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Blackhawk Network Holdings Inc (NASDAQ:HAWK)

Q2 2013 Earnings Conference Call

July 18, 2013 10:00 am ET

Executives

Patrick Cronin – VP of Finance and Investor Relations

Bill Tauscher – Chairman, Chief Executive Officer

Talbott Roche – President

Jerry Ulrich – Chief Financial & Administrative Officer

Analysts

Julio Quinteros – Goldman Sachs Sara Gubins – Bank of America

Mike Grondahl – Piper Jaffray

Ashish Sabadra – Deutsche Bank

Wayne Johnson – Raymond James

David Chiaverini – BMO Capital Markets

Ramsey El-Assal – Jefferies

Gil Luria – Wedbush Securities

Operator

Welcome to Blackhawk Network’s Second Quarter Earnings Conference Call. For those on the audio only dial-in, your lines have been placed on listen-only until the question-and-answer session. This call is being recorded. If you have any objections please disconnect at this time.

I would now like to turn the call over to Mr. Patrick Cronin, Blackhawk’s VP of Finance and Investor Relations. Please go ahead.

Patrick Cronin

All right. Well, thank you operator and good morning everyone. With me today to discuss Blackhawk’s second quarter 2013 earnings results is, Bill Tauscher, our Chairman and Chief Executive Officer, Talbott Roche, our President and Jerry Ulrich, our Chief Financial & Administrative Officer.

Before I turn the call over to Bill, I’d like to remind you that management will make statements during this call that include forward-looking statements within the meaning of Federal Securities Laws. Forward-looking statements contain information about future and operating or financial performance. Forward-looking statements are based on our current expectations and assumptions that involve risks and uncertainties that could cause actual results or events to be materially different from those anticipated.

However, we undertake no obligation to update or revise any such statements, as a result of new information, future events, or otherwise. For a list of description of those risks and uncertainties, please see our filings with the SEC.

And with that, I’d like to turn the call over to Bill Tauscher.

Bill Tauscher

Thank you, Patrick, and good morning everybody. Let me begin by highlighting a few key items from our earnings release and commenting on our progress toward our fiscal 2013 goals. For the second quarter, revenues totaled $226 million, an increase of 19% over the second quarter last year. The increase was the result of four key factors. First, load value increase 11% for the quarter, which I’ll comment on further in a moment. Second, we had a 20-basis point increase in commissions and fees as a percentage of load value. This was the result of favorable product and geographic mix of sales.

Third, we had higher fee income on our program-managed Visa gift products in the U.S. due to volumes, and in Australia related to the timing of other fees under our issuing bank contract. And fourth, we grew product sales which includes the Cardpool gift card exchange, telephone handset sales, and card printing services by 37% year-over-year in the second quarter.

Our load value growth was 11% for the quarter, a decline from recent quarters. Several factors that we believe were somewhat unique to the quarter contributed to this. Load value for the closed-loop gift card business started slowly this quarter, paralleling Department of Commerce data indicating slow sales at grocery during the early part of the second quarter and announcements by a number of retailers that weather impacted their results during the same timeframe.

In addition, one of our top distribution partners reduced promotional activity for a very low margin program as compared to last year, which adversely impacted growth by approximately 3 percentage points, but had a minimal impact on our revenues and operating margins.

And finally, our exit of the wholesale distribution segment of our prepaid telecom business in late 2012 had a negative 3 percentage point impact on load value growth. Excluding these last two factors, our overall load value growth would’ve been 17% for the quarter. Now, we have seen a rebound in load value growth over the most recent eight weeks, which includes the last four weeks of the second quarter and the first four weeks of the third fiscal quarter, which ended this past Saturday. That rebound is 19% unadjusted or 22% including the exit of the wholesale telecom business.

Now adjusted operating revenues, which is total revenue, net of the commissions and fees paid to our distribution partners grew by 21% for the quarter to $108 million. Distribution partner commissions as a percentage of the commissions and fees for the quarter ended June 15, 2013 increased 2.5 percentage points as compared to the quarter ended June 16, 2012.

Of the total, 1 percentage point increase resulted from the amendment in January 2013 of our distribution partner agreements with Safeway U.S. and Canada that eliminated the previous differential in commissions shared with Safeway as compared to other distribution partners. The remaining increase was due to change in the mix of sales from U.S. distribution partners and between the U.S. and international regions.

On a GAAP basis, net income for the second quarter declined year-over-year from $5.9 million to $3.5 million, reflecting an increase in the non-cash mark-to-market charge for accelerating the expense of partner equity instruments at the time of the IPO. This had a $3.8 million after-tax negative impact.

Excluding the after-tax impact of non-cash charges and credits, as outlined in the earnings release, our adjusted net income grew 18% to $8.6 million for the quarter. This, of course, includes the impact of the increased commission rate paid to Safeway, which Jerry will comment on further later on the call. GAAP earnings per share was $0.07 for both the second quarter and year-to-date periods.

Overall, we are pleased with our progress toward our full-year objectives. As discussed in our IPO prospectus, our business has a disproportionate share of revenue in our fiscal fourth quarter , which for 2013 is the 16-week period beginning September 8 and ending December 28 of this year. Because we have certain fixed expenses to support the full-year volume of business, and because marketing and other revenues and expenses may fluctuate quarter-to-quarter, we caution investors about reading too much into the results for the first three fiscal quarters, having said that, I want to mention several of our key initiatives and progress today. Increasing productivity of our existing grocery distribution partners is of course a key initiative.

We expect to add an estimated 1.7 million PEGs to the displays across our top domestic distribution partners over next four months in preparation for the holiday season. This increase and display PEG count is higher than either of the last two years. As part of that expansion, we will see several groceries in the U.S. migrate from what we have referred to as basic category of execution to best practices covering approximately 1,100 store locations.

In addition, a fuel loyalty program at Safeway is resulting in steady increases and growth rates over the past several months as they have expanded the program to third party fuel stations, and consumers are becoming more aware of the programming and purchasing gift cards to earn their rewards.

Last year, we proved significant telecoms sales gains with a dedicated fixture at one of our top five distribution partners. We have now commenced the rollout of dedicated prepaid telecom fixtures at three more of our top five groceries, and expect to see a return to growth in prepaid telecom by the fourth quarter as we get past the late 2012 exit from the wholesale telecom segment.

During the second quarter, we closed new distribution partner deals with the Home Depot and Shell, and executed a contract extension with Amazon to significantly expand the content we provide for Amazon.com commerce site. We’re particularly excited that Home Depot, a top five retailer in the U.S., will install our Gift Card Mall destination displays and dedicated prepaid telecom and financial service displays. This rollout is underway and is scheduled to be in over 2,000 U.S. stores by the end of September.

We signed multiple new large brands in the U.S. during the quarter including Chipotle, AutoZone, and Under Armour. This reflects our continued effort to incrementally add to the selection of fashion, dining, and other popular category choices for consumers. We’re also making good progress on our regional and local merchant initiatives and have launched limited duration discounted cards. We believe both these initiatives will provide incremental growth in 2014.

Overall, international load value growth continued to outpace the U.S., and today, total load value per international represented 15% of the total for the second quarter, up from 12% a year ago. Safeway announced the prospective sale of its Canada division to Sobey’s, who’s also a top distribution partner for us. We expect this transition to be smooth for our prepaid programs. Subsequent to the end of Q2, we had Tim Hortons, the largest restaurant chain in Canada as a content provider.

High double-digit growth during the second quarter in Europe was driven by continued expansion of distribution across Germany, the Netherlands, and the Nordic region, and increased productivity in the UK distribution partners including Tesco.

In Asia-Pac, Australia remained the largest component of Asia Pac load value but we experienced excellent growth in the Japan market with digital media product. We’re continuing to work on the development of China but we don’t expect revenues before 2014 and have started selling limited volumes in Korea.

Now, several of you, since the IPO have been asking us to comment on e-gift and digital wallet developments that seem to be on the news almost daily.

So I’ll now turn it over to Talbott to provide an update on our strategies and participation in this evolving space. Talbott?

Talbott Roche

Thank you, Bill. While the digital gift card market is small today, it is estimated to grow to 3% in 2014. We believe digital to be a key area of growth for our business in the coming years. Digital delivery represents an opportunity to enhance the convenience and value of gift cards through bundling with geo-targeted and profile-targeted promotions as well as retailer’s loyalty program.

However, the adoption of digital gift cards is limited today as very small number of retailers have made the investments to their point of sale required to support the seamless mobile redemption experience. Furthermore, many consumers prefer to give and receive physical gift cards, so we believe the mass adoption of digital gift cards will occur over an extended period of time.

Over the last two years, we failed to find an API accessible cloud based platform to manage the distribution of both physical and e-gift content into new emerging digital channels. Just as with our physical retail network, our strategy is to support gift cards into the highest traffic online and mobile environments. And towards that end, we’re partnering with many of the largest e-tailers, financial institutions, mobile wallet and payment players. These players are seeking to partner with us for speed-to-market and the value that we can create for their own digital solutions.

Our platform allows these players to leverage our existing contracts, connectivity and settlement relationships developed over the last 10 years with the leading 500 gift card brands in the U.S. Correspondingly, our card or content partners use our platform to drive incremental sales through distribution of their products into these new digital channels.

Today, we have approximately 200 e-gift cards under contract with more due to launch before the holiday period. We built our cloud-based digital platform to go beyond the sale of new gift card to support and improve consumer experience.

While gift cards are America’s number one requested gift, our research shows consumers have to stay pin points with gift cards. For instance, 84% of consumers have multiple cards and one place to keep all of their cards and track balances. Up to 70% have delayed a purchase because they forgot their cards and 65% reports having received a gift card they will not use.

Our platform allows consumers to register all of these cards into a single application, track balances, purchase new cards, opt into receive offers from merchants and even exchange unwanted card for cash or another card of they’re choosing.

While we’ve already pointed out that mobile redemption is supported by limited number of retailers, we do support redemption through all current methods available today for 2D bar codes like QR codes to NFC and to manual card number entry. These platform features are demonstrated to our own mobile application GoWallet and are also available to our digital partners to over 25 distinct APIs.

We’re developing our business across multiple digital channels. The most developed channel is our e-tailer channel. We sell physical and digital cards through some of the largest e-tailers in the country such as Amazon, eBay, staples.com, OfficeMax and others including our own GiftCardMall.com.

We recently expanded the network through an agreement to activate e-gift through CoinStar’s 18,000 coin-counting kiosks located in leading retailers across the country. Our e-tailer channel is experiencing triple-digit growth. We will continue to expand the content, enhance the merchandising of the category on these high-traffic sites and increase our marketing activities throughout this channel.

Through our digital platform, we are entering the incentive and rewards market, which a third party has estimated to be over $40 billion in annual load. We can provide these reward and incentive programs with just in time e-gift activation, which provides the consumer with the convenience of immediate delivery while lowering program expenses. We’re partnering with various reward and incentive players to grow sales through this channel.

On the mobile front, we’re offering an attractive solution to mobile banking and wallet providers seeking ways to add value to their own mobile experiences by supporting digital gifting. We have signed agreements with various mobile banking providers recently including monetize the quarter to deliver e-gift and card management services to mobile banking customers, many of who log into their mobile banking app multiple times per week.

We’ve also entered into an agreement to support a large mobile wallet player and are in the process of finalizing agreements with multiple other mobile wallet and payment players in the U.S., Canada, and Europe.

In addition to card management services, the Blackhawk digital platform supports the ability for brands to engage with their gift card consumers. Brands can use the platform to deliver targeted offers, loyalty rewards and marketing messages to consumers who register gift cards on the Blackhawk platform and other platforms enabled by our API. Registration allows us to transform the previously anonymous purchase of a gift card into a known customer profile to which we can target permission to offer us to increase spend and engage them.

Now, I’ll turn it over to Jerry, our CFO, to provide a few additional highlights on the quarter before we take some questions.

Jerry Ulrich

Okay. Thanks, Talbott. I’m just going to try to provide some additional color on the financials, maybe stave off some of the questions or answer them in advance, I’ll ask Patrick to slow me down if he thinks I’m rifling through some of these numbers too quickly.

Load value increased by $185 million in the second quarter compared to a year ago, and as Bill pointed out, that’s an 11% overall increase. We started the quarter slowly, but we did recover to 19% year-over-year growth in load value as we finished at the quarter and started in to the next quarter, the third quarter that we’re in now.

Now Bill mentioned that the exit from the wholesale telecom business in the second half of 2012 had about a 3% drag on the load value for this quarter. That drag should reduce in the third quarter and will be minimal in the fourth quarter as we completed the vast majority of the wind down by September 2012.

On the commissions and fees revenue line, it increased $20 million or 13% year-over-year as we benefited from the 20 basis point increase as a percentage of load value. Again, this was due primarily to the higher proportion of revenue from international, 15% in the second quarter of this year, versus 12% a year ago. International does carry a higher commission rate, and also note though that a higher proportion of those commissions and fees are shared back to the distribution partners. For the full year, we expect the commissions and fees percentage to be comparable to the rate for the full year of 2012, which was 9.3%.

On the second line of revenues, program, interchange, marketing and other fees, they increased by $10.5 million or 57% for the quarter. This was boosted by the timing of some fee income on Visa gift cards in Australia as well as by 27% growth in load value for the open gift products, open loop gift products in the U.S., that would be the Blackhawk program-managed Visa cards.

We also saw over 35% growth in marketing revenue which of course is a pass-through into the sales and marketing expense category. For the full-year, we would expect growth in these revenue lines to moderate significantly as the growth this quarter that was impacted by the timing of the open season in Australia as well as the timing of some marketing promotions and the related revenues and expenditures.

The final line of revenues product sales grew about $5 million or 37% over the prior year and 38% year-over-year on a year-to-date basis through the first half. The telecom handset sales have actually been down slightly year-to-date as compared to 2012 and as we have been working through some changes in our handset offering.

And we have now just gained more commitments for dedicated telecom displays from some of our top distribution partners. Cardpool and our card production services both contributed to the overall $5 million increase for the quarter. Distribution partner expense, so as we indicated in the earnings release, it increased to 66.8% of commissions and fees revenue as compared to 64.3% in 2012 due to the increased Safeway commission that we negotiated in the extension of our contract that is beginning at 2013.

And as we discussed previously in the prospectus and in the first quarter earnings release, this is a one-time amendment to normalize Safeway’s fee splits as compared to other distribution partners. So that amendment on a comparative basis had about 100 basis point impact year-over-year. And then in addition the shift in mix between distribution partners in the U.S. and internationally where I mentioned earlier that distribution commissions are slightly higher along with higher commissions and fees revenue that I mentioned earlier. We do expect the rate for the full year to be in the range of this current level of 66.8%.

The processing and services expense, we did gain some leverage on this line in the quarter, but again most of the volume leverage will be realized in the fourth quarter during the peak gift card season which of course drives a much higher top line revenue figure.

On sales and marketing for the second quarter, the expense includes $6.9 million of mark-to-market expenses related to the equity instruments held by certain distribution partners. Because of certain redemption call features prior to the IPO, we were required to use variable mark-to-market accounting for these instruments and we classify them as warrant and common stock liabilities on the balance sheet.

Since the redemption call features on these instruments were extinguished at the IPO event, this liability was re-classed to additional pay in capital at the time of the IPO. We do have one warrant remaining outstanding with variable terms, variable expense accounting. So, it will continue to impact future performance or future expenses on this line.

The warrant issued to the two other distribution partners prior to the IPO in connection with extensions of their contract are fixed instruments and the value was determined at the date of grant and that is being amortized over the term of the warrant. These non-cash charges are, of course, adjusted out for purposes of calculating adjusted EBITDA and adjusted net income and the full details are included in the earnings release.

Excluding the mark-to-market expenses, sales and marketing expenses increased just under 24% in the second quarter of this year compared to 2012 and further if we adjusted for the marketing revenue increase during the quarter. And net of this against the expenses, the sales and marketing line grew about 19.5%, so just slightly ahead of total revenue growth.

Turning to the general and administrative expense line, this does include an item this quarter of fair value adjustment for GAAP accounting purposes related to the contingent Cardpool acquisition consideration. This fair value calculation is updated each quarter based on our latest forecast for Cardpool as compared to the thresholds that are set for the contingent portion of the purchase price.

In the second quarter of 2013, a credit was reported to this fair value of adjustment in the amount of $1.5 million. And since this is part of a present value calculation with higher risk discounts used for further out period, it is subject to adjustment based on the timing of rollout of certain growth and expansion initiatives for the Cardpool business. It doesn’t necessarily reflect whether the remaining contingent consideration will ultimately be paid.

Excluding this credit, G&A grew 28% for the quarter, which reflects some higher costs associated with being public as compared to a year ago as well as increases in legal and compliance cost for our regulated open loop businesses and the support of our international expansion.

Income tax expenses, the effective tax rate for the second quarter was 38.5%, which brought our year-to-date effective tax rates to approximately 40% which is the current estimated rate for the full year. This rate is slightly higher than 2012’s full-year estimated tax rate of 38.7% – or effective tax rate, I should say, due primarily to the increase in the portion of non-deductible mark-to-market expenses in 2013 as compared to 2012.

Just a couple of comments about profitability growth overall, Bill mentioned earlier in the call that adjusted net income for the second quarter grew 18% and that of course includes the negative effect of the change in Safeway commission rate year-over-year.

For the first quarter, we actually had a decline in adjusted net income year-over-year due to the higher Safeway commission and increased marketing expenses related to some extra promotion for Blackhawk products as well as some higher program development costs. So, on a year-to-date basis, we’re still modestly down year-over-year about 7%. But as we have mentioned previously, our quarterly results in the first three quarters will fluctuate based on the timing of marketing expenditures, new partner rollouts leading up to the holiday season like expanding displays that Bill mentioned earlier, infrastructure cost and other seasonal expenditures.

Our mid to long-term target for annual growth in adjusted net income is in the low-20% range. For 2013, of course, this growth target is moderated by the Safeway commission change which for the full year will reduce that growth rate and adjusted net income by about 12 percentage points. So if we look at it on a pro forma basis, excluding the impact of the Safeway commission change in 2013, we believe at this point that adjusted net income growth will be in our target range.

Now, turning to the balance sheet and some comments on cash flows, year-to-date statement of cash flows and the balance sheet of course reflects the significant reduction in cash and overnight advances to our parent simply due to the buildup in settlement payables around the end – or the year-end holiday selling season.

So in the earnings release, we do provide a pro forma free cash flow table that starts with our cash flow from operations, removes the impact of the change in gift card settlement receivables and payables and then subtracts capital expenditures. The difference year-to-year in the change in settlement receivables and payables is essentially due to the timing of Christmas relative to our actual fiscal year-end.

So for the year-to-date 24-week period ending June 15, we showed pro forma cash flow use of approximately $13 million or $4 million if we add back the restricted cash related to partner equity purchases that was released at the time of IPO.

So even excluding the change in settlement payables following year end, we would use cash during the first three quarters to fund the ongoing investments in the technology platform, expansion of partner programs such as the displays and program development I mentioned earlier, and then which is made up in the fourth quarter due to the seasonality of sales and the result in earning leverage in that quarter. For the rolling four quarters ended with the second quarter of 2013, excluding the special dividend that we paid, our pro forma free cash flow was $29.4 million.

Capital expenditures were $15.1 million year-to-date compared to $10.7 million in the 2012 period. Now, $2.9 million of this increase was related to a retrofit of our existing corporate offices to better utilize our existing space.

While we’ve substantially increased technology-related capital investments from over the last several years from 2010 to 2012 with total capital expenditures reaching $29 million or 3.9% of GAAP revenues in 2011. We’ve currently target the increases for 2013 and 2014 at less than the revenue growth rates. So for the full year of 2013, we expect total capital expenditures of between $29 million and $30 million or about 2.5% of total operating revenues.

So that concludes our prepared comments and I’d like to turn it back to the operator to go ahead and open up the line for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Your first question comes from the line of Julio Quinteros from Goldman Sachs. Please proceed.

Julio Quinteros – Goldman Sachs

Hey guys. So a couple of quick ones. On the product side, can you just walk us back through the different growth rates, if you can just sort of set the parameters around how closed loop gift grew for the quarter, how open loop gift grew and then GPR? I just wanted to get a sense which one of those individually relative to the drag from the prepaid telecom side?

Bill Tauscher

Well, Julio, as you know, we’ve talked in the past, we don’t tend to disclose the specific details of the product line’s low value growth. During the quarter, the closed loop sales were impacted by the early slowdown. Obviously, I mentioned the growth rate in the open loop gift card sales and as you’re aware, because the financial services is relative nascent business for us, it’s a small piece of the business.

The growth rates are fairly high there, close to 100% year-over-year. I think we mentioned that the telecom business, particularly when you look at the ASP exit last year and no revenues from that wholesale telecom business. Those were actually down year-over-year slightly. So I think maybe by process of elimination, you can kind of back into some of the break down there for closed loop gift. But in general, we’re not going to provide the details around each of the product lines.

Julio Quinteros – Goldman Sachs

Sure, and then maybe thinking about the snapback in the number that you cited, the 19% recovery bin. Of those three segments, where did you see most of the strength come back, was it on closed loop, open loop or GPR?

Bill Tauscher

Yes, primarily closed loop that drives the overall number there.

Julio Quinteros – Goldman Sachs

The majority of it, okay. And then I guess just on the telecom decline, you said that that did start in the second half of 2012, so why would be backing that out? I mean that’s something that’s been already flowing through your numbers, it would’ve already been in the first quarter obviously just kind of go all the way through the end of the year. But it didn’t sound like it was a new development whereas if you kind of think about the partner situation, that makes sense, but the telecom situation seems like that should’ve already been in your numbers?

Bill Tauscher

Yes. I think it was just some additional staffs. We probably haven’t broken it out previously. For example, in the first quarter, I don’t think we mentioned. It’s really relevant to look forward to the rest of the year and what the impact on the growth rate is. So since we hadn’t disclose the detail for that related to the prior years, if you were searching around for kind of how that changes the trajectory going forward, that would be helpful.

Julio Quinteros – Goldman Sachs

Okay. And then just lastly on the distribution partner commissions, the rates came in a little bit, I think, it was a little bit below 66.8, what do you expect that to look like for the rest of the year now?

Jerry Ulrich

Well, I think, as I said, we expect the full year to come in around 66.8, 66.9.

Julio Quinteros – Goldman Sachs

Oh, for the full year.

Jerry Ulrich

In that range. Yes.

Julio Quinteros – Goldman Sachs

Okay, got it. Great. Thanks, guys.

Operator

Your next question comes from the line of Sara Gubins from Bank of America. Please proceed.

Sara Gubins – Bank of America

Hi. Thanks. Good morning. Maybe just to follow up on the last question about distribution partner commissions, as you think to 2014, should we expect that line item to continue to trend higher or do you think it would stabilize?

Jerry Ulrich

Well, certainly removing the impact of the Safeway commission change will moderate a portion of it. So as we said about 100 basis points increase is due to that. So that will go away, I think we’ll still see some shift in this international mix of business where it’s a slightly higher share of commissions paid to the distribution partners but again we mentioned that the commission fees, themselves are also slightly higher than percentage. So we would expect again in the U.S. the mix of customers has some impact but we don’t expect for 2014 to have a significant impact so again a slight upward trend for 2014.

Sara Gubins – Bank of America

Okay. Great. And then in the prepared remarks you talked about the rate of migrating from that business to best practices. Could you talk about the rate of which they’re adopting loyalty program? And am I correct in thinking of loyalty program practice?

Talbott Roche

So Sara just to make sure, the question is what do we see in terms of a cat movement from best practices into loyalty programs?

Sara Gubins – Bank of America

Right. That being a significant boost to commissions that you’d be getting from grocers?

Bill Tauscher

Sara, there’s really two items have note but first which we mentioned in our comments is that Safeway who previously had restricted their loyalty program to their own gas station footprint has expanded it to several third party gas station agreements and completed the coverage for almost their entire footprint and it’s having a pretty profound impact on our business as that loyalty program now covers most of Safeway’s sales and impacts most of Safeway’s gift card sales.

So that’s the first change that’s positive and then we are entering test with another significant top 10 retailer for them to test your loyalty with gift cards and our credit size is about that as well. So there has been two pretty significant items of movement in the current period.

Sara Gubins – Bank of America

Great. And then, just last question, are there any contracts with large distribution partners that are coming up, and if so, can you give us a sense of where those are going?

Bill Tauscher

We essentially lacked this. During this quarter, we completed a negotiation for one of our top five partners, so all of our top five distribution partners in the U.S. are now under contract terms ranging from four to six years.

Sara Gubins – Bank of America

Great. Thank you.

Operator

Your next question comes from the line of Mike Grondahl from Piper Jaffray. Please proceed.

Mike Grondahl – Piper Jaffray

Yes. Thanks for taking my questions. On the international side, what are you most excited about there?

Bill Tauscher

I think it’s two things. This is Bill Tauscher. The first is we are seeing an affirmation that is international markets mature, that the model financially and the model in terms of consumer and retail behavior is paralleling, and tracking behind obviously because it’s not as mature, but paralleling what we’ve seen in the U.S.

So, in a number of our more mature markets, we are continuing to see maturity both in the financial results and in the way we’re seeing basic productivity metrics. So it’s just a reaffirmation that international is not a boondoggle, if you will, but has become a contributor and should become a growing and more substantial contributor, going forward, both top and bottom line.

And then, secondly, we have several new markets in the Far East, in particular, that have the potential for explosive growth that are not contributing today other than the growth we’ve got in Japan which is beginning to be meaningful but those markets have a potential to provide considerable growth. We have not really quantify that nor literality provided that when we talk about any guidance or thoughts going forward so they’re sort of a unknown upside but we are investing in them, we are spending money in them, we know the size of markets and the potential that’s there.

How they’ll develop is uncertain because they’re new and even new in some cases to third-party gift card distribution or even gift cards as a method of giving gifts but there’s clearly a potential for some explosive result that could change the nature of international mail order magnitude. So, I think those are the two things.

Mike Grondahl – Piper Jaffray

Okay. And then the mobile banking app opportunity seems pretty interesting. Can you give us an example of a customer that you’re doing that for today, or is that sort of still in development?

Talbott Roche

We have a few examples that are in beta today but we’re not talking about the specific names of those players we will be in the future. It’s obviously a new channel for us that represent high frequency of engagement by the consumer and that’s why we’re excited about local banking. And these datas will be proving out our thesis that will be able to distribute new gift cards conveniently through these mobile banking interfaces.

Mike Grondahl – Piper Jaffray

Okay. Thank you.

Operator

Your next question comes from the line of Bryan Keane from Deutsche Bank. Please proceed.

Ashish Sabadra – Deutsche Bank

Hi. This is Ashish Sabadra calling on behalf of Bryan Keane. Good question on the bounce back in the load volumes. So I just wondering if you can provide some more color on what led to the bounce back? Was that increase in groceries? Was it one of the initiatives that you spoke about in the Safeway fuel program? Was there any change in the gifting season because second quarter is supposed to be seasonally strong gifting season? So if you could just provide some more color on the bounce back.

Bill Tauscher

Well, I think the first, as we pointed out was – this is Bill Tauscher, the first was that it was clearly a pickup in retail. It’s been pretty well established. The first part of the quarter, April in particular, retail was slow, grocery in particular. And so there was a bounce back. Some of that had to do with calendars, some had to do with weather. There has been various articles written about the different root causes, but it clearly was a short period of time for the year. And the retail sales have now shown across the board that they’ve bounced back. So that was the first fundamental reason.

The second one was clearly we saw some impact as Safeway begin to accelerate and that’s why we highlighted that so that picked up our closed loop business. I should comment that the comments that I’ve made about the fixture addition the 1.7 million PEGs that are going out across our distribution partners which is a new high for us certainly in the last few years has not had any impact yet. And so that, as we typically do, were going in over the second and third quarter and we’ll really see the benefit of that in the second half. So we’re excited about that, but that was not an explanation.

And then I think part of it was simply the timing of this one promotion and how that fell. This promotion has been notably in our business and it does break some of the relationship for load value in our operating revenues because as we pointed out, it has a significant promotional effect on load value but generates very little revenue or net adjusted revenue for us. So it’s little impact with our financials does break apart to about 3% in the last quarter that relationship so – and that was a – that sort of have more predominant effect in the early part of the quarter than it had on the later part of the quarter, just in the timing in that, Phil.

Ashish Sabadra – Deutsche Bank

Yes. Thanks, Bill. Thanks for that color. Now constraint, as you just highlighted, there are certain several new initiatives going on, but third quarter is also seasonally soft and then it ramps up in fourth quarter.

So how should we think about load volume growth for the rest of the year? Do you think that 19% is sustainable? Could we actually further constraint all the new initiatives of those likely programs and the telecom handset adoption, telecom handset? So with all the initiatives, can we expect that load volume growth to be sustained or going to accelerate going into the fourth quarter?

Talbott Roche

Yes. A couple of comments about that without sort of being direct to your answer. I think as we’ve mentioned that’s why Jerry brought it up, one of the constraints which has been this wholesale telecom business that has been dragged coefficient because we exited last year. Sort of the negative effect of that goes away mostly in the third quarter and completely in the fourth quarter. So in terms of load value numbers, that will have an impact.

Again, it’s not clear to us what will happen with this promotional activity with this certain retailer that we quoted. So that could have a swing effect. It won’t affect revenues, which is really where the focus should be especially our adjusted revenues as I commented earlier.

So where the number ends up being 3% plus or minus has some dependence on whether that promotion is run as we pointed out this quarter.

We do think, however, the fundamentals have been laid in the telecom business as we referenced with these major rollouts of these major new presentations and fixtures and the elimination of the wholesale business and then with all the PEGs and the migration of our basic fleet, if you will, further down that continuum of best practices and loyalty programs for us to have the kind of second half that we expect to have.

Ashish Sabadra – Deutsche Bank

Okay, thanks. And one final question on the Cardpool, how is that tracking as for your expectations? Thanks.

Bill Tauscher

Regarding Cardpool, we have entered in some new but they’re not really distribution, but some new retail or instruments to acquire cards that look very promising. As you might recall, Cardpool has sort of a natural growth to it just because there’s a large pent-up demand, if you will, of unwanted cards out in the marketplace and Cardpool has become the dominant player in this space, so it’s natural business growth as people become aware of it day-in and day-out is to grow.

But in addition to that, one of our key thesis was that we could acquire cards at retail using our system in effective way because we have – it’s a business that’s constrained by supply. If we can acquire the cards price effectively, which is what our system does, that we seem to have no trouble selling them. So we have entered into some new retail arrangements that we’re excited about and it looked like they have some reasonable prospects for productivity and we’ll be ramping up over the second half of the year and then extensively ramping in 2014. So we have every reason to expect. We’ll see continued growth in Cardpool on accelerated basis.

Ashish Sabadra – Deutsche Bank

All right, thanks. Thanks a lot.

Operator

Your next question comes from the line Wayne Johnson from Raymond James. Please proceed.

Wayne Johnson – Raymond James

Hi, yes. Good morning. So my question is on the e-gift program and I received a lot of questions on this topic and I appreciate the earlier comments. But could you just flesh out the economics, the relationship between the customers you provide this for versus the economics for the traditional retail distribution kind of a compare and contrast if you will, I’ll appreciate that.

Talbott Roche

Sure. This is Talbott and I appreciate the question. The economics today, remembering that the card partner is seeking us for third-party distribution opportunities into these new emerging digital channels is virtually the same as what we experienced on our physical distribution network. They’re, again, using us to reach channels that represent incremental opportunities for sale, so we have maintained our business relationships and business model in similar fashions towards physical distribution network.

Wayne Johnson – Raymond James

Okay, thank you. And just as a quick follow-up, so do any of these retailers split the e-gifting program between Blackhawk and other service providers or do you have the same type of relationship with them as you do with the physical cards?

Talbott Roche

Yes. Again, our relationships with our card partners and our content providers vary. They’re different all over and across the board. We have folks who are leaning in to e-gift to be more deliberate about their efforts to get into third-party channels. Some of them were working with us solely. We have others who are working with multiple parties. And then we, of course, have others, I think I commented earlier who have not yet entered the e-gift market for some of our retailers to play in because restaurants particularly have a challenge in terms of a redemption experience with consumers. So it’s all over the board.

Bill Tauscher

Let me add one other thing. Clearly, our approach which is following our same physical model and truly what Talbott focused on as she went down the list of different new emerging channels is to focus on where high volume potential is for e-gifts and for that matter, in some cases, physical gifts. But the real focus is around e-gifts and sign-up distribution partners for the digital distribution of those e-gifts as the numbers continue to grow for the content side.

There certainly are retailers who are selling e-gifts on their own site and in many cases, that’s sort of the parallel to retailers selling cards in their own retail store. And those retailers are doing those at some time on their own platform and sometimes on third-party platform. That’s, by and large, a business that we’re not participating in any more than we participated in the physical distribution of cards by a given retailer sold from their store.

What we are doing, of course, is again in parallel is attempting to negotiate arrangements with all of the large potential distribution players emerging in the new digital space using our content and relationships settlement and systems that we have in place and this platform that we’ve developed to sort of provide the same kind of third-party distribution, only digitally, that we have in the physical space, and in many cases, of course, those are new and different players. But in some cases, they are also our existing retailers.

Wayne Johnson – Raymond James

All right, perfect. Thank you for that.

Operator

(Operator Instructions). Your next question comes from the line of David Chiaverini from BMO Capital Markets. Please proceed.

David Chiaverini – BMO Capital Markets

Hey, good morning. My question actually is a follow up to the previous one regarding new channels. Can you talk about how Blackhawk will monetize the social networking relationships with Ifeelgoods, Boomerang and Treater?

Talbott Roche

Sure. Those are examples of – two of them are examples of social gifting applications that consumers can engage in to more easily or I’d say conveniently give e-gift in a mobile environment. And what’s happening is we’re allowing those players to leverage the content of our platform, so that they can infuse their solution with our digital content. Correspondingly, we’re allowing the card partners to use our platform and our settlement relationship that we’ve already established with them, to extend and test these new social gifting applications. So, that’s what the two of them were about.

And one of them is also a – I’ll call it a mobile incentive or rewards player. And they’re much the same way, leveraging our platform to access content and leverage the settlement relationships we already have in place with these content providers. So this is an example where smaller players in the mobile space will be able to get access to content that they might not otherwise be able to get access to for our platform.

David Chiaverini – BMO Capital Markets

Great, thanks.

Operator

Your next question comes from the line of Ramsey El-Assal from Jefferies. Please proceed.

Ramsey El-Assal – Jefferies

Hi, so the new distribution contract was great to see. Can you comment on the state of your kind of contract pipeline now versus perhaps how it looked relative to prior periods?

Bill Tauscher

Well, if you look internationally, of course, we continue to have a very robust expansion of – both distribution and content partners, not just in some of the new emerging countries, Korea, China, Japan, et cetera, but even in our more established countries where we’re just not as mature. An example of that, we mentioned on this call, was the signing of the biggest restaurant chain in Canada, if you’ve been to Canada you probably know Tim Hortons says a gigantic market share up there.

Ramsey El-Assal – Jefferies

Okay.

Bill Tauscher

So there’s a huge activity going on in the – outside the U.S. I would say in the U.S., however, our pipeline today if I looked at it and measured it, weighted it, et cetera, is about the same as it’s been in the last several quarters. Why we did sign – and are very excited about several very large players, if you count numbers and of course at Home Depot’s case, they’re just a gigantic retailer with huge traffic in volume, those are great wins, but we have some others in our pipeline that we’re deeply excited about.

Ramsey El-Assal – Jefferies

Okay. Thanks, that’s helpful. I wanted to ask a question about your PayPower general-purpose reloadable card program and I sort of thought of this in the context that the wholesale telecom business that you wound down. I would assume that’d be a program that had carried sort of high cost relative to the revenue that it’s generating in a pretty competitive market environment for product like that. What are your sort of long-term plans for PayPower? Is that sort of here to stay or is that something that you’re kind of potentially contemplating, making some adjustments to going forward?

Bill Tauscher

I guess the sort of answer to it it’s here to stay. We are continuing to expand our presence with PayPower both in retailers and in the physical presentation of PayPower and its racks and messaging and signing. We are continuing to expand some work with some very large partners from a white label standpoint. So because we’ve developed our own complete structure for program management, customer care management platforms that we’ve developed and own and operate, we become quite adept to doing and using all the PayPower is but then white labeling it for someone else whose brand or affiliation with other parts of what they’re doing make that capability, that GPR offering something that they can do and we have a number of those in work that we’re excited about.

So, we think it’s, while small and nascent as Jerry pointed out, it’s continuing to grow very dramatically and certainly here to stay as we continue to ramp up both our distribution and this white label effort.

Ramsey El-Assal – Jefferies

Okay. Last one and this is probably not necessarily a question that you’ll able to answer directly but engaged at all with MCX sort of on the digital and on the mobile side with a merchant customer exchange, it seems like when I look at your businesses, that might be the type of a platform where you could sort of add value. Is it a type of platform you could contemplate sort of partnering within some way, shape or form?

Bill Tauscher

Yes. I can’t answer obviously specifics about dialogues we’re having very clear. It is the kind of opportunity that makes a lot of sense for our platform and their multiple wallet players out there in the marketplace today that are coming at us from different perspective be it a merchant coalition in the case of MCX or a technology platform or a large financial institution. What we see -and retailers themselves having their own wallet application. We’re seeing a lot of varied mobile wallet activity in the marketplace and our digital gifting solution really provides that one-stop shop and level the engagement with the consumer that I think a lot of these mobile wallets are looking for. So, I know that’s not a direct answer, but I hope that is directionally helpful.

Talbott Roche

One other factor, this kind of – from a macro level, what the wallet guys are probably focused on the primary payment vehicles for the core of their wallets, prepaid as a percent of the overall electronic payments, i.e. debit cards, credit card, and so forth, is still quite small. So it makes it worthwhile for them to talk to us as an aggregator on the prepaid side because they can focus on the much larger transactional portions of the settlement side.

Jerry Ulrich

It’s a small percentage but as it turns out, a much more complex problem for them to solve. So that’s why we’ve targeted and focused on it, and while we look at ourselves as the provider of capabilities inside as many of these players as we can, successfully puts something together with.

Ramsey El-Assal – Jefferies

That’s all very helpful. Thanks a lot. The last one for me.

Operator

Your last question comes from the line of Gil Luria from Wedbush Securities. Please proceed.

Gil Luria – Wedbush Securities

Yes. Thank you for taking my question. Would you mind commenting on your growth rates by region in the U.S. so especially early in the year when the load volume growth was slower than trend line? Even by West Coast to East Coast, Midwest, were their trends any different on the – any noticeable change in any particular partner or region?

Bill Tauscher

Well, I think the early slowdown was probably heavier in the east and northeast, partly related to the weather factor. But as you know, some of our other retailers have mentioned other factors like delayed IRS refund checks, tax changes and frankly, the consumer sentiment survey was at a low point in April and it’s now rebounded nicely.

We did see some slowdown outside those regions as well and then, of course, as mentioned, a partner that reduced its kind of promotional program around a lower margin type program which didn’t impact our revenue line as much, that was outside that weather-impacted region.

Gil Luria – Wedbush Securities

And then would you mind quantifying the Australian item, the Australia fee that came in this quarter, how big that was? Is that a one-time item or a once-a-year item?

Bill Tauscher

It’s fees that we receive on an annual basis. It is lumpy in terms of quarters. It relates to legally how unredeemed balances on the Visa gift cards Australia are handled, the bank contract that we have with the issuing bank to that card specifies the timing of that fee income and this year, it just came in this quarter.

Gil Luria – Wedbush Securities

And how big was it?

Bill Tauscher

Well, I can’t talk about the specific items but the three items that I mentioned that drove the sizeable increase in that program marketing and interchange line were roughly evenly disbursed.

Gil Luria – Wedbush Securities

Got it. And then when did Safeway – what was the timeline of Safeway expanding the Fuel Rewards Program nationwide? At what point did they expand to all their stores or the majority of their stores? At what point was that live?

Bill Tauscher

It’s been a rollout that has been ongoing throughout the course of this year. So they first started it in Southern California and then as the year opened up and then moved it across the different banners and local regions of Safeway as the year went on.

It’s not in Canada, but it’s in all of the U.S. regions just now and of course, there is a maturation period because the consumer has to understand it and begin to make some of the behavioral changes that the loyalty induces. And so you see when these things roll out sort of a continuous period after they get established. So we have the benefit of a rollout over the first couple of quarters, and we’ll see now that will have some maturation as we move forward in the next couple of quarters at the year.

Gil Luria – Wedbush Securities

How long does that cycle take from when you bring a store up to this level of rewards and best practice until you get to that trend line of performance from that grocery store?

Bill Tauscher

Well, the facts are that we’ve seen continuous growth lines that exceed our overall growth line for our loyalty partners that’s lasted for multiple years, and the reason quite simply is the consumers continue to get more and more aware of this benefit and avail themselves of it. So it’s not like it’s – you roll it out and then six months later, you kind of reach maximum maturity. It takes longer. You get a longer-tail benefit from that.

Gil Luria – Wedbush Securities

Got it. Thank you very much.

Operator

Ladies and gentlemen, we have no more questions in the queue. I would now like to turn the conference back over to Mr. Jerry Ulrich for any closing remarks.

Jerry Ulrich

All right. I want to thank everybody for participating in our first public earnings call. I just want to highlight one item. A little bit embarrassing that came up during our call that somewhere in the automated world of transition from our spreadsheets to the printer on the earnings release, there’s a small error in the income statement. It will increase the net income by $72,000, which if you’re plugging the numbers line-by-line into your spreadsheets. And I thought I would just give you a heads up on that but that will be filed a little bit later and you’ll have some numbers that properly put to in the income numbers, so apologies for that.

And with that, I think we’ll end the call. Thanks very much.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect.

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