Diebold's record year hurt by vote machines; Elections business revenue too low for investors  Original Story here

Strong ATM sales helped Diebold Inc. soar to a record quarter and year, but hang-ups with electronic voting proved to be an albatross the company couldn't shake Wednesday.

Diebold's stock ped 5.5 percent, or $2.85 per share, to $49.32 on the New York Stock Exchange even after the Green company announced it more than doubled its fourth-quarter earnings over 2002 and surpassed $2 billion in annual sales for the first time.

``People wanted to see better margins,'' said Kartik Mehta, an analyst with FTN Midwest Research in Cleveland. ``What happened was they did not get the electronic voting revenue from Ohio they had been anticipating due to delays. The security systems segment is growing faster, but that is a lower-margin business.''

Diebold earned $59.2 million, or 81 cents a share, for the quarter, compared to $21.9 million, or 30 cents a share, a year earlier, the company said. That was a penny higher than analysts predicted.

The year-ago results included special charges for tax and accounting adjustments. Excluding those charges, the 2003 fourth quarter earnings were ahead by 10 percent, the company said.

Sales rose 23 percent to $648.4 million, including a 19.3 percent jump in Diebold's ATM division.

Diebold Election Systems proved to be a sore spot, though.

``The elections systems business proved to be challenging in 2003 as delays in implementation caused revenue to be down $11 million (to just over $100 million) versus the prior year,'' Chairman and Chief Executive Walden O'Dell said in a conference call Wednesday.

In the fourth quarter, the division had a $28.5 million order for electronic voting machines from San Diego County, Calif. But for the year, operating profit was down 9.7 percent.

O'Dell admitted there's some uncertainty when it comes to pinpointing revenue from electronic voting. State governments are still questioning the machines' reliability and security. (In the past, such questions have led to one-time costs to bring the voting systems up to code.) And some states, namely Ohio, have asked to delay installing the machines until this fall.

As a result, Diebold expects revenue to be flat for the first quarter. Most of the division's growth will come in the second and third quarters, prior to fall elections.

For the year, Diebold Election Systems should pull in $138 million to $170 million, the company said. This includes $75 million in expected revenue from Ohio, $37 million for a contract in Brazil, $30 million in recurring revenue from existing clients and as much as $30 million from opportunities in several other states.

``There is some volatility in their voting systems business... but it's not a large part of their business,'' said Philip Guziec, an analyst with Morningstar. ``The market could be reacting to expectations that there was going to be a big voting market and now there's not.''

O'Dell remained confident, though.

``Our touch-screen election systems continue to significantly outperform traditional punch-card and lever systems in real- world elections, and as a result we are confident this technology will continue to be implemented,'' he said.

For all of 2003, Diebold earned $174.8 million, or $2.40 per share, as sales reached $2.1 billion. The per-share result for the year also was a penny above analysts' expectations.

The company said it expects earnings to range from 38 cents to 42 cents per share in the first quarter of 2004 and $2.58 to $2.70 per share for the year.

Erika D. Smith can be reached at 330-996-3748 or ersmith@thebeaconjournal.com. The Associated Press contributed to this report.