Diebold, Incorporated (DBD)

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Diebold Inc. (DBD)

Q1 2010 Earnings Call

April 27, 2010 10:00 am ET

Executives

John Kristoff - VP, Chief Communications Officer

Tom Swidarski - President and CEO

Brad Richardson - EVP, CEO

Analysts

Reik Read - Robert W. Baird

Matt Summerville - KeyBanc

Paul Coster - JPMorgan

Zahid Siddique - Gabelli & Company

Gil Luria - Wedbush Securities

Michael Saloio - Sidoti & Company

Kartik Mehta - Northcoast Research

Presentation

Operator

Good day, everyone and welcome to the Diebold Inc. first quarter financial results conference call. Today’s call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the Vice President and Chief Communications Officer, Mr. John Kristoff. Please go ahead, sir.

John Kristoff

Thank you, Jessica. Good morning and thank you for joining us for Diebold’s first quarter conference call. Joining me today are Tom Swidarski, President and CEO; and Brad Richardson, Executive Vice President and Chief Financial Officer.

Just a few notes before we get started. In addition, to the earnings release, we 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.

We have also included non-GAAP financial measures throughout our presentation this morning. Specifically, I refer you to slides 26 through 32, which provide GAAP to non-GAAP reconciliations as well as our rationale for the use of non-GAAP measures.

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

And now, with opening remarks, I’ll turn it over to Tom.

Tom Swidarski

Thanks, John. Good morning, everyone. As you’ve seen this morning we delivered solid operational results despite a difficult comparison for the same period last year. And which we had particularly strong earnings. In fact, we exceeded our internal expectations during the quarter as some business closed sooner than expected and we benefited from a more profitable segment mix. As a result, we’ve gained more confidence in the full year outlook we provided during our last call, and we are reaffirming our guidance for both earnings and revenues for 2010. I am particularly pleased with the continued positive gains in our service and services businesses as we have put a great deal of focus on this area.

As the products business begins to stabilize growing and improving our services business further is paramount to our overall success. Our continued investment in infrastructure for services particularly in the Asia Pacific region enabled us to improve service profitability once again during the quarter. We are on track to achieve our goal to improve service gross margin for the third consecutive year. Our competitive advantage lies in our unmatched stability to deliver a full range of service, support and software solutions that work reliably at lower cost and with the flexibility to meet diverse customer demand. That’s the driving force behind our service strategy emphasis in our core businesses and it’s the key to our future success.

Finally our net debt position improved by over a $100 million from 31, 2009. Brad will expand on this during his comments but from my perspective, we’ll continue to focus on working capital improvement throughout the year.

Now, look at our performance during the quarter and the market environment in the geographic regions. You’ll note that we are now bringing out North America and our revenue disclosure. North America remained a key market for us. And we believe this new format will provide investors with more transparency and better understanding of our overall business. Brad will discuss this in more detail during his remarks.

In North America, revenue declined 17% and order sale 9%. This expected drop occurred primarily in the national bank segment with the completion of large, deposit automation deployments but major national banks credit a very challenging comparison. From profitability standpoint, however, we benefited from a more favorable mix of business within the segment during the quarter. I’m also encouraged by the year-over-year increase in financial self-service orders, we saw at the regional bank level.

In fact, first quarter regional bank orders also improved compared with the fourth quarter 2009, and it was the highest order entry period we’ve had in the regional bank space in five quarters.

While one quarter does not constitute a trend, this is the first increase in orders we’ve seen in this space in quite sometime. We’ll continue to monitor order activity in North America but our expectations remained that total revenue will decline modestly for the full year. On the services side of the business revenue decline in the mid-single digits as a result of lower installation revenue. Services revenue outside of installation grew during the quarter as we continue to increase our focus on a value added segment of our service business. Along those lines I continue to be encouraged by customer activity and the level of interest we have been receiving in the integrated services portions of our business. I recently visited with two important regional customers in the U.S. and the information they shared with me underscore the validity of our strategic direction and integrated services and equally important our ability to execute.

Because of our track record over the years we have developed a great deal of trust within that segment of the market. As these customers we focused on our core of banking business, this confidence in our ability to take on aspects of their operations where we can drive improvements in technology, efficiency and cost. In addition, we are continually building credibility within the industry as a result of our performance in this space. Last week the international association of outsourcing professionals announced its list of the top 100 global outsourcing companies. We ranked 15 on the list, moving up from 35 on last year’s list.

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