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Deluxe Corporation (NYSE:DLX)

Q3 2012 Earnings Call

October 25, 2012 11:00 AM ET

Executives

Jeff Johnson – Treasurer and VP, IR

Lee Schram – CEO

Terry Peterson – SVP and CFO

Analysts

Charles Strauzer – CJS Securities

John Kraft – DA Davidson

James Clement – Sidoti

Operator

Good day ladies and gentleman and welcome to the Q3, 2012 Deluxe Corporation Earnings Conference Call. My name is Clinton and I’ll be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answers session towards the end of the conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes. And now I turn the call over to today’s host Mr. Jeff Johnson, Treasurer and Vice President of Investor Relations. Please go ahead, sir.

Jeff Johnson

Thank you, Glenn. Welcome to Deluxe Corporation’s 2012 third quarter earnings call. I’m Jeff Johnson, Deluxe’s Treasurer and Vice President of Investor Relations. Joining me on the call today are Lee Schram, Deluxe’s Chief Executive Officer; 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 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 and 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 in any other statements addressing management’s intentions and expectations regarding the company’s future performance. Our 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 the call is addressing greater detail in today’s press release, which is posted in the news and Investor Relations section of our website deluxe.com 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. We just delivered our third outstanding quarter this year and are well positioned to grow revenue for the full year 6% to 7%, despite the continued sluggish economic environment. 2012 would represent the third consecutive year of revenue growth. The last time we achieve three consecutive years of revenue growth dates back 16 years to 1996.

We reported third quarter revenue and adjusted earnings per share well above our outlook. Revenue grew almost 7% over the prior year driven by small business services revenue growth of 14% of which 4% came from the OrangeSoda acquisition. Checks and forms both perform well and marketing solutions and other services revenues grew 23% over the prior year. Adjusted diluted EPS grew 9% over our strong prior-year. We also generated very strong operating cash flow we’re not drawn on our credit facility during the quarter and we have increased our cash position $77 million from last December.

Encouragingly, we continue to see stabilization in secular checked-declined rates with financial institution consumer declines less than 5% in the quarter, which is the third quarter in a row, we have seen significantly lower decline rates. We also continue to invest in brand awareness to help better position, our marketing solutions and other services offerings and drive future revenue growth.

Further, we extended our process improvement and cost reduction initiatives, while driving strong operating cash flow as we continue to transform Deluxe. In a few minutes, I will discuss more details around our recent progress in next steps, but first Terry will cover our financial performance.

Terry Peterson

Thanks, Lee. Earlier today, we reported diluted earnings per share for the third quarter of $0.81, which included restructuring costs of $0.04 per share. Excluding these costs, adjusted EPS of $0.85 was well above the upper-end of our previous outlook and 9% higher than the $0.78 reported in the third quarter of 2011.

Strong check and forms revenue in small business services and financial services and lower discretionary spend drove better than expected EPS performance. The restructuring charges were primarily for employee severance and infrastructure consolidations.

Revenue for the quarter came in at $378 million, which was well above the range of our outlook and up 6.5% from 2011. All three of our business segments performed well. Small business services revenue of $244 million grew 14% versus last year on a reported basis, of which nearly $8.5 million came from the OrangeSoda acquisition. While we continue to operate in a weak economic environment. We delivered growth in marketing solutions and other services, our Safeguard distributor, dealer and major accounts channels and in checks and forms.

Financial services revenue of $83 million declined less than 3% versus the third quarter of last year and reflected a lower than expected secular decline – check decline rate of less than 5%. The impact of lower check orders was mostly offset by price increases. The addition of Citizens Financial Group and higher non-check services revenue. Direct checks revenue of $51 million was down 8% on a year-over-year basis.

Gross margins for the quarter was 65.2% of revenue, down 0.3 percentage points from 2011. Benefit from price increases, improvements in manufacturing productivity and other cost reduction initiatives were more than offset by increased delivery rates, material cost and performance-based compensation expense.

SG&A expense increased $8.6 million in the quarter, it was 45.3% of revenue compared to 45.8% of revenue in the same period last year. Increased SG&A is associated with commissions on increased revenue, higher performance based compensation expense in the OrangeSoda acquisition last quarter was partially offset by benefits from our continuing cost reduction initiatives. Excluding restructuring costs, operating margin for the quarter of 20.0% was up slightly from the 19.9% generated in 2011, and was above our expectations with favorability coming from a higher revenue per order and continued cost reductions, partially offset by a higher performance based compensation expense and the OrangeSoda acquisition last quarter. All three segments delivered strong operating margins.

Excluding restructuring costs, Small Business services operating margin of 17.1% was down 0.2 percentage points from last year, due to expenses associated with the OrangeSoda acquisition, higher performance based compensation expense and increased commissions partially offset by continued progress with cost reduction initiatives and price increases. Financial services operating margin of 21.9% was up 2.7 points from 2011, due to higher revenue from price increases, as well as continued progress with cost reductions. Direct checks operating margin up 31.0% was in line with 2011.

Turning to the balance sheet and cash flow statements, year-to-date, we have increased our cash and cash equivalents balance by $77 million, despite having paid cash for the OrangeSoda acquisition and repurchasing $12 million of our common stock to offset expected dilution from employee plans. Total debt at the end of the quarter was $742 million the same as at the end of 2011. Cash provided by operating activities for the first three quarters of the year was $177 million, which was $6 million higher than last year and exceeded our expectations driven by stronger operating performance.

Compared to last year, stronger operating performance and the discontinuation of our defined contribution pension plan were partially offset by higher income tax payments, our planned contribution to our VEBA Trust for future medical costs in the first quarter and higher contract acquisition payments.

Capital expenditures for the first nine months were $26 million and depreciation and amortization expense was $50 million. Given our strong performance in the third quarter, we are raising our consolidated revenue outlook for the year to a range of $1.508 billion to $1.515 billion. We are not expecting much improvement in economic conditions for the balance of the year, positively excluding marketing solutions and other services in our outlook range. The underlying core business is actually growing from 2011.

Adjusted diluting earnings per share is also expected to increase to a range of $3.43 to $3.50, excluding $0.13 related to restructuring and transaction related costs. There are several key factors that contribute to our full year outlook versus 2011, including small business services revenue is expected to increase in the low double-digit and declines in core business products are expected to be offset by price increases and growth in our e-commerce, distributor, dealer and major accounts channels, plus double-digit growth in marketing solutions and other services offerings, which now include the OrangeSoda acquisition.

We expect financial services revenue to decline in the very low single digits range driven by a secular check order declines, which we expect will be approximately 5% to 6% in the fourth quarter, partially offset by higher revenue per order. The Citizens Financial Group migration and continued growth from non-check revenue streams.

Direct checks revenue declined in the mid to high-single digits driven by check volume reductions in a sluggish economy. Additional cost and expense reductions, increases in material and delivery rates, increases in performance-based incentive compensation, continued investments and revenue growth opportunities, including brand awareness, direct response campaigns, marketing solutions and other services offers and enhanced Internet capabilities, and an effective tax rate of approximately 33%.

We are tightening our operating cash flow outlook to a range between $239 million and $245 million in 2012, reflecting stronger earnings offset by higher income tax and contract acquisition payments and a first quarter contribution to our VEBA Trust. We expect contract acquisition payments to be approximately $20 million for the year.

2012 capital expenditures are expected to be approximately $35 million, roughly the same as 2011. 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 $65 million, including $15 million of acquisition-related amortization.

For the fourth quarter of 2012, we expect revenue to range from $381 million to $388 million. Adjusted diluted earnings per share is expected to range from $0.85 to $0.92.

In comparison to the third quarter, fourth quarter revenue is expected to be higher due to seasonal holiday and tax form offers and that continued ramp in marketing solutions and other services revenue, primarily driven by new customer migration rollouts in wholesale web services. Adjusted EPS in the fourth quarter is expected to be higher than the third quarter due to the higher revenue level, partially offset by an expected increase in brand awareness spending.

Shifting to our capital structure, we expect to maintain our balanced approach of investing organically and through 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 dilution from employee plans as we did in the second quarter.

Finally, we plan to pay off the $85 million of notes maturing in December without drawing on our credit facility. We believe our strong cash flow, strength in balance sheet and flexible capital structure positioned 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 quarter as we delivered on our expected costs and expense reductions towards our $50 million commitments net of investments in 2012.

Our focus in sales and marketing in the fourth quarter continues to be on improving sales and marketing backend operations through process centralization, simplification, platform and tool consolidation, and leveraging e-commerce capabilities. We consolidated our Little Rock and Joppa call centers for Custom Direct into our Colorado Springs Direct Checks call center in early July. We will continue to improve the mix of paper catalog and online search engine marketing expenditures.

In fulfillment, we expect to continue our lean product standardization, spoilage reduction and direct and indirect spend reduction initiatives, plus further consolidate our manufacturing technology platforms, enhance our strategic supplier sourcing arrangements and continue with other supply chain improvements and efficiencies. We are also working to close by the end of the year our Custom Direct Joppa printing facility and our SBS Rockford printing facility with all work being consolidated into other Deluxe printing facilities.

Finally, for the shared services infrastructure, we expect to continue to reduce costs 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 an update on our key revenue growth area, marketing solutions and other services and insights on next steps for improving our brand awareness. I will then highlight progress in each of our three segments, including the perspective on what we hope to accomplish in the fourth quarter and finally provide some context looking forward to 2013.

We have significant growth opportunities in marketing solutions and other services, including for small businesses, well the design, web services, social media, Web-to-print, search engine marketing and optimization, payroll and fraud and security services. And for financial institutions, customer acquisition, risk management and profitability offers.

We will continue to assess potential small to medium-sized acquisitions that complement our large customer bases with a focus on marketing solutions and other services. Here is an update on the four subcategories framework, we introduced on our first quarter call for marketing solutions and other services.

First, small business marketing is expected to represent approximately 41% of total marketing solutions and other services revenue, with expected organic growth rates this year in the high teens. Although expected actual growth rates will be higher this year, closer to the mid ‘30s given the PsPrint acquisition in July, 2011. Key growth initiatives include scaling Web-to-print by cross-selling to our customer base and continuing to add new customers through major accounts, distributors and partners.

Second, web services, which includes logo and web design, web hosting, SCM, SCO, email marketing, social and payroll services, as expected to represent approximately 30% of total marketing solutions and other services revenue, with expected growth rates this year close to 40% driven by the OrangeSoda acquisition.

Key growth initiatives and performance drivers include adding wholesale Telco and major accounts, cross-selling to our retail base through bundled presence packages, adding new customers, resellers and partners, and reducing web design and SCM campaigns cycle times and turn rates, also which ended the quarter at record low rates. This category is also our focus area for tuck-in acquisitions with OrangeSoda being a good example.

Third, fraud security and risk management services are expected to represent approximately 24% of total marketing solutions and other services revenue in 2012 with expected growth rates this year in the high single digits.

Key growth initiatives include scaling our program services for both national and community banks, and fraud and security offers for small businesses and direct to our consumers. It also includes adding banker’s dashboard customers, as well as adding features for our installed banker’s dashboard base.

Finally, other financial institution services are expected to represent approximately 5% of total marketing solutions and other services revenue with expected growth rates this year in the 25% range, a very high percent driven by a small starting revenue base. Key growth initiatives here including adding new CornerStone, SwitchAgent and gift and reward card financial institutions.

We expect marketing solutions and other services revenues to be approximately $285 million in 2012, up from $223 million in 2011 with organic growth in the mid-teens. If achieved, this performance would translate to a total revenue mix of around 19% of revenue towards our goal of achieving a 25% mix over the strategic period and up from 16% in 2011 and 13% and 12% the previous two years.

In addition to the items just mentioned, in order to accelerate revenue growth, we are continuing to invest more in brand awareness and positioning. Our brand awareness improvement starts with differentiating our offers for small businesses around the brand platform with the key message that Deluxe is a genuine, passionate small business partner that gives them everything they need, so they can focus on what they love. Think of it as Deluxe helping small businesses to pursue very unique passion.

We have been working closely with the national outside agency, while at the same time improving our online site architecture, content, integration and design in our call center experiences. We spent a little less than expected in the third quarter on the brand transformation simply given the timing and building out of this new integrated platform.

For the year, we will basically spend what we expected to spend in the second half of the year from our July earnings call guidance. But the timing will be shifted more heavily to the fourth quarter. So what should you expect to see from us. Our rollout is expected to begin late in the fourth quarter with television, digital, including mobile and print ads. And we expect to continue this throughout 2013 and three primary bursts weighted more heavily towards the first half of the year.

Our whole customer experience from on line to our call centers will be improved and integrated into this full brand transformation experience. We believe the outcome of our brand transformation will be messaging that is compelling, emotional, humorous, edgy, memorable and differentiated, but simple. A real rallying cry for our brand and our people.

For competitive reasons, we will not disclose the messaging or intended investment levels, beyond these initiatives, behind these initiatives at this time, but look for our new advertising to begin later this quarter. We have established return on investment criteria, based on the number of impressions, expected site visits, online leads and calls and we’ll use results against these metrics to guide us as we progress on this new brand journey.

Now shifting to our segments. In small business services, we had strong performance despite a continued sluggish economic climate. Revenue grew 14%, 4% of which came from the OrangeSoda acquisition. Checks and forms performed well. Our results from targeted customer segmentation in the call center improve. We increased new customers from our financial institution Deluxe Business Advantage referral program and for our Direct Response campaigns.

Response rates increase from better balance, (inaudible) rich content and online and print-based spend. Average order value and conversion rates remain strong. Our Safeguard distributor, dealer and major accounts channels grew revenue over the prior year. We also saw growth in web, SEM, SEO and payroll services. We ended the quarter with approximately 525,000 web-hosting customers. We continue to closely monitor the small business market. Optimism indices declined for the last five months including slightly in September as we exited the third quarter and remained at historically low levels.

Small business spending is more for maintenance than expansion and remains weak. But the outlook for improvement in business conditions over the next six months did improve as we exited the quarter. Small businesses continue to spend cautiously, scrutinized purchases and experienced tight cash flow.

In summary, current optimism indices have been trending downward and the outlook is not conducive for new spending for hiring. The good news is that increasing sales continues to be a small business owners, 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 to get and keep customers. Deluxe is better positioned as that indispensable partner for growth.

Our focus for the fourth quarter in core small business checks and forms is on acquiring new customers, increasing our share wallet through our enhanced shop Deluxe e-commerce site, growing distributor and dealer partners, adding new and cross-selling more in major accounts and improving segmentation. We will continue to improve the efficiency and effectiveness of our inbound, outbound and online customer touch points to maximize revenue scale capability. We also expect higher seasonal holiday and tax form revenues.

In marketing solutions and other services, we expect to continue to gain new customers through our telco-focused wholesale web services model, and customers and services in our retail model by selling bundled web presence packages, add other web to print marketing services, payroll services and logo customers, and continue to expand our search engine marketing customer base.

In financial services, we saw a third consecutive quarter of a better than expected secular checked decline rate with an actual decline of less than 5%, which was better than our forecast to decline range of 5% to 6% driven by strength in both the national and Community segments.

In addition, we benefited from processing checks for Citizens Financial Group in the current quarter. We had strong overall new acquisition rates and our retention rates remained strong and deals pending in the current quarter in excess of 19%. Positively, we now have commitments to extend all our large contracts through the end of 2013. We also continue to work a number of competitive RFPs and expected decision on one this quarter and we’re somewhat favorably informed not know, but not now on another one. We also simplified our processes and took complexity out of the business, while reducing our cost and expense structure.

We are planning for check units to be in a decline range of around 5% to 6% for the fourth quarter. We also expect retention rates in excess of 90% on deals pending in the fourth quarter and with close to 90% of our 2012 community bank contract renewals already completed with three quarters of the year behind us, we remain well ahead of last year’s pace.

We made progress again in the quarter in advancing non-check marketing solutions and other services revenue opportunities. Revenue grew over last year in these non-check services, which include customer acquisition, risk management and other profitability offers. The customer acquisition and specifically our cornerstone direct marketing analytics offer, we saw continued growth in new financial institutions that will roll out in the fourth quarter.

In addition to a number of community banks, that have started to roll out our new SwitchAgent offer, we have initiated branch pilots from four large financial institutions, including one where we do not produce checks for them.

Although still early in the rollout of our offer. We continue to be excited about SwitchAgents’ opportunity. For the first time ever, we recently presented that innovates false show, specifically showcasing our SwitchAgent offer. The positive customer and media responses we have seen from this abound are very encouraging.

Banker’s Dashboard also continued to perform well in the third 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 2012. Indirect 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 us another 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.

We completed the integration of our Little Rock and Joppa for Custom Direct call centers into our Colorado Springs – Direct Checks call center in July. And are now working on integrating our job with Custom Direct fulfillment into a Deluxe fulfillment site, which we expect to complete by the end of 2012. We continue to see a ramp in revenue enhancement synergies through our call center scripting and up sell capabilities, as well as synergistic cost and expense reductions.

For 2012, we expect direct checks revenue to decline in the mid to high-single digits, driven by continued declines in consumer usage in 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, all generating strong operating cash flow.

As we exit the third quarter on the heels of another outstanding quarterly performance and a continued challenging economy, we made good progress again in transforming Deluxe, but we still had a lot of work and opportunities ahead of us. We are continuing to prudently plan that the economic climate will not improve in the fourth quarter.

Our primary focus continues to be on revenue growth, especially in marketing solutions and other services, and on our new brand positioning. We expect to continue to trend our revenue growth in the fourth quarter with solid mid single-digit growth. If the economy improves in the fourth quarter, we should have some upside in small business services revenue. At the same time, we will not take our eyes off the cost reductions and process improvements. And we expect to continue to generate strong cash flows and provide a very attractive dividend.

Looking ahead to 2013, our portfolio continues to become better positioned to deliver continued sustainable revenue growth. We are planning for what we expect to be a fourth consecutive year of revenue growth. Given the continuing sluggish economic climate, we believe it is prudent right now to expect the increase in 2013 revenue to be approximately 2% to 4% compared to 2012, which is expected to produce adjusted diluted earnings per share growth ranging from approximately 3% to 6%.

With the assumption that we will be spending more on brand awareness and also have a higher tax rate in 2013 compared to 2012. We give some more color on our revenue thinking. We are planning on consumer checks through financial institutions to decline 5% to 6%. On top of this, positively as we indicated earlier, we have extended all large financial institution contracts through at least 2013. Now we have approximately 15%, your community bank contract dollars up for renewal in 2013 compared to 2012. So these should help to stabilize core checks, plus we have more competitive opportunities coming due through 2013.

In business products, we expect to expand existing organic initiatives including Shaft Deluxe in Canada, and to add Safeguard distributors, dealers and major accounts. In marketing solutions and other services, we expect organic mid-teens revenue growth. To give some more color on or thinking here, if we annualize 2012 expected revenue including adjusting for a full-year of OrangeSoda and organically grow in the mid teens, this would imply a targeted marketing solutions and other services revenue to total revenue mix of approximately 22% for the year. While we expect to exit the fourth quarter of 2013 closer to a 25% mix.

We are excited with our progress here and with the more cooperative economy and continued possible additional tuck-in acquisitions as catalysts, we could potentially grow marketing solutions and other services revenue even faster. We also expect our costs and expense reduction initiatives to continue in 2013. A couple of extremely important housekeeping items to consider for the first quarter of 2013.

First, there are actually two less business days in the first quarter of 2013 compared to 2012, which will represent approximately $12 million less in revenue year-over-year, resulting in a lower profit. Along with an expected higher tax rate and expected higher brand spending year-over-year as well in the first quarter. This in all likelihood will drive a decline in EPS in the first quarter of 2013, mostly due to the timing of two less business days. Only one of the business days comes back in the year in the third quarter and therefore we have one less business day in 2013, then in 2012 for the full year. It is also extremely important for us to see how the fourth quarter progresses and to closely monitor the marketplace and the economy over the next three months before providing more specific outlook details for 2013.

And now Terry, Jeff and I will open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from line of Charles Strauzer of CJS Securities. Please go ahead.

Charles Strauzer – CJS Securities

Hi, good morning.

Lee Schram

Good morning, Charles.

Charles Strauzer – CJS Securities

Hey, a couple of questions. Obviously with the check declines pretty low rate here and better handle on kind of dynamics or causes behind that?

Lee Schram

Charlie what we’re doing, and I think we’re continue to get smarter and smarter about looking out and looking at what the check rates have decline are and as I said in my prepared comments, the nice thing again this quarter as we saw both the community and the national accounts performed better than we expected. So it’s consistent now, we’ve seen that now for several quarters. What I would also tell you is we’re trying to get smarter and smarter every day looking at what are the drivers of the decline rates and I give you some examples of things that we’re working on.

We’re still going through the rigor of this, but when we look at things such as housing stock an automatic bill pay, credit card payments, branches that are opening and closing, we’re just getting smarter and smarter about being able to try to be more predictive about where we expect the decline rates to go. So we’re not ready to decline victory on this, but we know it’s important, we know investors are wanting us to try to get more information to be smarter and smarter about our projections in our rates of decline. And what we’re trying to do is work hard at looking at all these variable factors and trying to figure out how can we get more predictive. But again, the nice thing that we’ve seen is the consistency both in the national and the community bank space right now.

Charles Strauzer – CJS Securities

Very good. And then, you talked about some of the RFPs or the pending of these; one was not know but not now, maybe, if you can kind of clarify that a little bit, what’s that mean that – it’s potentially an award or is that one way that just kind of saying like, you know what we’re just delay, it’s a decision. I mean, you help us clarify a little bit of that?

Lee Schram

Yeah. I think the simple answer is that they told us we’re not ready to make a move. But we’re not – it’s not a long-term decision. As you know, most of these contracts, whether they’re competitive ones or ours are generally three to five-year contracts. And so the best I can leave with you is that, we were told not know but not now.

Charles Strauzer – CJS Securities

Okay. Very good. And then lastly, when you look at the October NFIB kind of small business optimism numbers, they weren’t very great. But kind of ticked downward again, just in general what you’ve seen from when you talk to small businesses out there? And just the general sense seems like the uncertainty around the election is still kind of holding people back, is that kind of what you’re seeing as well?

Lee Schram

Yeah, I think it’s in my prepared comments. So I think it’s tough out there. And I think we’re meeting more and more, we actually even spent more time this quarter with small businesses at large, because of our testing on the brand and the work that we’re doing on the brand. And what I’d tell you is, yeah, I think – we think it’s challenging out there.

And as I also said on my prepared comments what we like about what we’re doing, Charlie, is, when we did some more work with some outside parties in the quarter and we continue to see that the number one pain point is revenue growth for small businesses. And again, we believe the work that we’ve been doing and that we’re doing as we go forward to get our offers including this new services offers that help small businesses to get and keep and help them grow with their customers is really on the mark. And I think that’s why we’re excited about where we’re going directionally. And it would be like a better economy shore, but we’re going to work with the hand we’re dealt and we’re going to try to continue to improve the company as much as we can.

Charles Strauzer – CJS Securities

Great. Thank you very much.

Lee Schram

You’re welcome, Charlie.

Operator

Thank you. (Operator Instructions) Your next question comes from the line of John Kraft of DA Davidson. Please go ahead.

John Kraft – DA Davidson

Good morning, gentlemen.

Lee Schram

Hey, John.

Terry Peterson

Hi, John.

John Kraft – DA Davidson

Hey, congrats first of all. And a couple for each of you. Lee, you said you were keeping an eye out for tuck-in acquisitions on the SBS side. Are there any particular products if you like you’re missing or any particular focus that you might be looking for?

Lee Schram

Yeah, as I said we’re focused primarily in the marketing solutions and the other services space and more in the services piece of that. John, we are trying to continue to assess. What I would call the evolution of how our small business owner evolved as a business. So it’s early on and they’re trying to figure out how to brand themselves and get online and then moved to promote themselves and then to really get more customers. There are several areas that we were continuing to look at to see if it makes sense for us to dig deeper and get more offers or get more depth and capability in those phases.

And I’m not prepared to give you any more color other than that, but that’s how we’re looking at it and one other things that I want to highlight again I think is really important is the work that we’re doing to bring the brand together with the continuity from our call center – into our call centers, into our online offers content capability. We come out with this later in the fourth quarter, we think this is going to be a powerful positive formula for us as well. And so what we’re doing John, as we’re trying to validate what that’s going to bring and then what pieces that we think we might need to be looking at more closely to round out that our qualitative tool kit for that small business owner. So that’s how we’re looking at it right now.

John Kraft – DA Davidson

That’s helpful. Thanks, Lee. And just a clarification on the guidance that I’m assuming, assumes no new acquisitions in there or competitive RFP wins?

Lee Schram

Correct.

John Kraft – DA Davidson

And a couple for you Lee. I’m sorry for you, Terry. You mentioned consolidating a couple of check centers and I guess, I was wondering about a timeline there was that early 2013?

Terry Peterson

Now that we have two pretty facilities that we are consolidating will be done later this year; one is a check free facility in the Direct Checks space, the other is actually a pretty center in small business and that does not produce checks.

John Kraft – DA Davidson

The Rockford. Okay. And then separately on that the tax increase in 2013, you suggested might move up a little bit. Right now, you’re saying 33, where we think in 35. What’s the best guess at this point?

Terry Peterson

We haven’t put our specific guidance on that, yet, so I won’t give a specific number right now, but we had really over the past couple of years we’ve had some benefits, which just some of the quarters that have been more one-time in nature. And we expect the delta between this year and next year really to be attributed to fewer of those one-time benefits.

John Kraft – DA Davidson

Okay, that’s fair. Good job, guys. Looking forward to hearing and seeing those ads.

Terry Peterson

Thank you, John.

Lee Schram

Thanks, John.

Operator

Thank you. Your next question comes from the line of Jamie Clement of Sidoti. Please go ahead.

James Clement – Sidoti

Lee, Terry, Jeff, good morning.

Lee Schram

Hi, Jamie.

Terry Peterson

Hi, Jamie.

Jeff Johnson

Hi.

James Clement – Sidoti

Hi, hi. The question – most have been asked and has been answered. But I wanted to ask you a financial services in direct check, and obviously, a significant majority portion of margin being derived by checks in those segments. And margins continue to be very strong this year, as you look out over the next 12 to 24 months, I mean, would you expect some natural erosion in those markets with the erosion in kind of volume over time or do you think you have enough in the way of taking costs out to be able to keep them at these levels?

Lee Schram

Jamie, let me deal with direct checks, because it’s easier to give some color on that. We expected to stay tight to that 30% range. I’ve used language when I put it out usually at the beginning of the years plus or minus a couple of points around 30%. I think, Terry and I expect that to be the case as we go forward.

I think in the case of – again, without trying to be too specific in the case of financial services, I want you to remember that we are beginning to invest more in the non-check services area. And as we make investments and we start to make some of those investments in the third quarter, we’re making some more investments in the fourth quarter, I think, we’ll make more investments as we head into 2013 to come out with offers that we think are going to hit the mark, primarily for the community banks part of the market, but even up into some of our larger customers there. We’re going to make some investments there, and yeah, I think that will have some implications potentially for margin.

But look we know it’s important to keep the margin profile strong in our check businesses. And also you’ve probably heard my comment about we will continue our cost and expense reduction initiatives in 2013. We’re not prepared to give a specific number right now for that, but we’re staying after it. And so the real question, Jamie, is going to come down to how do we balance that exactly in the margin profile in implications for that financial services business. That’s the way I think you should think about it for modeling purposes.

James Clement – Sidoti

Okay. Great. And last question, if I may. Can you talk about the importance of search engine marketing and search engine optimization on your small business customers. How mobile is kind of impacting, I would imagine you’re getting as many questions at the LOCs as your answer, as you were asking to your own customers. So I’m curious for your thoughts, just considering that market (inaudible) that you ready to began?

Lee Schram

Look we are extremely thrilled with the OrangeSoda acquisition. It’s done a number of things for us, in addition to bring us a nice revenue stream and a bunch of smart people and just an unbelievable positive culture. They’re teaching us how to look at channels and customers and bring those search results to our small business customers. I just make a comment because this is really interesting, I’m going to have an update with the key leaders of the company this afternoon and we’re going to show a video of a spa owner in Connecticut and it’s a testimonial and I watched it yesterday for the first time and I told my small business leader.

This is just incredibly tremendous, I mean she talks very eloquently and very clearly about how we brought search engine marketing and optimization to her spa and how she’s using that Jamie to really build her customer network. So we’re just really excited about or we’re seeing strong results so far and we’re obviously expecting to be able to build on that and we’re also learning about churning and how to deal better with churn from the – just a great group of people that we’ve guided so there as well. So that’s the way I would think about and look at it right now and obviously we’re really introduced about the direction here.

James Clement – Sidoti

Thank you very much.

Terry Peterson

You’re welcome.

Operator

Thank you. I’d now like to turn the call over to Lee Schram for closing remarks.

Lee Schram

Okay. I just want to thank everybody again for their participation and questions that we got today. And as I normally say we’re going to get back to work, we got a lot left to do and we look forward to providing some more positive progress on our next earnings call. And I’m going to turn it over to Jeff for some closing housekeeping comments.

Jeff Johnson

Thank you, Lee. This is a reminder that a replay of this call will be available until November 1 by dialing 888-286-8010, when instructed provide the access code 466-727-95. The accompanying slides are archived in the news and Investor Relations section of Deluxe’s website at deluxe.com. Again thank you for joining us. Have a great afternoon.

Operator

Thank you for joining in today’s conference. This concludes our presentation. You may now disconnect. Have a good day.

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