Deluxe Corp (DLX) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, welcome to the Q3 2009 Deluxe Corporation earnings conference call. I will be your operator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) I would now like to turn the call over to Mr. Terry Peterson, Vice President of Investor Relations and Chief Accounting Officer. You may proceed.

Thank you Kiana. Welcome to Deluxe Corporation's 2009 third 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 the regulation FDE 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 tele-conference.

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 risk and uncertainties which could cause actually results to differ materially from those projected. Addition information about various factors that could cause actual results to differ from those projected are contained in the news release that we issued this morning, and in the Company's Form 10-K for the year ended December 31, 2008. In addition, the financial and statistical information that will be reviewed during this call is addressed in greater detail in today's press release which is posted in the news and investor relations sections of our website, www.deluxe.com, and was furnished to the SEC on the Form 8-K filed this morning. In particular any nonGAAP 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. In a continued challenging economic environment with more bank failures, we had another strong quarter and 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. Revenue shortfalls to the high end of our range were driven somewhat by small business and financial institution checks, but also by a slow start in seasonal holiday cards, promotional products and tax forms. However, loyalty and retention, fraud and security, and new Business Services revenue continued to to grow, and we had strong execution against our cost reduction program and spending controls. All of which drove better than expected adjusted earnings per share, and operating cash flow. 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 our turn around plan. In a few minutes, I will discuss more details around 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 third quarter of $0.56, which included restructuring, and transaction-related costs of $0.04. Excluding the restructuring and transaction costs, adjusted EPS of $0.60 was $0.01 favorable to the upper end of our previous outlook. Revenue for the quarter came in at $332.3 million, in the middle of the range of our previous outlook, and leveled off on a sequential quarterly basis. Operating margins for the quarter were above our expectations, with favorability coming from stronger performance on a our cost reduction initiatives and our continued focus on spending controls. Operating cash flow in the quarter of $64.3 million also exceeded our expectations driven by the favorable operating results. In the third quarter of 2008, we reported diluted earnings per share of $0.27, which include $0.38 of restructuring and impairment-related charges. Adjusted earnings per share of $0.65 last year benefited from higher revenue levels, and the associated margin flow-through, plus an approximate $0.07 per share benefit related to lower performance-based incentive compensation expense. Company-wide revenue was down 8% from 2008. Continued weakness in the economy, primarily in SBS, as well as the impact on our personal check businesses, have declines in check writing and turmoil in the Financial Services industry, contributed to the year-over-year reduction. Revenue from recent acquisitions partially offset these declines. Gross margin for the quarter was 63.3% of revenue, up 4.7 points from 2008. Restructuring related costs were higher in 2008, reducing the 2008 gross margin by 3.6% points. Benefits from improvements in manufacturing productivity, plant consolidations and delivery initiatives, were partly offset by increases in performance-based compensation expense, materials cost and delivery rates. Selling, general and administrative expense decreased $9 million in the quarter, and was 46.4% of revenue, compared to 45% in the same period last year. Increased performance-based compensation and SG&A associated with acquisitions were more than offset by benefits from the continued execution of our cost reduction initiatives. Adjusted operating income in the quarter was $57.9 million, down from $62.4 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 $193.9 million, was down 8.9% versus 2008, and up slightly from the second quarter. Revenue was unfavorably impacted by continued economic weakness in the quarter, especially in the sales, checks, and a slow start to seasonal holiday cards, promotional products, and tax forms. These declines were partially offset by contributions from our recent acquisitions. This segment reported operating income of $23.2 million, compared to $10.8 million in 2008. Restructuring and transaction-related costs, and asset impairment charges, were $18.2 million lower in 2009. The economy's impact on revenue and higher performance based compensation, were the primary drivers of this segment's results in the quarter. In Financial Services, revenue of $98.9 million, was down 4.7% versus the third quarter last year. The decline was due to the impact of lower check orders, partially offset by higher revenue per order as a result of recent price increases. Financial Services operating income was $18.5 million for the quarter, or 18.7% of revenue, compared to $7.1 million in 2008. Restructuring related costs were $10 million lower in 2009. Higher performance based compensation expense was offset by cost reductions.

Finally, Direct Checks revenue totaled $39.5 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. Operating income in the segment was $12.8 million for the quarter, or 32.4% of revenue, up 4.4 points from 2008. Turning to the balance sheet and cash flow statements, total debt at the end of the quarter was $807 million, compared to $853 million at the end of 2008. Cash provided by operating activities for the first nine months of the year was $150 million. The increase from last year was due to significantly lower incentive compensation and income tax payments, partially offset by higher planned contract acquisition and severance payments in 2009. Capital expenditures in the quarter were $11 million, and depreciation and amortization expense was $16 million.

Looking ahead to the fourth quarter, we do not expect any meaningful improvement in economic conditions, and therefore we expect revenue to range from $326 million to $341 million. Adjusted diluted earnings per share are expected to range from $0.54 to $0.64, excluding $0.01 of transaction-related costs. On a full year basis, this would result in a consolidated revenue outlook range of $1.33 billion to $1.345 billion, with the top end decreasing slightly from our prior outlook due to some softness in checks, and uncertainty around seasonal holiday cards, promotional products, and tax forms. In addition, we expect full year adjusted earnings per share to range from $2.27 to $2.37, excluding $0.40 per share related to asset impairment charges, restructuring and transaction related costs, and net gains on repurchases of long-term debt. There are several key factors in addition to the impact of recent acquisitions that contribute to our outlook in comparison to the fourth quarter of 2008, including Small Business Services revenue declines continue in the high single digits, as softness in core business products is expected to be partially offset by benefits of our e-commerce investments, and double-digit growth in our Business Services offerings.

In Financial Services, check order declines 0 of approximately 8%, given the continued turmoil in the Financial Services industry, and increases in other forms of electronic payments, which we expect will be partially offset by the price increase implemented in mid-third quarter, and continued contributions from non-check revenue streams. Low double digit revenue declines in Direct Checks, given check usage declines, and the continued weak economy, which is negatively impacting our ability to sell additional products. Increases in material and delivery costs, as well as higher performance-based compensation, offset by focused execution of our cost reduction initiatives, and an effective tax rate of 31%, which equates to a full year rate of 35.5%. We continue to expect to generate strong operating cash flows ranging between $190 million and $200 million for the year. We expect that lower earnings for the year will nearly be offset by continued progress on working capital initiatives, and lower performance based incentive compensation payments in 2009. Contract acquisition payments are expected to be approximately $20 million. Capital expenditures are expected to be approximately $45 million, up slightly from our previous outlook of $40 million, driven primarily by accelerating information technology productivity investments. Other capital investments for the year relate to our expansion in the use of digital printing technology, automation of our flat check delivery packaging process, as well as other investments in manufacturing productivity and key revenue growth initiatives. Depreciation and amortization expense is expected be to $67 million, including $21 million of acquisition-related amortization.

I will conclude with a few comments regarding uses of cash in the quarter and our capital structure. Once again in the quarter we maintained our balanced approach of organic and accusative investment coupled with debt reduction. The acquisitions completed early in the quarter were funded through cash from operations and availability on our existing (inaudible) -- for further debt reduction via repayment of credit facility borrowings. Going forward, we expect to maintain this balanced approach in order to drive our growth transformation while continuing to strengthen our balance sheet. We have been in active dialogues with our banking partners over the past several months regarding the replacement of our existing credit facility, and remain confident in our ability to attain a new facility in the next three to six months. We also expect to maintain our current dividend level. We believe our strong cash flow strengthened balance sheet, and flexible capital structure position us well to continue advancing our transformation. Now I'm turn the call back to Lee.

Thank you, Rick. I'll continue my comments with an update on what we were focused on at the enterprise level and then highlight each of our three segments, provide an update on our cost reduction program and close with a perspective on where we are heading as we wind down 2009 and look towards 2010. At the enterprise level, our strategic intent remains the same, becoming the best at helping small businesses and financial institutions grow. We continue to target our three customer segments, small businesses, financial services, and consumers. Over this strategic period we intend to drive the revenue mix of our business from 2008's 65% checks, 31% business products, and 4% Business Services, to approximately 45% checks, 30% business products, and 25% Business Services. We plan to remain focused on our strong check businesses. However, the overall mix of checks will change due to their expected continuing secular decline and growth in Business Services. Revenue growth is expected to increasingly come from higher gross Business Services, using a scalable unified web-enabled platform, and this delivery platform positions us to provide a pull through for printed products including checks, forms, business cards, full color, imaging, and other printed products. Growth is also expected to come from product and services offerings that help financial institutions grow core deposits and improve customer loyalty and retention. Finally we expect to provide our financial institution and small business customers with market intelligence, collaborative forms, and private label business networks. Repositioning Deluxe's brand continues to be an important growth enabler. In a nut shell, we want to be viewed by our customers as an indispensable partner in getting and keeping customers, guaranteed.

Now shifting to our segments. In Small Business Services, as expected, economic softness continued to impact our business. We had small revenue shortfalls in the third quarter to the high end of our previous outlook driven by checks and a slower start in seasonal holiday cards, promotional products and tax forms. Positively, our e-commerce visiter traffic up is double digit percentages from the same quarter last year. We also saw a continued ramp in sales of our Easy Shield Check Protection service and in our logo design services, continued growth and partner up business networking members where we have increased membership another 30,000 to now over 150,000 members. And growth in web services from our Hostopia acquisition. We are in the process of migrating 80,000 Aplus.net web services customers to Hostopia's single unified platform. We are on track to complete this migration in the fourth quarter. We are off to a good start with our search engine marketing acquisition with revenues and profits in line with our expectations at this point.s We are also seeing strong interest so far from customers for our new internally-developed e-mail marketing service called EasyContact by Deluxe. We are closely monitoring the small business market and continue to be optimistic that the pace of decline is weakening. In fact, we saw small sequential revenue growth from the second to the third quarter. Key small business optimism indices are increasing slightly, but small businesses have not shifted to hiring, and capital investment spending remains at record lows. Although we are cautiously optimistic the economy is bottoming out, key indicators are still unclear, and while we appear to now be hovering around a floor, we do not yet see an upward ramp beginning. small businesses continue to spend less, scrutinize purchases more, and struggle with cash flow. The good news is that increasing sales continues to be their number one paying point, and we now offer many products and services to help them here.

As the economy recovers, with the transformative 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 fourth quarter in core small business products is on acquiring new customers, increasing our share of wallet through our enhanced shop Deluxe e-commerce site, and having a successful holiday card, promotional products, and tax form season. We continue to be focused on improving the efficiency and effectiveness of our inbound, outbound, and online customer touch points to maximize revenue scale capability. In new Business Services, we expect to gain new customers through our Hostopia telco-focused wholesale model. Complete migration of Aplus.net customers to our unified platform, add email marketing customers, continue to role out Merchengines -- SEM offers, and add logo and business networking enterprise customers, and add sales. 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 we have all of our existing major contracts extended through 2010. We continue to shift our focus to winning new competitive national accounts where we believe there are many opportunities by year-end 2010. We are responding to two RFPs, and we expect to hear decisions on these by year-end. In the quarter, we did see the rate of checks accelerate slightly to more than the 6% to 7% rate previously anticipated, driven primarily by large national banks that have been acquired and where some branches have been sold. Again this quarter, we continue to see strong overall 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. We made progress again in the third quarter, in advancing new non-check revenue growth opportunities. Revenue grew over last quarter, and last year in our non-check loyalty retention and fraud monitoring and protection solutions. Our new partnership on Deluxe calling with Nationwide is an example of one of our growing loyalty and retention services offers. Although we continue to see momentum building in these new non-check 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 fourth quarter, we are slightly adjusting the expected check order decline rate to around 8%. Due to added uncertainty from recent increases in bank failures, higher declines at large national banks that have been acquired, and some branches that have been sold. We expect to maintain our high retention rates and acquire new check customers. As mentioned on our last call, we introduced a planned price increase in the third quarter, driven by rising material and delivery processing costs. We also expect some revenue contribution from non-check offers aimed at helping financial institutions grow core deposits.

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 slightly higher than our expectations, and we delivered another solid operating margin in the quarter coming in at 34%, excluding restructuring-related costs. 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 low double-digit declines in Direct Checks revenue, driven by consumer usage reductions and 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 cost and expense reduction initiatives. Today we announced that we are raising our target from $300 million to $325 million, with $15 million of the increase coming from pull-forwards into 2009 from 2010. We now expect $105 million of net savings to be realized in 2009, on top of the $155 million already realized since mid-2006. We expect to realize the remaining $65 million in savings in 2010, which is $10 million higher than our previous $55 million commitment. Approximately 45% of the $325 million reduction impacts go to market sales and marketing and operations, 25% impacts fulfillment, and 30% impacts shared services infrastructure. Overall, we had another solid quarter, delivering more than expected, and we pulled forward savings into the third quarter in three primary areas, including channel and sales support operations, marketing spend efficiencies, and indirect spend reductions. Given these third quarter pull forwards, on top of pull forwards already achieved in both the first and second quarters, our cost reductions are now closer to about 80% complete, with 20% remaining in the fourth quarter of 2009.

Here are some highlights of the key cost reduction activities for the third quarter and focus areas for the reminder 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 end operations, refined our channel management structure and improved our call center productivity. For the remainder of 2009, we will continue to realign sales and marketing back end operations through process 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 and online Merchengines marketing. For fulfillment, we had a strong quarter with lean productivity improvements and indirect spend reductions. In 2009, with a recent October site closure, we now have closed five fulfillment sites as planned. We began implementing our fully automated Flat Check Package processing in the third quarter, and will continue with another location in the fourth quarter, and finish all locations in the first half of 2010. We also introduced more digital printing in the third quarter and in the fourth quarter. We will continue our lean product standardization spoilage reduction and direct and indirect spend reduction initiatives. Plus advance work on reaIigning to a common manufacturing platform. We also initiated more strategic supplier sourcing arrangements in the third quarter, and expect these and other supply chain improvements and efficiencies to continue over the balance of the year. 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. As you can see, in spite of a very challenging economy, we made good progress again in the third quarter in transforming Deluxe. But we still have a lot of work, and opportunities ahead of us. We are not expecting the economic climate to improve in the fourth quarter, and are hopeful that we have bottomed out.

In the fourth quarter, 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 non-check financial institution revenue offers. Looking ahead to 2010, we believe that our portfolio is becoming better positioned to deliver sustainable future revenue growth opportunities, through stabilization and the rate of decline in our check or check businesses, adding existing organic initiatives such as shop Deluxe and loyalty and retention offers, and in strategic additions in new Business Services including payroll services, logo design, and web net business networking, and Merchengines marketing services. In a more normal economy, we believe this would position us for approximately flat to very low single digit revenue growth, and strong single digit adjusted diluted earnings per share growth. However, given the current weak economic climate and lack of directional clarity, it is more prudent for us to expect 2010 revenue to be down low-to-mid single digits compared to 2009. Which is expected to produce adjusted diluted earnings per share ranging from a low single digit decline to low single digit growth. As part of these estimates, we expect to deliver strong double digit revenue growth in our new Business Services offerings. However, we believe it is extremely important for us to closely monitor the marketplace over the next three months before providing a more specific outlook for 2010. In the first half of 2009, where S&P 500 companies posted revenue declines of 18% with even higher rates of declines in earnings per share, we continue to believe Deluxe has demonstrated its value as a disciplined and stable company. We do not believe Deluxe is getting enough credit for our strong performance in these challenging economic times. With our total year outlook for revenue expected to decline 8% to 9%, and adjusted earnings per share expected to decline only 4% to 8%. All of this, while we are making positive strategic moves to reposition the company for sustainable longer-term growth generating strong cash flows, and providing a very attractive dividend. Now operator, we'll open the call up for questions.

(Operator Instructions) Our first question comes from the line of Jamie Clement of Sidoti. You may proceed.

Good morning gentlemen. Lee, can you run us through some of the economics of the Flat Packaging? And I think you laid out a timeline of other facilities where you would have that rolled out, and I know that cost you some money earlier this year, are you still spending money on that, or from a savings perspective, are you in net positive territory now?

We have started the complete automation of the process. It's an amazing thing to watch. We're having a company doing this 90 plus years, one way It's amazing to watch this process, and its just a very impressive technology, but -- so we started it, and what we're doing, Jamie, is continuing to improve the amount of throughput literally every day at this point in time, and we're getting exactly what we're looking for at this point. It's just real exciting for us. What we're then doing is beginning the build out of the other sites that we're going to be put in the Flat Packaging solution in, so the answer is we're still investing in it. We're still building that out. The real benefits on this thing are going to start to become really, -- as we get all of this in place in the first half, you'll start to see a lot of nice improvements in terms of our cost structure as we get into the second half of next year.

Can you give us a sense historically how much shipping has been sort of as a percentage of cost in the check business?

Yeah, what we like to say, and we've said this publicly many times, I mean, if you look at the cost structure, so the cost to get to the gross margin line, roughly a third of the cost is the material, the ink, the printing, the paper. About a third is the labor and the fulfillment we call imprinting here in the overhead, and then about a third is the delivery of a piece of it. What we also have been public about in the past is that because of the increasing rates and the postal service, the delivery portion of that is becoming a higher mix than that, even that third to today. So the opportunity for us to really get focused on -- as we've been taking down a number of our fulfillment plants and doing a good job on that. As this all comes in to play, the ability to get our cost structure down more in that delivery space with the automated Flat Packaging, is a real positive opportunity for us.

Okay. Thank you very much for your time.

You're welcome, Jamie.

Our next question comes from the line of Mike Hamilton of RBC. You may proceed.

Good morning, everyone.

Good morning.

Wondering on the check side if you could give any picture you've got on what's happening in a number of accounts per household.

I don't have any information on that. Here is what we're trying to do, Mike. We are -- we have stepped up probably six months ago our focus with literally every -- clearly every one of our large national banks, but also a lot of our community banks, just creating a better understanding of demand deposit accounts, holders, checking accounts, and so on and so forth. And I think we're getting smarter and smarter at this point. I -- what I would tell you is it's still difficult to completely spot all the right trends on when you see a demand deposit account holder increase, and you see a checking account holder, how do you line all those up to the ability for us to become more predictive on where we see check at this point, but what I would tell you is we're not yet ready to be prime time and public with all of that, because again, we're just getting stronger and stronger at understanding all of that right now. But what I like about it, and I like the work that Tom Morefield who runs my segment and his team are doing, is just getting us more clarity, and creating a deeper relationship with the FIs in understanding this, and then how to we drive the right programs in terms of what we're doing on check, and then in the non-check space to be able to understand how all of that stuff plays out, but I can't give you, Mike, a specific household number.

Thanks. Could you give a picture of your assessment of organic growth in small business in the quarter, what kind of decline we're getting once we strip out acquisitions?

I don't have that number off the top of my head. I would just tell you that, again, if you look at the expectation of $100 million dollars this year, in all new Business Services, you can't divide it by four because of the acquisitions, Mike, as they play out like that. But clearly you would have seen a small double digit decline in the core rest of the business. And remember, a lot of that is in the more discretionary type of promotional products, apparel, retail packaging, and supplies that are clearly much more economic oriented or dependent than our other traditional more checks and forms related product.

Mike, this is Terry. Hostopia has been our largest revenue producing acquisition. In that acquisition we did start lapping this quarter. For about two of the three months were lapped this time for the first time now.

By the way, that continues to go very well. It's just one of the things that's just very impressive for me to watch right now with Collin Campbell, who heads Hostopia, and its just getting these 80,000 customers migrated. We're doing quite well. For those of you who do understand this web services space, there's been many companies that have tried to do this and have not been able to successfully bring customers over from multiple different platforms and put them on a single platform, and I've got to tell you, it's just very impressive to see what Collin and his team are doing right now. It's coming along quite well, and it's just something I'm very proud of the Company on.

Lastly, what is your feeling on normalized SG&A run rate at this stage?

It's been tough this year, Mike, just simply because we've got the last year, which we pretty much didn't have any performance incentive comp in there, and this year we have built that in, because we've been delivering a lot stronger performance and more in line with what we would have expect the company to be doing. And so as we move into 2010, that should be just an expectation that's going to be built into the model the same way, and kind of what I gave in my preliminary view in terms of where I think things are heading here. So I think that will level that big -- that thing that's been more of a blip, and then you're down to we will get more cost and expense reductions next year, and the $65 million that we're now committed to, and depending on I don't know the exact ratio, we gave the 45%, 30%, 25% mix, I don't know the exact ratio that will play out next year at this point, but I would expect that it will continue to decline just based on the fact that we're getting more and more costs out and expect to it be more in the back end of the sales and marketing operations, and the G&A area. So I would just -- again, I can't give you a specific number right now, Mike, but I would expect you're going to see, because of the leveling out year-on-year, or the performance incentive comp and the improvements that we expect to get going forward, you're going to see a lower structure as we move into 2010.

Thanks for the insights.

You're welcome, Mike.

Our next question comes from the line of Charles Strausser of CJS Securities. You may proceed.

Hi, good morning.

Hey, Charlie.

One quick question. If you look at kind of the initial 2010 guidance and kind of the range of outcomes there, if you take a look at the low end versus high end, what are you expecting in terms of economic kind of recovery in there, and, also, if you think about potential new customer wins, like you talk about the two large bank customers that have RFPs out there, are you baking any wins into that guidance yet?

I suspected this might come up in terms of questions. Here is the way I would think about where we're at right now, we, consistent with both Rick and my comments, we are not expecting any improvement right now. And I just think right now, just given where we are, and you're starting to see some people come out and say yes, maybe things are getting a little bit better on more of the business buying, more of the technology buying side there, but you're also seeing a lot saying, no I'm not seeing it get better at this point, and we are prudently saying right now that we're not expecting it to get better. And that's what that range really identifies today. It also does not assume that any of these competitive decisions that we have out there right now on the -- that I've been talk ting about on the FS side, are coming the Deluxe way. Again, are we working to do our best to get some share of that? Absolutely. But I think, again, the prudent way to think about it is that, we are not assuming that, and what -- and what we put out initially. So the way I would look at it is assuming things stay where they are right now, in terms of where the economy is right now, and in the fourth quarter, and we'll watch this closely. There are probably, at this point in time, is more upside than downside to what we're talking about, but, again, we need to be careful until we see how the rest of the year transpires, lock in everything we've got in terms of our initiatives, our investments, where we see the biggest growth opportunities in the Business Services and some of these other non-check areas in the financial institution space, but that's the way to think about it right now, and I think that probably gives you about as best a view as I can.

So basically it's safe to say you're taking a somewhat conservative view with the potential for upside?

Yeah, and I think we have to right now. I think that's just the prudent thing for us to be doing, and I -- again, I -- I think we're, as I mentioned and then Rick mentioned, as well, I think we're seeing the bottoming out, but we're not yet seeing this -- there's pockets where people are buying more things, but we're just overall, I think it's just more of a bottoming out, and a stabilization around that, and I think it's just prudent for us to be planning and thinking that way, as we move into the balance of the fourth quarter and into 2010. So it doesn't take my enthusiasm away for what we're working on, what we're investing in, the ability for us to this year to have strategically added so many new Business Services plays to our portfolio, and I thinks I mentioned in the comments, I think when then economy does start to come back, this is going to position Deluxe a lot better than where we had entering the year or even six months ago at this point.

Got it. Just a -- kind of just quick more macro question. When your call center people talk to the small business owners that are out there, and given some of the kind of new service enablers or marketing enablers you guys have given to them as potential sales tools, what are you hearing back from -- general feedback in terms of just spot polling from your operators? Are they seeing any resistance to them --some of these new service offerings at all, or are they kind of embracing them?

I think the way to look at it is as follows, we are continuing to add customers to the -- I call it the base Hostopia telco-wholesale platform. We also see more opportunities as we get stronger in developing some of the markets that we're in the Europe, in that space as well. We're adding to -- as we position the Aplus. net customers on Hostopia platform, Charlie, we also have the opportunity to start bringing more of our services that Aplus.net did not offer to those customers, so I think -- we're hearing some excitement about that, as well. We're also starting to see even ad sales on the partner up networking, you can go out and look at it and see some of the ads that are out there. We're starting to to see some more upside in that at this point in time. We're also seeing some of the large national banks very interested in the social networking, or business networking, as we like to call it, partner up platform, more on a private label basis so -- and then the Merchengines, we're very excited about this, and we did, as is I said in my comments again, right in line with where we expected on that, so we're off to a good start. So I think we're looking at positive things right now that we just feel good about. Obviously all of us would like a better economy to bring this all out in for that small business owner and that's just struggling with cash flow and trying to figure out where they want to position to spend their more than right now, but, again, I think as things progress, you're going to see these things continuing to become a bigger percentage of our portfolio, as, again, I laid out.

Excellent. Thank you very much for taking my questions.

You're welcome, Charlie.

(Operator Instructions) Our next question comes from the line of Jamie Clement of Sidoti, you may proceed.

Hey, Lee, just a follow up. In terms of next year, you talked about a sort of a general outlook. Are there any unusual capital projects that you would have next year that would dramatically, at this point in your mind, change your CAPEX spending from '09 to 2010?

What I would tell you is that Rick made the comment that we slightly increased from $40 million to $45 million, and -- in 2009, and, any again, some of this is just -- , get some of these investments, and especially in technology areas that we think are going to help play out both internal technology improvement needs, as well as some technology things for our more customer basing technology things. We just decided that we're going to get a little more ambitious this year to getting some of these things done, and we just think the success of our -- of our information technology organization delivering projects on time, on budget, has been terrific, so we just thought now is the time to move it forward a little. What I would tell you right now, again I'm not trying to give guidance on this specifically, but I would say that you'll see us come down a bit from the 45, as you go into next to year. So I think you'll see us spend less, and, again, I can't give you a specific how much less yet, but it will -- I do not expect us to spend the -- something near the 45 as we get into next

Okay. So in terms of other cash flow levers and that sort of thing, I mean depending on how the RFPs on the two banks you mentioned, I mean, everything else it sounds is pretty much in line, kind of next year with what you were seeing this year, I mean, right?

Very fair.

Okay. Thank you very much.

Our next question comes from the line of John Kraft of D.A. Davidson. You may proceed.

Good morning, guys.

John.

Good morning.

Just a few follow ups here. Lee, you've talked about the two banks that you might hear about, as far as the potential win by the end of the year. If you did win either of those, when would the revenue hit? And also when -- when you've talked about 2010, you have suggested there are some others there as well, is there another two in 2010, or is the number bigger than that.

The way I would say, it's very difficult to predict exactly when cutover points are going to happen. I mean what I would clearly tell you there will be a revenue stream that will be in 2010 on both those deals, John. Exactly when we're asking those same questions as we work through this process, as well, but I -- every time I feel like I've got it nailed down or understand it better we get a little bit different answer. So I honestly can't give you a specific quarter or month when we expect it at all, but those will both roll in the 2010 time frame. As far as other ones, I'm not going to give you a specific number, other than to say there are, as I said in my prepared comments, there are other opportunities on top of those that will come in 2010, and we expect to be there, and to do our best to try to participate in those opportunities, as well.

Okay. That's fair. And then also in your prepared remarks, Lee, you suggested that the goal for sort of the breakdown of the business segment-wise, 45% checks, and 25% of the Business Services, and so on, when -- is there a target date for that?

The way we've been, again, pubic about this, it's basically, think of -- think of a -- , a strategic period. So think three-plus years at this point and I think that's the best way to describe our vision for where we see that unfolding, and what I would tell you is progress along the way. because I'm not yet going to give you, what that split might look like for next year until we do all of the work and get our planning process finalized for this year, but, I would expect us to progress. I've been clear, I've been -- we've been asked, give us some indication, so we've kind of said, well, the 55 is closer to a 100 now, this year, so I would expect us to have again, the double-digit growth next year in this, and therefore contributing a bigger piece of the pie, and I think John right now that's probably the the best I can do to help you frame

Oh, that's fair. And then -- regarding this Q4 Hostopia migration, is there material costs involved in doing that?

There is. And that's some of what you see in some of the transaction-related -- I think there's $0.01 in the forecast, and it's not all that. There are some other things that are transaction-related that we're working through, but -- so, yes, there is some cost to do that, and, by the way, the great news is we expect to get that done in the quarter, and on -- by the way, on track with exactly what we thought when we bought Aplus.net, we'll have it behind us and we'll have 80,000 more customers, which will give us almost 400,000 web services customers that the Company can call their own, so to speak. And so we're excited about it, we'll have that work behind us and start being able to bring on other products and services to those customers as we move into 2010.

And lastly, Rick and Lee, both of you guys talked about this, as sort of a bigger picture question, that is around the 8% or so declines in check you expect in Q4, I guess. First of all, what was it in Q3? But also, if you could just talk a little bit more about that. You said that obviously the current environment with failures and bank branch closures and so on, but it just seems to me intuitively that those customers still have a book of checks and still are writing checks. Are now a net loser here in all of the consolidation and the bank failures, or am I just missing this?

Great question, you're on the right track here. The way I would look at it, yes, it was roughly there in the third quarter as well, John, and I -- again, it's back to Mike's question earlier, it;s getting hard to exactly predict all of this stuff, but what we are seeing is some of the nationals that we have that have been acquired, and some of them are acquired into our own by our own bank, and some of them are acquired by others. That we're still producing checks for, it's just been hard. There's some spikes, and it's hard for us to understand exactly why all that, even though we're asking all the right questions to the financial institutions at this point. We have seen an increase in failures it's -- , what I would say is that there's been some that are going against us, but I'll give you a great example -- we had one literally after we got ourselves prepared for this call, we got -- and it's now public -- we got an inside -- right as it was coming out from them, but US Bank just picked up the -- a bunch of branches from BB&T, as part of the Colonial Bank changeover, and we're excited about that because that will be additional checks that we'll be able to provide those customers through our relationship with US Bank. So it's just hard, John,every day to -- I would not say -- it's kind of net wash at this point. It's hard every day to tell exactly where this thing is going to play out, and then the timing of people leaving there, or they run into somebody else. And some of them just go to a community bank or go someplace else or go to a national that we have, as well. It's just hard to get an exact read on that, and, therefore, we just see that -- we saw the rate pop up just slightly. We just think it's prudent again where we are to just forecast this way right

And -- but just to clarify further, you do expect that this is somewhat elevated, and that maybe we'll see some slowing of the decline rate in out years?

Yeah, I don't -- right now, again we're not expecting something to get wild and crazy at this point, other than what we're seeing today, but, again -- hard to tell, right? I mean how many more banks are going to fail or all of that. It's just difficult for us to predict. I would say right now prudently, we plan where we are. We think it's the right thing to do, and we think there's good stability around that right now, but again, we've got to keen a watchful eye on it. That's obviously part of what we do as leaders here.

Thanks your your candor. Thanks, guys.

You're welcome, John.

With no further questions in the queue, I would like to turn the call back to Mr. Lee Schram for closing remarks. You may proceed.

I just want to again thank everybody for participating in the questions today, and we're going to get back to work here. We do 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 October 29th, by dialing 888-286-8010. When instructed provide the access code 15299747. The accompanying 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. Good day.