monitor the ATMs. We may be doing patch management, currency forecasting. It's a whole suite of services they choose between, and again, what we're seeing over time is that as we get them on an IS deal over five years, sequentially they begin to pick other services once they have confidence in your ability to deliver. These are not like thousand-dollar-a-month type of services. In many cases, these could $5, $10, $15 a unit type of services. As you begin to spread that and build it out, which it was building for us, it's given us good confidence in not only the business model which is really taking the order off the street and giving us five years to work specifically with an institution, it's also allowing us to improve operation and being in there with them. In order of magnitude, the ATM is going to cost the same. Service contract is about the same. That doesn't change at all. It's just the ancillary services that come along with that over the five-year period.

Let me ask it differently to just to make it more specific. If you had a small bank that was going to buy 10 ATMs from you this year, that would be a $200,000 order. If you had the same bank sign a five-year integrated services contract with you for 10 ATMs, with some of those up sales that you are talking about, let say a typical level of up sale, how big would that five-year contract be?

Maybe it moves up 5% over the course of the five years. We only revenue the managed services pieces in the current year. That's the building effect. Say with an additional $5,000 in this hypothetical situation, maybe year one it's only an additional $1,000 in service revenue. Is that clear?

I'll just take it off-line. Let me translated it to what I'm getting to, which is how much do you expect the US regional revenue to grow this year over last year?

I would say, first of all, the order entry certainly is the case to solid growth. I don't think we are giving out specific to relative to the growth in regional versus the big guys.

What I'd say is in essence, our mix is changing. The last several years, you'd have see the mix heavily weighted by the national accounts, the strategic accounts. It's now shifting more back, especially the second half of the year, to being influenced by the regionals, which is very good news for us.

The other thing it also suggest is, we're not only able to hold the revenue, we're growing it. That means we're filling up pretty big buckets from strategic accounts, or national accounts, with a lot of smaller accounts. For me, that's the overriding message that you've got a lot of activity. We have 450+ customers now using deposit automation. You have 110 or 150 customers that have over 10+ deposit automated terminals out there within their network.

We are starting to see what we've talked about for a long time come is the regional bank space beginning to take off. Deposit automation is a key driver. Deposit automation decisions lead to this IS capability and for us that's a good sequence to occur.

Gil, this is John. Just one more point on the IS. You used the example of a bank that was going to replace 10 ATMs. One of the dynamics we're seeing is they typically would replace all their ATMs. Maybe this is a bank that did two ATMs a year over a five-year period. Now, they transition to an IS contract and they want to replace all 10 ATMs because we're taking over management for them.

Got it.

My second question is following up on some of the guidance questions.

If we're saying three-quarters of the profit in the second half of the year, more in the fourth quarter, so take 40% of the profit you expect to come in the fourth quarter, how much of that are you marking for December? And how much of that has the risk of slipping into January?

Gil, that's a good question. That's something that we are looking very closely at.

I don't know if we have that exactly earmarked but I can assure you of this much. The installation ability and the ability to revenue and because it's back-end loaded, there obviously is risk associated with that. We certainly think we have the ability and capability of hitting exactly what we're lining up. And we've got our organization geared up for it. And the point is, as long as we get the orders in and we can schedule them here in the May, June, July timeframe, we're very, very confident in our ability to be able to deliver and meet that and while some may slip, I think within our guidance we have that factored in appropriately.

Got it. Thank you.

(Operator Instructions) We'll go next to Paul Coster at JPMorgan.

Thank you. Good morning.

A couple of questions. First of all, regarding the European restructuring, it sounds like it's quite complicated. Can you talk a little about the organizing principles around it? And specifically, how you protect your incumbent customer account over there, particularly those customers that might be more than country-specific, maybe regional and even have operations in the emerging markets? Is there any risk associated with this restructuring there?

I'll start and then as Brad in comment as well.

I would say the driving force is exactly what you hit. The recent EMEA is so strategically important to us, and the reason we're putting additional into specific locations and maybe not putting as much of resource in other locations, has to do with the large strategic accounts that are resident there, that are morphing into global banks. It doesn't take you long to figure out between Spain and France and the UK that you've got a lot of the players that impact other parts of the world.

In essence, we're putting more resource and maybe looking at some of the other areas that are less important and small geographies, whether it be in Africa or little parts of Eastern Europe where there's complexity, and now with the compliance and guidelines. We're saying, you know what? It's really not worth it. We're not going to drive much profitability there and it doesn't give as much benefit globally. Why do it.

In terms of complexity part of it, we've basically broken it down into seven discreet projects. It is being run by specific managers. Things like service and logistics are one specific tranche of work that's being done. It's being evaluated. Shared services, we take a look at that, our countries' focused activities. Manufacturing, you can go right down the line.

We don't believe this is complex. The complexity comes in, in terms of dealing with the work councils and making sure we have dotted all the i's and cross the t's. And I'd reiterate, Brad and I feel confident we can make the decisions this year. Some of the cost may be into next year but our goals is, we're taking cost out immediately because there are some things, whether it be shared service or logistics, those are not discussion points. There are other things more strategic that'll be heavier discussion points. But we feel good and have a lot of clarity in terms of leading that. Likewise we've added some resource to help us make good decisions in managing these projects over in EMEA to support the existing EMEA team.

Do you think you have the right products for EMEA at this time?

Yes, the thing we can't do is be all things to all people.

And that's why I think when you look at our order entry, when we focus on specific markets, we can do exceedingly well. Order entry is up 40% in the quarter. Again, these things are lumpy but what that proves to us time and time again is when we're focused on specific accounts, specific countries, we can do pretty darn well in EMEA.

We're nowhere near where we want to be in EMEA. We don't have the same influences and have the same capabilities we do in Brazil or Latin America or North America or Asia-Pacific. We understand that which means we have to be even more focused to make sure that we start building some density within these countries to drive our business model, which is services and recurring revenue stream in these key countries and with these key customers.

If you pursue these service opportunities in emerging markets -- you cited the example in India -- is there any compromise to your margin structure?

Overall, if you looked at India in general, there absolutely is. The services is much better than the product margins. The key there for us is as we build density -- much like we did in the United States. If you look historically over the last five or seven years in the United States, and look at our service margins, they've continued to improve through efficiencies, through density, through the technology, the back-end systems that we're deploying, to be able to take calls out of the system, the quality of product.

Once we have the density, it's very advantageous. Right from the get-go in India, that was the business model we went to. We recognized on the early end, everyone that's in there, everybody wants to be in India. Local guys are in there. Global players are in there. So on the product side, that's going to be very, very competitive and very challenging.

As such, the first thing we did several years ago was build an IS center there and begin to manage the products. As such, we 're happy with the growth. We're very happy with the profitability we have moved to in India, whereas three, four, five years ago we didn't have the density nowhere near where we are today.

It's a good business model. It seems to make sense and on top of that, as you can see from some of the comments today, we've been able to secure some pretty significant orders so people are confident in our ability to deliver as well.

Last question actually relates to the domestic business.

You and your main competitor in the US have both talked about order intakes in excess of 20% year-on-year growth in the last few quarters and yet the revenue growth is modest.

Is this simply because the order intake relates to such a small subset of your business? There seems to be a delay between the order intake and the actual revenues. Can you talk about the cycle time there? And what is it that I'm missing?

Yes, I think you've hit on the head. There is an increase delay between orders and revenue. Absolutely.

There's a couple parts to that. One is you're no longer just talking about an ATM because the impact of deposit automation, the bank itself has much more to do to be prepared for deposit automation. You need their processor or network to handle to be able to handle the more complex transaction to be able to handle that deposit for ATM.

They need to have the right technology infrastructure, be TCI IP, and making sure they have there IT pieces in place. And then third, they have workflow issues within the bank branch facility.

For anyone, when you deal with the complexity of deposit automation outside of the big five or 10 national banks, once they have that in place you can just move quickly. With a lot of the smaller players, it takes a while for them to be prepared, even after they order it. As such, you see the delay relative to self-service as extended.

The other thing that extends it is really the ISPs. Again, IS is more complex than just a simple ATM. Both of those work in the favor long-term. And they change the dynamics from a competitive standpoint to prevent a lot of the low-end providers to just come in and compete. It's very, very difficult and complex when you add a IT, add software, and you add the technology piece to it and the ability to manage it.

You're exactly right. It takes much longer as you move to the tier banks, the smaller tier banks, which is the phase we're in and where our orders have increased significantly over the last six to eight months.

Paul, also, your question was certainly on the order entry. And if you go back and look at the discussion and pattern of our order entry in North America, certainly it began to strengthen significantly in the fourth quarter of last year. We had another strong quarter, the first quarter, and therefore a proxy of six months of revenue. That's why it's now coming in the second half. That's was contributing to the back-end loading nature of our earnings performance for the corporation, one of the factors.

Thank you very much.

Audra, we have time for one more question, please.

Alright, and we'll take that question from John Williams with Goldman Sachs.

Hello, guys. Thanks for squeezing us in.

You've seen a couple quarters in a row of pretty strong order growth from the US regionals. I was curious if you could give more specific on when you expect to see those translate into revenue. And I know you give a little more color on that. But just in terms of, I know with the extended sales cycle, is this something that should probably continue into early 2012? Or should we see the full impact of what you've seen in the last few quarters, over the rest of 2011?

Certainly, John. What we saw in the fourth quarter and what we've seen in the first quarter, the vast majority of that should revenue here in the second half. Obviously, as we continue to strengthen the order book, and we've certainly seen continued strength in April, if that continues then obviously that revenue will be in 2012 support continued momentum.

The other thing John is, again, we talk about IS, remember those are five years.

We will get to the point here, within this year or next year, where that additional revenue begins to kick in as well. So we're expecting IS to start to contribute in a meaningful way in the second half of this year as well.

Again, as that goes over time, our backlog in that space alone will continue to grow rapidly. That again, will yield their impact, begin impacting third and fourth quarter but begin to have a mere material impact in 2012.

In terms of clarity on the growth you are seeing, is there something specific from the regional that continues to be driving this? Or is it just the fact that there is probably some backlog on their side, in terms of upgrading and ordering?

Two things, one would be pent-up demand and you have ADA and PCI compliance issues hanging over them. The other thing is, we began five years ago with an education series that has carried on for five years out in the field where we've taken in essence this entire solution out of the market.

This year alone we're going to be running 35 or 40 seminars. We generally have 20 or 25 banks attend. Most banks, from what we've seen, end up attending these over a two or three year period before they make a big decision relative to IS. Deposit automation maybe brings them in the door and then they see the whole suite of solutions in security and logical security, and that really is a big factor.

We have been building towards this and the marketing and development of the capabilities as well as the product capability. Kartik asked the question earlier, we're the only ones with the flexibility of letting someone have a single check or single note. That's a huge issue for small credit unions to begin down this path. If you want a single check and a bulk note, you can have that.

The flexibility becomes much more important to the segment which is why we designed the terminals the way we did. And as such, I think we're enjoying the success of that right now and that will continue. We see nothing to prevent that with the issues of reliability and availability we get, the cost of ownership, again, with the service infrastructure and with the capability. It's not just now that we've been talking with them. We've been talking to them for two or three years. It's just now that they've begun to move in a serious manner.

The other thing that's impacted them is, you probably have about 35,000 deposit ATMs deployed by the top three or four or five banks in the United States. They're starting to see them everywhere. They're starting to see ads on TV so they have a need to really move.

Got it. That's good to hear. One other question quickly, I guess, just quickly on capital allocation.

You guys obviously bought back some shares on the quarter. You've got a pretty good cash position. You've got what seems like a decent 3.5 million share lock left under your authorization. What are you thinking now on capital allocation? Would you consider an enhanced buyback or at least really ramping it up, given the stocks up these days, down a little bit. What are you thinking here?

I think, John, we're still focused on the 4 million share authorization that was authorized in February. Again, we'll continue to look at this and I would continue to point out to you that as we look at our overall capital allocation or we look at the balance sheet, certainly a lot of our cash is offshore at this point.

So, we're accessing that cash to fund share buyback program and we're trying to do that in a tax efficient way. We'll continue to execute on the current program, look at tax repatriation strategies. And we'll take a look at this as we get through 2011 for 2012.

Got it. Thank you, guys. I appreciate it.

That does conclude the Q&A session. I will turn the conference back over to management for any closing remarks.

Thanks, Audra, and thank you everyone for joining us on the call today. As always, if you have any follow-up questions, please don't hesitate to reach out to myself or Chris Bast. Thanks again.

That does conclude today's conference, thank you for today's participation.