Deluxe Corp (DLX) 2009 Q2 法說會逐字稿

Good day ladies and gentleman and welcome to the second quarter 2009 Deluxe Corp.'s earnings conference call. My name is Keisha and I will be your operator today. (Operator Instructions)

I would now like to turn the call over to Terry Peterson, Vice President of Investor Relations and Chief Accounting Officer. Please proceed.

Thank you, Keisha Welcome to Deluxe Corporation's 2009 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 the analysts after the prepared comments. At that time the operator will instruct you how to ask a question. In accordance with Regulation FD, this call is open to all interested parties. A replay of the call will be available via telephone and Deluxe's website. I will provide instructions for accessing the replay at the conclusion of our teleconference. Before I begin, let me make this brief cautionary statement. Comments made today regarding financial estimates and projections 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 on the company's Form 10-K for the year-ended December 31st, 2008. In addition, the financial and statistical information that will be reviewed during the call is addressed in greater detail in today's press release, which is posted in the news and 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 good morning everyone. We had another strong quarter and despite a very challenging economy, we were able to deliver on our financial commitments. We reported revenue in the middle of our expected range while adjusted earnings per share was above the high end of our range. Although individual segment revenues were in line with our outlook, we continue to experience greater weakness than expected and more discretionary products such as lower margin imaging, apparel, retail packaging products and full color.

While revenue in our higher margin personal check businesses came in close to the top of our expected range. We continued our strong execution against the cost reduction program, implemented spending controls and maintained a disciplined approach to deploying capital. We saw growth in loyalty, retention, fraud and security and new business services. We made further progress strategically in expanding our higher growth business services with the early July announcement of a definitive agreement to purchase Aplus.net's share hosting customer base and the acquisition of merge engines adding small businesses and new technology to our already growing base and capability. We continue to prudently manage our company, closely monitor the small business and financial institution markets, invest in future growth areas and focus on strong free cash flow generation as we continue to transform Deluxe and execute on our turn around plan. In a few minutes, I'll discuss more details in our recent progress and next steps, but first Rick will cover our financial performance.

Thanks, Lee. Earlier today we reported diluted earnings per share for the second quarter of $0.54 which included restructuring and transaction-related costs of $0.03. Transaction related costs include customer migration expenses directly attributable to transferring customers from recently announced acquisitions on to our existing unified web hosting platform in Hostopia plus direct professional services fees associated with the acquisitions.

Excluding the restructuring and transaction costs, adjusted EPS of $0.57 was $0.06 favorable to the upper end of our outlook communicated in April. Revenue for the quarter came in at $332.1 million as the difficult economic environment continued to impact small business services, particularly in several of the more discretionary lower margin product lines. Revenues from our personal check businesses came in near the top end of our expectations. Operating margins for the quarter were well above our expectations with favorability coming from better than expected results from our cost reduction initiatives, favorable product mix and continued focus on spending controls.

Earning per share also benefited from a lower than expected tax rate given several one time benefits. Operating cash flow in the quarter of $22.9 million also exceeded our expectations due to benefits from working capital initiatives and the favorable operating results. In the second quarter of 2008, we reported diluted earnings per share of $0.63 which included benefits from higher revenue levels and the associated margin flow-through plus an approximate $0.11 per share benefit related to lower performance based incentive compensation expense. Companywide revenue was down 9% from 2008.

Continued weakness in the economy primarily in SBS, as well as the impact on our personal check businesses have of declines in check writing and turmoil in the financial services industry contributed to the year-over-year reduction. Revenue from the Hostopia acquisition completed in August of 2008 partially offset these declines. Gross margin for the quarter was 61.8% of revenue down 0.5 percentage points from 2008. The restructuring-related costs incurred as part of our manufacturing footprint consolidation reduced gross margin 0.3 percentage points as compared to the prior year. The benefit from improvements in manufacturing productivity and delivery initiatives were more than offset by increased material costs. Selling, general and administrative expense decreased $11 million in the quarter and with 45.7% of revenue compared to 44.7% in the same period last year. Increased performance-based compensation and normal SG&A associated with the Hostopia and partner up acquisitions completed in the third quarter of 2008 were more than offset by benefits from continued execution of our cost reduction initiatives.

Adjusted operating income in the quarter was $55.4 million down from $64.5 million last year which had a higher revenue base.

Next I'll cover a few highlights in each of our three business segments. In small business services revenue of $191.9 million was down 7.7% versus 2008. And setting aside the first quarter seasonal tax forms business, we saw sequential growth in the second quarter. Revenue in this segment was unfavorably impacted by continued economic softness in the quarter, continued declines in the outside of checks and forms, softness in discretionary product lines as well as a lower Canadian exchange rate which alone accounted for a $2 million reduction. These declines were partially offset by contributions from the Hostopia acquisition and organic growth in fraud protection services.

This segment reported operating income of $20.6 million compared to $30.3 million in 2008 primarily due to the economy's impact on revenue and higher performance-based compensation.

In financial services, revenue of $100.5 million was down 8.6% versus the second quarter last year. The decline was due to the impact of lower check orders, partially offset by higher revenue per order resulting from a fourth quarter 2008 price increase.

Financial services operating income was $19.3 million for the quarter or 19.2% of revenue up from $18.8 million or 17.1% of revenue in 2008.

Finally, direct checks revenue totaled $39.7 million down 14.1% on a year-over-year basis due to continuing declines in check usage and a weak economy which is negatively impacting our ability to sell additional products. These reductions were partially offset by higher revenue per order from recent price increases. Operating income in the segment was $13.2 million for the quarter or 33.2% of revenue, up 4.2 points from 2008.

Turning to the balance sheet and cash flow statement, total debt at the end of the quarter was $819 million compared to $853 million at end of 2008. Cash provided by operating activities for the first half of the year was $85.8 million. The increase from last year was due to significantly lower incentive compensation payments and benefits from our working capital initiatives. Partially offset by higher planned contract acquisition payments in 2009. Capital expenditures for the first six months were $24 million. And depreciation and amortization expense was $35 million.

Earlier this month, we announced two small tuck-in acquisitions. The shared hosting business of Aplus.net which is expected to close at the end of July and the completed acquisition of the search engine marketing firm Merge Engines which together will be acquired for approximately $30 million in the third quarter. For the balance of the year, we expect that these acquisitions will contribute approximately $7 million of revenue and will be essentially EPS neutral after recording expenses for transaction and customer migration costs.

Looking ahead to the third quarter, we expect revenue to hang range from $325 million to $340 million. Adjusted diluted earnings per share are expected to range from $0.51 to $0.59 excluding $0.05 of restructuring and transaction-related costs. We expect the challenging economic conditions will persist throughout the remainder of the year and are tightening our consolidated revenue outlook range to $1.32 billion to $1.36 billion for the full year with the top end decreasing slightly due to declining patterns seen in the first half in more discretionary product lines. In addition, given our solid first half performance, we are raising our expected adjusted earnings per share to range of $2.15 to $2.35 excluding $0.40 per share related to asset impairment charges, restructuring and transaction-related costs and the net gains on repurchases of long term debt. There are several key factors in addition to the impact of the recent acquisitions that contribute to our outlook for the last half of 2009 in comparison to 2008, including small business services revenue declines in the mid to upper single digits as declines in core business products will be partially offset by benefits of our e-commerce investments and double-digit growth in our business services offerings. In addition, the recession began to have a significant negative impact on this segment in the fourth quarter of 2008, which will lessen the impact of year-over-year percentage declines later in 2009.

In financial services an expectation of check order declines of approximately 6% to 7% given the turmoil in the financial services industry and increases in other forms of electronic payments, which we expect will be partially offset by a mid-3rd quarter price increase and continued contributions from noncheck revenue streams. Double-digit revenue declines in direct checks given check usage declines and the weak economy which is negatively impacting our able to sell additional products, year-over-year increases in material and delivery costs as well as higher performance-based compensation and increases in employee and retiree medical costs, offset by focused execution on our cost reduction initiatives. However, some cost savings were accelerated into the first half of the year which will lessen the incremental flow-through in the last half and an effective tax rate of 33% to 34%.

We continue to expect to generate strong operating cash flows ranging between $185 million and $200 million for the year. We expect that lower earnings for the year will essentially be offset by continued progress on working capital initiatives and lower performance-based incentive compensation payments in 2009. We expect contract acquisition payments to be approximately $20 million.

Capital expenditures are expected to be approximately $40 million as we execute our plan to expand the use of digital printing technology, further automate or flat check delivery packaging process and make other investments in manufacturing productivity as well as key revenue growth initiatives. Depreciation and amortization expense is expected to be $67 million including $21 million of acquisition-related amortization.

Finally, in regards to our capital structure and uses of cash, we maintained our focus in the first half of the year on prudently deploying capital with a balanced approach of organic and inquisitive investment coupled with debt reduction. During the second quarter, we did not repurchase any of our long term debt because the discount rates were significantly less than what we saw in the first quarter. Going forward, we expect to maintain this balanced approach in order to drive our growth transformation while continuing to strengthen our balance sheet. The recent acquisitions will be funded through operating cash flow and availability on our existing credit facility.

We currently have no concerns regarding our ability to maintain compliance with the financial covenant in our current credit facility and are confident in our ability to obtain a new credit facility in six to nine months, which will replace our existing facility several months before its July, 2010 expiration. We also expect to maintain our current dividend level.

We believe our strong cash flow, strengthened balance sheet and flexible capital structure positions us well to continue advancing our transformation. several months before its July, 2010 expiration. Now I'll turn the call back to Lee.

Thank you, Rick. I will continue my comments with an updated perspective on where we are strategically positioning the company. Then highlight each of our three segments and describe how the new acquisitions fit in, and close with the progress update on our cost takeout program. At the enterprise level, 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 offer a sweep of life cycle driven solutions including personalized printed products and a growing suite of business services including logo design and payroll, all designed to help our customers operate their business. Fraud monitoring and Security Solutions to protect our business partners and their customers and hosting web promotional loyalty market intelligence business networking and e-commerce services to help our customers grow their business.

Over the strategic period we see the revenue mix of our business changing from 2008 65% checks, 31% business products and 4% business services to approximately 45% checks, 30% business products and 25% business services. While we plan to remain focused in our strong check businesses, the overall mix of checks will change due to their expected continuing secular decline and growth in business services. Overall growth will come from fulfilling underserved needs by leading with higher growth business services using a scalable unified web enabled platform as a cornerstone of our strategy to drive a greater portion of revenue from an annuity based services. This unified services delivery platform will better position us to provide a pull-through for printed products including checks, forms, business cards, full color, imaging and other printed products. We also aim to help financial institutions grow core deposits and improve customer loyalty and retention. Finally, we will provide our financial institution and small business customers with market intelligence, collaborative forms and private labeled business networks. We look to provide simple easy to use complete innovative solutions focused on fulfilling customers' needs while using continuous improvement principles to operate on a daily basis.

Repositioning Deluxe's brand continues to be an important growth enabler. In a nutshell we want to be viewed by our customers as an indispensable partner in getting and keeping customers guaranteed.

Now shifting to our segments. The small business services as expected economic softness continued to impact our business. We have small shortfalls to the high end of our second quarter revenue outlook range and more discretionary imaging, apparel, retail packaging products and also in full color. Excluding these products, we saw continued stability from the first quarter in our remaining core products including checks and forms. Positively, we saw a continued ramp in our easy shield check protection service and in logo design services, growth in e-commerce visitor traffic, significant growth in business networking members from Partner Up where we have increased membership 100% from year-end 2008 to over 120,000 members and growth in web services from our Hostopia acquisition. In the quarter we also announced a partnership with Score which now makes Partner Up the exclusive social network for Score's small business community.

We also will add over 80,000 Web Services customers through the spending Aplus.net acquisition and expect to end the year with well over 400,000 small business web services customers. In addition, we continue to work to leverage more web service offerings for our small business customers from our unified technology delivery platform. This includes our mid-July release of a new internally developed e-mail marketing service called Easy Contact by Deluxe. As well as our entry into Search Engine Marketing or SEM through the recent merge engines acquisition. Although still very early in adoption, our small business customers are starting to tell us that they need help with managing SEM, advertising campaigns, given a significant expected shift to online from offline advertising.

Merge Engines fits perfectly into our strategy with a simple easy and complete SEM campaign advertising offering. The Aplus.net and Merge Engine acquisitions are expected to contribute annual revenues of approximately $20 million collectively be basically neutral to second half 2009 earnings per share and accretive in 2010.

We continue to closely monitor the small business market and continue to be optimistic that the pace of decline is weakening. However, key small business index indicates remain concerning with negative trends and small business loan activity, increased bankruptcies and overall sentiment readings only slightly above the historic lows set in the first quarter. Although we are cautiously optimistic the economy is starting to bottom out, key indicators are still unclear right now and it appears far too soon to spot the floor. Small businesses are still spending less and scrutinizing purchases more. The good news is that increasing sales continues to be their number one paying point. As the economy recovers, with the transform active changes we are making to deliver more business services offerings that help small businesses get and keep customers, Deluxe will be better positioned in the future as that indispensable partner for growth.

Our focus for the remainder of 2009 in Core SBS products is on acquiring new customers and increasing our share of wallet through our enhanced Shop Deluxe e-commerce site and improved small business segment focus. We are focused right now on continuously improving the efficiently and effectiveness of our inbound, outbound and online customer touch points to maximize revenue scale capability.

In new business services, we will continue to integrate and scale our logo design services where we have seen the strongest ramp in Deluxe customers buying logos over the last month since the acquisition last year. Web services with our expanding e-mail marketing and SEM offers plus new customers through our pending acquisition of Aplus.net and business networking services customer acquisitions.

We also will continue to look for opportunities to add more business services to our unified technology delivery platform. All business services including payroll services, loyalty and retention, fraud and security, logo, web and business networking again are expected to generate approximately $100 million in revenue in 2009, up from approximately $55 million in 2008. So we are starting to build some scale capability here.

In financial services since all of our existing major contracts are extended now through 2010 we shifted our focus to winning new competitive national accounts where we believe there are many opportunities by year-end 2010. In the quarter we responded to the first RP and we expect more yet this year.

Again this quarter we continue to see strong overall new acquisition rates and our retention rates 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.

In addition to our strong Core check revenue, we made progress again in the second quarter in advancing new noncheck revenue growth opportunities. Revenue grew over last quarter and last year in our noncheck loyalty retention and fraud monitoring and protection solutions. Although we continue to see momentum building here in these new noncheck revenue initiatives, we also continue to see decisions by financial institutions taking longer with more approval levels and a focus on spending less. For the remainder of 2009 as indicated in our last earnings call, we continue to expect check order declines to be around 6% to 7% for the rest of the year. The second quota order decline was slightly higher due to the timing of when the financial crisis impacted our business. Order volumes from several large national accounts declined significantly in the last half of 2008 due to the turmoil that will lessen the impact of year-over-year percentage declines in the last half of this year.

In addition to the continuing impact of the economy and turmoil, increases in electronic payments also contribute to order declines. We expect to maintain our high retention rates and acquire new check customers. As mentioned on our last call, we will be introducing a planned price increase in the third quarter, driven by rising material and delivery process costs. We also expect some contribution from noncheck offers aimed at helping financial institutions grow core deposits.

Earlier this morning we announced a new line of marketing solutions called Fast Forward conversion services by Deluxe. These services are designed to help banks maximize the value of mergers and acquisitions by increasing account retention, building customer loyalty and reducing costs.

Finally we will continue the simplification work with the goal of taking complexity out of the business and reducing our cost structure.

In direct checks, our revenue was in line with our expectations and we delivered another solid operating margin in the quarter coming in at 33%. We continue to look for opportunities to provide accessories and other check-related products and services to our consumers. For the remainder of 2009, we expect double-digit declines in direct checks revenue driven by consumer usage reductions in a weak economy. We expect to reduce our manufacturing costs and lower SG&A in this segment and keep our profitability profile within one to two points of a 30% operating margin level while generating strong cash flow.

In addition to these actions in each of our segments, here is an update on our $300 million costs and initiatives programs where $90 million of net savings are expected to be realized in 2009 on top of the $155 million already realized since mid-2006. We expect to realize the remaining $55 million in savings in 2010. Approximately 40% of the $300 million reduction impacts go to market sales and marketing, 30% impacts fulfillment and 30% impacts shared services infrastructure.

Overall we had another solid quarter delivering more than expected in the second quarter. For 2009, reductions again will not necessarily be linear through the quarters. We executed better than expected and pulled forward savings into the second quarter in four primary areas including channel and sales support operations, information technology, lean productivity improvements and finance. Given these second quarter pull-forwards on top of pull-forwards already achieved in the first quarter, our cost reductions are now closer to 55% completed in the first half and 45% remaining in the second half of 2009.

Here are some highlights of the key cost reductions activities for the second quarter and focus areas for the remainder of 2009. These are in addition to the ongoing savings that are occurring each quarter from previously implemented actions. We continue to realign sales and marketing back into operations, refined our call management structure and improved our call center productivity. For the remainder of 2009, we will continue to realize sales and marketing back end operations through processed centralization, simplifying business processes, platform and tool consolidation and leveraging e-commerce capabilities. We also will continue to revamp our marketing services media customer touch points as we improve the mix of paper, catalog, on line and search engine marketing.

For fulfillment, we had a strong quarter with lean marketing improvements and direct spend reductions. In 2009, we will close five fulfillment sites, four of which are now completed including one recently shut down in the third quarter and the remaining one scheduled for later in 2009. We expect to begin fully automating our flat check package processing in the third quarter and finish this in early 2010, introduce more digital printing which continued in the second quarter, continue our lean product standardization spoilage reduction and direct and indirect spend reduction initiatives, plus advance our work on realigning to a common manufacturing platform. We also initiated more strategic supplier sourcing arrangements in the second quarter and expect these and other supply chain improvements in efficiencies to accelerate in the second half of 2009.

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 remainder of 2009 we expect to continue to reduce costs in all areas as opportunities exist to centralize, streamline, standardize and improve efficiencies. More specifically, we are reducing outsourcing and contractors spent from information technology, shifting to a more regional self-service human resources structure and continuing to reduce our real estate footprint with the planned 13% square footage elimination, although there is some dependency here on a weak commercial real estate market.

As you can see, in spite of a very challenging economy, we made good progress again in the second quarter in transforming Deluxe. But we still have a lot of work and opportunities ahead of us in the remainder of 2009. We are not expecting the economic climate to improve in the near term and are hopeful that the pace of decline is slowing down. But this is still unclear. We are expecting stability in our core check revenues, continued strong progress in our cost reduction initiatives and more meaningful revenue contributions from e-commerce and our new business services and noncheck financial institution revenue offers. We continue to believe Deluxe has demonstrated its value as a disciplined and stable company in these challenging economic times and that we are making positive strategic moves to reposition the company for sustainable longer term growth, while currently generating strong cash flows and a very attractive dividend. Now, operator, we'll open the call up for questions.

(Operator Instructions) Our first question comes from the line of Charlie Strauzer with CJS Securities. Please proceed.

Hi, good morning.

Hi, Charlie.

Hey, just a couple quick questions. When you talk about the 6% to 7% decline in checks, what are you kind of assuming for volume underlying those numbers there?

That is the expected unit decline, Charlie, is the 6% to 7%.

That's not a sales decline.

That's a volume decline number.

That is a volume.

Order volume.

Order volume decline the way we look at it.

Got it. How can we extrapolate more of a sales decline number for when we kind of look at the segment there?

The best way to look at it . You got to remember timing all plays into this. Earlier in the year we announced we were going to have a price increase and now we're basically telling you that's going to start in the third quarter. So you got to look at timing of all that and also you got to look at mix of products. So the best I can tell you to look at it ,we expect to see a single digit decline this year when you add all those pieces

Got it. If you can talk more about the competitive front and some of the upcoming rebids from potentially some of your competitors. Anything changing there?

No. We still see as I mentioned in my prepared comments, we saw our first RFP that we actually responded on. And one thing you got to remember about these, Charlie, is they take a long time. They take a long time to renew and they take a long time to go through their process. So, that one is not settled and decided yet. And we believe there's other ones that will still come out yet this year, and then we also believe there will be more that will come in the 2010 time frame.

Got it. And thank you very much.

You're welcome, Charlie.

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

Hey, guys.

Hi, John. Morning.

Just to kind of follow up on that last question, Lee, the price increase in Q3, is that across the board or specific to certain bank segments?

It's in the -- the way to look at it, John, is it's in the financial services business and it's not. The way our contracts work is when there are material or there are delivery increases, we have the opportunity to adjust our price depending on where those changes are. We mentioned this on previous calls, too, John. It's not the same in every segment , meaning the same in every national or community or credit union space. So you can't necessarily give a one size fits all price increase across the board. That's the best can I do with trying to explain

Okay. Well, and then I guess almost along those lines, Rick, and you, Lee, both mentioned turmoil, obvious turmoil in the financial services side. It may be hard to dig into this but at one point I thought you had said that you were seeing some attrition from some of the bigger banks towards more of community banks. Is that something you're seeing now?

What we see is the banks have been acquired. So you know who some of those that are we have. And that they've been acquired by another one of our banks. You see -- often you'll see spikes in the numbers in terms of check volumes. And it's just hard for us to exactly gauge is that things that they're doing within their migration conversions? Is it people that are leaving, consumers that are leaving those collective banks, so to speak, or is it the economy that's impacting it or is it more electronic payments that is things are moving through. So we try to dial in with our large banks and get clarity as best we can. But sometimes even the banks obviously are challenged with understanding exactly what those pieces are. So that's the comments that we made. And yes, we have -- for a while we were seeing a little bit more of a movement in terms of our mix to the community market. What I would tell you right, now is that's pretty stable at this point. We haven't seen a further movement from kind of national to the community. Other than places where we're winning and continuing to win in the community and the credit union market.

Sure, okay. That's helpful. And then moving on to the business services side of things, can you update us on your target margin for the business services . And I guess both kind of later this year is it reasonable to get to kind of that 14% we saw last year and longer term? For small business

Yes I think while the challenge we've got in there John, as you know in the short term is as we're bringing these on and going through some of the migration work and also as we have to leap the purchase accounting, we've got to work our way through that. But the goal here is clearly to get into that that low to mid-double-digit as a percent of operating margin and we think we're very comfortable with the moves that we're making here. And as we build these things in and as they become larger scale opportunities, we see that playing out quite nicely.

And then lastly, I haven't heard you talking too much about the business or the Deluxe Business Advantage program. Is it that you're focusing less on the referral and the leverage through the bank channels to generate those new customers or is it just -- can you talk about that?

No. It's not less of a focus. In fact, it's remained a very strong focus and the program has gone quite well for us. We're very pleased with the way the program's working. So for some of the people out there, basically what we do is we wrap our small business link to the financial services market and bring those clients through with our check and our other forms programs. But no, John, we haven't commented on it specifically but we continue to focus on it. The program has actually gone quite well.

Okay. Good to hear. That's all I have. Thanks, guys.

You're welcome, John. Thank you.

Your next question comes from line of Jaime Clement with Sidoti Please proceed.

Lee, good morning. What I was curious about and I was wondering if you could kind of give us a sense of how this is going to play out the next year or so is, now that you have the vast majority of your products and services more integrated on your e-commerce platform, what is the marketing of these products going to start to look like, to make sure that small business customers know that you have all this stuff?

The way I mentioned in my prepared comments again, what we're trying to do, Jamie, is balance the. Historically, Deluxe has been a very paper catalog intensive company and we inherited that with the NABs acquisition and it worked quite well for a number of years. But what's happening now as you know is customers are looking on the web through the Internet to make their purchases. And so what we're doing is we're having to be very smart because we still have a customer base that likes to get the catalogs. And so we're constantly looking to turn the dials as I call it between what do we want to do as far as paper catalog, online and then search engine marketing. And so what clearly you're going to see, though, is that we will increase the penetration of online and search engine marketing. And another nice thing about the Merge Engine's acquisition is now we've got somebody that's going to help our small business customers to do that better for them in terms of the program that we're trying to put out there.

We also think it's a tremendous learning for us in allowing us to get somebody into our company who is an expert at doing this so that we can get better at doing this as well. So, what you're going to see is us showing up there with our Deluxe brand. And you've seen some of the announcements we've come out with recently, The Easy Contact by Deluxe. We're going to hit the market with the brand more, more online. The other thing that I think is a plus for us, Jamie, is the Partner Up. Partner Up, getting Partner Up out there more and with small businesses. And we basically have taken the 60,000 members that we had at the end of the year to now 120,000. The viral marketing and the ability for them to speak to each other and then to introduce the company more through that capability is a powerful one for us as well. So, there's many things that we're trying to piece together to really get better at this. And what I would tell you is I'm learning it's a real art, not a science. I mean it's hard to figure out which dials exactly you have to turn on all those to make the most lucrative way to attract and build customers. And that's what we're just working on as I mentioned in my comments to try to get better at.

Okay. And just, you alluded to this in the prepared remarks. The flat package check distribution, I think you said you'd hoped to have that conversion or that process wrapped up in early 2010. Is that something -- is that process costing you money right now? Do you feel you'll be more efficient next year from a packaging and distribution standpoint?

We are really excited about this. We took a little longer than we would have liked to have gotten I call it the technology out of our provider. They've done a great job. It's just a work to try to get that done but now we will start here in the third quarter and put it into our first location. And again we expect to get it into all the locations where we're going to put it in early 2010. It will absolutely give us a benefit at some of the $55 million, Jamie, that's coming in the 2010 time frame once we get this thing fully in. But we're really excited. I mean picture yourself as one of our great employees that builds checks every day. To be able to do something that's so technologically innovative for us, it's a real thrill for the whole fulfillment team and the leadership and obviously the people are going to have an opportunity to use the new technology as we go forward.

Okay, great. Thanks a lot for your time.

You're welcome.

Your next question comes from line of Austin Ruth with North Oak Capital. Please proceed.

Good morning.

Morning, Austin.

I wanted to -- I was just curious. Is there a scenario in which the, I guess it's 90% or so is of your business that is printing be it checks, forms or otherwise, is there a scenario in which you could see that actually growing?

The way I would look at it is. Let me break it down into pieces, Austin. There right now clearly, just based on the comments we've made, there is an opportunity to get some share in the check space. Not only through the work that we're doing in the community and the credit union space. It's kind of an ongoing but looking at some of these bigger contracts. How successful we'll be with all that, we can't predict at this point in time. But we're playing it out as obviously there's an opportunity for us there. The second opportunity is the balance of really what we call business products within the small business services space. And the opportunity for us really is, can we get the mix of how we have use our inbound, outbound and then our Internet or our e-commerce channel to work to be more effective for us. And the introduction of Shop Deluxe which is kind of our common one single platform to pull all those products and services together on. And this is a huge thing for us because historically, we haven't been able to have everything, all the different brands that came with NEBS weren't all on one platform. So, we think there is an opportunity to cross-sell and use that platform for efficiently along with the use of our call center reps both from an inbound and an outbound perspective. So, you're onto the right perspective. Can we grow it enough? That remains to be seen at this point in time. Obviously there's a lot of things with the economy and where small businesses will go. Will they move faster away from those more printed products to more the services side? It's anybody's guess. Obviously, we're trying to also position ourselves on the business services side where we see much bigger potential growth based on our -- all the conversations that we have with the small business owners. So, I think we have opportunities in all those. But clearly what and I think the focus is clearly there, how all that stuff will play out, that's a little tough for us to predict in the kind of markets that we're -- the kind of economy that we're dealing with right now.

I guess the constant migration to electronic payments has been challenging for checks obviously. I was just curious if the shift that has been seen as consumers tighten their belts from credit to debit, if you see that as a further challenge to printed checks.

Look, I think the challenge has always been out there. There are people that are going to still write checks, want to write checks. And there's all sorts of different media to pay other than checks obviously that have been out there. But I don't think we see a more -- a much more significant leap from credit to debit at this point in time. There's some people who now want the float of the check. We hear comments from, you'll hear more on the consumer side when you're selling direct to the consumer, you'll hear comments on that. So I would -- I cannot tell you that we see more of that that shift occurring today.

Okay. And then lastly, just on some of the key strategic areas that you noted, the ones I guess not related in business services, loyalty retention, security and fraud offerings, are those tied to the printed checks or are there opportunities to expand those businesses that are unrelated to printed checks?

Unrelated. There are some that are tied. If you have a fraud protection on somebody's checking account, but we also have ID theft protection services that we sell. We sell a Deluxe Tech product which helps financial institutions. But I would say the bigger opportunities for us are going to be in again noncheck spaces there. We have our Deluxe Calling Solution which we featured on previous calls, which is we're continuing to start to see a nice ramp there. We have our On Boarding Welcome Home Tool Kit Solution, which we continue to see advances in. So it's really again as I mentioned in the prepared comments, it's really more the noncheck space where we see opportunities.

Okay, thank you.

You're welcome.

(Operator Instructions) With no further questions in the queue, I would now like to turn the call back over to Lee Schram with closing remarks. Please proceed.

I just want to thank everybody for your participation again and your questions today. And we're going to get back to work now and we look forward to providing another positive progress report on our next earnings call.

Thank you, Lee. 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 89715561. The company slides are archived in the news and 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. This concludes the presentation. You may now disconnect. Great day, everyone.