Diebold Nixdorf Q3 earnings report: Signs of growth

A lot can happen in three months. And at Diebold Nixdorf, it apparently has.

When the company held its Q2 earnings call in July, ATM sales were in the dumps, margins were under duress, reorganization costs were still rising and the company's cash position was precarious.

To the outside observer, it looked as if the wheels might be coming off, a perception reflected in an immediate drop in the company's share price.

Since then, management has been tightening down the lug nuts, judging by the company's Q3 call on Wednesday morning. Again, Wall Street reacted immediately, this time with a 14 percent boost for DN shares.

One of the best indicators of progress in Q3 was the company's first revenue increase since acquiring Wincor Nixdorf in 2016. Growth in the product and software segments through the past three months generated a 1 percent earnings bump in constant currency.

Presenting a look at the past three months' adjustments were Diebold Nixdorf President and CEO of eight months, Gerrard Schmid, and Interim Chief Financial Officer of one month, Jeffrey Rutherford, who came on board after Chris Chapman's abrupt departure.

Schmid began by explaining that the company had addressed its liquidity problem by engaging with lenders to raise $650 million of capital through a new term loan and renegotiating the terms of its existing credit agreement.

"Given current debt levels, we are reaffirming our commitment to improving cash flows and using excess cash for deleveraging," he said. "Our core priority, as a team, is to improve cash flow performance through operational improvements."

These improvements are taking several forms:

• The divestiture of 5 to 10 percent of the company's noncore businesses. DN is working with advisors and prospective buyers, and expects initial transactions in Q4 and finalized agreements by mid-2019.
• The rolloff of unprofitable business, most notably in China, Southeast Asia and India. "The margins are negative in many, many cases, and we also see a number of customers trying to extend out service warranties to multiple years," Schmid said. "So it's a multiyear loss making proposition to be in that business in certain countries."
• A new operating model that streamlines management layers and reduces personnel costs. The company is eliminating 1,600 noncustomer facing positions, mostly in middle management. "This wasn't a blunt instrument approach that we adopted," Schmid said. "It was a very, very analytical thoughtful look at spans of control, levels of management across the board."
• Services modernization. The company is working with customers to upgrade outdated and costly hardware models and software stacks. Additionally, DN will continue to automate incident management and response, and work toward standardizing internal processes, service offerings and contract terms for more consistent contract management.
• A 30 percent reduction in the ATM portfolio. "This effort is being well received, as demonstrated by the fact that 98 percent of Americas banking orders where we've seen strength in the quarter were based on streamlined configurations," Schmid said.

This "DN Now" program is expected to generate savings of approximately $250 million by 2021, savings that will start to show up in 2019 with the implementation of the company's new operating model.

Additional help could be coming from an ATM market that is finally beginning to show signs of revival. Shmid pointed to three positive signs:

• Strong activity across the board in the Americas. "Revenue growth of 4 percent in constant currency for the third quarter is encouraging, as the company benefited from higher product volumes in Brazil, Canada, U.S. national accounts and Mexico, and stronger software activity in Latin America," Rutherford said.
• A "big push" in markets such as Mexico, where large numbers of newly banked citizens are driving an increase in transactions and a need for a hardware refresh of aging and old machines.
• Migration to Windows 10, particularly in North America.

In response to an analyst's question about a downward trend in cash transactions, Schmid was optimistic. He said that a "modest degradation" was possible, but not a rapid falloff.

Additionally, he said, "When we speak to our major customers in large markets around the world, many of them will continue to advocate and have strategies where they will be increasing the number of physical touchpoints that they'll have with consumers. And many of them see the ATM as the most natural device to increase those touchpoints.

"So from my perspective, I don't see ATMs on a go-forward basis as purely being cash dispensing, but having far richer functionality to allow banks to maintain that physical touchpoint with consumers. … I think we have a meaningful role to play in the banking industry for several years still to come."