Diebold Nixdorf Inc (DBD) 2012 Q2 法說會逐字稿

Good day, everyone. 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 Vice President and Chief Communications Officer, Mr. John Kristoff. Please go ahead, sir.

Thank you, Deanna. 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 have 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 in past calls it is important to note that we have restructuring, non-routine expenses and impairment charges 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 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 will turn it over to Tom.

Thanks, John. Good morning, everyone. Thanks for joining our call today.

We generated solid top-line growth during the quarter and we improved our net debt position by nearly $50 million. Also, we achieved profitability in EMEA during the quarter and are on track to achieve our goal to be profitable for the full year in that region. We saw more than 30% revenue growth in Latin America and Brazil, a region where we are building upon our leadership position.

I am also pleased with our overall top-line performance, as we experience strong financial self-service growth in deposit automation with national account customers in the United States. However, as expected, we saw a reduction in the regional account activity associated with ADA compliance. This shift in activity resulted in a less profitable mix of business in our North American operation. Combined with a much higher tax rate in the quarter, this resulted in a sequential drop in earnings from the first quarter.

Given a recent significantly negative shift in currency, as well as a delay of anticipated additional revenue from Brazil elections systems into 2013, we are tightening our guidance for 2012. Aside from these two items, our outlook remains unchanged, and we are confident in the underlying factors that are driving growth in the business.

Now let's look at the business from a geographic standpoint, starting with North America. Revenue in North America increased 18% from the second-quarter 2011, driven by continued strong performance in financial self-service, partially offset by the decline in security.

Importantly, total order entry in North America grew in the low single digit range on very good performance in the second-quarter 2011, when we saw double-digit growth in orders, further illustrating the robustness of the market and our leadership position. This growth was driven by a significant increase in the national account segment associated with the deposit automation adoption.

When looking at deposit automation shipments in the national accounts, excluding BofA, Chase, and Wells, we saw an increase of more than 150% with multiple customers accounting for the growth. This represents a good, sustainable trend. Also, deposit automation shipments to the regional bank segment increased nearly 50%.

We also grew our service revenue in North America. In addition to increased installation volume, we saw a nearly 30% increase in our Integrated Services revenue and a 50% increased in managed services, reflective of our continued focus on growing our software-led services business.

While service gross margin in the quarter was down due to certain increased costs, we expect full-year gross margins to be similar to 2011. Brad will provide more detail regarding our service margin in his commentary.

From my perspective, the most important element here is growth, particularly in the managed and Integrated Services. Our expectation is that we will continue to grow our services business overall in North America in 2012, strengthening the foundation upon which our market leadership in the region is built.

Looking at our security business, revenue decreased slightly, consistent with our prior expectations. Orders decreased in the low single-digit range against a difficult comparison to last year, when we had a particularly large order associated with the United Nations building in New York.

I am very encouraged by the progress we are making in the financial electronic security space, where we have been focused on building a dedicated sales force, service infrastructure, and delivery platform for Integrated Services. In fact, during the second quarter, we grew electronic security orders more than 20% in the banking segment.

Two great examples of our ability to deliver services in the banking sector occurred during the quarter, with separate Integrated Services agreements with Regions Bank and BB&T. We are performing security monitoring for both financial institutions, enhancing security for their customers, employees, and assets. This is a major benefit as financial institutions continually strive to improve productivity and focus resources on their key operations.

Along these lines, our total contract value for IS security to financials increased from about $4 million in the quarter to more than $10 million in the second quarter. While these aren't large numbers, this growth reflects the value that financial institutions place on security services, and this plays very well to our strengths.

The value of the Diebold brand in security remains powerful, and there are extensive opportunities in the commercial industry to build upon the trust we have developed with our customers, from self-service to security. The recent appointment of Tony Byerly as EVP of Electronic Security will be invaluable in helping us execute our strategy to grow the electronic security business.

Having most recently served as President and COO of Stanley Convergent Security Solutions, and also having spent his career with ADT, Honeywell, and other leading security companies, Tony brings with him more than 25 years of experience, deep relationships, and credibility within the security industry. During the past several years we have developed a top-tier infrastructure to manage and monitor complex security systems.

In addition to the organic growth potential Integrated Services represents, we will also pursue sensible opportunities for smaller bolt-on acquisitions, as a mean to position security for long-term growth moving forward.

I am pleased with the progress we are making in transforming our security business, leveraging our capabilities in Integrated Services, reengineering our sales strategy, and recruiting an outstanding new leader. And I am confident in our ability to generate growth in security in the second half of 2012 and deliver on our security revenue guidance for the full year.

In EMEA, revenue decreased 19%, largely the result of a difficult comparison to the second-quarter 2011, when we reported exceptionally strong growth of 36%.

Total orders in the region were down in the high single digits, with growth in Turkey and South Africa more than offset by weakness in Western European markets. In addition, we have currency headwinds, as the dollar strengthened significantly against the euro during the quarter.

However, the real story in EMEA is that the restructuring efforts and hard work to establish sound footing in the region continue to pay off. EMEA swung to a profit during the quarter in the midst of a very difficult macroeconomic environment.

We saw continued momentum in the deposit automation and recycling, driven by Opteva Flex Series of ATMs which we successfully introduced in Italy, the Middle East, Turkey, and select countries in Eastern Europe during the quarter.

In addition, South Africa remains a robust market for us, where we recently secured deposit automation and cash dispenser orders in excess of $10 million.

The UK remains an active market and to some extent has been screened off from the larger European economic crisis. While we have virtually no market share in the UK today, we see opportunities in this market and are investing.

The UK financial self-service terminal fleet is aging. Their average age is 10 years, well past the typical retirement schedule of seven to eight years.

During a recent visit to London I had the opportunity to meet with leaders from several Tier 1 banks. They recognize that deployment of new technology is overdue and major new investments will be forthcoming in the next few years. Each also recognized that Diebold has the unique capabilities that can add value as a strong third player in the UK market.

I also attended to the launch of our Opteva 820 at the European ATM Conference and Expo. My conversations with customers made it clear that the 820's smaller design, combined with enhanced functionality, is spot-on for the UK market.

Going forward, there is a clear opportunity for us to provide a credible alternative self-service option offering in this market. As such, during the quarter we brought on John Ennis to lead our sales and service activities and execute the Company's growth strategies in the UK and Ireland.

Prior to joining Diebold, John gained 20 years of experience in financial self-service, holding several senior management positions in the banking and supplier sectors, most recently leading Wincor's banking division in the UK. John's banking and technical expertise combined with his experience in the UK will be highly valuable in helping us establish a sound position in this important market.

So as we look at the EMEA region as a whole, important actions were taken to ensure that we have aligned the organization to maximize our ability to compete effectively are taking hold, and we feel we're in a stronger position to achieve sustainable profitability in the region moving forward.

Looking at Latin America and Brazil, revenue in the region increased substantially, by more than 30%. This comes against a relatively easy comparison to the second-quarter 2011, in which business was heavily back-end loaded during the year.

We had continued strong performance in the region with very good activity in financial self-service, including a bid for 17,000 teller terminals and an order for more than 200 ATMs in Brazil. Orders in the region during the quarter declined in the mid single-digit range due primarily to a couple of very large orders in Brazil that we expected to come during the second quarter but won't close until the third. Therefore we expect order growth to be very good in third quarter as we continue to lead the market in Brazil.

I had the opportunity to serve as the keynote speaker at the CIAB conference in Sao Paulo last month, the largest such conference for our industry in the Americas. During my trip I met with various banks including Bradesco, Santander and Banco Itau. Our conversations confirmed for me that our innovative solutions in service infrastructure, which have been long established in the market, continue to give us a competitive advantage in Brazil. So we are well positioned to win a number of other opportunities there as we progress through the year.

Looking at the elections business, Brazil election officials recently affirmed their intent to purchase 90,000 voting terminals from us in 2012. To date, the government has ordered 35,000 units, which we will revenue in 2012.

However, they also informed us that they will not be ordering any additional terminals until after their elections in October. This means any revenue from these additional terminals would be recognized in 2013.

We had previously anticipated delivering 60,000 units in 2012. We have adjusted our full-year revenue and earnings guidance accordingly.

Looking to the rest of Latin America, the market remains very strong. During the quarter Venezuela, Peru, and Mexico each performed very well in winning new business in the financial self-service space. In summary, we continue to maintain a market-leading position throughout Latin America and Brazil and are well positioned to capture a significant amount of growth expected to occur there in 2012 and beyond.

Looking at the Asia Pacific region, revenue was flat in the second-quarter 2011. Total orders in the region declined, compared with a very strong quarter last year.

Demand continues to be robust in China with particularly active order levels in the regional bank segment. In India, revenue declined due to unfavorable currency exchange, which caused us to be down on a dollar basis there. During the quarter, major changes began to shift the landscape in the ATM industry in India in a positive direction.

The Indian government began an initiative in the country for the state-run banks to, joined together, nearly double the number of ATMs over the next two years. To facilitate a bidding process for the number of ATMs needed in this initiative, the government divided the country into 16 zones. Various vendors, distributors, and ISOs recently submitted bids in a reverse auction to deploy 3,000 to 4,000 ATMs in each zone.

Under this model, the ATM deployer owns and operates the ATM and receives a per-transaction fee from the bank. This requires a good deal of upfront capital and carries with it significant risk, especially in some regions where little is known about transaction history and trends.

Given these risks and the significant upfront capital required with unknown returns, we opted not to bid on any of the zones as a primary deployer. However, only two of the 16 zones were awarded to a traditional ATM manufacturer. This gives me confidence in our ability to win ATM and related services business from a number of deployers who submitted winning government bids. We feel this is the right approach for us, given our scale and solid track record of providing Integrated Services and related solutions in India.

In addition to the state-run banks deploying ATMs, the private banks are also being forced to increase deployment in order to remain competitive with the state-run banks. This initiative will also create a major opportunity for us. As a result of all this recent activity we anticipate demand in India will be actively back-end loaded this year.

In Southeast Asia we are gaining momentum in deposit automation with our Flex Performance Series of ATMs. We also delivered excellent cash recycling successes during the quarter at TMB in Thailand, Mandiri in Indonesia, and Suncorp in Australia. So when looking in Asia Pacific for the balance of the year, given the currency headwinds we face in India we anticipate flat to modest growth.

Looking at expectations for the full year, our outlook is unchanged. However, the push-out of the elections revenue we expect from Brazil and the negative shift in currency affect our guidance for both revenue and earnings for the full year.

We now expect to deliver EPS of $2.50 to $2.60 per share in 2012. We expects fourth-quarter earnings per share to be substantially higher than the third-quarter earnings as the entire full-year reduction in revenue and earnings expectations from Brazil elections systems and lottery occurs in the third quarter.

We continue to be optimistic considering the activity we are seeing in our key markets and in the strong position we hold in those markets. Our top-line performance during the quarter speaks positively toward the underlying health of our markets and the breadth of our capabilities.

While we have much work ahead in the coming months to meet our expectations, we are confident in our ability to effectively manage the business and deliver results to shareholders. With that, I will turn the call over to Brad.

Thanks, Tom, and good morning, everyone. Before I get into our quarterly financial results and 2012 outlook, I would like to touch on a few key topics from the quarter.

First, we delivered 12% revenue growth despite a 6% negative currency impact, which was primarily driven by the Brazilian reai and to a lesser extent the Indian rupee and the euro. The solid second-quarter revenue results were once again impacted by strong performance in our North American financial self-service business, especially as it relates to deposit automation.

We continue our strategy to transform into a software-led services Company, as evidenced by the nearly 30% revenue growth we experienced during the quarter in our North American Integrated Service business. Also contributing to improved overall performance is the continued success of our restructuring efforts in EMEA.

As we communicated during last quarter's call, we eliminated $15 million from our cost structure in the region last year. During the second quarter, we again saw improved gross margins; and more importantly, we achieved modest profitability. As Tom said earlier, we are on track to achieve profit in EMEA for the full year despite the economic headwinds in this region.

Finally, moving forward our strong balance sheet and anticipated free cash flow supports our growth in key areas such as software, services, and electronic security.

Now to review our financial results. Turning to slide 14, total revenue was $743 million, up 12% from the second quarter of 2011, including a 6% negative currency impact. For the quarter, service revenue increased 2% and product revenue increased nearly 27%, again driven by financial self-service in North America.

Looking at our financial self-service business on slide 15, second-quarter revenue was $590 million, an increase of 16%. This includes double-digit growth in North America, Latin America, and Brazil. As Tom mentioned, service revenue grew 4%, primarily due to growth in North America.

In the security business, on slide 16, second-quarter revenue was $144 million, a decline of 3%. As we have noted on previous calls, the strategy for the security business is to focus on building our electronic security sales in the financial industry, and we saw a good sequential increase from the first quarter, which builds our confidence in the long-term growth prospects for our electronic security business. As such, we are making the necessary investments in our leadership team and infrastructure to build our presence within this space.

Additionally, we continue to gain traction in the security Integrated Service business. And as opportunities in the electronic security industry grow, especially within the regional bank space, we remain confident that we will achieve our full-year security revenue guidance of 1% to 4% growth.

Turning now to slide 17, total gross margin for the second quarter decreased 1 percentage point from 2011. Service gross margin for the quarter was down 70 basis points, due to a number of items. Let me explain.

First, we are making significant investments in our Integrated Services infrastructure, including supportive of the large outsourcing contract with Toronto Dominion that we will begin executing at the end of this year. As we expect our Integrated Service business to expand in both financial self-service and security, it is necessary to invest in the infrastructure to support that growth.

Secondly, the number of previous-generation ATMs replaced with Opteva units in North America during the first quarter was significant. This resulted in high scrap expense associated with inventory no longer needed to service the older units, which negatively impacted our margin.

Finally, we invested in new technology to improve the efficiency of our North American service fleet during the quarter. Even considering these factors, we still expect to maintain our full-year service margins at comparable levels to 2011, given our expansion in software and services and cost improvements in other areas of the business.

As anticipated, we experienced pressure on product gross margin during the quarter, declining 1.3 percentage points due to an unfavorable geographic and customer mix.

Moving on to non-GAAP operating expense, as highlighted on slide 18, in the second quarter, operating expense as a percent of revenue was down 1.9 percentage points primarily due to operating leverage on higher revenue. In addition to controlling costs through SmartBusiness 300, we are investing in our IT in global business services to reduce our long-term cost structure.

And we are investing in certain strategic initiatives to improve our sales and security infrastructure. We have also stepped up our investments in R&D to support future offerings in financial self-service and security.

So even with these increased investments, we expect our full-year operating expense to be around 18.5% of revenue, a substantial reduction from 2011.

Now to slide 19. Non-GAAP operating margin in the second quarter increased to 6.4% from 5.6% in 2011. On a dollar basis, operating profit rose nearly 30%.

Similar to the first quarter, this increase was driven by strong performance in North America as well as improved profitability in EMEA. As such, we remain confident that our full-year operating margin will be in the low to mid 7% range.

Turning to the EPS reconciliation table on slide 20, non-GAAP EPS moved from $0.44 per share in the second quarter of 2011 to $0.49 per share in the current quarter. Our non-GAAP tax rate moved up considerably, from 24.9% in 2011 to 34.4% in 2012. The 9.5 percentage point increase is attributable to more income in jurisdictions with higher tax rate. Additionally, a nonrecurring discrete item related to state tax benefits reduced the effective tax rate for the second quarter of 2011.

Our full-year EPS guidance assumes the non-GAAP tax rate of around 27%. Slide 21 provides some insight on the sequential decline in non-GAAP EPS.

As shown, EPS declined by $0.25 from the first quarter of this year. The majority of the decline came in North America, resulting from a much stronger mix of national account revenue as well as increased service costs we covered earlier. These items resulted in a 3 percentage point decline in total gross margin and an $0.18 reduction in EPS contribution in North America alone.

From a global standpoint, the net result was a $0.16 reduction in EPS contribution. The higher tax rate also contributed to lower earnings per share in the second quarter.

Turning to slide 22, free cash use improved $6.3 million in the second quarter, while year-to-date free cash use improved by $69 million. As such, our free cash flow will be more balanced this year, though we still anticipate a strong fourth quarter. Our significant improvement in free cash used year-to-date, coupled with continued high-profile enterprise-wide initiatives, puts us in a position to potentially exceed $170 million in free cash flow for the year.

Looking at slide 23 and 24, days sales outstanding again improved by 4 days from the prior year to 48. Inventory turns improved slightly during the quarter versus the prior year. While we are at the highest second-quarter inventory turn level in several years, we have room to continue to improve inventory turn as we move forward.

Moving next to the liquidity and net debt slide on slide 25, we finished the quarter in a net debt position of $101 million, a reduction of nearly $50 million from the net debt position at June 30, 2011. As our net debt improves, we retain a solid financial position that gives us the flexibility to reinvest in our business.

In addition to our dividends, our primary use of cash includes investments in the business through areas such as research and development, smaller bolt-on acquisitions, as well as an opportunistic approach to share buyback. During the quarter, we did not repurchase any shares; however, we have roughly 2.4 million shares remaining on our repurchase authorization, which will enable us to repurchase shares opportunistically depending on market conditions.

In our full-year outlook for 2012, as shown on slide 26, we expect revenue to increase 6% to 8%, down from the previous guidance of 7% to 10% due to currency headwinds and the pushout of additional Brazil voting revenue in 2013. We are also tightening full-year guidance for financial self-service revenue to 10% to 12% due to currency.

Security revenue guidance remains unchanged. And Brazil elections and lottery revenue is now expected to be in the range of $45 million to $55 million.

We are tightening our full-year 2012 non-GAAP EPS guidance to be in the range of $2.50 to $2.60 per share from the prior guidance of $2.50 to $2.70 per share, again due to currency headwinds and the pushout of additional Brazil voting revenue to 2013. So at a constant tax rate of 27%, our revised earnings per share guidance represents a 12% to 16% growth off of a 6% to 8% growth in revenue.

Regarding the FCPA investigation, as shown on slide 27, earlier this year we completed our global internal review. We are continuing to cooperate with the Department of Justice and the SEC in their ongoing inquiries.

We have recently begun initial discussions with the government toward a resolution to this matter. However, we cannot predict the timing or nature of any potential settlement at this point. Moving forward, as has been our practice, we will continue to communicate any material updates on an ongoing basis.

In closing, I am encouraged by our second-quarter revenue growth despite significant currency headwinds seen in our core markets. While our gross margins during the quarter were below historical norms due mix effects and service-related items I discussed earlier, our margin expectations for the full year remain essentially intact. In addition, we are maintaining our discipline around operating cost containment.

Finally, as Tom stressed in his comments, aside from the moves in currency and the delay in the additional Brazil voting business, our outlook for the year remains the same. Our overall performance continues to successfully align us with the strategies and operating targets set within our financial framework.

Our revised revenue guidance for 2012 still puts us above our long-term goal of 4% to 6%, and we are making strong progress towards achieving our target of 15% sustained return on capital employed. For the last 12 months, our return on capital employed stands at 14.9%.

The strength in our core markets provides the catalyst for our growth expectations moving forward. In addition, our restructuring efforts in EMEA continue to bring improvements from an operational standpoint. And lastly, our solid balance sheet and improved free cash flow performance provides us with the leverage we need to deliver on our commitments as we move into the second half of the year.

With that, I'll turn it back to John.

Thanks, Brad. Deanna, we are prepared to take our first call -- I'm sorry, our first question at this point.

(Operator Instructions) Kartik Mehta, Northcoast Research.

Hey, good morning, Tom. I'm wondering; if you look at today the fundamentals in the ATM market versus at the beginning of the year, worldwide, what markets do you think are in line with what you expected, better than what you expected, and maybe worse than what you expected?

Okay. Let me go by region. I'll start with North America. I would say North America is in line with what we expected.

We knew coming out of the gate that the first quarter -- we didn't know maybe quite the sheer size the first quarter was going to be on the regional side, but we knew it was going to be very strong. So you saw a lot of the -- a little bit of the second quarter being pulled in as a result of the ADA, the deadline. But I would say, really both this year and long-term sustainability, the underlying factors in North America remain constant and we are pretty bullish about that.

When I look at EMEA, I would say EMEA overall you would say is probably a little worse as the year has gone on relative to some of the Western European countries. So in our case, while revenue for instance in the quarter was down, and you would say -- well, that might be a negative impact for us. Actually we swung to profitability because of the focus on specific countries there.

So overall, I would say for us where we participate you would say that that's a pretty choppy market and it is pretty volatile. But I would say that is probably down a little from what we expected at the beginning of the year.

When I look at Asia Pacific, I would say Asia Pacific is pretty close, maybe with the biggest movement in terms of being more positive than we thought in terms of India and what that can mean really for the outlying years in terms of the actions of the government there. Because not so much with the state-run banks, but really that puts the private banks in a position of having to play catch-up, and so you have opportunities in both of those segments as that unfolds. So, Asia Pacific probably is maybe going to be a little better than we thought at the beginning of the year.

And I think the remainder would be Latin America and Brazil. For us I would say in the self-service piece, certainly if I strip out Brazil voting, the voting piece was different than we expected as I explained. But on the self-service side I would have to say very strong and maybe even a little better than we thought at the beginning of the year.

Then, Tom, you talked a little bit about India and how the market is changing there. From a growth perspective, what would you expect the growth rates for that country to be from an ATM side over the next couple years?

Yes, Kartik, I think from our standpoint the big pieces there have to do really with the managed services sides of things. So, you know when you start taking a look -- if you're going to look at just the unit count you'd say pretty strong growth, but the pricing on that is pretty low; and how you participate there is a little different.

So for us, I would say it should be a double-digit growth environment for us in India with a lot of emphasis on service and services. And that really plays into what we think our strength and what we built there within the Indian market.

And certainly as you have seen, the dynamics there are changing very quickly. We will know a whole lot more in the next three to four months how things shake out. But we feel pretty good about what is happening there from a macro-level standpoint.

Then just one final question, Tom. In Brazil, there were talks in the marketplace that maybe Banco Itau was going to put out an RFP. I am wondering, to the extent you can talk about it, has that RFP been placed? Have they determined who is going to supply the ATMs?

Yes, Kartik, I think we can from the standpoint that they have been pretty public in terms of looking to have a second supplier there. As many may know, that Banco Itau is one of the best banks in the world, and certainly from a stature standpoint but also in terms of a performance standpoint within Brazil and Latin America.

They have been captive really to Itautec, which is their -- was a wholly-owned subsidiary there from a technology standpoint. So they were the sole provider in terms of ATMs.

They changed, really, approaches here this year. And fortunately for us, we did win an order from the bank. We have been in the process of working with them, and when I visited Brazil on my most recent trip I had a chance to have several meetings both at the bank and at the technology show we were at and had some long conversations there.

So I feel very good about our capabilities, especially compared with what they are accustomed to. I think for us it will be a long relationship unfolding over many years.

The first pieces of the hurdle -- you have to get through certification; you've got to go through all the internal hurdles you might imagine with a bank with 30,000 or 40,000 ATMs and the local sophistication they have. But to date, they were very positive to me in terms of where we stood, the pace with which we were pushing them -- not them pushing us -- and our ability to really not only get in there on really the hardware side but on the services side as well, which is really key.

So we have some pilots going on certainly from the technology standpoint. But more interesting to me, we've got a lot of pilots going on, on the services side, which I think is really encouraging because that gives you really the sustainability that you have versus just selling a piece of hardware. So I feel really good about that and I think 2013 for us should shape up very nicely with Banco Itau.

Thanks, Tom. I appreciate it.

Matt Summerville, KeyBanc.

Morning. A couple questions. Brad, can you quantify the hit you took on excess and obsolete inventory and some of the investments you are making in the fleet? What did all of that cost you in the quarter?

Well, Matt, I think if you look at the overall margin performance and the trend that we had been on, what I would ask you to do is just assume the trend that we had been on now. Again, first quarter was maybe a little stronger than the historical trend, but take that historical trend and then delta it versus what we actually delivered; and that is really the impact.

Then the level of investment you are making in infrastructure around the Integrated Services organization, how long will these investments you are making suppress margins somewhat, if you will?

Yes, I think again, implied in our guidance is that the margin performance for the service side of the business will be up from certainly the performance that we delivered in the second quarter because, again, of the high investments. But those investments will continue for the rest of this year, I think is a fair assumption.

But again we are guiding to relatively flat service margins. Again, second half will be up slightly, but it will still be burdened by some of this infrastructure investment as we formally launch the Toronto Dominion contract.

Matt, if I may have one comment there, so our expectation is we would enter -- exit the year, I should say, in the fourth quarter, north of 28% relative to the service margins. So I would say the second and third quarter would bear the biggest impact relative to the immediacy of the building of the infrastructure.

If I can explain that for a minute, it is basically because of the level of sophistication associated with Toronto Dominion, but also because of the growing book of business there. The decision we made was really to invest significantly to have the capacity to allow us to expand into the future. So I would call this a step-function investment. So it is one that really should be able to carry us for several years after this and be cutting edge and also give us, again, competitive advantage.

So while it is going to impact us I would say maybe materially in the second and third quarter in terms of margins, we would see sequential growth from this point in terms of margins and, more importantly, give us really good confidence in our ability to handle the increased volumes that we are seeing and that Toronto Dominion gets layered on, and the level of sophistication that we want to manage that business going forward.

Hey, Tom, just one or two other things. Can you update us as to what the total contract value is that you have now, just in the ATM business? You gave us the security business.

Then can you also help us with how we should think about mix. You provided a bridge essentially from Q1 to what you just reported in Q2. As we move from here to Q3 and 4 -- on the product side, obviously -- how should we be thinking about mix relative to this quarter?

Hey, Matt, I'm sorry; would you frame the first part of your question again? Were you talking about Toronto Dominion or were you talking about something different?

No, just the total ATM file value or Integrated Services backlog. It is a number you have given before.

Yes, yes. I think the contract value in the second quarter was about $100 million, total contract value; and the backlog now is getting close to $0.5 billion.

Great. That is what it was looking for there.

Yes, so that would be the -- basically that is spread over the three or four or five years of value in the contract, what we haven't revenued yet, that will revenue over that period of time for contracts we have already signed. And therein lies the issue relative to making sure we've got the right infrastructure in place to be able to put the kind of processes along with the technology in place to handle the volumes that we see coming down the pike here in 2013.

And then just on mix in the back half of the year?

Mix in the back half of the year? It would be -- if you're looking at North America, the mix clearly starts weighting towards the nationals. And maybe that is 55%, 60%-40% national to regionals. And then you see a higher mix of international as well.

Thank you.

Gil Luria, Wedbush Securities.

Thanks for taking my question. Orders overall, so it sounds like US orders are still up, and a few other regions they were down. Overall orders, how were they year-over-year? And what do you expect for the rest of the year in terms of how orders are going to come in?

Yes, so, Gil, the way I would think about that is in the quarter itself, down slightly. But when I look at the full-year I would say orders are going to be up very consistent with revenues.

So obviously each quarter brings its own unique comparisons, and likewise in the third quarter I would see very significant growth in orders. But again a lot of that has to do with timing; and when you even that out over the course of the whole year, you would say double-digit order growth scenario.

Got it. Then in terms of that mix shift in the US, regional banks appear to be coming off the highs from ADA pretty quickly. How long do you expect that decline to go? How much further down would regional banks go?

Is the ramp in nationals going to be enough to offset that? Are we looking at a possibility of declining revenue next year in North America?

Next year? I am not sure I can really answer next year. I think I would answer that maybe -- because I don't have enough information there. But I would say, Gil, when I think of this year, I would say that the strength in the nationals combined with where we are at in the regionals should put us in very good stead and be basically flat.

The one thing I would suggest is that as a result of the ADA, it pulled a lot of the orders in from the second quarter to the first quarter. And the revenue obviously was impacted dramatically as well.

But I would say going forward I would expect order entry to begin climbing again for the regional bank space, in that the second quarter I think was more of a breather in the market than there was any significant material change there. So I would expect for us, regional bank performance to be from a historic standpoint relatively good. It is just when you are coming off the kind of level we had in the first quarter, we are just not going to really see any activity like that for many, many years.

But I feel very good about the order activity in the regional bank space. And again it'd begin to climb from where it was in the second quarter.

Then finally --

It's just that the nationals will be even stronger. I think that the message.

Got it. Then finally on security, you're expecting to turn that into growth, into positive growth in the second half of the year. Is physical security stabilizing? Is it that electronic security is going to grow so fast to compensate for the declines in physical security? Is that business going to stabilize at this point?

Yes, I would say that in essence the physical security is pretty close to what I would call stable now. So the growth truly is going to be electronic security growth.

Again, we looked at that and we feel pretty confident in that 1% to 4%. We have said that all along.

I know when you look at that number you say -- geez, we haven't been able to hit it yet. But again as we look through the second half of the year, these are mostly orders in hand that we're executing against, and we feel very good in the 1% to 4% range.

And as I mentioned on the call, the more important piece is that we are seeing some real traction there on the electronic security side with the banks. I mentioned two significant banks where you'll get recurring revenue streams now with long-term contracts that, while they may not make an impact here for each of the next two quarters, long term that is very sustainable and good margin business when you talk about monitoring on the security front.

So we are pleased with the kind of activity there. And like we said, we moved from about $4 million to about $10 million, which -- again, it's small numbers, but gives me confidence in the trend that we should see good performance in 2013, which is probably the most important comment.

Got it. Thank you.

Julio Quinteros, Goldman Sachs.

Hi, it's Roman in for Julio. Question on the guidance. Just wanted to clarify perhaps what, if anything, surprised you during the quarter. So obviously, currency headwinds and the macro environment, it is what it is. But of the increased investments and even the mix shift between regionals and nationals, did any of that surprise you? Maybe was the mix shift a little bit quicker, or the increased investments a little more than you expected originally?

No, I would say that wasn't a surprise. Really there are two discrete factors. One as you mentioned, the currencies.

But the one that was the surprise or the information we got was really Brazil. It had to do with the Brazil elections and the impact for the full year.

So really outside of that, the first half of the year would be in line with where we said was -- the first and second half were going to be pretty even this year. And now we think the fourth quarter is going to be a little bit bigger because of the movements out of the third quarter relative to the Brazil elections.

So I'd say overall some ins, puts and takes, ins and outs. But nothing really of any dramatic surprise.

Okay. In relation to Brazil, what was the reason for the pushout? And what degree of comfort do you have that the order will actually come in, in the October time frame you provided?

Yes, so the pushout was they're running elections in October. And so -- I don't know if you remember, but earlier on we mentioned that they had a changing of the guard there. So we had basically the commitment of 90,000, and they placed a hard order for 35,000.

As they started unfolding the year, they came to us and basically said -- look, we're not going to do any other orders before the election. The elections are in October; so we have expectations then in the December time frame to receive an additional order.

And while you are never 100% sure, we got -- we had some direct conversations with them and feel pretty confident about the ability of that occurring. So that is our expectation, it would be a fourth-quarter order.

Okay. Then one last one on EMEA, what is the plan there going forward? How can we expect you to grow that business from here, given the cost reductions you have taken there?

Yes, okay, so I think there's two aspects. One is we have been very, very focused on the profitability side of the equation. So as such, as we indicated there are select countries where we are focused on.

We got out of certain countries and try to get out of some cost structure there. You saw all the actions we had taken over the years, and I think it is paying off by the performance both -- not this quarter because we had profitability, but even last quarter in terms of the improvement year-over-year.

So the trend there is positive. We continue to manage that very closely.

The second piece is that when you look at it from an overall standpoint, despite getting out of certain countries and moving the organization around, our order entry has been reasonably good and I think for the full year should be pretty comparable to last year, with difficult economic environment. So, the other piece of that is -- so we have certain countries we have some strength in.

The UK happens to be a country where, quite frankly, we have not been a player at all. So that was a market where we felt, given the size of the banks and the impact they have from a global standpoint and the conversations we have had, that we have been working with some of them, that we developed a product oriented toward that market that we unveiled to the market. We brought in a leader that has been a banking expert there for the last 10 years with one of the biggest competitors in the region.

And we also have additional infrastructure we have put in place. So my expectation, the UK would be an important player for us going forward along with what we do in Brazil and in Italy, in Belgium and South Africa, and some of those key countries in addition to Turkey.

So really the area that probably we have the weakness from in terms of Eastern Europe, we don't see that changing here for us in the short term. But we have got those other countries where we think the opportunities are pretty good. And with the leadership we have put in place, feel very good about not only profitability but being able to start looking at some growth here in 2013.

Thank you.

(Operator Instructions) Michael Kim, Imperial Capital.

Hi, good morning, guys. Just first off on the tax rate guidance, can you help us understand a little bit the balance of the year, especially considering the mix of regions that drove a bit of a higher tax rate in the second quarter? Thanks.

Yes, Michael. Let me answer that again. I think the 34% tax rate that we had in the second quarter brings the year-to-date non-GAAP tax rate up to about 28%. As we look to the full year, we are guiding to around 27%.

So I think you can see in the second half of the year, it will be slightly a lower tax rate than where we are on a year-to-date basis. That is really driven by, again, all the discussion that we just had on what's happening to the profitability in the North American business with more national bank revenue, which again comes in at a lower margin. So that is really what is driving the overall tax rate down slightly in the second half of the year.

Okay, great. Then just turning to electronic security, more of a strategic question. I think in looking at Stanley Black & Decker they have been pretty active in acquiring and consolidating a number of security companies over the past few years. How do you guys feel about your organic capacity versus adding bolt-ons or perhaps something a little bit more substantial than that?

Yes, I will start that and Brad can add any comments he wants. There's a couple things.

Let me first talk about the organic side. One of the things that you would look at when you tear our businesses apart, you'd say -- hey, in North America, which is what we are talking about really with electronic security, you would see self-service historically a 50, 50-plus-% market share. You see the same thing in physical security; as a matter of fact in physical security it was probably 60% or 70%.

And then you would see electronic security. Our share of the financial marketplace is less than 10%, and it's somewhere are around 6%, 7%, 8%, somewhere in that neighborhood.

So first of all, the opportunity and that we focused on was really focusing on the financial industry with electronic security. We really started moving in that direction aggressively over the past, say, year. We took one of our key folks that sold Integrated Services and put them over on that side of the house to say -- you're going to do that on the electronic security front.

So I am really pleased with the Regions and BB&T kind of conversation that we've got. Major top 25 banks that are looking for us to do that, which is evidence to our capabilities there.

The second would be that we brought Tony over to run the business because of his experience and capabilities. So he will have the ability to tweak our strategy as we go forward. And clearly we don't need Tony to help us in the financial space, we need him to help us in all the other commercial spaces, along with his experience on the M&A side.

So I would say for us, we think about them as small bolt-on acquisitions. We want to make sure that we have got the core of our Company focused and running clearly in the financial space, and then to take advantage of some of the experience we have with some of the major type of enterprise-wide projects.

But first things first. We want to get financials running, and then we will start looking outside the financials to increase our capability there.

We feel like we have the skill sets; we have the competency; we put the right organization in place, and now we have the right leadership. So we are going to be patient with this. We think it is a big market with a lot of opportunity going forward.

But if opportunities from an M&A standpoint avail themselves, we will do those prudently. We are not going to acquire for the sake of acquiring. They have to either add capabilities or capacity that we don't have today, and they have to be at the right price.

So we are going to watch that very closely. Most importantly, our confidence in terms of delivering 1% to 4% this year is solely based on the financial sector. Then as we go forward I am hoping that we should start seeing capability of growing double digits here, 2013, '14, '15 in the electronic security space.

Great. Thank you very much.

Paul Coster, JPMorgan.

Yes, thanks for taking my question. My sense is that you expect the Brazil electoral systems business to shift into 2013. That said, it's after the elections themselves. So is there any urgency in Brazil or is it possible it shifts back into 2014 and beyond?

No, the contract -- the way this commitment is written is that if they don't order those this year, pricing, certification, everything else goes out the window. So that is something that they don't want to put themselves through again.

So their sense of urgency is taking advantage of a pretty favorable contract, which we got some assurances of that they will do this year. And for us it means the order would be then December revenue next year.

But they have been on the mindset of saying -- look, we are going to replace numbers of these each and every year. Thus this becomes much more of a recurring business. And I think this is just part of that strategy.

So we feel pretty good about or our confidence is pretty high in terms of what is going to happen here next year relative to the revenue and this year relative to the order entry in December.

Got it. There was a sort of strange data point last week regarding Bank of America's intentions around its off-premise ATMs and withdrawing a number from the market. Can you just comment upon that? Is it something that we should be concerned about more broadly regarding the national accounts?

No, I think for us it's actually a good movement. So for us, the movement in terms of the off-premise locations are much less technically competent types of ATMs, so to speak. So in Bank of America's case they are looking for the kind of functionality and service contracts and capabilities that we can provide, where you are talking about taking cash, checks, recycling, availability in the 99% range.

So the off-site terminals is much more like the ISO market, which is a market we really don't participate in. So for us, that was really a place that impacts some of our competitors who play in that space but really doesn't impact us in any manner, since we are really focused on the functionality and services side of the business.

Okay. Then lastly, I apologize if you have already answered this, but just shaping the remainder of this year, it sounds like it is going to be heavily back-end loaded owing to the India and TD service contracts. But correct me if I am wrong there. But in addition, should we expect sequential growth in the third quarter?

In terms of -- I assuming you are saying sequential growth from an EPS standpoint?

EPS and revenue standpoint, yes.

Okay, so I would say for sequentially, no; you would see really the fourth quarter bearing the biggest growth relative to EPS to get us to our guidance. So third quarter would be down sequentially in that regard. From a revenue standpoint, we're relatively flat.

Got it. Thanks very much.

At this time I would like to turn the call back over to John Kristoff for any final or closing remarks.

Thanks, Deanna. Thank you, everyone, for joining us this morning. As always if you have any additional or follow-up questions, please feel free to reach out to me directly.

This does conclude today's conference. We thank you for your participation. You may now disconnect.