Deluxe Corporation Q2 2010 Earnings Call Transcript

| About: Deluxe Corporation (DLX)

Deluxe Corporation (DLX)

Q2 2010 Earnings Call Transcript

July 22, 2010 11:00 am ET


Jeff Johnson – VP, IR and Treasurer

Lee Schram – CEO

Terry Peterson – SVP and CFO


Charles Strauzer – CJS Securities

John Kraft – D.A. Davidson

Jamie Clement – Sidoti


Good day, ladies and gentlemen. And welcome to the second quarter 2010 Deluxe Corporation earnings conference call. My name is Eric. I'll be your audio coordinator for today. At this time, all participates are in a listen-only mode and we will facilitate the question-and-answer session at end of the presentation. (Operator instructions)

As a reminder, the conference is being recorded for replay purposes. I would now like to turn your presentation over to Mr. Jeff Johnson, Treasurer, Vice President, Investor Relations. Please proceed.

Jeff Johnson

Thank you, Eric. Welcome to Deluxe Corporation's 2010 second quarter earnings call. I'm Jeff Johnson, Deluxe's Vice President of Investor Relations and Treasurer. Joining me on the call today are Lee Schram, Deluxe's Chief Executive Officer; and Terry Peterson, Deluxe's Chief Financial Officer. Lee, Terry, and I will take questions from analysts after the prepared comments. At this time, the operator will instruct you how to ask a question.

In accordance 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 and any other statements addressing management's intentions and expectations regarding the company's future performance are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

As such, these comments are subject to risks and uncertainties, which could cause actual results to differ materially from those projected. Additional information about various factors that could cause actual results to differ from those projected, are contained in the news release that we issued this morning, and in the company's Form 10-K for the year ended December 31, 2009.

In addition, the financial and statistical information that will be reviewed during this call, is addressed in greater detail in today's press release, which is posted in the News and Investor Relations section of our website,

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 Schram, Deluxe's CEO.

Lee Schram

Thank you, Jeff, and good morning, everyone. Deluxe delivered a very strong quarter. We reported revenue and adjusted earnings per share above the high-end of our ranges. Revenue grew overall approximately 5% with all three segments delivering strong revenue and declined less than 1%, excluding the acquisition of Custom Direct.

We are especially pleased that Small Business Services revenue grew slightly over the prior year and for the first time, since the fourth quarter of 2006. Checks and forms both performed well against our expectations. And new business services revenues grew more than 50% over the prior year.

We had solid execution against our cost reduction program and spending controls, which along with strong revenue drove better than expected EPS. Adjusted diluted EPS from continuing operations grew 19% over the prior year and we generated strong operating cash flow.

As indicated on our last call, in the quarter, we began investing in brand awareness and in organic technology initiatives to help better position our new business services offerings, and generate future revenue growth. At the same time, we are continuing our process improvements and cost reductions, while driving strong operating cash flow, as we continue to transform Deluxe and execute our turnaround plan.

I am also pleased that we have hired a permanent leader for our Small Business Services segment. Dave Hemler brings to Deluxe more than 20 years of experience with specific expertise in small business. As President of Best Buy for business, he led the first year of profitable growth for that business in its history. He also turned around Microsoft's lowest-performing subsidiary to its fastest growing, in his role as President of Microsoft Canada. So welcome, Dave, to Deluxe.

At the same time, I want to thank Joanne McGowan, a partner with Aveus, who will continue to support Deluxe for a period of time to transition Dave and work other key growth initiatives. For her leadership and the many significant contributions she has made to Deluxe in her interim role as our Small Business Services segment leader. Thank you, Joanne for your simply outstanding leadership and commitment.

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

Terry Peterson

Thanks, Lee. Earlier today, we reported diluted earnings per share for the second quarter of $0.65, which included $0.03 of restructuring and transaction-related costs, primarily associated with the CDI acquisition. Excluding the restructuring-related charges, adjusted EPS of $0.68 was $0.03 favorable to the upper end of our previous outlook and 19% higher than the $0.57 reported in the second quarter of 2009.

Revenue for the first quarter came in at $348 million, which was at above the top end of our previous outlook and up approximately 5% from 2009. Consolidated revenue was down less than 1%, excluding the impact of the CDI acquisition. All three of our business segments delivered solid revenue.

Small Businesses Services revenue of $193 million was up about 1% versus 2009. Revenue was unfavorably impacted by continued economic weakness, but business services showed solid growth.

Financial Services revenue of $98 million was down about 2% versus the second quarter of last year. The impact of lower check orders was mostly offset by higher revenue per order and higher non-check revenue.

Revenue per order benefited in the 2010 quarter from both last October's and this May's price increases, and the amortization of a past contract settlement.

Direct Checks revenue totaled $57 million, up 43% on a year-over-year basis due to the CDI acquisition. Excluding the impact of the acquisition, Direct Checks revenue was down only around 3.5% due to strong reorder performance.

Gross margin for the quarter was 65% of revenue, up 3.2 percentage points from 2009. Benefits from improvements in manufacturing productivity, plant consolidation, delivery initiatives and product mix were partly offset by increased delivery rates.

SG&A expense increased $9 million in the quarter and was 46.2% of revenue, compared to 45.7% in the same period last year. Increased SG&A associated with acquisitions and the acceleration of our brand awareness advertising was partially offset by benefits from the continued execution of our cost-reduction initiatives.

Operating margins for the quarter, excluding restructuring and transaction-related costs of 18.9% was up from the 16.7% generated in 2009 and was above our expectations. Continued progress against our cost-reduction plans contributed favorably in all three segments, as well as, the following segment specific factors.

Small Business Services operating margin of 15.7% was up 3.9 percentage points over last year and also benefited from a favorable product mix.

Financial Services operating margin of 20.7%, was up 1.4 points from 2009 and included the impact of improved revenue per order.

Direct Checks operating margin of 26.9%, decreased 6.6 points from 2009, reflecting the acquisition of Custom Direct.

Turning to the balance sheet and cash flow statement, total debt at the end of the quarter was $847 million, compared to $769 million at the end of 2009. This increase was primarily related to the April cash purchase of Custom Direct for $98 million, which was funded with the draw on our credit facilities.

Cash provided by operating activities for the first half of the year was $71 million. The decrease from last year was due to significantly higher performance-based compensation payments, earned in 2009 and paid out in the first quarter of 2010, and higher income tax payments partially offset by lower contract acquisition payments and higher earnings.

Capital expenditures for the first six months were $21 million, and depreciation and amortization expense was $35 million.

Earlier this month, we finalized a contract settlement with a large financial institution that previously acquired one of our clients and recently chose to consolidate its check printing business with another provider. We have been producing checks for a small portion of our client’s customers.

The business will transition during the third quarter, at which time we expect to receive termination payments of $24 million, which will be recorded as revenue in our Small Business Services and Financial Services segments, and will benefit diluted earnings per share by an estimated $0.30 per share.

Given our strong performance in the second quarter and the recent contract settlement, we are improving our consolidated revenue outlook for the year to a range of $1.39 to $1.415 billion, which included approximately $60 million for the Custom Direct and net $18 million related to the contract settlement, which reflects the $24 million settlement, partially offset by the anticipated reduction in volume.

At the high end of the range, we are only expecting a slight improvement in the economic conditions. Adjusted diluted earnings per share from continuing operations are expected to range from $3 to $3.10, which include the benefit from the contract settlement.

There are several key factors that contribute to our full-year outlook, including Small Business Services revenue, excluding the contract settlement is expected to decline in the very low single digits to flat range, as declines in core business products are expected to be offset by benefits from our e-commerce investments and double-digit growth in our business services offerings. In addition, we expect that approximately $10 million of the net impact from the contract settlement will be reflected in this segment's revenue.

Excluding the contract settlement, we expect Financial Services revenue to decline in the low single digits to flat range, driven by check order declines of approximately 8%, given increases in forms of electronic payment and a continued weak economy, which we expect will be partially offset by higher revenue per order from price increases, and the amortization of a past contract settlement in the first half of the year.

The new SunTrust win, which will contribute volume in the second half of the year and continued contributions from non-check revenue streams, also, we expect that approximately $8 million of the net impact from the contract settlement will be reflected in this segment's revenue.

Direct Checks revenue, including the Custom Direct acquisition is expected to increase in the 30% range, driven by $60 million from the Custom Direct acquisition and improved reorder volumes stemming from past quantity reductions, which will only be partially offset by check usage declines in the continued weak economy.

Continued focus, execution on our cost reduction initiatives, increases in delivery rates, continued investments in revenue growth opportunities, including business services, brand awareness, direct response test campaigns, helping financial institutions grow core deposits and enhanced internet capabilities, and an effective tax rate of approximately 34%, which excludes the first quarter charge of $3.4 million related to the recent Healthcare Reform Legislation.

We expect to continue generating strong operating cash flows, ranging between $220 and $230 million in 2010, driven by the contract settlement, strong earnings, continued progress on working capital initiatives and lower contract acquisition payments, which we expect to be approximately $15 million.

However, performance-based compensation payments were $18 million in the first quarter of 2010, as a result of our performance in 2009. 2010 capital expenditures are expected to be approximately $40 million, down 10% from 2009. The plan to invest in key revenue growth initiatives, expand our use of digital printing technology, complete automation of our Flat Check delivery packaging process and make other investments in order fulfillment, delivery productivity, and IT infrastructure.

Depreciation and amortization expense is expected to be $75 million, including $25 million of acquisition-related amortization.

For the third quarter of 2010, we expect revenue to range from $360 to $370 million, including a net $22 million related to the contract settlement, which reflects the $24 million settlement, partially offset by the anticipated reduction in volume.

Adjusted diluted earnings per share are expected to range from $0.94 to $0.98, including the impact of the contract settlement. In comparison to 2009, the factors affecting our full-year outlook are similar to those affecting the third quarter.

In comparison to the second quarter, diluted earnings per share is expected to be higher in the third quarter due primarily to the contract settlement, which is expected to benefit the third quarter by $0.30 and lower effective tax rate of approximately 32%, reflecting the timing of expected tax contingency resolutions.

This favorability will be partially offset by additional brand awareness and direct response advertising test campaigns that we expect will drive incremental revenue overtime, but not contribute measurably in the third quarter, as well as, the anticipated reduction in volume related to the contract settlement.

Shifting to our capital structure, we expect to maintain our balanced approach of investing organically, enter small to medium-sized acquisitions in order to drive our growth transformation. We also expect to maintain our current dividend level.

To the extent we generate cash flow in excess of these priorities. We plan to pay down debt in order to further strength our balance sheet. We believe our strong cash flow, strengthen balance sheet and flexible capital structure position us well to continue advancing our transformation.

I will conclude my comments with an update on our cost and expense reduction initiatives. Overall we had another solid quarter and remain on track for delivering our $65 million target for the year. These savings, again, will not necessarily be linear through the quarters and they do not include expected synergies from the Custom Direct acquisition, which are included in the Direct Checks expectations.

In the second quarter, we continue to realign our sales and marketing backend operations. We find our channel management structure and improve our call center productivity. We realize additional efficiencies from our ongoing shift to online form of advertising.

Our focus for the remainder of 2010 will continue to be on improving sales and marketing backend operations, through process centralization, simplification, platform and tool consolidation and leveraging e-commerce capabilities. We will also continue to improve the mix of paper catalog and online search engine marketing.

For fulfillment, we had a very strong quarter with lean productivity improvements and direct spend reductions. We implemented our fully automated Flat Check Package processing equipment in another site in the second quarter and we expect to complete all remaining installations in the third quarter.

We also expect to complete the expansion of our digital press footprint over the balance of the year and continue our lean productivity standardization, spoilage reduction, and direct and indirect spend reduction initiatives.

We also plan to advance our work on moving to a common manufacturing platform, enhance our strategic supplier sourcing arrangements and continue with other supply chain improvements and efficiencies.

Finally, for the shared services infrastructure, we continue to make good progress in managing information technology costs through data center cost reductions and other system utilizations, network and voice communication efficiencies. We also made progress in finance, human resources and real estate.

For the remainder of 2010, we expect to continue to reduce costs in all areas, as more opportunities exist to centralize, streamline, standardize and improve efficiencies.

Now, I'll turn the call back to Lee.

Lee Schram

Thank you, Terry. I'll continue my comments with an update on what we are focused on overall and then highlight progress in each of our three segments. I will also include throughout perspective on what we hope to accomplish in the second half of 2010.

Here is an update on our revenue expansion improvement initiatives and our key enablers. We continue to make progress with solid revenue results again in the second quarter. So we are optimistic our focus and actions are beginning to take hold.

Our four key enablers to driving revenue growth again include strengthening our products and services portfolio, customers, technology and brand awareness and positioning. We made progress in the second quarter in all four enablers. Here are some examples.

We grew new business services revenue more than 50% over the prior year quarter, improved our internet customer experience and added new distributors and dealers.

In addition to organic initiatives to improve our products and services, we continued to assess potential small to medium-sized acquisition that complement our large customer bases with a focus on Small Business Services and new offerings aimed at helping financial institutions grow their core deposits.

We completed more granular and targeted small business customer segmentation research that we will begin market testing in the third quarter. We extended investments in technology on new service offers that will drive over time to all offers having the same customer look and feel. We also accelerated our brand awareness and positioning through advertisements in network, national public and commercial radio and in online media, including,,,, and others.

We kicked off project REV by selecting nine small businesses to participate in our year-long Deluxe-sponsored marketing lab, designed to build marketing expertise for these small businesses. Over the balance of the year, we will continue our brand awareness initiatives and complement these with some direct-response media test campaigns, including both television spots and mobile events.

We expect these initiatives will help us drive new customer acquisition and revenue growth over time as the economy improves. Although, we expect to continue to improve EPS quarterly this year over prior year, at the high end of our outlook through margin expansion and cost reductions. We also are investing some back into the business to drive even more sustainable and higher-revenue growth for the future. We have the ability to measure our return performance from these brand initiatives and direct response campaigns. And this will determine the size and extent of investment levels over time.

Now shifting to our segments. In Small Business Services, as expected, economic softness continued to impact our business. We had strong performance, however, as revenue exceeded our expectations and we were pleased to be able to report slight revenue growth for the first time since the fourth quarter of 2006. Checks and forms were strong. Our results from targeted customer segmentation in the call center improved. We increased new customers, both from our financial institution, Deluxe Business Advantage or DBA program and outside DBA.

Response rates increased from better balanced and enriched content in online and print-based spend. Average order value and conversion rates remain strong. Our safeguard distributor and dealer channel results showed strength and revenue in Canada exceeded our expectation. We also saw strong growth in web, logo and payroll services. In the quarter, we won several new Hostopia, North America, TelCo and also started to introduce additional value-added services on top of our, core web services offer.

We continue to closely monitor the small business market and are optimistic that the pace of decline has bottomed out. However, key small business optimism indices continue to hover at historic lows. There was some improvement in the first two months of the quarter, but optimism declined again in June, so we are not seeing a sustainable upward trend. Small businesses remain apprehensive about hiring and capital investment remains at record lows. They continue to spend less, scrutinize purchases more, experience tight cash flow and struggled with getting loans.

Demand for expansion loans is still well below the 2006 peak level. The good news is that increasing sales continues to be their number one paying point and we now offer many products and services to help them here. As the economy recovers, but the transformative changes we are making to deliver more business services offerings that helps small businesses get and keep customers. Deluxe will be better positioned in the future as that indispensable partner for growth.

Our focus for the balance of 2010 in core small business products is on acquiring new customers, increasing our share of wallet through enhanced Shop Deluxe e-commerce site and on improved segmentation. We will continue to focus on improving the efficiencies and effectiveness of our inbound, outbound and online touch points to maximize revenue scale capability.

In addition to increasing check revenue, at Custom Direct or CDI acquisition, also yielded technology, tools and systems that we expect will allow us to accelerate web-to-print offers. Both Deluxe and CDI were using the same technology platform, but CDI was further advanced. So this allows us to accelerate expansion of web-to-print offers later this year, with additional scale potential in 2011.

In new Business Services, we now have approximately $400,000 web-hosting customers, with about two-thirds of these primarily through TelCo wholesale and one-third through retail channels. All of these customers are on our single unified delivery technology platform. We expect to gain new customers through our Hostopia, TelCo focused wholesale field sales model, where we have recently added a new experienced global sales leader from the web services industry.

We are seeing an increase in the number of opportunities in the TelCo wholesale pipeline. Expect to add services for our and Deluxe retail customers, including fax to email, email marketing and search engine marketing offers through a combined call center and online sales model. We continue to roll out search engines, SIEM offers and add global customers.

The brand awareness, radio and online campaigns, plus direct response television spots and mobile-event testing, should help with getting the Deluxe brand more robustly recognized in the market. All business services, including payroll services, loyalty and retention, fraud and security, logo, web, search engine marketing and business networking are still on track to generate approximately $120 to $130 million in revenue in 2010, up from $91 million in 2009.

In Financial Services, with all large contracts except one already extended through 2011, we continue to focus on extending contracts due in 2012 and beyond. Regarding the recent contract settlement, we previously produced checks for a small portion of this client's footprint and the acquiring financial institution has decided it is most economical and advantageous to consolidate under one check provider, even though they indicated Deluxe has done simply an outstanding job. Although the gain from the settlement is large, the size was driven more by the amount of time remaining in the old contract, than the annual volume of the business lost.

In late June, we began producing checks for SunTrust and we are off to a good start. Again this quarter and expected in 2010, we saw strong overall new acquisition rates and our retention rates remain strong, well in excess of 90%. We recently won two nice-sized regional competitive deals that will add to our check portfolio. These wins, coupled with our SunTrust win will more than offset the financial institution loss. There are also still a significant number of competitive opportunities over the next year.

In the quarter, we did see the rate of decline of checks perform basically in line with our forecasted rate of around 8%. We also simplified our processes and took complexity out of the business, while reducing our costs and expense structure. We introduced in the second quarter, a new transformed check program complete with simplified check designs, pricing options, new customer self-service portals, dashboards and consultative tools that has been very favorably received by our pilot financial institutions. This will begin to be rolled out to more financial institutions through the balance of 2010.

We made progress again in the quarter in advancing non-check revenue growth opportunities that focus on helping financial institutions grow core deposits. Revenue grew over last quarter and year in these non-check services, which include loyalty, client communication, regulatory, fraud and security, analytics, deposit-driven acquisition and rewards checking offers. We continue to sign up financial institutions, including a strong June performance with rewards checking offers from our exclusive partner with Bank View for our community bank and credit union customers.

We are also encouraged by our recent acquisition of Cornerstone where we have already closed six new financial institutions, analytics deposit acquisition marketing program. We also had a very strong quarter in providing financial institutions, with a comprehensive Reg E offer to assist them in the notification and permission of overdraft practices for their clients, which for us includes printing, call center and various marketing services. These Reg E initiatives will continue into the third quarter. And approximately 20% of these wins to date are with non-Deluxe check financial institutions.

As you can see momentum continues to build in these non-check revenue initiatives and we expect all of our offers will contribute more to Financial Services revenue in 2010 than they did in 2009. In Direct Checks, our revenue was higher than our expectations, driven by accelerated reorder rates and we delivered a strong 27 point operating margin in the quarter, excluding restructuring and transaction-related costs. We continue to look for opportunities to provide accessories and other check-related products and services to our consumers. We are very pleased with the integration of Custom Direct thus far, as we leverage the best of both Direct Checks and Custom Direct into a best in class direct-to-consumer check experience. We are already beginning to see the start of the expected revenue enhancement synergies through our call center scripting and upsell capabilities.

In addition, cost-reduction activities are well underway with savings already accruing in material, procurement, delivery, media and marketing expense leverage and other SG&A. As mentioned earlier, we are also benefitting from web-to-print capabilities added through the Custom Direct acquisition. To summarize, we are running slightly ahead on our integration activities and corresponding synergy benefits thus far.

For 2010, we now expect revenue growth in the 30% range, driven by the Custom Direct acquisition and accelerator reorder rates partially offset by declines in consumer usage and a continued weak economy. We expect to reduce our manufacturing cost and SG&A in this segment and drive our operating margins to the upper 20s percent range, including acquisition amortization and transaction costs while generating strong cash flow.

As we exit the second quarter, on the heels of a very strong quarterly performance and a continuing challenging economy, we made good progress again in transforming Deluxe, but we still have a lot of work and opportunities ahead of us in the balance of 2010. We are only expecting the uncertain economic climate to improve slightly through the balance of the year, at the high end of our outlook range.

As I indicated earlier, our primary focus is on revenue growth and we are investing in our future with better product and services offers and supporting brand awareness and direct response campaigns. We are playing offense, making positive strategic moves to reposition the company for sustainable longer-term revenue growth.

With SunTrust and other smaller regional bank wins, help stabilize core checks more than offset the financial institution loss and we have more competitive opportunities not in our outlook. If the economy improves, we should have upside and Small Business Services revenue as we know it is important for us to continue to demonstrate growth in this segment. At this same time, we will not take our eyes off of cost reductions and process improvements and we expect to generate strong cash flows and provide a very attractive dividend.

Now Eric, we'll ask you if you can open the line and – for the Q&A session.

Question-and-Answer Session


Thank you. (Operator Instructions) Your first question comes from the line of Charles Strauzer with CJS Securities. Please proceed.

Charles Strauzer – CJS Securities

Hi, good morning.

Lee Schram

Hi, Charlie.

Terry Peterson

Hi, Charlie.

Charles Strauzer – CJS Securities

Lee, just a quick question for you, when you look at the traction you are making on the business service side income on non-track businesses. What are the ones that really stand out as the ones that are driving more growth than others and what are the areas that you think you might need to make some tuck-ins and kind of bolster the ones that are not performing as well as you thought.

Lee Schram

We are really doing well on all of the ones I mentioned. So web services and logo and the payroll services are probably three that stick out. The way I would look at what we're trying to do from a potential tuck-in standpoint is how do we get stronger at – again, the areas that allow our small business customers to get and keep customers?

So if you think about what we're trying to do is, how do we help them with growing revenue? Either growing revenue through expanding the capabilities, they have already with customers that are in their full so to speak or attracting new customers. So a lot of what we're trying to do is bring those all together, again as I mention, get the same look and feel to all of the offers over time and then how do we really robustly continue to target more on that marketing services around getting key customers.

So those would be the areas that I would look at in that space and then as we deal with the Cornerstone acquisition, we’re just trying to make sure that as you look at that core deposit stream and the focus that banks have in growing their core deposits, how do we find opportunities within there that seem to make sense, like – like our Cornerstone acquisition, to really, you know, allow us to help – scale capabilities that we don't have, or technologies that we don't have that really allow us to round out the offers for – for our FI clients. So I think that's the best way to think about it.

Charles Strauzer – CJS Securities

And when you talk about kind of your going to small business end user and saying to them, look, we can provide you can a whole suite of services now. How is the pitch being made? Are they being made more on an outbound basis from your call centers or is that one that calling you to buy one or two products or services and they are trying to be upsold? Can you walk us through a little bit of the process there?

Lee Schram

Yeah, Charlie, that's a great question. We're right now continuing to mention in the prepared comments to get better and better at how we do this every day, and every month and so on. And the way we're – what we're really trying to do is obviously first and foremost, you know, reach them through the online world and if we can do that and make the offers as simple as we possibly can over that media, that's the first and foremost initiative.

But we also are extremely focused on improving the efficiency of our – the way we provide our personalized customer experience through our inbound and outbound call center agents that we have. And we're training people and for this test that I mentioned, we're going to do – this direct response test that will start here in the quarter, we are also training our – our call center agents to be even more targeted at being able to sell those – those – I'll use the generic term web-based services.

So when you see these ads come out, you'll see they are much more targeted at the services center base. And so we're going to – we’re training up across the line to be able to able to – not only hit them through through the online world but they'll also be able to hit them through the – both the inbound and the call center agents.

Charles Strauzer – CJS Securities

Excellent. Thank you very much, Lee.


Your next question comes from the line of John Kraft with D.A. Davidson. Please proceed.

John Kraft – D.A. Davidson

Good morning, guys, and congrats on the progress.

Lee Schram

Thank you, John.

Terry Peterson

Thank you, John.

John Kraft – D.A. Davidson

Just wanted to go first back to the lost client and the termination fee there, judging from your guidance there, it looks like lost revenue per quarter's run rate is about $4 million. Is that fair?

Lee Schram

Yeah. That's about right.

John Kraft – D.A. Davidson

Okay. But you said that SunTrust would more than offset that?

Lee Schram


John Kraft – D.A. Davidson

And the logic for them to move to the competitive reasons was economical. Would it come down to price or was there more to that and I'm assuming it was a dual force contract there for a while. Was there an RFP to both of you?

Lee Schram

The way I would look at it is there was a – the other provider has a significantly larger share and they just decided look, running two vendors with a small share just doesn't make sense. Again, as I said from an economic standpoint and how they are looking at and consolidating and what they want to do from their vendor perspective, and again, what I would tell you is that it is hard for us to take the loss, especially when they have told us that they have done a good job. But, again, it's very logical and very obvious with just a very small amount of the revenue stream coming through that they would do something like this.

John Kraft – D.A. Davidson

Sure. No, that's fair. And then Terry, you mentioned that – sort of the general declines in check usage was about 8% now. Is that a pretty good number going forward? It has kind of bounced around a bit?

Terry Peterson

It has – excuse me – it has bounced around a little bit, but, you know, from an outlook perspective. That is kind of the number that we are going with and the number that we have contemplated in the number we provided. So whether or not how permanent that becomes or how long it shows up at that rate, we don't know the answer to that yet, but certainly in terms of the outlook for the balance of 2010, that's where we're looking.

John Kraft – D.A. Davidson

Okay. Fair. And then, I'm just going to try this. Last year, it seems to me about this time, you guys provided some – at least directional outlook comments on the out year. And, you know, I guess maybe last year was a special situation but any thoughts of sort of providing some directional commentary in 2011?

Terry Peterson

No. We're not prepared yet, John, to do that. I think the way to think about it is just given – we're starting to get a little more certainty, I think the whole roll, little more clarity here and all of a sudden taking a step back. So I think we're just being prudent at this point in time. And, you know, in terms of what we're doing for the balance of the year in terms of the approach we take in the forecast and no, we're not planning at this point in time – at this point in time to say anything about 2011 specifically.

John Kraft – D.A. Davidson

Okay. And then Lee, while I have got you, this last question, a bigger-picture question, specifically on this – this small business lab, this pilot project REV. How do you – what do you think this looks like in a couple of years from now? I mean, I guess, maybe you could comment a little bit about the revenue model in particular?

Lee Schram

Well, all we're – specific to project REV, what we're trying to do as I met all of these nine small business owners and they are terrific people. We had a three-day session with them in the quarter. And they are from all parts of the United States and all different types of small businesses and what we're trying to do is partner them up with a Deluxe person and all of the tools and then listen to their ideas and bring the marketing programs and initiatives and services to them and the printed capability that we have as well. And what we clearly expect to get – get from it is, once we test and learn, test and learn and we feel it's a broad enough geographic region and a broad enough small business – type of small business reach. That we're going to learn a lot that helps us with all of the research and work that we have really stepped up over the last three to six months, to be able to get more focused and then back to kind of Charlie’s question allow us to target more and more where we can scale revenue growth as we move forward. So that's the way to think about it.

John Kraft – D.A. Davidson

Okay. Good enough. Thanks, guys.

Lee Schram

You're welcome, John.


(Operator instructions). Your next question comes from the line of Jamie Clement with Sidoti. Please proceed.

Jamie Clement – Sidoti

Good morning, gentlemen.

Lee Schram

Hi, Jamie.

Terry Peterson

Hi, Jamie.

Jamie Clement – Sidoti

Lee, a follow-up question to some of Charlie’s, as you market the – you know, the new Deluxe platform and all that you have built, I know that, you know, going back as – you know, when you were building up some of these businesses and getting product lines on the same systems and all of that, you know, one of the things you talked about was the – you know, the ability to, you know, cross sell some of the web services to existing print customers and vice versa.

Is there with the worth the market research that you have done and with what you have seen over the last couple of quarters, can you talk a little bit about the nuances of the strategy of cross selling versus kind of the overall market strategy?

Lee Schram

We believe that there is a clear continuing opportunity – we're already cross selling today from the use of the core Deluxe print world – in to the new Deluxe services world. And we're getting better and better and testing and learning again on where to find our customers and when to bring up various offers. And – and, again, a lot of my comments, Jamie around that how we're really granularly getting at the segmentation of our small business customers is teaching us where do we then target a cross-sell opportunity. And what product or what service do we start that cross-sell opportunity with?

And then what is kind of the next-best product or service and so on and so forth. And rather than going out and saying – you know, whoever calls in, we just try to hit them with the same, the same stuff. So it's incredible how much more knowledge we have learned and how we're going to again continue to test and learn on that. So but the bottomline, Jamie, is we clearly expect that there is more cross-sell, up-sell opportunities, and the more we bring all of these offers together, allow them to have the same customer look and feel…

Jamie Clement – Sidoti


Lee Schram

whether you are buying an email marketing or logo or hosted web servicer for change in market, whatever, if it's packaged together, it becomes easier for us to be able to up-sell and cross-sell those opportunities. And then as I mentioned here, one of the things that – we took a little bit more time. We didn't feature it on the last call. But now clearly is something we're excited about is with CDI, yeah, we got the check business, but we also got some nice tools that were interestingly the same – best of – best in class state-of-the-art tools that we were using for this web-to-print space. And now we’re trying to see if we can accelerate the capability to bring those and we see that to as an up-sell, cross-sell offer to our small business clients and potential clients as well. So hopefully that string of thought helps you to get a perspective on how we're thinking about it.

Jamie Clement – Sidoti

Lee, just changing gears a little bit. It sounded like going back to your fourth quarter conference call that your number of orders on the printed product side, that was around the time and maybe it was in the month of December. I don't specifically remember, maybe that stabilized a bit and you maybe started seeing a little bit of a lift, but at that time and I believe on your first quarter call, you were still talking about the size of the order and in certain cases the business mix still being pressured. I think – Here you talked about revenue per order coming up. Am I thinking about the timeline, right? Like in other words, number of orders starting to come back maybe six months ago, but, maybe the mix not being, quite, what it was during the second quarter here where it's better? Is that right?

Lee Schram

I don't know the exact timing. Terry is looking at it.

Jamie Clement – Sidoti

I don't know the exact time, but it seems like orders were coming back, but were smaller and now they are kind of getting – At least trending more towards what you’ve seen in prior years? I mean, is that an accurate statement or?

Terry Peterson

It has stabilized more. We have not gotten back to levels that we were.

Jamie Clement – Sidoti

Of course not, of course not. But at least, you are not facing the same kind – At least in the numbers it doesn’t seems like you are facing same kind of pressure than you were facing in three quarters ago.

Terry Peterson

One thing to contribute positively, is we have taken some price increases in parts of each of the three segments and that certainly has contributed to the revenue per order trending that we're seeing right now.

Jamie Clement – Sidoti

Sure. But, Terry, I just would assume the ability to take those price increases. Obviously, it says something about this future customer base versus where it was maybe nine months ago, right?

Terry Peterson

That's fair.

Jamie Clement – Sidoti

Okay. Thanks very much.


Ladies and gentlemen, we have no more questions in queue at this time. I would like to turn the call over to Lee Schram for closing remarks.

Lee Schrams

Thanks. I’d just like to thank everybody for their participation today and again for the questions. As said before, we're now going to get back to work and we look forward to providing another positive progress report on our next earnings call.

Jeff Johnson

Thank you, Lee. This is a reminder that a replay of this call will be available until August 5, by dialing 888-86-8010. When instructed provide the access code, 14755302. The accompanying slides are archived in the news and Investor Relations section of Deluxe's website at Again, thank you for joining us, have a good afternoon.


Ladies and gentlemen, thank you for your participation in today's conference. In concludes our presentation. You may now disconnect, and have a good day.

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