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Diebold gets off to a rough start with 2016 earnings

Subpar performance in Q1 prompted the company to back off its outlook for the full year, but CEO Andy Mattes says that Diebold has plenty of large deals in the pipeline.

April 28, 2016 by Suzanne Cluckey — Owner, Suzanne Cluckey Communications

Diebold Inc. saw "many positive developments" in the first three months of 2016, according to president and CEO Andy Mattes. But none of them paid off in time to keep the company from falling short of expectations on the Street. Year-over-year revenue was down 11.3 percent in Q1, including a drop of 20 percent in product revenue. (see box)

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Like its competitor NCR, Diebold saw sluggish ATM sales during the quarter, which Mattes attributed at least in part to complications in emerging markets.

"In China, product volumes continue to be impacted by the government by local mandate, which we largely expected," he said. "In other emerging markets, such as India and Brazil, we experienced slower decision-making on hardware due to country-specific issues."

China last year implemented regulations that require foreign ATM vendors to establish partnerships with domestic manufacturers before they can sell their products in the Chinese market. This had the effect of shutting out all of the big three ATM-makers that had been serving the market — at least temporarily.

Late in 2015, Diebold entered a joint venture with Chinese manufacturer Inspur, purchasing a minority stake in the company. Mattes said Diebold would be the first major competitor to establish such a relationship to get back into the fast-growing Chinese market.

However, "first" does not mean imminent, in this case. The company does not expect the JV to become operational until the third quarter. When that finally happens, though, it could provide a noticeable boost for Diebold hardware sales, Mattes said.

It's harder to predict when Diebold might see a bump in business from the emerging Indian market. Following great fanfare about the government's opening of the IAD market, enthusiasm waned as questions arose about the profit potential under reserve bank rules.

As a result, Mattes said, "We see decision cycles being slow, slower than they used to be. We also see pricing in India on the hardware front to be extremely aggressive. And as you know, we are very selective in the type of deals that we take. We don't want to just have the bottom feeder deals."

Mattes said that in North America Diebold is adjusting to the longer timelines that accompany branch transformation projects. In Q1, this meant that while the company's financial self-services business grew about 5 percent in constant currency, product revenue declined 18 percent.

"It seems all players in the industry are seeing the market transition from a rip-and-replace to more of a platform architecture strategy," Mattes said. "As a consequence, projects are getting more exciting but also more involved because they touch many interconnected applications. This trend is manifesting itself across all customer segments in North America, including our regional bank customers who slowed their pace of hardware deployment."

When it comes to omnichannel platform architecture, Diebold can expect to reap benefits from its business combination with Wincor Nixcorf AG, which brings strong capabilities with behind-the-counter technology.

The proposed acquisition has cleared the share tender and financing hurdles, and has received antitrust clearance from the United States, China and Turkey. Diebold awaits regulatory clearance from eight other countries and expects to finalize the deal this summer.

Meanwhile, the companies continue to move forward with their respective business transformation plans. For Diebold, this means seeking to shift the mix of revenue from lower-margin hardware sales to higher-value services and software contracts to become a services-based, software-enabled provider of innovative hardware.

The company is seeing some success in its efforts. According to Mattes, services and software now represents 67 percent of Diebold's total revenue. Additionally, he said, more than 80 percent of the company's installed base of ATMs is under a service contract, with renewal rates of approximately 95 percent.

Diebold has more than 13,000 competitive units under service contract in North America and nearly 30,000 units under managed services agreements globally, Mattes said.

Despite soft hardware sales and attenuated timelines, Diebold did score new business wins in Q1. To date, the company has:

inked an agreement with Regions Bank for an initial rollout of Diebold ActivEdge card readers on 400 of the bank's ATMs;
signed a product and service agreement with BBVA Bancomer in Mexico covering 700 ATMs;
secured competitive wins with two financial institutions in Chile;
achieved growth of 5 percent in EMEA with orders for both products and services;
secured strong orders year-over-year in the Middle East and Africa ;
landed a product and service contract with a top-five French bank ; and
won branch transformation contracts with new customers in Spain and the U.K.

Ultimately, though, misses on both revenues and earnings per share during the quarter, prompted a downward adjustment to Diebold's full-year outlook. (see box)

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Mattes still found cause for optimism. "We've got more large deals in the pipeline than I've seen in a very long period of time. They are on the product side. They are on the services side. … Word is getting out in the street, which means we're getting a lot of interest around these things."

And then there's the huge omnichannel prize that Mattes expects to be ideally positioned to pursue once Diebold and Wincor are combined and running in tandem.

"Lots of complexity, lots of opportunity, $15 billion [total addressable market] — and we’ll definitely take our share of that market."

graphics Diebold Inc.

photo istock

About Suzanne Cluckey

Suzanne’s editorial career has spanned three decades and encompassed all B2B and B2C communications formats. Her award-winning work has appeared in trade and consumer media in the United States and internationally.

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