Deluxe Corp (DLX) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2008 Deluxe Corporation earnings conference call. My name is Alicia and I will be your coordinator for today. At this time, all participants are in a listen only mode. (OPERATOR INSTRUCTIONS) At this time I would now like to turn the call over to your host for today's conference, Mr. Terry Peterson, Vice President of Investor Relations and Chief Accounting Officer.

Thank you, Alicia. Welcome to Deluxe Corporation's 2008 second quarter earnings call, I'm Terry Peterson, Deluxe's Vice President of Investor Relations and Chief Accounting Officer. Joining me on the call today are Lee Schram, Deluxe's Chief Executive Officer and Rick Greene, Deluxe's Chief Financial Officer. Lee, Rick 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 be available via telephone and Deluxe's website. I will provide instructions for access at 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 managements 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 future 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 31st, 2007. 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 Investor Relations section of our website, www.deluxe.com and was furnished to the SEC on 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.

Thank you, Terry and welcome everyone. We are disappointed with our revenue performance for the revenue in the quarter and the resulting impact on earnings per share. We are not immune from the very challenging economic conditions and the impact that this is having, particularly on our Small Business Services segment. In spite of this, our updated EPS outlook, although reduced because of the weakening economy, still reflects an improving second half over the prior year.

There are a tremendous number of positives in the quarter that tend to go unnoticed in challenging economic times. And because of these positives we remain extremely optimistic about the continued transformation of Deluxe. We had a very successful Knowledge Exchange Expo with our financial institutions, which has already led to new check and noncheck business wins, added several new leaders to our executive and senior management teams, further stabilized margins in our check businesses continue to deliver on our $225 million cost reduction program and made planned investments in e-commerce, verticalization, merchandising, loyalty, retention and monitoring and protection solutions.

At the end of the quarter we released the first version of our new state-of-the-art, customer facing e-commerce platform called ShopDeluxe. We also have completed four strategic acquisitions so far this year in the custom full color, logo, Web and business networking services spaces. All areas we expect double-digit revenue growth in the future. These acquisitions are also helping reposition Deluxe strategically from not just the leader in printed products but over time to a leader in higher growth, business services as well. In a few minutes I will just more details around our recent progress, next steps and strategically where we are positioning the Company but first Rick will cover our financial performance.

Thanks, Lee. Earlier today we reported diluted earnings per share for the second quarter of $0.63 in line with our previously communicated outlook. Revenue for the quarter came in at $367.7 million, below our most recent outlook, primarily due to lower expected volumes in Small Business Services as the challenging economic environment continues to can impact this segment. Despite the revenue short fall in SBS, our core check businesses met our expectations. Solid operating margins for the quarter benefited from continued execution on our cost reduction initiatives, with savings in line for our expectations, and from a reduction in our performance-based compensation. Operating cash flow in the quarter totaled $37 million, which again was slightly better than our expectation for the quarter. In the second quarter of 2007, we reported diluted earnings per share of $0.69, which included the benefit of higher revenue, partially off set by higher performance-based compensation last year and additional cost savings in the 2008 period.

Company-wide revenue in the second quarter totaled $367.7 million down 8.1% from 2007. As noted one of the primary drivers in this year-over-year decline is lower volumes in our Small Business Services segment as economic conditions worsen in the quarter and continue to impact several of our core products, including checks and forms. Direct Check volume was also down and lower revenue per order affected Financial Services. Gross margin for the quarter was 62% of revenue, down 2.3 points from 2007. Improvement in manufacturing productivity as a result of lean initiatives and direct spend reductions, were more than offset by prices by Financial Services, an unfavorable product mix, and higher related costs, mostly from fuel surcharges.

Selling, general and administrative expense decreased $23 million in the quarter as was 45% of revenue, compared to 47.4% in the same period last year. Lower performance based compensation, benefits from continued execution on our cost reduction initiatives and lower amortization all contributed to the improvement. As a result operating income in the quarter was $61.3 million compared to $67.5 million last year.

Let's now shift our focus to a few highlights in each of our three business segment, in Small Business Services revenue of $211.5 million was down 8.1% versus 2007. Revenue in this segment was unfavorably impacted by economic softness in the quarter, particularly in our core checks and forms products. Operating income in this segment was $29.1 million or 13.8% of revenue, compared to $30 million in 2007.

In Financial Services, revenue was $110 million, down 6.7% versus the second quarter last year, while check order volumes remain strong with only a 1.3% decline year-over-year, lower revenue per order, which was previously anticipated was the primary driver of the overall decline. Financial Services operating income was $18.8 million for the quarter or 17.1% of revenue, down from $23.2 million in 2007.

Finally, Direct Check revenue totaled $46.2 million, down 11% on a year-over-year basis due to continuing declines in check writing, plus a search engines decision to limit our Internet impressions based on their revised advertising policies. These reductions were partially off set by higher revenue per order from price increases. Operating income in the segment was $31.4 million for the quarter or 29% of revenue, up slightly on a percentage basis compared to last year.

Turning to the balance sheet and cash flow statement, total debt at the end of the quarter was $837 million compared to $844 million at the end of 2007. Cash provided provided by operating activities for the first six months was $67 million. This decrease from last year was due to a higher 2007 related incentive compensation payment earlier this year and lower net income, partially offset by lower income tax payments and progress on our working capital initiatives. Capital expenditures in the quarter were $9.4 million and depreciation and amortization expense was $15.6 million.

Earlier we announced that have closed Hostopia acquisition for approximately $100 million net and that we purchased PartnerUp, a small business social networking company for $3.8 million.

For the balance of the year, we expect that these companies will contribute approximately $15 million in revenue, $2 million of EBITDA, and a diluted loss per share of $0.08 due to the estimated amortization associated with purchase accounting and interest expense.

Looking ahead to the third quarter of 2008, we expect revenue to range from $367 million to $374 million, diluted earnings per share are expected to range from $0.56 to $0.60. There are several key factors in addition to the impacts of the recent acquisitions that distinguish our 2008 outlook in comparison to the third quarter of 2007, including continued economic softness in the Small Business Services segment, and declines in the personal check businesses driven primarily by fewer checks being written. In addition, lower revenue per order and Financial Services and weaker advertising response rates in Direct Checks will also be contributing factors. Lower delivery rated costs in Financial Services because we absorb the impact of the mid-May 2007 Postal rate increase since we did not begin implementing our flat check delivery package until the end of the third quarter last year, and continued execution of the $225 million cost and expense reduction initiatives net of investment. For the full-year given the continued economic challenges impacting our Small Business Services segment, the pressure of lower check usage on our core check businesses and the recent acquisitions, we expect consolidated revenue to range from $1.515 billion to $1.535 billion. In addition we expect an EPS range to from $2.52 to $2.62. There are several key factor in addition to the recent acquisitions that contribute to our 2008 full-year outlook. Despite modest contributions from the ramp of our e-commerce initiatives and verticalization work, we expect that current economic conditions will continue to adversely affect our Small Business Segment and thus drive a mid-single digit decline in revenues.

In Financial Services we expect the continuation of 4% to 5% declines in check writing, with the related revenue pressure bing partially offset by a previously planned price increase early in the fourth quarter. And we expect the revenue declines in Direct Checks to be more in the high single digits driven by declines in check usage. Other factors contributing to our 2008 earnings per share outlook include, continue progress with the previously announced $225 million cost and expense reduction program and a full-year effective tax rate of approximately 35%, although the third quarter rate will be lower as a result of settling tax contingency matters. We expect operating cash flows to range between $195 million and $205 million for the year, reflecting lower earnings, partially offset by continued progress on our working capital initiatives. We expect contract acquisition payments to be approximately $20 million. Capital expenditures in 2008 are expected to be approximately $30 million and depreciation and amortization expense is expected to be approximately $65 million, including $28 million of acquisition related amortization.

To conclude, let me comment on our capital structure. We funded our acquisitions through cash and draw from our current credit facilities. The capital structure we have in place today provides a great deal of flexibility to execute transformation strategy that we believe will create a vibrant value-creating Deluxe for the future. Our priorities for uses of cash remain investing both organically and in small to medium sized strategic acquisitions to augment growth and we also proactively evaluate other opportunities to create shareholder value.

In the quarter we did not repurchase any shares. We are focused on driving the proper balance between investment to drive long-term value and near-term opportunities the market may presents. To the extent we have excess cash after these priorities we intend to pay down the remaining balance on our credit facilities.

I will join Lee and Terry in taking your question news a few minutes, but first I'll turn the call back to Lee.

Thank you, Rick. I will continue my comments with an updated clarified prospective on where we are strategically positioning the Company, then highlight each of our three segment and close with a progress update on our cost takeout program.

At the enterprise level about our strategic intent remains the same. Becoming the best at helping small businesses and financial institutions grow. We will continue to target three customer segments, including Small Business, Financial Services and consumers. Where we plan to offer a suite of life cycle driven solutions including personalized printed products and a growing suite of business services, including logo design, payroll, and other human resources services all designed to help our customers run their business. Fraud monitoring and security solutions to protect our business partners and their customers. And hosting Web services, promotional, loyalty, market intelligence, business networking and e-commerce services to help our customers grow their business. Our growth will come from fulfilling under-served leading by meeting with higher growth Business Services, using a scalable, unified Web enabled platform acquired through Hostopia, as a cornerstone of our strategy to drive a greater portion of our revenue from annuity-based services. With this unified services delivery platform we are better positioned to provide a pull-through for printed products, including checks, forms, business cards, full color digital Web to print, imaging and other printed products. We will also be in a position to provide our financial institution and small business customers with market intelligence, collaborative forms and private label business networks to improve customer connections, loyalty and retention. We look to provide simple, easy to use, complete, innovative solutions, focused on fulfilling customer needs while using continuous improvement principles to operate on a daily basis. Repositioning Deluxe's brand continues to be important to growth enabler.

Also critical to our growth is the key intersection between financial institutions and small businesses and expanding relationships and in helping us reach verticals industry segments more deeply, key vertical segments include retailers, contractors, professional service providers and banks and credit unions. In order to insure we execute well and align key leaders and capabilities, our go-forward plan is focused on five key areas.

First, financial institutions and our core check capabilities, plus growth outside of checks in loyalty, retention, marketing intelligence and fraud monitoring and protection offers.

Second, direct to the consumer and growing check share, plus adjacency growth through other products and services that consumers can buy directly from us.

Third, small business core business products sold through enhanced e-commerce capabilities and an improved vertical customer focus.

Fourth, higher growth business services, including logo design, payroll, human resources, business networking, hosting and Web services.

And fifth, cost reductions and simplification, where we expect to continue the solid work already under way as part of our $225 million cost reduction initiative. But where we also see opportunity to improve processes and reduce costs further through order management system rationalization, pricing simplification, product set rationalization, and just-in-time product and services rationalization.

Now shifting to our segments, in Small Business Services as expected, economic softness had on impact on our business. But the impact in the quarter was even more pronounced than we expected, especially late in the quarter. Given the trends we have seen driven by the challenging economy that we now project will continue in the second half of the year, we have reduced our revenue forecast accordingly. The most significant second quarter shortfalls were in checks, forms, banking supplies, retail signage, and packaging materials. However, we had revenue growth in full color products and payroll services. We also saw an initial ramp in the EZShield Check Protection Service and expect even more growth in the second half of the year.

We released the first version of our new state of the art e-commerce shopping site called ShopDeluxe at the end of the quarter. We will continue to add content and capability here throughout the second half of the year. And we will begin promoting the new site in our catalogs and through other media. We added new safeguard distributors and will see more of a ramp as their business grows and as we leverage them where opportunities exist with financial institutions.

Now for some additional color for our acquisitions, we are off to a successful start with Logo Mojo, our logo design services acquisition, leveraging personalized logo capabilities in a differentiated, simplified way into our product portfolio. Driven by conversion rate success from our Web services partner ship and the stickiness that high-growth Web services provide for our customers, we closed the Hostopia acquisition yesterday. We are extremely excited about this acquisition as we believe Hostopia brings an innovative, entrepreneurial team that culturally is a strong fit with Deluxe, in addition to being focused,m just like we, are on small businesses below 20 employees. It also brings us Web hosting capabilities. But is much more than just a hoster. With Web services, e-mail marketing, fax to e-mail, mobility sync and other offers, plus a presence outside of North America with an emerging European customer base. Finally and critically important, Hostopia provides a unified, scalable services delivery platform, which can serve as the cornerstone of our strategy to obtain a higher portion of revenue from annuity based business services. We are creating a framework using Hostopia technology architecture that will easily connect ShopDeluxe and also provide a Web services broker for Logo Mojo, PartnerUp and other business services that we continue to evaluate based upon our customer's needs. We expect Hostopia to be accretive on an EBITDA basis for the balance of 2008 and on an EPS basis in 2010.

Finally, PartnerUp, from our Knowledge Exchange Expo collaborative work the last several years and from market research, we have learned that financial institutions and small businesses desire more information, more market intelligence and more of an opportunity to drive relationships with each other. Similar to Hostopia, PartnerUp first brings smart, innovative, entrepreneurial people. They also bring market intelligence tools, collaborative building capabilities, business networking tools and a small advertising revenue stream. We see these giving us capability to partner with both financial institutions and small businesses in bringing private label and community building networking capabilities to improved customer connection, loyalty, and retention.

In the human resources services area, in addition to our current payroll services currently deployed in Canada, in late July we initiated a pilot with HireRight, that we expect to extend over 90 days to test employee background screening services for our small business customers.

Shifting a bit, the following addressable market statistics linked to our current revenue base will allow you to better understand market sizes and growth potential and give you a sense of why our strategic acquisitions and partnerships dating back to the Johnson Group are so important to our future Small Business Services success. Nearly 50% of our current Small Business revenue today comes from a $1.5 billion check market declining 3% to 4% a year. Approximately 47% come from $7.3 billion business products market, which we estimate is declining 1% to 2% a year. Under 5% comes from a $16.5 billion full color digital Web to print market growing at 10% to15% a year. Under 5% comes from a $6.9 billion imaging and promotional market growing at 5% a year. Less than 1% comes from a $9 billion human resources, including payroll services, background screening, training, education and personnel administration growing at 6% a year. Virtually none of our current revenue to-date comes from a $5.1 billion Web services market growing at 22% a year. And none of our current revenue to-date comes from a $1 billion market for ad services within the business networking space growing at 20% a year. It will take some time to build out all these high growth acquisitions and partnerships, but they create the potential for Deluxe to bring more innovative, thought leadership business services to our customers, in addition to our already leading personalized printed products, where we believe with better e-commerce capabilities and a clearer verticalization focus we can gain share of wallet.

In Financial Services, we continue again this quarter to proactively extend several check contracts. We now have only two large contracts left to extend through 2009. In pleading these extensions, helps lock in positive annuity-based check revenue streams. It also allows us to focus now on winning several competitive national accounts, which will be starting their RFP processes in the near future. Again this quarter we continue to see strong overall new acquisition rates, especially in the credit union space and our retention rates also remain strong, in excess of 90%. We continue to simplify our processes and take complexity out of the business, while reducing our costs and expense structure. Starting early in the fourth quarter, we will also be rolling out our regular planned price increase that will drive both revenue growth and operating income.

In addition to our strong core check revenue, we made progress in the second quarter in advancing new non-check revenue growth opportunities. We grew revenue sequentially over the prior quarter and over last year and our noncheck loyalty, retention, and fraud monitoring and protection solutions. Building off of the Knowledge Exchange Expo financial institutions visits to our Phoenix call-center, we had our highest number of Deluxe calling wins of any quarter and a pilot with a very large national account of our Welcome Home Tool Kit on boarding solution successfully finished and now we are beginning to plan for a larger rollout. Although we continue to see momentum building in these new noncheck revenue initiatives, we also see decisions by financial institutions taking longer, with more approval levels and a focus on spending less.

In Direct Checks, our revenue was slightly lower than expected driven by a search engine's decision to limit our Internet impressions based upon their revised advertising policies, and by a sales tax law change in the state of New York, which negatively impacted our affiliates Internet program. We had another solid operating margin coming in at 29%. As mentioned earlier, we see opportunities in the direct-to-consumer segment to provide other products and services in addition to checks and related accessories to our consumers. We initiated some extensive research in the quarter to better profile our customers and their propensity to purchase. One of the opportunities we uncovered is that a high percentage of our customer base take photos frequently, and tend to be do-it-yourself crafters. Given this, we work with a partner an created an exclusive arrangement from a patent protected process where we will provide, starting in the middle of the third quarter, the ability for our customers to customize high quality, matted photo greeting cards suitable for all occasions and seasons. This is one example of a product opportunity outside of checks created by our innovated team using findings from our research. We are not sure how big this opportunity will be, but this and several others being assessed could contribute to revenue streams in the future.

In addition to these actions in each of our segments, here is an update on our cost and expense reduction initiatives, the plan continues to target a $225 million reduction through 2009 or $70 million is expected to be realized in 2008 on top of the $105 million already realized from 2006 and 2007. We have not yet completed a thorough enough assessment of the additional cost reductions associated with the simplification initiatives that I mentioned earlier. But these will begin contributing additional savings in 2009. Overall we had another solid quarter, delivering to our target levels against the $70 million expected this year. As we have consistently indicated, the 2008 reductions again will not necessarily be linear through the quarters, with over 60% of the reductions in the second half of the year. Also, approximately 50% to 60% will fall to the bottom line. However, the percentage was lower in the second quarter and first half, as we more aggressively reinvested in new noncheck revenue solutions and key enablers.

Here are some highlights of the key cost reduction activities for the second quarter and continued areas of opportunities as we move forward. These are in addition to the ongoing savings that are incurred each quarter from previously implemented actions. In our go-to-market sales and marketing, our focus continues to be on realigning sales and marketing back-end operations and on refining our channel management structure through process centralization, simplifying business process, platform and tool consolidation, and leveraging e-commerce and vertical segmentation capabilities.

During the quarter we announced an August closure of our Flagstaff call-center. And we also completed smaller reductions in several other call-center locations. Our externally led review of our call centers mention on the first quarter call with the objective of continuing to improve our productivity, also continued in the quarter. For fulfillment we had a strong quarter with lean productivity improvements and direct spend reductions. Given small business volume declines, we have recently initiated a deeper review of our small business cost structure. As such, the culmination of this review may trigger charges later this year and additional cost savings, neither of which are included on our current outlook or our $225 million cost reduction target. Throughout the remainder of 2008, we also continue to invest in automating our flat check package processing and we expect to continue our lean product standardization and indirect spend reductions initiatives, plus advance our work on realigning to a common manufacturing platform. We also plan to initiative more strategic supplier sourcing arrangements and enhanced value stream mapping and improvements and efficiencies.

Finally, for shared services infrastructure, we continue to make good progress in information technology driven by data center cost reductions, and other system utilization, networking and voice communication efficiencies, as well as in finance, human resources and real estate.

For the balance of 2008, we expect to continue to reduce costs in all areas as opportunities exist to centralize, streamline, standardize and improve efficiencies. As you can see, although our revenue was disappointing, driven by challenging economic conditions, we again progressed in the second quarter on our cost reductions. But more importantly in creating and starting to build out a frame work for revenue growth through new organic and business services offers. Unfortunately, we saw a deteriorization in the economy as the second quarter matured and we now expect this impact to continue at this level in the second half of the year. So we have reduced our revenue outlook to reflect this. In the second half we still expect strong execution on our cost reduction initiatives. Stability in our core check revenues, more meaningful revenue contribution from new noncheck revenue offers and key enablers, and some revenue from our logo, Web services and business network acquisitions.

Looking ahead, we believe that our portfolio is becoming better positioned to deliver sustainable future revenue growth opportunities and higher operating income and cash flow. Using market growth and decline rates, against our updated portfolio creates a roughly flat top line. Adding to that existing organic initiatives such as ShopDeluxe and verticalization, plus higher response and penetration rates and strategic additions in other business services spaces creates a top line that can grow solidly into the mid single digits over the mid-term. Also important, dependency on checks and small business products and accessories decline to 45% and 25%, while business services grow to 30% and we achieve a better balanced overall portfolio.

Now, Rick, Terry and I will take your questions.

(OPERATOR INSTRUCTIONS) And your first question comes from the line of Charles Strauzer with CJS Securities. Please proceed.

Hi, good morning.

Charlie.

If we can talk a little bit about, -- kind of simplifying a lot of the information that you just gave out on the acquisitions and the game plan, when you think about your four million plus small business customers and the Hostopia and how that fits in, what is the real simple kind of attack plan for introducing those four million customers to these new services?

Charlie, we're -- this is what we're really excited about. I think the first thing you have to remember is that Hostopia bring their own, more teleco wholesale model where they get their small businesses today. So they bring that. We don't think there is a significant -- same customer base there. So we first of all get that.

The second thing that we get is right away out, next week as we officially get this transaction closed, we are ready to go with basically being able to introduce our customers into the Hostopia platform. And we already have a process that we built with Hostopia to be able to do that. And so we open up right away to what we saw as demand for our Web services partnership that we started. And now not only what we created with that partnership but really being able to expand, because what Hostopia brings is a tremendous platform, not just hosting as I said, they bring Web services, e-mail marketing. They purchased a mobile company so they bring that. They have a fax to e-mail capability. So all the services we see coming to our small business customers and they're asking for these kind of services. So I think that is really important.

Another thing that's really critical for us is there is a lot of hosting companies out there gobbling up other Web service companies and they have all these (inaudible) platforms. What the Hostopia team has done is they create a fantastic unified platform. They have some patentable technology that they have got in terms of what they created. And it is a single platform. And we see the ability to add on a lot of the other acquisitions and other services that we have already. And just creating an easy go to market and a simple go to market platform for our customers. So there is a lot here, Charlie, as you said, and as we get more -- over time and being able to explain more and more of this, I think you will start to sense the same excitement that we have about the Hostopia play.

Got it. And when you look at kind of the lowered guidance and kind of when you look at the back half of this year, kind of especially -- see sorry specifically Q4, you're looking at a pretty meaningful jump year-over-year in margins when you kind of back into the numbers. And can you give us color on what gives you the confidence that you can achieve those kind of margin expansion and goals?

Charlie, I think you have to look back to what Rick and I talked about in our comments, there's a lot there. First of all, you've got some seasonality in our Small Business segment around the holiday greeting card lines and around the store value gift cards. And that brings us a natural positive spike in the fourth quarter. Even in tough economic times we still believe there is going to be -- or small businesses out there that will clearly have plays in that space. We start to get late in the quarter from some tax form ramp as well. And then we also have ramp that is we talked about. We saw success with the EZShield fraud solution in the second quarter. And we believe we're going to see that ramp continue and get even stronger as we get into the fourth quarter. We saw distributors shoot up through the safeguard plays that we've made. We also believe that continued content and capability that we're adding to the initiative release of ShopDeluxe is going to help, as well as a lot of the verticalization targets and focus that we have as well. And then, I don't want to under estimate. And a lot of people say was it there all along? And it was there and along that we did have a planned price increase in the check area for early in the fourth quarter. And that obviously will bring is a positive revenue and operating income play.

And the other thing you have to remember, Charlie as I said in the script, is that we also have that -- the cost takeout, which not only is more in the third and fourth quarter, but it's also where we expect more to actually stick to the bottom line. So I think those are the big pieces that you need to think about which is why we have some confidence even with the reduced guidance or reduced forecast that we think we're in good shape.

Great, thank you very much.

Thank you Charlie.

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

Good morning gentlemen.

Hi.

Can I just follow up on that last question if I could? I don't want to beat a dead horse here, but as you think about your guidance, and you come up with your forecast, presumably you talked to various division groups and sales people and sort of take a guesstimate at what they think they can do. In the past -- and maybe you discounted by a certain percent out of conservatism, is this current guidance, maybe, discounted even more? Or -- I guess if you could talk about your methodology for coming up with that range.

I think we saw as Q2 we started to see more of a depth in the Small Business segment and what they were buying. And by the way, sometimes you say it is more retail targeted, more contract -- it was kind of more across the board. And so we're always trying to get better at our forecasting in all of our segments. But yes, we sit down with our team, and we have a very thorough and very rich process where we do a build-up. We look at all sorts of indicators from mail drops to traffic coming through our call centers, through traffic coming through our e-commerce sites. And we sit down and assess it. And basically given the trends that we saw in the second quarter, and the expectation that everything out there that you read -- and because we have gone later this quarter with -- about a week that we normally do, just kind of wrap in the acquisition stuff. You have read it everywhere. And we're seeing it, and because of that -- because of the trends that we see, we said look, this is where we see things right now. In spite of all the good initiatives that we have and that we believe, and we believe will help us tremendously as we move forward, that was our best view and our best visibility that we had. That was kind of the way that we thought through it and the process that we took.

Okay, that is fair enough. And Lee, on the four acquisitions you specifically mentioned, expecting that there should be double digit growth rates in the future, what would be a ballpark estimate of what the four of those are doing right now?

Well I think if you go back to the market information that we put out there, and we have been asked -- everywhere Rick and I and Terry seem to go, give more color on that and that's what we tried to do here. I think the way to think about it is, Hostopia, on their own put out about a 20% to 24% -- in their fiscal year for '09, which ends in March of next year. And we said about 22% was the market. So I think that is about a good way to think of that one right now. And as far as the business networking one is such an entry play right now. But we think it is such a great strategic opportunity for us and just the ad market alone we believe is growing north of 20%. Logo clearly growing -- probably a little lower than that, but growing at a tremendous double digit rate as well. And then again, I mentioned full color, the digital and the acquisition -- the small acquisition we did earlier in the year that added to the Johnson Group play we see growing in the 10% to 15% space.

Okay, so no, it's not really expecting particular coloration, that's good. And then Rick, I didn't hear you specifically when you talked about uses of cash. I didn't hear you mention the dividend. Has there been talk about what you might do with that?

Well, John, the dividend is something that we review with our Board on a quarterly basis in looking at that as a possibility for use of cash. But at this point in time we do not anticipate changing our dividend policy. We're certainly -- continue focused on our name priorities around investing organically, as well as small to medium sized acquisitions to augment growth, and we've executed that in the quarter and continued focused on that, and then look at other potential opportunities, like share repurchase and the dividend. But at this point in time we do not anticipate changing our dividend policy.

Okay. And then last question. The contract acquisition payments you say now -- I think you said $20 million for the year, that is tick up from certainly what you have been doing so far. Is that ramp already spoken for? Or are you just sort of keeping that ready for some of these larger national accounts that you mentioned, Lee?

It's really based upon the fact that we have had some success here in the first half of the year in extending some of our large accounts and locking those up for a longer period of time that is creating that small uptick here for the year.

So if you are able to win some of these national accounts back, that could even be bigger? Yes, we wouldn't see that until early '09?

I don't know. It would probably be this year, probably be in '09. Yes it would be. We'd have to look at obviously where we're heading in 2009. And if we locked up, John, all but two, and we've got that in our runway here, being able to look at it we would have to kind of think of a restart as you get into 2009.

Got you. Okay, thanks guys.

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

Good morning gentlemen.

Good morning.

Most of my questions have actually been asked and answered. But one thing I did want to ask you about is this has come up on the last several conference call. It is always the balance of -- or the income statement balance of removing costs and reinvesting for the future and that sort of thing. And obviously it sounded as if the first half of 2008 was going to be one where -- you mentioned this in your prepared remarks. Where we weren't going to see -- the balance was probably going to be a little bit more weighted on the reinvestment side. As you look out a couple of years, and you know you have these acquisitions that you made. And I know that you need to support the plans that you have, I mean are there costs that you see that you are spending this year that are going to kind of be out of the system at some point in 2010, 2011, whatever the right time frame is as you get more efficient? What is the right way to think about the balance here?

Well, I think you have to go back on what we committed in $225 million. The $105 million through '06/'07 to $70 million this year, $50 million next year. And then clearly in the prepared remarks that we said is that we have got some other areas that we're now going to go -- get after as well. Some of them that we think can give us benefit in 2009. So I think that is the runway that I am comfortable with giving.

I guess Lee, obviously the stocks have been down, and it is down an awful lot today. And I got to tell you I think one of the -- maybe I'll just offer you the opportunity to respond to this. When the cost savings were announced, the base Deluxe business was kicking off ex $100 million of EBITDA. And obviously economic continues have gotten tough. And we understand that. But even if the investment spending balance was balanced with the cost savings, I mean I think what probably scares investors here is -- I mean you talking about a potentially huge organic decline that has occurred over the last 18 months. And I just -- from where I sit I don't think that is necessarily the case. And it seems to me like there -- that there are costs here related to reinvestment that are not necessarily going to be with you guys for the long term.

Yes, I think the way I think you need to look at it, there is a tremendous positive base on the core check business. We really like -- I love the aggressiveness of what our sales teams have been doing in working with the financial -- an aggressiveness around not more price reductions but just getting out there and getting in front of our financial institution accounts. Offering not only great check program, but also a great noncheck additional services. So I think that is really big. I think that is being missed by a lot of people right now to your point. I think that clearly the economic piece is biting off some -- obviously you guys can look at what it is doing to others as well. But yes, I think the plays that we got. The articulation of where we're now going in terms of bringing the services out. The ability to take market information and then add to that with initiatives to we already have under way today. And being able to see some sustainable opportunities to get some revenue growth. And yes on a better overall cost structure -- to what you're really getting at as we move forward. Absolutely that is the play without getting into 2009, 2010. But yes, that is the way to think about it.

And a follow up question for one of Charlie's. And I think you addressed it. Really specifically from a Hostopia perspective, but you had these acquisitions, can you talk a little more. And your response to Charlie seemed it was a little more near term. But kind of a longer term, you know how do you aggregate the new service offerings and really bring them to your customers? Can you give us a sense of kind of what the master marketing plan is down the road?

What we're trying to do is bring them altogether. We're trying to make sure that the play that we have is around using Hostopia is that core master unified platform from a technology standpoint. And then we believe we've sorted out how we get the linkage to the ShopDeluxe e-commerce platform. And we have got some really smart people that we have brought into the company that have built that all up. And then think of it as being able to bolt on PartnerUp, and Logo Mojo, and some of the other service offerings that we have organically, and then other areas that we're continuing to look at. Bringing that altogether, and driving more and more revenue per unit kind of thinking off a very stable, fixed cost based platform that is not complicated, simple and easy for our customers to be all to use and easy for us to be able to administer and run and create that annuity stream. I think that is the best I can give you right now until we get more into the -- all the acquisitions and how we're trying to bring all those things in, because again, they're relatively new at this points.

And that is very fair. Let me just ask one last question. You guys offer a lot of printed products to small businesses. But you don't necessarily -- you don't offer everything. And I mean from what I gather, I mean you have no desire to offer everything. But when you think about the kinds of products that you don't offer that might be a little bit more commodized, might be a kind of situation where you have a ramp in over capacity in the printing industry. You have talked about partnerships, are there opportunities for you to expand via partners, the multi-assets? Basically distribution or printed products. You've got a lot more services, you got a ton of customers, you don't necessarily offer anything, is there an opportunity for that down the road?

We're always looking for ways that we can solidify both the core small business products space that we talked about. I think the big -- without trying to get too far into this, I think the biggest play, how do we get stronger in that focus on verticalization and bringing more to those vertical retail contractors, professional services markets, and how do we play the -- the ShopDeluxe and the e-commerce better end of that. That doesn't necessarily mean it's all our stuff, if that is what you're alluding to. That is just bringing more content to the small business.

No, that is exactly what I was talking about. Thank you very much for your time.

Thank you.

The next question comes from the line of Mike Hamilton with RBC, please proceed.

Good morning.

Hey, Mike.

Just wondering if you could give the year-over-year change in incentive expense in the second quarter?

Mike, this is Terry, we don't actually publish that number precisely, but we do list that certainly as a contributing factor in the results year-over-year. So it is a significant contributor, but we don't actually publish that number.

Secondly, would you be able to isolate the costs you have laid out in your gross initiatives year-to-date?

No we haven't done that either, Mike. The way I would frame it is we spent money on all the programs that I mentioned around verticalization, ShopDeluxe, the financial institutions spaces around the noncheck and the loyalty, retention, the fraud, security space. But we haven't given a specific number. The way to think about it is more in the first half of the year than we are planning on spending in the second half of the year.

I would also add, Mike, that on a year-to-date basis we spent $15 million in capital expenditures. A good portion of that has been in support of the number of growth initiatives, particularly our e-commerce platform that we're continuing to invest in, and some of the other growth initiatives there.

Then last one, could you come -- I assume I'm direct given the changes and search engine that you dropped some market share in direct in the quarter -- what opportunities do you have to be able to respond to that?

We already have jumped on this thing, and I think we got through the New York affiliate issue pretty quickly here, so we don't expect that to have any exact impact on the balance of the year. We expect some impact on a search engine decision. But we think we've been able to figure out a clear and a new way to be able to work through that. Which we believe will basically impact us favorably again, or get us back in the fourth quarter.

Thank you.

Your next question comes from the line of Atin Agrawal with Longbow Research, please proceed.

Good morning guys, I think most of my questions have been answered. But I just have one question for you, apart from the recent acquisitions that you have made, I know that you have done work in the e-commerce area. Would you be able to provide us with what kind of revenue benefits you will expect in the second half of the year from the other e-commerce initiative?

We haven't provided that at this point in time and we won't at this point in time. I think the words Rick used, we expect modest to modest contributions from verticalization and ShopDeluxe focus but also too early at this point in time to get into where we see this all playing out. And especially given in this market and this economy right now. But I think as we get out farther in '09 and over time as this thing start humming we'll be able to give you a little better color on that. But for now it's not something that we're going to disclose.

Okay, well thanks, that is all the questions I had.

Your next question come from his the line of Beth Lilly with Gabelli, please proceed.

Good morning, Rick, Lee and Terry.

Good morning.

I wanted just to talk for a minute on the acquisitions that you have made, and if you could provide a little insight into what you paid for them as a multiple. And then who are the -- who is the competition that you're up against in terms of these businesses that you bought? Who -- who are you considered to be the other players in the market?

I think Hostopia -- you can go out and do the math around if we paid net $100 million. And the forecast that Hostopia put out for their fiscal 2009, we paid about three times revenue. Is one way you know to look at it. There is EBITDA, double digit EBITDA returns that they're driving that they put out. You can look at that. We looked at it from what is the drive with and without synergies on hurdle rates, and cost of capitals and all that. And without -- what I would tell you without any synergies, this covers -- gets above our internal hurdle rates, and then when we get the synergies it just plays onto that even more. So I think that is the biggest one out there. I mean there is not a lot out there right now in the business networking space. I mean we think we found a company that is probably at the forefront of being targeted at the small businesses -- social or business networking space. So I don't think there is a lot out there to frame that one.

As far as the logo, you know there is other logo companies out there today or other businesses that are bringing that on. But I think the way to think about it is forget what the other competitors -- I'll let you figure out who those are all. It is what our customers are really asking for us. And they're asking us not only to be a great personalized products, but they're also asking, you got to help us grow our business. And the way to grow, to get out of small businesses, their brand, their logo, their website, and their ability to serve businesses, or drive revenue. The other thing we started hearing is there are opportunities in the human resources area, not only in the payroll services space but we're going to test this employee background screening, and other areas. So I think that's the way we're looking at it is we have got to bring more of what our customers are asking us and more of what we think we need to be providing. Obviously there are areas in the market that are growing as well, which are obviously exciting for us.

So what happens to the margins as -- you're transitioning the business model to these faster growing businesses. You got a $1.5 billion revenue base and these are small in the scheme of things. But what happens to your margin structure?

I think over time what you see is we get these things in, build the revenue base and platform kind of off over the chart that we put out -- as we are doing the prepared comments -- I think we would be able to see these growing. And then being, as I said in my prepared remarks, to drive -- with our cost takeout and where we're going, to be able to drive improved operating income and in the -- and improved operating cash flows as we go forward.

Okay, so will your margins expand?

I mean the bottom line -- I think we expect revenue to grow, and I think we expect some margin expansion. But I don't want to put exact numbers out there at this point in time. Yes we expect it to improve, yes we expect operating cash flow to improve as we get these things in and integrate it into the Company and into our selling process and integrate it in with our customers.

Okay, and Lee, longer term you talked about you know it is a flat top line growth company. And then with better marketing and improving your offering, you're going to see mid-single digit growth about correct?

Yes, if you just look at the market rates of growth are declining in the portfolio mix today, that would get you to kind of that plus or minus 2%. And then if you extend out the -- you know what we talked about is initiatives that we're driving, and then higher response rates and penetration as we integrate and get synergies here that is when you get into the idea of being able to get mid-single digit growth.

Okay, and is that something you envision for 2009?

I think that the way we kind of placed it out there is medium term. What we have got to do, is some of the themes behind the questions that we're getting here today and the good ones, as you bring these acquisitions and bring all of these pieces together, what we have got to do and we're going to work hard on the second half of the year, Beth, bringing them in, expanding them as far as what we think the synergy capabilities are. An obviously we wouldn't have done them if we didn't think these things were going to help us a lot, which they will. As we work through the second half of the year and give us a lot more clarity. Sooner rather than later, we can start getting some top line growth.

Yes, because it is interesting for this first quarter, your revenues declined 8%'s and on a year-to-date basis they're down 7%, so you're talking about a pretty dramatic reversal.

Fair enough.

So -- and to Jamie's point, I think that is part of the problem with the market today. It sees a dramatic decline. And yet you're telling us that you think longer term you can grow mid-single digit. And so I think -- we're having a hard time bridging that gap.

And again, I think you have got the look -- I would really study that chart. And I would study that chart today and say if this is what their mix is today, which it is, and this is what the market is expected to do, this gets you kind of into a flattish opportunity -- plus minus 2%. And then as you mature the synergistic capabilities that we talked about, get better response rate, add in the richer ShopDeluxe and verticalization play, add in some other services capability, or extensions on some of these tests that we're doing, there is clearly an opportunity. And we understand that we have got to go deliver on that, we understand it is something we have got to execute to. And we think it is something that we do very well. And we have got to go to work to get that done. That's the best way I can describe it.

Thank you very much.

You're welcome.

I would now like to turn the call over to Mr. Schram for closing remarks.

Let me close by saying while we're disappointed with our revenue performance in the second quarter, we remained aggressive with our cost reduction initiatives, and also made several positive, strategic moves to better position Deluxe for revenue growth in the future, which we are extremely enthusiastic about. Thank you for your participation and questions today. We're going to get back to work and we look forward to providing a positive progress report on our next earnings call.

This is a reminder that a replay of this call will be available until August 7th, by dialing 888-286-8010. When instructed, provide the access code 74753746. The accompanying slides are archived in the Investor Relations section of Deluxe's website at www.Deluxe.com. Again, thank you for joining us and have a good afternoon.

Thank you for your participation in today's conference. That concludes the presentation. You may now disconnect. Good day.