E-Voting Boosts Earnings Despite Hacking Concerns

Disaster is often an opportunity for building a great business. For the industry leader in electronic voting, the calamitous 2000 Presidential election provided an opportunity to earn hundreds of millions of dollars, but not without controversy.

Back in 1871, Chicago's Great Fire burned the city to the ground leaving its residents with nothing. Homes and businesses burned, lives and vital records left smoldering in the ashes.

But that moment of loss was a moment of opportunity for the Diebold Company. Hundreds of safes bearing the Diebold name survived the inferno with their contents intact, tempering the brand with a reputation for safety, security and ruggedness.

More than a century later a disaster of another kind seemed to offer an opportunity to Diebold. The Florida "hanging chad" debacle left a presidential election in question and focused the country on the task of finding a better way to vote.

In 2000, Diebold supplied Brazil with a $100 million electronic voting system, and that country's election went off without a controversy. The system worked, and company officials believed Diebold was ready to grab a big part of the billions that would be invested in upgrading the U.S. system.

Six years later the company has become the leading player in a growing market for electronic voting systems. The company's election division earned nearly $200 million in its most recent fiscal quarter, and Diebold's stock price currently lingers near its 12-month high.

Despite continued concerns from politicians, election supervisors and academics about glitches and the possibility of hacking into electronic voting systems, a surge in demand during the last five years has grown the industry and made e-voting a very profitable enterprise.

So why do some observers expect Diebold to leave the voting business altogether?

2000 Debacle Leads to More E-Voting

Soon after the 2000 election, Congress weighed in on the need to improve the country's voting systems. It passed the Help America Vote Act of 2002, which committed federal dollars to help states and localities upgrade outdated systems. According to officials at the United States Election Assistance Commission, more than $3.1 billion has been spent on new voting systems and training since then.

Diebold's experience building ATMs had earned the company billions, and electronic voting seemed similar enough to make it a logical extension of its efforts.

Diebold aggressively pursued the market, buying a Texas firm and quickly rolling out a touch-screen voting system, called AccuVote that made it the largest publicly-traded player in the election systems market in the U.S.

Its main rivals, Sequoia Voting Systems and Election Systems & Software, are niche private firms that don't have other ongoing business that generate the money to fund a big sales force or research and development. So their ability to quickly roll out and sell to thousands of local election commissions was limited compared to Diebold.

The AccuVote system quickly became the market leading electronic voting system. But that initial success came at a cost.

AccuVote had flaws. Its early designs were not up to snuff on security or reliability. Academics publicly demonstrated system hacks that purportedly showed how easy it was to alter a vote count.

And then Diebold's political partisanship came into question. While the company worked on upgrades and redesigns, Diebold's CEO Walden O'Dell was sending out fundraising letters in 2003 telling Ohio voters that he was going to "help Ohio deliver its electoral votes to the President."

Democrats quickly seized on the letter as proof that Diebold's opaque, touch-screen systems were somehow rigged to favor Republican candidates.

The political complaints didn't affect the widespread use of AccuVote in the 2004 election, but the letters may have cost O'Dell his job. Two years later the Diebold board of directors forced O'Dell out, replacing him after the election unit started turning a profit.

And the politic attacks may have taken a toll that's hard to measure in dollars -- the company's once sterling reputation has been damaged by controversy.

"If this leadership in the company had a choice they would not have gotten into the business in the first place, for sure," said Gil Luria, research analyst, for Wedbush Morgan Securities. "Diebold has worked 150 years to build a great brand for physical security, and over the last two years it's seen that brand erode substantially because of this business."

Despite Controversy, Earnings Boosted

But the damaged reputation hasn't hurt revenues. Even with the controversy, the company's election division is profitable, contributing about $180 million in sales to its most recent quarterly results. Sales of AccuVote account for only 8 percent of the company's overall sales, with ATMs and security systems making up the vast majority of revenues.

The money is likely to continue rolling in during the coming years because only a third of the nation's voters will use electronic voting systems for this year's election. Experts say governments around the country will likely invest another $3 billion on electronic voting systems in the coming years.

But Diebold's No. 1 spot in the market and profitability probably will not be enough to keep the company in the elections systems business. Analysts say it would not be surprising to see a spin-off in the months after this midterm election.

"It's a profitable business, and any profitable business somebody is gonna want to own," said Luria. "And in this case it's much better off in private hands -- maybe a private equity firm -- managing it for cash flow, because there's still cash to be made in this business over the next few years."

Analysts say that even if Diebold succeeds in selling its election unit for $100 million, it will be considered a costly diversion from the core business that made company the bulk of its money, not to mention its reputation for security.