When Andy Mattes was hired as the new president and CEO of Diebold Inc. in June 2013, the company wasn’t in what you’d call peak running condition; revenues were flagging, margins were deteriorating and free cash flow was feeble.
The company was overbalanced with management and missing market opportunities as the result of operational deficiencies.
Mattes set to work with Diebold leadership, crafting a multiyear turnaround plan to be executed in three phases: crawl; walk; run.
Two years later, Diebold has reached a turning point in its crawl phase and is ready to start walking, Mattes said Thursday in the company’s second quarter earnings call.
“We’ve put our processes in control,” he said. “We have our systems. We feel very comfortable that the cost containment thought process is becoming part of the general DNA of the company. And then, we’re opening a new chapter on the walk side of the house, where we’re going more into a services-led, software-enabled business.”
The comment was, in fact, in answer to an analyst’s question about the company’s decision, also announced Thursday morning, to eliminate the chief operating officer position and part ways with George Mayes, who joined Diebold in January 2005 as vice president of global manufacturing, and was named COO in January 2013.
Mattes related this news in his opening remarks, wishing Mayes well. Later, he said that eliminating the COO position had been a tough decision to make:
But as a company, we’ve been putting a lot of effort in taking out management layers, streamlining the organization, hiring great talent as close to the customer as possible. … [W]e started doing that in the middle management ranges at the beginning of our turnaround. At some point in time, you also have to do it at the top of the organization. At the end, it will also [benefit] our decision-making processes and it’ll make us a little bit more customer-centric in our approach going forward.
Tough decisions do seem to be translating to bottom-line results. In two years, Diebold has improved its gross margin by 300 points, expanded profit margins by 100 basis points, and increased free cash flow to 90 percent of net operating profit after tax.
And despite ongoing challenges — most notably, weakness in foreign economies and currencies — Mattes pronounced the company’s earnings in the latest quarter to be “solid.”
He reported that financial self-service revenue increased by 5 percent year-over-year, or 13 percent in constant currency.
Additionally, Diebold saw Q2 revenue gains of 7 percent in its security division (8 percent in constant currency), largely from electronic security sales.
Diebold also realized double-digit orders and increased market share in EMEA, which helped somewhat to offset declines in Brazil, where revenues plummeted by 95 percent (down $36 million) year-to-year, and China, which has implemented government regulations encouraging banks to work with home-grown technology providers (a development that dampened NCR Q2 revenues in China, as well).
These gains are indicative of the company’s readiness to graduate to walking, Mattis said:
Our recent track record is encouraging and the leadership teams see significant opportunities to accelerate mix shift toward services and software and increase share during the walk phase of our transformation. We’re focused on increasing the percentage of recurring monthly revenue from software and services alike, which typically improves visibility and value. In most cases, these are also the faster growth areas within our industry.
Diebold is already reaping rewards from its purchase in March of London, Ontario-based Phoenix Interactive Design Inc., a provider of software solutions for ATMs and other self-service applications.
Mattes reported that Mexican FI Banorte had selected Phoenix software for its multivendor network of 7,000 ATMs across Mexico, a win that was influenced in part by Diebold’s already strong presence in Latin America, he said.
Diebold will be looking for more of this type of synergy as it seeks to rebalance its revenue mix so that the company’s more profitable software and services segments comprise at least 60 percent of total revenues.
This, in turn, will be the company’s foot in the door for the automation technologies banks are tapping into for their branch transformation projects.
Mattes pointed to important service wins, including a new agreement with one of America’s top three banks covering 2,200 multivendor ATMs.
The company also is reporting inroads in the retail service space with a 2,500-ATM multivendor service agreement with “the world’s largest independent ATM deployer.”
These results were no less than Diebold leadership had expected, Mattes said:
When we launched the Diebold 2.0 transformation, we knew that most of our success was within our control. … As we begin to enter the walk phase, we will continue to execute on cost, cash and talent, while placing a greater emphasis on improving our revenue mix and sustaining our top line growth, especially in services and software. We remain upbeat about the opportunities emerging from the transformation taking place within our industry and our company.