In early November, as the presidential election unfolded, all eyes were suddenly on Diebold
Electronic voting has met with its share of controversy, and any high-profile snafus during the election would have provided more ammunition for outspoken detractors who have frequently warned of possible tampering, software glitches, system malfunctions, or data manipulation. With few exceptions, the tens of thousands of Diebold Accu-Vote touch-screen units in operation seemed equal to the task, but none of that success was reflected in the bottom line. As in the last quarter, the company's election-systems segment continues to weigh heavily on earnings.
Still, fourth-quarter results released after the bell yesterday showed the company setting records. Earnings advanced 7.4% to $0.87 per share -- at the low end of guidance -- on revenues that rose 10.6% to $712.2 million. But excluding the election-systems business, which has just wrapped up a legal entanglement in California, earnings per share would have risen by 15.4%. Segment revenues plunged to only $13.6 million during the quarter on fixed costs, which along with weakness in Europe chopped 170 basis points off gross margins to 28.0%.
Fortunately for Diebold, voting machines constitute only a tiny fraction of its overall business. The company's bread and butter remains ATMs. Diebold controls two-thirds of the domestic ATM market, and its revenues in that division rose 12.6% during the quarter, and 13.1% for the full year, to $1.7 billion. Sales were even more robust overseas, particularly in the Asia-Pacific region, where revenues jumped 31.4%.
Diebold stands to gain handsomely as banks upgrade their older networks. During the fourth quarter alone, the company landed orders totaling more than $100 million for its next-generation Opteva line, including a sizeable contract with Carrefour, Europe's leading retailer. With changing regulatory requirements sparking demand for new ATMs, the banking industry has begun a replacement cycle that some analysts predict could continue for the next several years.
Any new technology meets with a certain degree of skepticism, but electronic voting will ultimately become a more accurate and efficient means of tallying ballots. The federal government is spurring the transition by mandating that the multi-billion-dollar commitment that has been earmarked to replace older punch-card and lever machines be spent by 2006.
Until then, Diebold's core "financial self-service" systems and security-products sales (and their accompanying service revenues) are growing at a healthy double-digit clip. Even with the weakness in the election-systems sector, the company still produced unprecedented fourth-quarter revenues, earnings, and free cash flows. With strong (albeit slightly toned down) growth prospects for next year, Diebold's stock just might be a good place to make a deposit.
Fool contributor Nathan Slaughter once had a summer job helping customers use new ATMs, but he owns none of the companies mentioned.