Deluxe Corporation's CEO Discusses Q4 2012 Results - Earnings Call Transcript

| About: Deluxe Corporation (DLX)

Deluxe Corporation (NYSE:DLX)

Q4 2012 Earnings Call

January 24, 2013 11:00 AM ET


Jeff Johnson

Lee Schram – CEO

Terry Peterson – SVP and CFO


Charlie Strauzer – CJS Securities

Jamie Clement – Sidoti

Wayne Archambo – Monarch Partners

Ben Glaze – Apollo

Paul Karos – Whitebox


Good day ladies and gentlemen and welcome to the Fourth Quarter 2012 Deluxe Corporation Earnings Conference Call. My name is Sheyla [ph] and I’ll be your operator for today.

At this time, all participants have been placed on a listen-only mode. Before we’ll end the conference, we will conduct the question and answer session. If at any time during the call you require operator assistance, please press star zero and an audio coordinator will be happy to assist you.

As a reminder, this call is being recorded for replay purposes. I would like to now turn the conference over to your host for today, Mr. Jeff Johnson, Treasurer and Vice President of Investor Relations. Please proceed sir.

Jeff Johnson

Thank you Sheyla [ph]. Welcome to the Deluxe Corporation’s 2012 fourth quarter earnings call. I’m Jeff Johnson, Deluxe’s Vice President of Investor Relations and Treasurer.

Joining me on the call today are Lee Schram, Deluxe’s Chief Executive Office, and Terry Peterson, Deluxe’s Chief Financial Officer.

Lee, Terry and I will take questions from analysts after the prepared comments. At that time, the instructor, the operator will instruct you how to ask a question. In accordance with regulation FD, this call is open to all interested parties.

A replay of the call will be available via telephone in Deluxe’s website. I will provide instructions for accessing the replay at the conclusion of our teleconference.

Before I begin, let me make this brief cautionary statement. Comments made today regarding financial estimates and projections and any other statements addressing management’s intentions and expectations regarding the company’s future performance are forward looking statements as defined in the Private Securities Litigation Reform Act of 1995.

As such, these comments are subject to risks and uncertainties, which could cause actual results to differ materially from those projected. Additional information about various factors that could cause actual results to differ from those projected are contained in the news release we issued this morning, and in the company’s Form 10-K for the year ended December 31, 2011.

In addition, the financial and statistical information that will be reviewed during this call is addressed in greater detail in today’s press release, which is posted on our investor relations website at and was furnished to the SEC on the Form 8-K filed this morning. In particular, any non-GAAP financial measures are reconciled to the comparable GAAP financial measures in the press release.

Now, I’ll turn the call over to Lee.

Lee Schram

Thank you, Jeff and good morning, everyone. Deluxe delivered our fourth outstanding quarter of 2012. We reported revenue at the top end of our outlook in adjusted earnings per share above the high end of our outlook.

Revenue grew 6% over the prior year quarter driven by small business services revenue growth of 11% of which 3% came from the OrangeSoda acquisition.

Checks and forms all performed well against our expectations and marketing solutions and other services revenues grew 26% over the prior year.

Adjusted diluted earnings per share grew 14.5% over the prior year. We launched our new brand awareness campaign to help better position our products and services offerings and drive future revenue growth.

We also advanced process improvements and delivered on our $50 million cost reduction commitment which generating a strong $244 million in operating cash flow for the year. We extinguished higher interest rate 2015 debt and issued new lower interest rate 2020 debt while also paying off our remaining 2012 debt in mid December.

In a few minutes, I will discuss more details around our recent progress and next steps, but first, Terry will cover our financial performance.

Terry Peterson

Thank you, Lee. Earlier today, we reported diluted earnings per share for the fourth quarter of $0.83 which included losses of $0.07 per share from early debt retirement in the quarter, and restructuring charges of $0.05 per share.

Excluding these costs, adjusted EPS from continuing operations of $0.95 exceeded the upper end of our previous outlook and was 14.5$ higher than the $0.83 reported in the fourth quarter of 2011.

The restructuring charges are primarily for employee severance and infrastructure consolidations.

Revenue for the quarter came in at $388 million and grew 6% over last year and 2% sequentially from last quarter.

All three of our business segments performed well in spite of an estimated negative revenue impact of around $2 million to $3 million from hurricane Sandy.

Small business services revenue of $254 million grew 11% versus last year on a reported basis including OrangeSoda which added nearly $8 million of revenue in the quarter.

While we continue to operate in a weak environment economically, we delivered growth in marketing solutions, and other services, checks and in our online Safeguard distributor and dealer channels.

Small business and services revenue also benefitted from previous price increases. Financial services revenue of $82 million was basically flat versus the fourth quarter of last year.

The impact of lower check orders offset the benefits of price increases, revenue from the citizens financial group, and higher non-check services revenue. Direct checks revenue totaled $51 million which was down 7% on a year-over-year basis.

Gross margin for the quarter was 64.5% of revenue which was flat with 2011. Benefits from price increases, improvements in manufacturing productivity, and delivery initiatives were offset by increased delivery and material rates, and performance base compensation expense in 2012.

SG&A expense increase $10.3 million in the quarter and was 43.8% of revenue compared to 43.5% of revenue in the same period last year.

Increased SG&A associated with commissions on increased revenue, higher performance base compensation expense, the OrangeSoda acquisition, and higher brand awareness spending was partially offset by benefits from our continuing cost reduction initiatives.

Excluding restructure recharges, adjusted operating margin for the quarter was 21.1% which was nearly flat with the 21.4% generated in 2011 but better than our expectations. All three segments delivered strong operating margins compared to expectations.

Excluding restricting charges, small business services operating margin of 17.9% was down 1 percentage point over last year due to higher SG&A driven by the OrangeSoda acquisition, and higher brand spending.

Financial service operating margin of 23.8% was up 2.6 points from 2011 due to better product and services mix, and cost reductions.

Direct checks operating margin up 32.7% increase 0.8 points from 2011 as we continue to realize planned synergies from integrating custom direct, and lower acquisition related amortization.

Turning to the balance sheet, and cash flow statement, for the year, we increased our cash and cash equivalents balance by $17 million despite having paid cash for the OrangeSoda acquisition, and repurchasing $27 million of our common stock to offset expected dilution from employee plans, and reducing our debt.

Total of debt at the end of the year was $653 million, down from $742 million at the end of 2011 as we repaid the remaining $86 million due on our 2012 notes in December.

As previously announced, we leveraged the favorable high yield market in the fourth quarter, opportunistically strengthening our capital structure.

We repurchased $200 million of our seven and three-eighths [ph], 2015 notes at a premium in 2020.

Cash provided by operating activities for the year was $244 million, a $9 million from 2011. Compared to last year, stronger operating performance and the discontinuation of our defined contribution pension plan were partially offset by higher income tax payments, a planned contribution to our VEBA Trust for future medical cost in the first quarter and higher contract acquisition payments.

Capital expenditures for the year were $35 million, and depreciation and amortization expense was $66 million.

Looking ahead to 2013, we expect consolidated revenue on a full year basis to range from 1.535 billion to $1.575 billion.

Diluted earnings per share are expected to range from $3.60 to $3.80. There are several key factors that contribute to our full year outlook including small businesses services revenue is expected to increase in the high single digits range as declines in the core business products are expected to be offset by benefits from our e-commerce investments, price increases, our distributor dealer and major accounts channel, and double digit growth in marketing solutions and other services offerings.

We expect financial services revenue to decline in the mid-single digits range driven by recurring check order declines of approximately 5% to 6% and some pricing pressure which we expect will be partially offset by continued growth from non-check revenue streams and price increases.

Direct checks revenue decline in the mid to high single digits driven by check volume reductions, a continued sluggish economy, additional cost and expense reductions, increases in material and delivery rates, continued investments in revenue growth opportunities including brand awareness, marketing solutions and other services offers and enhanced internet capabilities and an effective income tax rate of approximately 34%.

We expect to continue generating strong operating cash flows ranging between $240 million and $255 million in 2013, reflecting stronger earnings in the mid to upper end of our outlook and lower VEBA payments for future medical cost offset by higher tax and incentive compensation payments. We expect contract acquisition payments to be approximately $15 million.

2013 capital expenditures are expected to be approximately $35 million roughly the same as 2012. We plan to continue to invest in key revenue growth initiatives and make other investments in order fulfillment and IT infrastructure.

Depreciation and amortization expense is expected to be $62 million which includes $15 million of acquisition related amortization.

For the first quarter of 2013, we expect revenue to range from $377 million to $385 million. Diluted earnings per share are expected to range from $0.85 to $0.90.

As we indicated on our third quarter earnings call, there are actually two less business days in the first quarter of 2013 compared to 2012, which will represent approximately $12 million left in revenue year over year, resulting in a lower profit.

Brand spend is also expected to be higher in the first quarter of 2013. These two factors are driving a potential decline to slightly up range in earnings per share in the first quarter of 2013 compared to the first quarter of 2012. Only one of the business days comes back in the year in the third quarter, leaving us with one less business day for the full year in 2013 versus 2012.

Also, as a reminder, historically, direct check has their strongest revenue quarter of the year in the first quarter.

Checking to our capital structure, we expect to maintain our balance of priorities [ph] of investing organically after small-to-medium-sized acquisitions in order to drive our growth transformation. We also expect to maintain our current dividend level and repurchase shares to offset dilutions.

To the extent we generate cash flow in excess of these of these priorities, we plan to accumulate cash in advance of our 2014 senior [inaudible] maturity. We may also, from time to time, consider retiring outstanding debt through open market repurchases, privately negotiated transactions or other mediums. We believe our strong cash flow, strength in balance sheet, and flexible capital structure, position us well to continue advancing our transformation.

I will conclude my comments with an update on our cost and expense reduction initiative. Overall, we had another solid year and we delivered on our commitment to reduce our cost and expenses in 2012 by approximately $50 million, bringing our total reductions since mid-2006 to $435 million. Strong performance in the fourth quarter helped to offset the impact of restructuring charges.

Looking ahead to 2013, we will continue our focus on the revenue growth base of our transformation but will not lessen our focus on cost and expense reductions. We expect to drive an incremental $50 million of cost reductions, net of investments in 2013. Approximately 50% of the $50 million in expected reductions will come from sales and marketing, another 35% from fulfillment and the remaining 15% coming from our shared services organizations.

Our focus in sales and marketing for 2013 will be on sales channel optimization, platform and tool consolidation and leveraging our order streaming and marketing efficiencies.

We will also continue to improve the mix of paper catalog and online search engine marketing. In fulfillment, we expect to continue our lean direct and indirect spend reductions, further consolidate our manufacturing technology platforms, drive delivery technology and process efficiencies, reduce spoilage, further enhance our strategic supplier sourcing arrangements and continue with other supply chain improvements and efficiencies.

Finally, for our shared services infrastructure, we expect to continue to reduce cost in IT and other areas as more opportunities exist to improve efficiencies.

Now, I’ll turn the call back to Lee.

Lee Schram

Thank you, Terry. I will continue my comments with the perspective on what we accomplished overall in 2012, then provide expectations for 2013 for our key revenue growth area, marketing solutions and other services, and finally, some thoughts on our brand campaign. I will then highlight progress in each of our three segments, including a perspective on what we plan to accomplish in 2013.

Deluxe grew revenue in 2012 for the third consecutive year for the first time since 1996. And the 7% revenue growth rate was the highest since 1994, excluding the next [ph] acquisition. We stabilized our core check and product businesses and improve our mix of faster growing marketing solutions and other services revenues to 19% of total revenue.

We acquired OrangeSoda to expand opportunities in higher growth marketing solutions and other services. We also took steps to accelerate our brand transformation with our new Work Happy campaign. We want small business owners to see Deluxe as a genuine, passionate partner who gives them everything they need so they can focus on their pursuit of doing what they love and work happy.

In addition to our strong print leadership, we continue to invest in our employment brand, in digital technology, in extending sales channel reach and in our communities. Our efforts earned us awards and recognition including the Candidate Experience Award, Best in Show at Innovate [ph], corporation of the year from the Metropolitan Economic Development Association and the Jefferson Award for community service.

In shared services infrastructure, we reduced cost and improve the effectiveness of the information technology, finance, human resources, real estate and legal functions. Our intense focus on cost reductions has now delivered enterprise-wide savings of $435 million since mid-2006.

We exited the year with more robust and innovative products and services, solidified process, a better infrastructure and improved financial results.

Our operating cash flow grew for the fourth straight year allowing us to maintain our dividend and pay down debt while paying cash for an acquisition.

In addition, we strengthen our capital structure in November with a debt refinancing and an attractive rate, and extended term.

We recognize that there’s still a tremendous amount of work to do, but we made great strides in 2012.

As we enter 2013, our primary focus continues to be profitable revenue growth and increasing the mix of marketing solutions and other services revenues. We have created more differentiated technology led check offers through investments in automated flat packaging, digital printing and online portals and dashboards.

We also have significant growth opportunities and marketing solutions and other services. We will continue to assess potential small to medium size acquisitions that complement our large customer bases, with a focus on marketing solutions and other services.

We have strengthened our channels in small business to include financial institutions, online, retail, wholesale, distributors, dealers, and major accounts.

Deluxe is now more capable of helping small businesses pursue their passion, as a trusted provider of everything a small business needs to market and operate their business and helping small to mid size financial institutions with customer acquisition, risk management, and other value add services offers.

Here is an update on our four subcategories framework from marketing solutions and other services. We ended 2012 right in line with our expected $285 million in revenue, with mix in the four sub categories basically in line with our expectations.

First, small business marketing finished 2012 at 41% of total marketing solutions and other services revenue, and is expected to represent approximately 40% in 2013 with expected growth in the mid teens this year.

We exited December with our highest monthly growth rate in the web to print space at 21% since completing the PS print acquisition.

Key growth initiatives include scaling web to print by cross selling to our customer base, and continuing to add new customers through distributors, dealers, and major accounts.

The second category, web services, which includes logo and web design, web hosting, SEM, SEO, email marketing, social, and payroll services, finished 2012 at 30% of total marketing solutions and other services revenue, and is expected to represent approximately 34% in 2013 with expected organic growth rates in the high teens.

Key growth initiatives and performance drivers include adding wholesale web telco, and SEM, SEO, major accounts of which we have already secured about $15 million from deals already closed which will roll out throughout 2013.

Cross selling to our retail base through bundled presence packages, adding more new customers, resellers, and partners, reducing web design and SEM campaign cycle times and churn rates and adding payroll services customers including new features such as time, and attendance applications.

This category is also our focus area for talk in acquisitions. We closed 2012 with approximately 550,000 webhosting customers, and we expect to close 2013 with nearly 750,000 webhosting customers, or up 36% from 2012.

The third category, fraud security and risk management services finished 2012 at 24% of total marketing solutions and other services revenue, and are expected to represent approximately 21% in 2013, with expected growth rate in the mid single digits.

Key growth initiatives include scaling our program services including adding new features for both national and community banks, and fraud and security offers for small businesses and direct to our consumers.

It also includes adding bankers dashboard customers as well as adding features for our installed bankers dashboard base.

Finally, other financial institution services finished 2012 at 5% of total marketing solutions and other services revenue, and are expected to represent approximately 5% again in 2013 with expected growth rates in the high single digits.

Key growth initiatives here include adding new cornerstone, switch agent, and get the reward card financial institutions.

We expect marketing solutions and other services revenues to be approximately $330 million to $340 million in 2012 or 2013 up from $285 million in 2012 with organic growth in the mid teens.

If achieved, this performance would translate to a total revenue mix of around 22% of revenue including a yearend exit run rate well above 25% of revenue towards our 25% mix goal and up from 19% in 2012 and 16 and 13% [ph].

We spent considerable energy in 2012 examining our marketing strategies, whole focus groups, looked at large research studies, and shadowed small business owners while they work.

Through this process, we uncovered insights to help us connect with our customers on a more emotional level. We learned that the primary motivator of today’s small business owner has shifted from business growth, to personal satisfaction.

This insight formed the basis of our new brand campaign. The redesign on, and training for our dedicated call center sales representatives. And it will be at the core of our small business marketing efforts and products and services offers going forward.

Deluxe, wants small businesses to pursue their individual unique passions by not letting their dream jobs become work. So we can provide them everything from websites to printing, to marketing.

Our expertise is at the small business owners’ command. We are at their service, and our objective is to simply allow them to work happy.

We kicked off our new advertising campaign in late 2012 with three television commercials. The campaign continues throughout January, on television, and also in print ads, digital online and radio.

All these media will continue at various times throughout 2013 and three primary burst weighted more heavily towards the first half of the year.

We believe the outcome of our brand transformation is messaging that is compelling, emotional, edgy, memorable, and differentiated, but simple. A real rallying cry for our brand and our people.

For competitive reasons, we will not disclose investment levels, other than to indicate that it is a multi-million dollar campaign and all plan spending is included in our current outlook ranges.

We have established return on investment criteria based on the number of impressions, expected sight visits, online leads, and calls as well as we expect to see an increase in brand search traffic, social media mentions, and positive social sentiment, and more YouTube video views.

We will use results against these metrics to guide us as we progress on this new brand journey.

It is important to remember that this campaign is primarily focused on improving brand awareness, and not a targeted direct response campaign. So far, I can share with you that we are very pleased with our results to date. At the launch of the campaign, we were seeing click-through rates 50% above those of prior campaigns and significantly above benchmarks.

Traffic to is up significantly in double-digit percentages. YouTube views of the three commercials are now over 300,000 and we are closing new business both online and in our dedicated call centers.

Now shifting to our segments. In small business services in the quarter, as expected, we did not see any notable improvements as the economic climate for small business remains sluggish. We have a strong performance however as revenue grew 11%, 3% of which came from the OrangeSoda acquisition. Checks and Forms perform well and seasonal holiday cards perform slightly better than our expectations.

Our results from targeted customer segmentation in the call center improved. New customers from our Financial Institution Deluxe Business Advantage Referral Program and through our direct response campaigns remain strong.

Response rates increase from better balance and in rich content in the online and print-base spend. Average order value and conversion rates remain strong. Our online safeguard distributor and dealer channels and Canada grew revenue over the prior year. We also saw strong growth in web, SCM, SCO and payroll services.

In the quarter, we won contracts with additional US, South American and European telcos, all of which we expect will migrate and organically build out small business customer, web services in 2013. Again, we ended the year with approximately 550,000 web hosting customers.

We continue to closely monitor the small business market. Optimism indices, after barely rising in October, declined to one of the lowest levels ever in November and edged up only slightly in December, clearly in recessionary territory. November and December 2012 readings marked the lowest levels since March of 2010.

70% of small business owners characterize the current period as a bad time to expand. 45% of small business owners believe conditions will be worse six months from the end of 2012 with only 10% believing they will be better. They continue to spend cautiously, more in maintenance mode, scrutinize purchases and experience tight cash flow.

Small businesses expectations for real sales gains for 2013 lifted only slightly as we ended the year.

In summary, current optimism indices have been turning downward and at roughly three-year lows. The good news is that other than taxes and regulation, increasing sales continues to be a small business owner’s number one pain point. And our portfolio is significantly more robust now with many offers to help them here. As the economy recovers with the transformative changes, we are making to deliver more services offerings that help small businesses get and keep customers, Deluxe is better positioned as that indispensible partner for growth.

Our focus for 2013 is on accelerating our brand transformation and significantly improving overall market awareness while institutionalizing our brand promise for our customers. Profitably integrating and extending our marketing solutions and other services portfolio, effectively acquiring and retaining customers across multiple channels. Building a more effective retail services sales model, scaling major accounts and strategic channel partner relationships and improving our customer experience.

In financial services, we saw the rate of decline of checks perform slightly above the higher end of our forecasted decline range of around 5% to 6%. However, including our estimated negative impact from Hurricane Sandy, we saw decline rates closer to 5% and December was less than 5%.

We had strong overall new acquisition rates and our retention rates remain strong on deals pending in the current quarter in excess of 90%. We also simplified our processes and took complexity out of the business while reducing our cost and expense structure.

Looking ahead to 2013, we expect check units to be in a decline range of around 5% to 6%. Retention rates to be in excess of 90% on deal spending this year. We have already extended all our large contracts to the end of 2013. We have fewer community bank contract dollars up for renewal on 2013 compared to 2012. And we also continue to work a number of competitive RFPs and expect a decision on one this quarter. We also implemented a price increase at the start of this year.

We made progress again in the quarter in advancing non-check marketing solutions and other services revenue opportunities. Revenue grew over last year at the highest organic rate of any quarter in 2012 in these non-check services which include customer acquisition, risk management and other profitability offers.

In customer acquisition, and specifically our cornerstone direct marketing analytics offer, we saw a continued growth in financial institutions. We have seen strong demand for our switch agent offering since formally unveiling our bill pay capability at Synovate late last year.

We are engaged with our customers and prospects to continue advancing our offering going forward in a way that is responsive to market needs. We believe it will be an important tool for banks beyond acquisition to anchoring profitable clients.

Banker’s Dashboard also continued to perform well in the fourth quarter. As you can see, although not as fast as we had hoped in some areas, momentum continues to build and we expect strong double-digit growth in these marketing solutions and other services in 2013.

In Direct Checks, revenue was in line with our expectations driven by strong revenue per order and strong custom-direct accessories revenue. We continue to look for opportunities to provide accessories and other check-related products and services to our consumers. Although we have made significant progress with the custom-direct integration, we are still working on a number of initiatives to create an integrated best in class, direct to consumer check experience.

In fourth quarter, we completed the integration of our Joppa custom-direct fulfillment into Deluxe fulfillment site.

We continue to see a ramp and revenue enhancement synergies through our call center scripting and upsell capabilities, as well as synergistic costs and expense reductions.

For 2013, we expect Direct Checks revenue to decline in the mid- to- high single digits driven by continued declines in consumer usage and a weak economy. We expect to reduce our manufacturing cost and SG&A in this segment and drive our operating margins in the 30% range while generating strong operating cash flow.

As we exit 2012 on the heels of an outstanding quarterly performance in continued sluggish economy, we have made tremendous progress in transforming Deluxe. But we still have many opportunities ahead of us in 2013. We believe we are well positioned entering 2013 for our fourth consecutive year of revenue growth.

Despite the sluggish economy, our financial discipline has enabled us to invest in people, technology, products, services and our brand in order to position ourselves for sustainable revenue growth while continuing to improve profitability and operating cash flow.

Our technologies and channels are stronger. Our digital technology services offer is more mature. Our infrastructure better and our management talent is deeper and aligned to grow revenue. We know it is critical for us to be able to grow revenue again in 2013 and improve the mix of our marketing solutions and other services revenues, and we are well positioned to make this happen.

We have developed a strong platform for long term growth with the objective of transforming Deluxe to more of a growth services provider from primarily a check printer, thereby changing our product mix and resulting stock price multiple.

Before I open the call up for questions, I would like to take this opportunity to thank all Deluxe employees for their hardwork, dedication and simply outstanding performance of 2012. Thank you Deluxers. Let’s get off to a great start in 2013.

And now Sheyla, we’ll open the line for questions for Terry, Jeff and I.

Question-and-Answer Session


Yes. Ladies and gentlemen, if you wish to ask a question, please press star followed by one on your telephone key pad. If your question has been answered or you wish to withdraw your question, please press star followed by two.

Press star one to begin and please stand by for your first question.

And you first question comes from the line of Charlie Strauzer with CJS, please proceed sir.

Charlie Strauzer – CJS Securities

Hi, good morning.

Lee Schram

Hi, Charlie.

Charlie Strauzer – CJS Securities

Thank you first of all for that thorough detail on the quarter and the kind of the outlook, I just wanted to touch base on a couple of things here if I could.

When you look at some of the new initiatives on the marketing side that you’ve launched and you said you’ve gotten some very significant increases in kind of page views and things like that, what are some of the things that you’ve heard more anecdotally as to what, what are the things that are resonating more with some of these potential customers?

Lee Schram

As far as the new campaign, Charlie?

Charlie Strauzer – CJS Securities

Correct. Yes.

Lee Schram

Yes. Clearly what we’re seeing is people that, I would argue, people that didn’t know Deluxe did as much as we do, we’re seeing. We also are seeing people that are coming to the story and might have heard of us before, but didn’t have the reach which is great, we believe for cross selling, we’re seeing that.

Clearly what we’re also seeing is more in the newer spaces and services specifically I would say web services would probably be at the top of the list along with the search engine marketing and search engine optimization spaces.

But we’re actually favorably surprised so far with just the number and amount in interest in the company and it’s coming through again all our channels. People are seeing the television ads, they’re hearing us on the radio, they’re seeing us on print, they’re seeing us online, and they’re coming to us through into the call centers, into the online world, we’ve even gotten comments through the banking channel, we’ve gotten comments through our distributor, our dealer and our major account channels as well.

What we want out of this is at least early on, Charlie because obviously, it’s early on, is it’s starting to happen.

Charlie Strauzer – CJS Securities

So Lee, what’s the next step? You’re getting some of these interest coming in, how do you then kind of capitalize more on that? Is it more kind of an outbound basis with your call centers of your partners? Kind of clarify a little bit more what’s the next step if you could.

Lee Schram

Yes, I mean we’re early. We put money and initiatives in the past. We’ve never done as far what I would call far reach in terms of the television world so to speak. But as I mentioned in my prepared comments and I think it’s consistent with what I said in the third quarter call, we’re going to stay at this right now.

It’s very early in the campaign, we clearly believe it’s starting to work for us, and starting to get us the brand recognition outside of being, as we all know, more of that check provider, and now reaching more and more into the marketing solutions and other services space.

So we’re going to stay after this, we’re committed to it, we put in our guidance and we’re going to do the three burst [ph] that I talked about, and you’ll see more of it in the first half of the year, Charlie, than the second half of the year, but obviously, if it continues to work, we’ll consistently look at return on investment criteria and we’ll make decisions that are smart and we’ll keep the investment community informed as to how we see this playing out.

But so far, again, it’s just amazing to be out in the community, we have some local good coverage here, it’s just people commenting on it, and just commenting very favorably. And what I would say is, interesting is, that it’s kind of what I call emotionally compelling and different from some of the competitive edge that are out there, and that was the intent when we launched this. So that’s what I can comment on at this point.

Charlie Strauzer – CJS Securities

Great, thank you very much, that’s very helpful.

Lee Schram

You’re welcome.


And your next question comes from the line of Jamie Clement with Sidoti. Please proceed.

Jamie Clement – Sidoti

Lee, Terry, Jeff, good morning.

Lee Schram

Hi, Jamie.

Jeff Johnson

Hi, Jamie.

Terry Peterson

Hi, Jamie.

Jamie Clement – Sidoti

Lee, first, a major question here. You started 2012 as well as the previous couple of years looking for a 7% to 8% organic decline in check usage, number is actually, started off the year closer to 5%, you adjusted your guidance to 5% to 6% through the year, and now, you’re still looking for 5% to 6% for the upcoming 12 months and I believe on the last conference call, you said, you all were still doing some internal work and then obviously a forward projection would be upcoming in this conference call which you gave.

What have you all learned this year to bring that assumption down from the 7% to 8% to that 5% to 6% range? Like, do you think this is a long term sustainable range, is it something maybe related to the housing recovery? Just a little bit more color on that switch because that 7% to 8% was something you were sticking two or three years.

Lee Schram

Yes, Jamie, we’ve done a lot of work here and I would argue that we have to stay at this and stay paranoid with it every day, and we do.

And what do I mean by that? We’re constantly watching the trends that are out there and for us, it’s working with our financial institutions and seeing where they see trends and how they are working, and we’re working with the consumer.

It also is looking at metrics around housing stock, and electronification, mobility. I’m not going to give you specific formulas that we use other than we’ve gotten good at it because I know that my competitors are out listening to this call.

But I believe we are getting better and better at marker around these things. But I will tell you Jamie, we got to stay on top of this because those things can move, and when they move, we believe they can move those percentages or decline around.

But we wouldn’t have guided right now, 5% to 6% declines for this year, if we weren’t comfortable that the current markers that we see for that are in that range.

They are right now, and because of that, that’s where we believe we should guide. And if they change up or down, meaning if they get better than that, and lower rate of decline, or slip back, we will again keep the investment community informed of that.

But right now, we’re as strong as we ever have been at improving how we look at this. But again, I’m as paranoid as ever, and I think I will stay that way.

Jamie Clement – Sidoti

Okay, that’s very fair. I don’t know Lee, whether you want to take this, or it was really during Terry’s prepared remarks. I was a little bit confused about some of the commentary around the outlook with respect to price competition versus price increases.

I believe there were price increases mentioned in the small business services sector, and then both price increases as well as price pressure referenced in financial services. I could have that backwards. If I’m wrong about that, please correct me, but where are you seeing the price improvements and then where are you seeing the price pressure?

Terry Peterson

Jamie, I’ll take that one. You are absolutely right. We do have price increases that we’ve actually already put into the market place in small business services. And we also did put a price increase into our list price for financial services that also went in just early now in this first quarter of 2013.

And the pricing pressure that we also referenced related to financial services, that really has to do with when we’re renewing contracts.

It’s really the discounts that we were having to absorb as we renew contracts and as we bring on new business, that discount that provides kind of a counter pressure to those price increases that we did.

Jamie Clement – Sidoti

Okay, to the extent that you continue to renew contracts ahead of time, and is that still a strategy here? I mean are you still actively looking to renew these contracts before they gets or update [ph]?

Terry Peterson

Yes, absolutely, as much as we can.

Jamie Clement – Sidoti

Okay, okay. So all right, well, thanks very much for the time, I appreciate it.

Lee Schram

Thanks, Jamie.

Terry Peterson

Thanks, Jamie.


Ladies and gentlemen, (Operator Instructions).

And your next question comes from the line of Wayne Archambo of Monarch. Please proceed, sir.

Wayne Archambo – Monarch Partners

Yes. Wayne Archambo, Monarch Partners. Could you just give us some assessment of what the OrangeSoda acquisition has met your expectations, plusses and minuses? Just give us some reading of what your experience has been there.

Lee Schram

Yes. We are really pleased so far. We’ve owned them a little over half a year now. We’ve actually given markers here in revenue the last two quarters. I think both quarters are in the $8 million range. It’s pretty much right where we expect it to be, maybe a little bit better on the revenue side.

But culturally, it’s everything we thought they were going to do for us. They are teaching us how to reach customers and get customers found online at a better way. So they are bringing us customers that we then can sell other products and services to.

The other nice thing about the deal when we mentioned it early on when acquired it is they also have some of the same partners in the relationships that we have. And so we’ve been able to get stronger around those and more holistic with offering the products and services through those partners.

So I would just tell you that so far we are extremely pleased with the deal.

Wayne Archambo – Monarch Partners

And do you find in the market place, there are other OrangeSoda type transactions out there that are for sale. Is that one-off? Is it an active M&A market out there?

Lee Schram

I will stay consistent. I’ve said this on many calls before. I look with the team that I have and I have some outside help constantly at partnerships and potential inquisitive opportunities. I mentioned in my prepared comments that we will continue to look at small to medium-sized opportunities for acquisition. Yes, primarily, in the marketing solutions and other services space and more specifically in that categorization of web services. So I think I would just choose right now to leave it there.

Wayne Archambo – Monarch Partners

Okay, great. Thank you.

Lee Schram

You’re welcome.


And your next question comes from the line of Ben Glaze with Apollo. Please, proceed, sir.

Ben Glaze – Apollo

Hey, guys. Just a quick question, kind of a follow-up to Jaime’s. Do you always think about visibility into the business, like giving full year guidance here? And you kind of mentioned that if you’re equation changes as the year goes on, maybe you’ll adjust up or downward. I’m just trying to think about how much confidence we should put behind that in kind of what the visibility you have into contractual revenues it might be?

Lee Schram

As far as the rate of decline on checks, again, Ben?

Ben Glaze – Apollo

Yes. So I guess, like the key drivers or your assumption, the rate of decline on checks. I’m curious like, I guess, is there a way to have much visibility into the business because –

Lee Schram

Yes. I think that the way to think about it, Ben is we made some comments in the prepared comments that between locking in all the big deals for the year. So that should give you, the investor some comfort that we have that run rate established for the year.

We have to lock in our community bank contracts that come up every year. If we do at the rates above the 90% that I talked about and that it down to what the consumer is going to write checks for. But if you add up all those pieces, I think the positive news is we’re trying to take the variables that we can control off the table as best as we can. I think we’ve done. And then we’re at the mercy of what consumers are writing checks for and obviously, they write more checks when the economy is better, and then down to housing stock, electronification, mobility, and switches and payment methods and all that.

But again, the best I can do for you is I think we were thorough on our assessment of this. We wouldn’t have guided to this if we didn’t expect it to be in this range right now. Again, Ben, I think that’s the best we could do at this point.

Ben Glaze – Apollo

That’s very helpful. The other question I have is just if you could help us thinking more about – and I guess, we’re kind of thinking about what you do want to disclose. But some of the growth rates are so impressive in the marketing and other services segments and sub-segments, just to help us think about like the incremental margins on revenue relative to kind of the traditional checks business which appears to be very incremental margins.

Lee Schram

Yes. Let me start with this. We’re consistently getting pushed for how do I get more and more comfort to the investor for the growth and how can hit mid teams organic growth and revenue here. And we gave you some markers today that I think are important.

We communicated that we had the best month that we’ve ever seen since we acquire PSPrint in December. We gave you markers around the number of web hosting customers that we ended the year which was bigger and was our biggest lift in any quarter last year, the fourth quarter. We also gave you a marker for the end of this year. And we gave you another marker that said – and I’ve been mentioning on calls. We gave you a number actually today of $15 million of business that we’ve already secured that will roll out. And the timing of that is dependent on when telcos and the media and other major accounts and between the web and search engine marketing optimization world is roll out.

But those are firm deals and depending on how well we time those of working with them, all those give us confidence that we can get to that, the growth rates that we put out there. And again, we wouldn’t have done it if we didn’t have confidence right now that that’s the best way to guide the investor where we are.

Ben Glaze – Apollo

Got it. Thanks.

Lee Schram

You’re welcome.


Your next question comes from the line of Paul Karos with Whitebox. Please, proceed, sir.

Paul Karos – Whitebox

A quick question for you. Would you mind with the marketing solutions area, just giving us kind of the landscape of the competition? What are the type of companies you compete against and how do you see a Deluxe fitting into that landscape?

Lee Schram

It depends on the category. And you have to decompose each one of them. So we have various players in the financial services space that we compete. They’re all smaller. I’m not going to mention all those on the call here, give that out but there are –

Paul Karos – Whitebox

No, not the names, just general characterizations would be great.

Lee Schram

Yes. There are smaller players that are in the profitability models and metrics. There are smaller players that are in direct marketing analytic spaces. There are lots of players in the fraud and security, and risk management areas as well that we compete with. But there’s no one big player that we compete against there.

In the web services space, I’ll mention a few companies that are out there. Obviously,, GoDaddy are players in the space. There are the constant contacts and the email marketing space, Vistaprint, and so on and so forth. But there is no one big player that dominates the market in this space.

And then obviously, there’s a lot of players in the marketing space. The smaller companies that do everything from promo and apparel, to larger web-to-print companies. Again, Vistaprint, probably, the most recognized one out there but nobody dominates. There is a lot of market opportunity and there’s a lot of fragmentation in the market and that’s actually something that we believe plays to our favor. And if we pull and keep improving, getting the brand more recognized for Deluxe, we think that bodes well for us and give us an opportunity to work with the customers we have and then get new customers.

Paul Karos – Whitebox

So as usual, there’s a lot of fragmentation that the risk is obviously that people get really aggressive on pricing. Do you view the fragmentation no more as a positive in the market share gain sense of it or how do those offset each other?

Lee Schram

Yes. I view is real positive. No one dominates and controls price and I just view it as a real opportunity for us.

Paul Karos – Whitebox

Great. Thanks.

Lee Schram



And there are no further questions at this time. This concludes you Q&A portion. I would like now to turn the call back over to Lee Schram. Please, proceed, sir.

Lee Schram

Yes. I just want to again, thank everybody for participating and for the questions today. And again, hats off. I know there are a lot of Deluxers out there listening in on the call as well. And again, I just want to commend you for a great year and again, we did it. We’ve got to get out and earn our keep and do it again in 2013. And again, as I mentioned earlier, it’s important we get off to great start.

So we’re going to get back to work, roll up our sleeves and get going and we look forward to providing another positive progress report on our next call, and I’ll turn it over to Jeff.

Jeff Johnson

Thank you, Lee. This is reminder that a replay of this call will be available until February 7th by dialing 888-286-8010. When instructed, provide the access code, 93002809. The accompanying slides are archived on our investor relations website at

Again, thank you for joining us. Have a great afternoon.


Thank you, ladies and gentlemen. This does concludes today’s presentation, you may now disconnect. Have a great day. Bye.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!