DIEBOLD NIXDORF, Inc Q2 FY2025 earnings call

• Capitalizing on market opportunities: Diebold Nixdorf is a leader in a $32 billion banking and retail automation market. Innovative self-service solutions are well positioned to capture growth. - Driving disciplined growth and profitability: In Banking, accelerating branch automation by introducing teller cash recycler technology and additional managed services; capitalizing on ATM refresh cycle. In Retail, AI-driven checkout solutions solve real customer challenges. - Focus on lean operations: Enhancing profitability, first half free cash flow success sets stage for $800 million in cumulative free cash flow by 2027. - Progress on growth acceleration strategy: In Banking, benefits of branch automation, cash recycling and fit-for-purpose strategy seen; wins in Middle East and India. In Retail, AI continues to change the way customers think about operations, first live customer in U.S. with Smart Vision product; launched retail manufacturing in Ohio; consolidating repair centers and rolling out technician software.

Banking: Revenue was up $50 million sequentially, order entry was strong. Gross margin was up 140 basis points year-over-year and 180 basis points sequentially, led by product margin expansion. Retail: Drove sequential growth in order entry revenue and backlog in Q2. Gross margin was down sequentially 70 basis points and year-over-year 190 basis points, with strong product margins offset by service margins. Product orders grew 10% year-over-year, reaching the highest level in 3 years. Backlog stands at approximately $980 million.

• Business trending toward the higher end of guidance across revenue, adjusted EBITDA and free cash flow. - Total company revenue expected to continue building with approximate split of second half revenues at 45% in Q3 and remainder in Q4. - On constant currency basis, expect to grow at least approximately 1%; FX expected to be a tailwind of approximately 1% for the year. - Adjusted EBITDA guidance $470 million to $490 million, trending toward higher end. - Non-GAAP effective tax rate for the year expected in the 40% to 45% range. - Free cash flow trending toward higher end of expected range of $190 million to $210 million, representing 40%-plus free cash flow conversion.

• Potential market volatility could impact results. - Tariffs could have an impact on margins and costs, although efforts are being made to mitigate. - Long and complex sales processes in some markets could delay revenue recognition.

Q: Expand a little bit on the fact that you have all this confidence regarding that Retail business inflecting in the second half of the year. Can you speak to where that is being driven from a pause versus still standpoint? Is it North America? Is it Europe? And then can you maybe discuss a little bit how the funnel in North America may be starting to mature and if you'd be willing to maybe put a value on that North American funnel?

A: Yes. Thanks, Matt, for the question. Look, in the quarter, what we saw was a much higher mix of point-of-sale revenue versus SCO revenue. That mix unfavorably impacts us in terms of margin performance from the perspective of not only services, but hardware as well. Some of that backlog and order entry growth that we're seeing, and Octavio will comment on this in a second, it's led by Banking, but we're seeing really positive signs of recovery in Retail. And we -- remember, in that backlog sits our Deutsche Post win, which we would expect to start converting into product sales towards the end of this year or early next year as well. So we remain confident that over the next quarters, we'll be able to sequentially improve both revenue, operating profit and margin as well.

Q: Just, Octavio, you mentioned about the Indian market, and it's clearly a very large addressable market. And you mentioned that the ATMs you sell there are more compact and energy efficient. Overall, are you able to achieve a similar margin profile in these machines? And just can you speak more broadly to the opportunity ahead in India?

A: Yes. So Antoine, India is probably one of the largest ATM deployer market today or one of the largest ones. We built our strategy around local manufacturing in India with a more compact, more energy-efficient product, smaller footprint because that's what the market needed. So this new redesigned product that meets all of our DN Series quality standards does allow us to compete and command similar margins to those that we have in the rest of Asia Pacific. Remember, the importance of this market is that it is a very fast-growing hardware market and more -- and one where we weren't particularly strong since we had exited manufacturing there a couple of years ago. By reentering, this allows us to once again start growing our installed base there. And the important part is as we grow this installed base, we have a very strong service annuity for the future.

Q: Positive to see the pilot program and the one customer on the uptake in Retail for the Vynamic software. Can you just give us a sense of the conversion of pilot programs or the lead time that, that takes?

A: Yes, Justin. And again, it varies, to be honest, depending on the size of retail, the complexity of what they're trying to deploy. We're encouraged that this is a midsized grocer that had a couple of hundred stores, but they've started with the first 18 that are now live. So we're happy to see that. That was a process that roughly took us 6 months from the inception of the first proof of concept to piloting in one of the stores to now starting to roll out in the first 18 stores. So I would say that for midsized companies, we're anywhere from -- 6 months should be a good time frame. We see that in some of the larger grocers, some of the larger retailers, that process is a little bit more extensive, particularly as retailers with multiple -- with hundreds or thousands of stores really create a more comprehensive testing process and evaluation process.