The top two manufacturers of automated teller machines predict a good year for the industry, partly because it is time for banks to replace a number of their machines.
Diebold Corp. and NCR Inc., which reported solid fourth-quarter results last week, say the ATM replacement cycle is in full swing and could last another two or three years. Earnings rose 170% at Diebold and 40% at NCR.
During his company's earnings conference, Diebold chairman and chief executive officer Walden W. O'Dell observed that "things outside of what we and our competitors do" are driving the replacement cycle.
He said examples include the mandatory implementation of the Triple DES data-encryption standard for ATMs and point of sale terminals; the Americans with Disabilities Act, under which ATMs have to be more accommodating to the blind and others; and the Check Clearing for the 21st Century Act, known as Check 21.
Mr. O'Dell said during the Wednesday conference call that the industry's preparation for these developments has helped Diebold the last two quarters. "We expect it to continue," he said.
The North Canton, Ohio, company posted net income of $59.2 million for the quarter and $174.8 million for the year. ATM revenue rose 19.3% year over year in the fourth quarter, to $469.6 million. Diebold expects its overall first-quarter revenue to rise 10% to 13%.
Check 21, which fosters the use of digital images in lieu of paper checks, has yet to take off but will result in widespread upgrades in the near future, NCR chief executive Mark Hurd said. An analyst said that the law, signed in October, will probably lead to check-imaging functions in ATMs, which will ultimately mean cost savings for banks.
"In the Americas region, we saw both solid revenue growth and order activity during the quarter as banks prepare their ATM networks for the upcoming migration to check truncation," Mr. Hurd said.
Nonetheless, he predicted that the big rollout of check imaging technology will not take place until 2005.
"I still don't believe that the U.S. market is going to immediately move from its current installed base to a Check 21 image-ready ATM environment in six months or nine months," he said during his company's earning conference last Tuesday. "I think this will be over two to three years."
Mr. Hurd said 10% to 15% of NCR's U.S. machines could be upgraded - rather than replaced - for check imaging.
Erick Brethenoux, a sell-side analyst for Lazard Freres & Co., said NCR and Diebold will eventually profit from Check 21. "It's not just replacing ATMs," he said. "It's a bigger project, requiring the linking of banks' back-end systems, as well as some applications like bank statements, and customer relationship management."
NCR, of Dayton, Ohio, posted net income of $80 million for the fourth quarter. A $35 million charge in the second quarter for environmental cleanup at a factory the company once owned dragged down yearly profits to $58 million. Fourth-quarter revenues in the ATM business were up 13% year over year, to $392 million. NCR says it expects total revenue to rise as much as 2% this quarter, though it predicts a flat year, partly because of higher pension expenses. ATM-generated revenues should rise 5% to 10% for the first quarter, it said.
Analysts said both companies will benefit from the replacement cycle, but they differed on which of the two would do better. NCR is the largest ATM maker globally and Diebold is the largest domestically.
"In talking to the financial institutions, I would say, by and large, the two companies manufacture a similar mouse trap" and charge similar prices, said Matt J. Summerville, an analyst for KeyCorp's McDonald Investments. "But I would say over the last 12 months or so, I've heard more favorable commentary from banks here in North America regarding NCR's hardware and open-architecture software for the ATM."
Kartik Mehta, a senior analyst for First Tennessee National Corp.'s FTN Midwest Research Securities Corp., said neither company has a technological advantage over the other. But he called Diebold's Windows-based Opteva ATM a well-timed launch. "Diebold realized that the replacement market was going to happen and they came out with a brand-new ATM that caught people's eye," he said.
Mr. O'Dell said the new Opteva machines constituted about half the ATMs sold in the United States last quarter. The international rollout, now 10% of those sales, has been slower because each country has different certification requirements, he said.
He projects that Opteva machines will account for 90% of new ATMs sold domestically and 60% of those sold internationally by next year.
