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Diebold Nixdorf delivers a 'solid' Q4
Diebold Nixdorf achieved the first really promising earnings results since its business combination two years ago. But while CEO Gerrard Schmid described Q4 results as "solid," he and the rest of the executive team caution that the company still has a couple years of restructuring work to do to create a sustainable modern enterprise.
February 19, 2019 by Suzanne Cluckey — Owner, Suzanne Cluckey Communications
"The strongest profit and cash flow performance the company has delivered since the combination of Diebold and Wincor Nixdorf," was how CEO Gerrard Schmid summed up Q4 results in a Diebold Nixdorf earnings call before U.S. markets opened last Wednesday.
"Solid fourth quarter results" was just the sort of news the company's CEO of less than one year needed to be able to deliver. It was certainly the sort of of news shareholders needed to hear, and their relief was reflected in Diebold Nixdorf share performance following last Wednesday's earnings report.
Prior to the 8:30 a.m. EST analyst call on Feb. 13, the company's shares listed at $5.22. Immediately after the call, they shot up to $7.20 and, two days later, closed out the week at $8.05, an improvement of more than 54 percent.
Still, Diebold Nixdorf has an arduous road ahead to get back to its share price of approximately $29 as of mid-August 2016, when Diebold officially acquired Wincor Nixdorf. But the numbers are at least moving in the right direction for a change with the company's most recent earnings report.
A critical element of success in Q4 was product sales, which grew nearly 14.5 percent year over year (18 percent in constant currency). Much of this increase took the form of ATM hardware sales, as financial institutions began to prepare for the next operating system upgrade and sunsetting of Windows 7 in January 2020.
Diebold Nixdorf sold more than $100 million worth of Windows 10-enabled machines in the last quarter of the year, Schmid said.
In his view though, improved ATM sales were not simply the function of a required operating system upgrade:
"On a global basis, the strength in banking orders reflects a number of recent customer conversations I've had, namely that the ATM will continue to serve as a critical customer touch point at financial institutions for several years. This reflects a more stable outlook for the industry going forward."
Schmid also assured listeners on the call that Diebold Nixdorf is maintaining a firm foothold in the ATM market.
"Based on market intelligence for ATM shipments, DN is maintaining a solid share in Europe and North America, growing our share in Latin America and the Middle East and we are intentionally focusing our efforts on more profitable business in Asia."
Schmid's choice of the word "stable," is an admission of sorts, though, that the boom years of the early 2000s are unlikely to return, as lucrative western markets mature and global banking and payments channels evolve.
At least partly as an acknowledgement of the changing financial landscape, Diebold Nixdorf has streamlined its banking hardware offering by 30 percent and optimized its manufacturing footprint, in the process closing a manufacturing plant in India.
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The company also continues to sharpen its focus on software and services. Diebold Nixdorf accomplished a 6 percent boost in year-over-year earnings, but experienced a decline of 2 percent in constant currency.
Responding to an analyst's question, Schmid said the decline in services resulted from three factors: a large low-margin contract in Asia; unfavorable foreign exchange; and volume declines in China.
To increase service efficiency and margins, Diebold Nixdorf has launched a services modernization plan that includes hardware and software upgrades, automation of incident identification response and standardization of internal processes.
"We are seeing early signs of success, which include sequential gross service margin expansion in the third and fourth quarters," Schmid said.
In software, Diebold Nixdorf has strengthened product management and product development functions with new talent, he added.
The big questions in the call dealt with working capital, liquidity and the timeline to a return to profitability.
Schmid reported cash of $492 million, net debt of approximately $1.75 billion and a leverage ratio of net debt to trailing 12 months adjusted EBITDA of 5.3 times, within the bank facility covenant maximum of 7 times. The company expects break-even results in cash flow for 2019, he said.
Chief financial officer Jeff Rutherford said the company is targeting revenue growth of 2–4 percent annually, led by Americas banking and retail segments and services and software business lines.
"With respect to our operating profit and adjusted EBITDA, we are targeting strong improvements driven primarily by the DN Now $400 million cost savings program. Revenue growth from higher-margin services and software offerings should also benefit our profit margins," he said.
In response to an analyst's question about the company's ongoing cash restructuring expenses, Schmid emphasized that the company's current DN Now initiative involves structural, not programmatic, change.
"We're not looking at one-time changes," he explained. "We're looking at structural changes to how we operate. … Our expectation coming out of the back end of 2021 is a sustainable organization. And that's what we're focusing on. We're not trying to focus on one-time gains. And therefore, while I understand the preference to be minimizing restructuring. we actually think it's the right long-term answer for the organization's health."
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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Diebold Nixdorf
As a global technology leader and innovative services provider, Diebold Nixdorf delivers the solutions that enable financial institutions to improve efficiencies, protect assets and better serve consumers.
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