Deluxe Corp (DLX) 2010 Q1 法說會逐字稿

Good day ladies and gentleman and welcome to the first quarter 2010, Deluxe Corporation earnings conference call. My name is Chanelle and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of this conference.

(Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Jeff Johnson, Treasurer, Vice President Investor Relations. Please proceed.

Thank you Chanelle. Welcome to Deluxe Corporation's 2010 first quarter earnings conference call. I'm Jeff Johnson, Deluxe's Vice President of Investor Relations and Treasurer. Joining me on the call today are Lee Schram, Deluxe's Chief Executive Officer and Terry Peterson, Deluxe's Chief Financial Officer. Lee, Terry, and I will take questions from the analyst's after the prepared comments. At that time, the operator will instruct you how to ask a question. In accordance with the 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. The comments made today regarding financial estimates and projections and any other statements addressing management's intentions and expectations, regarding the company's future to performance, are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. As such, these comments are subject to risks and uncertainties, which could cause actual results to differ materially from those projected. Additional information about various factors that could cause actual results to differ from those projected, are contained in the news release that we issued this morning and in the companies form 10-K, for the year ended December 31, 2009.

In addition, the financial and statistical information that will be reviewed during this call, is addressed in greater detail in today's press release, which is posted in the news and Investor Relations section of our website, www.deluxe.com and was furnished to the SEC on the form 8-K filed this morning. In particular, any non-GAAP financial measures are reconciled to the comparable GAAP financial measures in the press release. Now, I'll turn the call over to Lee Schram, Deluxe's CEO.

Thank you, Jeff, and good morning everyone. In a continuing challenging economic environment, we delivered a very strong quarter. We reported revenue at the top of our expected range, while adjusted earnings per share was well above the high end of our range. All three segments delivered strong revenue. Checks and forms both performed well against our expectations and new business services revenues grew 33% over the prior year. We had strong execution against our cost reduction program and spending controls, which drove better than expected EPS and operating cash flow.

Adjusted diluted earnings per share from continuing operations grew 30% over the prior year. We generated strong operating cash flow,and we were not to drawn on our credit facility as we ended the quarter. We completed the acquisition of Custom Direct in early April to extend our direct to consumer offerings and enhance our cash flow generating capabilities.

In late March, we started to invest in developing improved brand awareness to help better position our new business services offerings. We have started to invest more back into the business to drive revenue growth, but we are continuing our process improvements and cost reductions while driving strong operating cash flow 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 Terry will cover our financial performance.

Thank you, Lee. Earlier today, we reported diluted earnings per share for the first quarter of $0.65, which included $0.07 related to a one-time income tax charge related to healthcare reform legislation. Excluding the one-time healthcare reform related charge, adjusted EPS from continuing operations of $0.73 was $0.09 favorable to the upper end of our previous outlook, and 30% higher than the $0.56 reported in the first quarter of 2009.

Revenue for the quarter came in at $335 million, which was at the top end of the range of our previous outlook, and down only 1% from 2009. All three of our business segments delivered strong revenue. Small business services revenue of $192 million, was down less than 1% versus 2009. Revenue was unfavorably impacted by continued economic weakness, but business services showed solid growth. Financial services revenue of $101 million, was also down less than 1% versus the first quarter of last year. The impact of lower check orders was mostly offset by higher revenue per orderer and higher noncheck revenue. Revenue for order benefited in the 2010 quarter from last year's price increase and the amortization of a past contract settlement. Direct checks revenue totaled $41 million, down 6.3% on a year-over-year basis, but better than recent quarters, due to improved reorder performance.

Gross margin for the quarter was 64.7% of revenue, up 2.8 percentage points from 2009. Benefits from improvements in manufacturing, productivity, plant consolidations and delivery initiatives, were partly offset by increased delivery rates. SG&A expense, decreased $10.4 million in the quarter and was 44.2% of revenue, compared to 46.7% in the same period last year. Increased SG&A associated with acquisitions and the acceleration of our brand awareness advertising, was more than offset by benefits from the continued execution of our cost reduction initiatives and an unforecasted $1.3 million gain from the maturity of company-owned life insurance policies.

Operating margin for the quarter, excluding restructuring and transaction-related costs, as well as asset impairment charges in 2009, was 20.8%, which was up from the 16.1% generated in 2009 and was above our expectations. Favorability on a year-over-year basis came from higher revenue per order, progress with our cost reduction initiatives and our continued focus on spending controls. All three segments delivered strong operating margins. Excluding restructuring and transaction-related costs, small business services operating margin of 15.4% was up 4.7 percentage points over last year, due to continued progress with cost reduction initiatives. Financial services operating margin of 23.8% was up 4.5 points from 2009, due to the impact of improved revenue per orderer and continued progress with cost reduction initiatives. Direct Checks operating margin of 38.2% increased 6.3 points from 2009, due to significant cost reductions.

Turning to the balance sheet and cash flow statement. During the quarter, we repaid the $26 million that was outstanding on our credit facility at the end of 2009. We also invested $3 million of excess cash, in cash equivalent investments. Cash provided by operating activities was $53 million. The decrease from last year was due to significantly higher incentive compensation payments earned in 2009 and paid out in 2010. Partially offset by lower contract acquisition payments and higher earnings. Capital expenditures for the quarter were $10 million and depreciation and amortization expense was $15 million.

In early April, we purchased all the outstanding shares of Custom Direct for $98 million in cash, which was funded with a draw on our credit facility. Although the acquisition is expected to be EPS neutral in 2010, after absorbing $0.03 of transaction-related costs, those results include an estimated $11 million of acquisition-related amortization expense. We also expect the transaction will generate incremental cash tax savings of approximately $10 million from certain acquired tax attributes. Given our strong performance in the first quarter and the acquisition of custom direct, we are improving our consolidated revenue outlook for the year to a range of $1.36 billion to $1.4 billion, which includes approximately $60 million for custom direct. The high end of the range, we are only expecting a slight improvement in economic conditions.

Adjusted diluted earnings per share from continuing operations are expected to range from $2.55 to $2.75. There are several key factors that contribute to our full year outlook, including small business services revenue is expected to decline in the low single digits to flat range. As declines in core business products are expected to offset by benefits from our e-commerce investments and double digit growth in our business services offerings. We expect financial services revenue to decline in a mid-single digits to flat range, driven by check order declines of approximately 8%, given the weak economy and increases in forms of electronic payments, which we expect will be partially offset by higher revenue per order from price increases and the continued amortization of a past contract settlement. The new Sun Trust win, which will begin to contribute volume in the second half of the year, and continued contributions from noncheck revenue streams.

Direct Checks revenue, including the custom direct acquisition, is expected to increase in the upper 20%'s range. Driven by $60 million from the custom direct acquisition and improved reorder volumes stemming from past quantity reductions, which will only be partially offset by check usage declines in the continued week economy. Continued focused execution on our cost reductions initiatives, increases in delivery rates, continued investments in revenue growth opportunities. Including business services, brand awareness, helping FIs grow core deposits, acquiring new small business customers and enhanced internet capabilities and an effective tax rate of approximately 35%, which exclude the first quarter charge of $3.4 million, related to the recent healthcare reform legislation.

We expect to continue generating strong operating cash flows ranging between $195 million and $215 million in 2010, driven by an incremental $15 million from the operations of custom direct, stronger earnings, continued progress on working capital initiatives and lower contract acquisition payments, which we expect to be approximately $15 million. However, variable compensation payments were $18 million higher in the first quarter of 2010, as a result of our performance in 2009.

2010 capital expenditures are expected to be approximately $40 million, down 10% from 2009. We plan to invest in key revenue growth initiatives, expand our use of digital printing technology, complete automation of our flat-checks delivery packaging process, make other investments in oder fulfillment, delivery productivity, and IT infrastructure. With the acquisition of custom direct, depreciation and amortization expense is now expected to be $75 million, including $25 million of acquisition-related amortization.

For the second quarter of 2010, we expect revenue to range from $335 million to $345 million. Adjusted diluted earnings per share are expected to range from $0.58 to $0.65, which even at the low end reflects year-over-year growth. In comparison to 2009, the factors affecting our full year outlook are similar to those affecting the second quarter. In comparison to the first quarter, adjusted EPS is expected to be lower in the second quarter, due primarily to three factors. First, historically direct Direct Checks revenues are strongest in the first quarter, thus we expect a sequential revenue decline in this segment outside the custom acquisition. Second, we had an unforecasted $0.03 per share gain in the first quarter from the maturity of company owned life insurance policies. And lastly, we began investing late in March to improve our brand awareness, which will continue throughout Q2.

Shifting to our capital structure. We expect to maintain our balanced approach of investing organically and -- through small to medium sized acquisitions in order to drive our growth transformations. We also expect to maintain our current dividend level to the extent we generate cash flow in excess of these priorities, we plan to pay down debt in order to further strengthen our balance sheet. We were also pleased to have closed on a new $200 million credit facility in the first quarter at attractive rates and terms. We believe our strong cash flow, strength in balance sheet and flexible capital structure, position us well to continue advancing our transformation.

I will conclude my comments with on update on our cost and expense reduction initiatives. Overall, we had another solid quarter, and remain on track for delivering our $65 million target for the year. These savings do not include expected synergies from the custom direct acquisition which are included in the Direct Checks expectations. These savings, again, will not necessarily be linear through the quarters. In the first quarter, we continued to realign our sales and marketing back-end operations, refined our channel management structure and improved our call center productivity. At the end of the first quarter, we completed the closure of our Colorado Springs small business call center. We also realized additional efficiencies from our ongoing shift to on-line forms of advertising. Our focus for 2010 will continue to be on improving sales and marketing, back end operations, through process centralization, simplification, platform and tool consolidation and leveraging ecommerce capabilities. We will also continue to revamp our marketing services media customer touch points as we improve the mix of paper catalog and on-line search engine marketing.

For fulfillment, we had a very strong quarter with lean productivity improvements and direct spend reductions. We plan to complete the implementation of our fully automated flat-check package processing in the middle part of this year, and over the remainder of 2010 we will complete the expanse of our digital press footprint and continue our lean product standardization, spoilage reduction, and direct and indirect spend reduction initiatives. We also plan to advance our work on moving to a common manufacturing platform, enhance our strategic suppliers sourcing arrangements, and continue with other supply chain improvements and efficiencies.

Finally, for the shared services infrastructure, we continue to make good progress in managing information technology costs, through data center cost reductions and other system utilization, network and voice communication efficiencies. We also made progress in finance, human resources and real estate. For 2010, we expect to continue to reduce costs in all areas, as more opportunities exist to centralized, stream line, standardize and improve efficiencies. Now, I'll turn the call back to Lee.

Thank you, Terry. I'll continue my comments with an update on what we are focused on overall and then highlight progress in each of our three segments. I will also include throughout, a perspective on what we plan to accomplish throughout the balance of 2010. As mentioned on our last call, we are shifting our primary focus to revenue expansion, but we will not take our eyes off of cost reduction and process improvement initiatives. We are off to a good start with solid revenue results in all three segments in the first quarter. So, we are optimistic our focus and actions are beginning to take hold. We believe there are four key enablers that are critical right now to driving revenue growth.

First, strengthening our products and services portfolio, which is becoming better positioned to deliver sustainable future revenue growth as the broader economy recovers. It starts with checks, where we are stabilizing and pursuing share gains through new acquisition wins, through enhancing our customer experience and through simplifying offers. We also capitalized on our strategy of optimizing cash flow in our Direct Checks segment through our acquisition of Custom Direct. Next, we are better optimizing our business products portfolio by broadening our distributor and dealer channel reach. By improving our Internet experience, and through new offers, including electronic tax forms, stamps and e-holiday cards. Finally, in business services, we are growing web and hosting services, search engine marketing, payroll fraud and security, loyalty and retention, analytics driven deposits acquisition, rewards checking and business services. We will also continue to assess potential small to medium sized acquisitions that complement our large customer bases with a focus on Small Business Services and new offerings aimed at helping financial institutions grow their core deposits.

The second enabler is customers, where we are focused on improving their experience through enhancing our Internet capabilities, driving clearer customer segmentation, plus adding new customers. Our third enabler is technology. With our unified delivery services platform. We will continue to invest in developing service offers that all have the same customer look and feel and will create additional scalable organic services. And finally, fourth, improving our brand aware conditions and positioning. Our objective is to communicate our brand, points of differentiation and benefits earlier before customers consider or decide to purchase Deluxe products and services. We started in late March, and will ramp more in April and through the balance of the year to improve Deluxe's brand awareness.

We worked extensively with several external experts to determine how best to reach small businesses. Based on this work, we have decided to advertise through network and national public radio, including through mobility and on-line media, including CNN. com, entrepreneur.com, Fastcompany.com, time.com, Newsweek.com and others. Further we will also invest in events where small businesses actively participate including Growco and a signature series with entrepreneur. We also recently introduced project REV, which is a year-long marketing lab sponsored by Deluxe designed to build marketing expertise for small businesses. These investments will ramp through the balance of the year and were in our initial outlook for the year. We expect them to help us drive revenue growth over time as the economy improves. Although we expect to continue to improve EPS quarterly this year over prior year, at the high end of our outlook, through margin expansion and cost reductions, we are also investing some back into to the business to drive even more sustainable and higher revenue growth for the future. We have the ability to measure our return performance from these brand initiatives and this will determine the size and extent of investment levels over time.

Now, shifting to our segments. In small business services, as expected, economic softness continued to impact our business. We had strong performance, however, as revenue exceeded our expectations and we were pleased at this point to get to about flat with the prior year. Checks and forms were strong. Our results from targeted customer segmentation in the call center improved. Response rates increased from better balanced and enriched content in on-line and print-based spend. Average order value and conversion rates remain strong. Our safeguard distributor and dealer channel results showed strength and revenue in Canada exceeded our expectation.

We saw growth in sales of our Easy Shield Check Protection service and continued growth in partner up business networking members. We saw growth in web services, and completed a migration of 80,000 Aplus.net customers to [stopius] single unified platform. We signed up more media partners to help us grow our merch engine -- search engine marketing revenues. Strong interest also continues in our new internally developed e-mail marketing service called Easy Contact by Deluxe.

We continue to closely monitor the small business market, and are optimistic that the pace of decline is weakening, however, key small business optimism indices continue to hover at historic lows and in March took a step back. Small businesses remain apprehensive about hiring and capital investment spending remains at record lows. Key indicators are still unclear and while we saw continued slight improvement in the first quarter, it is too early and the ramp not significant enough to call it an up ward trend. Small businesses continue to spend less, scrutinize purchases more, experience tight cash flow and struggle with getting loans. Demand for expansion loans is still 35% below to the 2006 peak level. The good news is that increasing sales continues to be their number one paying point and we now offer many products and services to help them here. As the economy recovers with the transformative changes we are making to deliver more business service offerings that help small businesses get and keep customers, Deluxe will be better positioned if the future as that indispensable partner for growth.

Our focus for the balance of 2010 if core small business products is on acquiring new customers, increasing our share wallet through our enhanced Shop Deluxe e-commerce site and on improved segmentation. We will continue to focus on improving the efficiency and effectiveness of our inbound, outbound, and on-line customer touch points, to maximize revenue scale capability. In new business services, we expect to gain new customers through Hostopia TelCo focused wholesale model, add versus for our Aplus.net customers, add e-mail marketing customers, continue to roll out merch engines SEM offers, and add logo and business networking enterprise customers. All business services, including payroll services, loyalty and retention, fraud and security, logo, web, search engine marketing, and business networking, are still expected to generate approximately $120 million to $130 million in revenue in 2010, up from $91 million in 2009.

In Financial Services with all large contracts except one already extended through 2011, we are now focusing on extending contracting due in 2012 and beyond. We also are working closely with Sun Trust to begin migration to Deluxe in the second half of 2010. On the two competitive RFPs we indicated on our fourth quarter call that we began working, one was extended with the current provider, but only for one year, with a commitment to go to full RFP. The reason for the delay was due to an acquisition migration which is taking priority right now. A second opportunity is still being worked and pending. We are seeing some acquisition migration new account penetration challenges in several banks and weak consumer spending. And given this, we are tightening our outlook to an expected unit decline rate of approximately 8%.

Again this quarter and expected in 2010, we saw strong overall new acquisition rates, and our retention rates remain strong in excess of 90%. In the quarter, we simplified our processes and took complexity out of the business while reducing our cost and expense structure. After completing significant research and co creation with our financial institution partners of all sizes, we will introduce in the middle of the second quarter a new transformed check program, complete with simplified check designs and pricing options and new customer self-service portals, dashboards, and consultative tools. Also late in the first quarter, we had the first of three regional knowledge exchange Expos with the two others planned in the second quarter. The focus of this year's Expos is on findings from the collaborative work of representatives from to 15 financial institutions, who address the question, "How do financial institutions sell multiple products and services to baby boomers and millennials, in times of distrust?"

We made progress again in the quarter in advancing noncheck revenue growth opportunities that focused on helping financial institutions grow core deposits. Revenue grew over last year in these noncheck services, which include loyalty, retention, fraud and security, analytics deposit driven acquisition and rewards checking offers. We are off to a solid start with our exclusive partnership with Bank View, to bring rewards checking offers to our community bank and credit union customers. Also, late in the quarter, we completed a small tuck-in acquisition of Cornerstone, who has been a partner of ours in bringing traditional, analytics driven, deposit marketing programs to our community banks. We expect this acquisition will help us scale new deposit services offers more quickly and robustly for our financial institutions. We are also providing financial institutions with a comprehensive reg E offer to assist them in are the notification and permission of overdraft practices for their clients, which for us includes printing, call center and various marketing services. As you can see, momentum continues to build in these noncheck revenue initiatives and we expect all of our offers will contribute more to financial services revenues in 2010 than they did did in 2009.

In Direct Checks, our revenue was higher than our expectations driven by improvement in reorder curves and we delivered an exceptional 38 point operating margin in the quarter. We continue to look for opportunities to provide accessories and other check-related products and services to our consumers. We also acquired custom direct in early April and we have already started the integration into our Direct Checks segment. We are excited to leverage the best of both Direct Checks and Custom Direct into a best in class, direct to consumer, experience. We believe there are revenue enhancement synergies through our call center scripting and upsell capabilities, plus cost reduction opportunities through material, procurement, delivery, media, and marketing expense leverage and other SG&A reductions. At the same time, custom direct has some wonderful best in class capabilities in bindery and void spoilage, that will help improve our capabilities as well.

For 2010, we expect revenue growth in the high 20%'s range driven by the custom direct acquisition and improved reorder curves only partially offset by declines in consumer usage in a continued weak economy. We expect to reduce our manufacturing costs and SG&A in the segment and drive our operating margins to the upper 20%'s range including acquisition amortization and transaction costs while generating strong cash flow.

As we exit the first quarter on the heels of a very strong quarterly performance and a continued challenging economy, we made good progress again in transforming Deluxe, but we still have a lot of work and opportunities ahead of us in the balance of 2010. We are only expecting the economic climate to improve slightly through the balance of the year at the high end of our outlook range. As I indicated earlier, out primary focus is on revenue growth, and we are investing in our future with better products and services offers in all three customer segments. We are playing offense, making positive strategic moves to reposition the company for sustainable longer term revenue growth. The Sun Trust win helped stabilize core checks and we have more competitive opportunities not in our outlook. If the economy improves, we should have upside in small business services revenue, as we know it is important for us to demonstrate growth in this segment. At the same time, we will not take our eyes off cost reductions and process improvements and we expect to continue to generate strong cash flows and provide a very attractive dividend. And now Chanelle, we will ask you to open the line up for questions.

Sure.

(Operator Instructions)

Your first comes from Charles Strauzer of CJS Securities.

Hi, good morning.

Hi, Charlie.

Hey, great margins across the board there. I just wanted to talk a little bit more about the strength there, and what kind of -- what drove that behind the scenes and sustainability of those kind of margins. I know that -- obviously in the direct checks side with Custom Direct being folded in, those margins are obviously coming down as they're integrated in, but let's start with Direct Checks. If you look at -- was it 38% whatever, in the quarter, and look out two or three years down the road, Lee, is there anything -- is there any impediment that you see once you fully integrate both companies to prevent those margins from getting back above call it the low-to-mid 30s?

I think, Charlie, what's going to happen there is -- is as we integrate the two companies, we will -- we said upper 20s right now. We're obviously going to continue to work to improve that from here. Again, I think we've had a couple of -- we had a 38% performance in Q4, and a 38% performance here, and really the drivers of it is we leverage our cost structure really well. We did better than we expected in the fourth quarter. We did better than we expected in the first quarter on revenue and therefore were able to again, let a lot of that fall right through the bottom line, and I don't expect that you will see it as strong as we -- as we move through the balance of the year. But we're doing everything we can to continue to make sure that our cost structure in that segment, as well as when we introduced the custom direct capabilities into the segment, are going to continue to help us. But I'm not at a point right now, Charlie, where I'm going to predict that way out until we really look at and we've got our teams out in Maryland and in Arkansas, their two sites right now, working with the teams and pulling things together, but its -- obviously we have expectations we built in to be able to do this acquisition. But until we really understand in more detail what I would tell you is that's probably the best I can give you right now.

The other thing, too, Charlie, in my prepared comments, too, I did mention too that just in the balance of this year, we're expecting right now preliminarily, about $11 million of additional acquisition related amortization, so, we'll have to absorb that as well.

Understood, understood. And if you look at the strong margins like in small business, obviously that is much better than we, or probably you, were looking for and talk a little bit more about what drove that and the sustainability account of those margins.

We are really getting -- first of all, we had a very strong checks and forms quarter. It was a little above what we expected in the segment and obviously we make good margins on those. I think the good news there is, we were just a little light on the more discretion products and service -- there more products and that probably the checks and forms is a better place for us to have strength, and, therefore, that drove better overall operating margins. And we are -- Charlie, we are getting better and better at, and I've said this many, many call, at turning the dials around, where should we invest on-line through paper, through our call centers and this is a job that's never over. And I think that we're pleased, but we also have been saying we expected to see some margin improvement in small business and I think as we further develop and enrich our business services offers as well, I think that you'll see more sustainability towards what your -- margins that you saw us put out in the first quarter.

Now, the flip side to that is we have made a -- a lot of comments in this -- in our prepared comments, about brand and getting brand awareness to be stronger. So, that will impact our operating margins a bit in the small business segment as we invest a little bit more in the brand space. But we think it's a good investment and the right investment, because we also think that's going to help bring us revenue, more topline revenue over time and it's time well as we all know this economy will get better at some point, and I think that's when we are -- we're positioned right and thoughtful about how we're doing this, we think it's going to help us there as well. So, I think those are the balancing factors to think about.

Great and then just one more macro question. When you maybe get some samples back from your call centers, et cetera, what are the small business customers telling you? Are they loosening up the purse strings a little more? Are they thinking about spending more? Is it getting harder for them? What is the general trend you seeing amongst your customer base?

No, I think it's what I said in the prepared comments, I think they're just being exceptionally smart and prudent in how they spend, where they spend. And again, what we are noticing more and more is they are looking for how to do we get and keep customers and how do we differentiate ourselves out there and clearly like any company, they're also looking for how they lean their structure as best they can. But I think what we identified -- I said in the prepared remarks, Charlie, is exactly where they're at at this point.

Excellent. Thank you very much. Congratulations.

Thank you, Charlie.

Your next question comes from the line of Jamie Clement of Sidoti.

Good morning.

Hi, Jamie.

Hi, Jamie.

Lee, as you went through the brand awareness and market research process with some outside consultants that you mentioned, ahead of an increase in marketing spending for our own brand. Can you give us a sense of some of the things you found out about, A, Deluxe and the perception of Deluxe, and then, B, the market opportunities for some of your services?

Yes, I mean everybody that's out there still, obviously first and foremost, thinks of Deluxe as a check company, and, you know, that's -- by the way, that's a wonderful thing for us, because we want to obviously stay strong there, but it also can be a detriment if they don't understand that there's all of these other products and services that we offerer. And so what we -- the research that we've done is to think about the decision-making process, Jamie, that a small business owner goes through and what we're trying to do is to bring ourselves forward in the awareness and interest area before we go further down stream into, "I'm going to make a purchase of a form," or, "I'm going to make a web services purchase or a logo purchase," or whatever. So we're trying to bring the power of the Deluxe brand earlier in the awareness cycle for a small business owner. And then we've done a lot of research. I'm always asked, are we going be on TV? Well, on average, what we've done through our research is more of our small businesses listen to the radio and specific programs and then hone in on-line to a lot of the areas that we talked about. Show up at Growco type of events and so it's a very robust thoughtful process about all the different medias and places that we think need to show up in a much deeper and richer way.

So, I think that's the process that we've gone through. And we've always done some smaller testing in certain areas, but this is a more robust really thoughtful and positioned approach with all of the new -- what will become all the new products and services that are out there and then how we target and segment more and more for our customers and we're just getting better and better at the analytics and the understanding and that's all weaved into how we've thought through this brand awareness approach.

Okay, Lee, and that sounds pretty darn consistent with the message that you guys have given over the last couple of quarters, so it's sort of fair to say that the research that you've done generally supports your own interpretation of what the market's perception of you guys is. Right?

Absolutely. And it's so fun. I was out in the quarter with some of these events and its so fun to see people's eyes light lite up when they can come to Deluxe and realize that we have a wonderful suite of products and services that can really help them. It's just -- and again, what we believe is the more we can get that in front of people earlier on we think it's going to help us as they get to their point of purchase decision.

Okay. Thank you all very much for your time.

You're welcome.

Okay, Jamie.

You're next questions from the line of John Kraft of D.A. Davidson.

Good morning gentleman and nice work on the quarter.

Thank you John.

Thanks John.

Lee I wanted to go back to something you said towards the end, you were talking about some of the newer growth of your acquisitions and you said that the revenues went from $91 million to $120 million or $130 million and expected in 2010. Was that just a total of all of the recent acquisitions or what were you kind of putting in that category.

Again, John, what -- we've bed asked more and more can we help clarify what's included in all these new business services space or these business services space, which is -- think of a nonprint noncheck. And so, in the 10K file at the end of -- for 2009, we reported a $91 million number. What we're trying to do, John, is to give an indication for all of the segments and again most of it obviously is in small business services, but how much revenue do we expect to generate that's in that new business services area, and that's the $120 million to $130 million.

Got you. Nonpaper stuff. And then just a couple of housekeeping items. Terry, the balance on the line as of today, can you give us that?

We did as we mentioned, we did draw on that credit facility for the acquisition of custom direct, so that represents the substantial portion of our outstanding borrowings today.

So, most of that is taken up now?

No, the -- well, the credit facility had nothing drawn on it.

Its $200 million, right, so now you have about a hundred or so?

$200 million capacity and then we drew the $98 million when we bought Custom Direct a couple of weeks ago.

Okay, so that's about the balance?

That's correct.

And then the -- just specific to that pending RFP that you're working on, is there a date when that contract is due that you can give us or sort of a timeline of when that might be -- when you might have an answer?

I expect later this year. John, the problem with all of these, sometimes they delay them.

Sure.

I'll give you a specific one and then I -- well I want to come back. The best I can give you is, it will absolutely be this year and it will be -- I think it will be the second half this year when they'll get to a decision.

Okay. And then just to last, just on -- the Sun Trust is officially on board at the very beginning of Q3 or is it going to hit the tail end of Q2?

No, it will be a second half of the year and we're really looking forward obviously to getting started with our new partner here.

Sure. Thanks, guys, congrats again.

You're welcome, John.

Your next question comes from line of Mike Hamilton of RBC.

Good morning, and thank you.

Hello, Mike.

Would like to come back to just -- perhaps I missed it, bit in some of the earlier discussion on segment margin, wanted your thoughts on sustainability in the financial institution side of checks. Obviously best margin you've shown in a long time in that business and you were really a pretty different company when you were driving the kind of margins that you're showing now.

Yes, no, I'll go ahead and take that one, Mike. No, we feel really good about the margins that we produced in financial services along with the other two businesses and we do with a lot of the cost reduction initiatives that we have really pushed and delivered on. We feel pretty good about being able to sustain kind of that low 20% range as a margin in financial services really through the balance of this year.

Congratulations there.

Mike, something I want you to think about, and this is important and it's also important competitively that we're (inaudible) here. We believe we've been very consistent in, I would say, almost every script, if you went back and looked at them over the last, you know, four or five quarters, always talk about we continue to work on process improvement and cost reduction specifically in financial services. In this quarter, I mentioned on the call that in the middle of the second quarter, we're going to introduce several new things in the way that we work with financial institutions and their consumers, on checks. And so we believe a lot of these actions are -- and we worked really hard with banks of all sizes to create this offer, and, again, we have kind of stuck high level in describing that because we believe that competitively we have some things that are going to be powerful here for us. So that's the way -- that's how I would think about it, Mike, and therefore we expect those to gain us benefits as we -- you know, as we roll these things out starting in the middle of the second quarter.

Practically, does this offering become a hybrid between direct and traditional FI?

No, no, it's specific to what we're doing with our financial institution partners.

Fair enough. But it's not designed to be an offering that gives a lower price point to those who desire it, who want to do things on their own, in other words a customer who comes in and says, "I'll go through the portal on my own to get a low price on checks?"

No.

Okay.

It's more the way we work with financial institutions. And there's all sorts of reporting, both at their end and our end that's always being worked and challenged. And I've said this for years, people think making a check is a very simple thing and distributing it. It's a very tedious and complex process between the financial institutions and Deluxe and so that's more of what I'm talking about about the portal and the benefits that it gains the financial institution and the benefits therefore, that it also gains with Deluxe. We didn't do this on our own. We worked really hard with the largest mega banks to the smallest community banks in really coming up with what we believe is a better offer for everybody.

Driving interface efficiencies?

Yes.

Okay, yes, fair enough. A couple of detail questions here. One, the 600,000 restructuring in the quarter, I assume that that's actually $1.9 million if we add in the $1.3 million on insurance proceeds there as an offset. Is that accurate, Terry?

No. I mean, the insurance proceeds are completely independent and separate. There is a -- just some small restructuring actions that we took in the Company, and we had, you know, some partial offsets with some adjustments to past actions, but -- so there's nothing too significant that way. Going forward the items will be adjusted for -- or more around the transaction-related costs with Custom Direct, but the insurance side has really nothing to do with that.

So, that was not booked in SG&A, the insurance proceeds?

The insurance proceeds -- the insurance gain was booked in SG&A, yes, but it was not -- it was not a part of the restructuring number.

I'll catch up with you offline on that. My math doesn't work there. One last one then, Terry, on your $11 million amortization, is that incremental on 2010, just to be sure I understand?

That is strictly -- that is strictly for 2010, all incremental, and all directly associated with the acquisition accounting for custom direct.

Thanks very much. That's it for me. And, again, I echo everyone else's congratulations.

Thank you Mike.

Thanks, Mike.

Your next question comes from the line of Bishop Cheen of Wells Fargo.

This is Davis (Inaudible) calling in for Bishop. I just want to talk about the capital structure for a second. You have some bonds maturing in 2012 and 2013 or 2014, I believe, and I just want to see what you thought of the high-yield market right now, would you look to issue more debt at that guaranteed tranche? Just want to get your thoughts there.

We just completed all our work around the credit facility which has been our focus for several months and our next focus area will certainly be on the 2012. So, we haven't really come out and stated or articulated any strategy around that yet, but nonetheless, we certainly are in a lot of communications with banks, looking at options and ideas around how and also when. When would be the optimal time to address that maturity.

Okay. Are you capped in any way on that guaranteed tranche or do you have some flexibility there?

Can you explain what you mean by the guarantee tranche?

I'm sorry, through the 7.375, the debt through that level. Are you capped in terms of the amount of debt you can guarantee based on the credit facility or the indenture or anything like that?

This is Jeff. The 2015's do have a -- a carve out for security, but not necessarily for upstream guarantees -- they have upstream guarantees. They already do have upstream guarantees in the 2015s.

Okay. That's all I have. Thanks.

You're welcome.

Okay, thanks.

Your next question comes from the line of (Inaudible) Renaissance Technology.

Hey, good morning, guys.

Good morning.

I just had a couple of follow-up questions on financial institutions. First, how big an impact did the contract settlement amortization have on pricing, and then the second question was, if you guys could talk a little bit about how big the Cornerstone acquisition was. I know you said it was small, but was curious what type of revenue impact it had.

Let me take the cornerstone, then I'll let Terry circle back on the financial institution question. It's a small acquisition here. They primarily have been a partner of ours for a little over a year now, and we just -- we partnered in this space with several others over -- over the last probably three years, and finally found somebody that we think really matches what we like in terms of more analytics driven offers for primarily the community bank market in this space. And so think of it as very small right now. But we also believe this gives us strength in working with financial institutions, many of the ones we are working with are even saying to us, we would like this. We would like to have the more rebut Deluxe name behind it, so it why don't you just buy these guys? So, obviously that was something that was always on our radar to think is that something that makes since and we were just able to get that done. We do like the scale potential for this, but right now just think of it as a very small acquisition.

Uh-huh.

And I'll go ahead and address the contract amortization. That -- typically with contract settlements and amortization of those, we typically only disclose those actual numbers when they've been very large and very disruptive to trending and margins and such. In this case here, it was, you know, just a little more than the normal noise we would have from quarter to quarter, but certainly not of the magnitude that would disrupt revenue trending or margin trending, and I believe as I answered a former, or a previous question we expect, too, that those financial services margins will hold pretty steady throughout the balance of the year, kind of in that low 20% range, even without this amount coming through. So, not material from a trending standpoint. Got it. Thanks a lot, guys. You're welcome.

Thanks.

That concludes the Q&A session. I would now like to turn the call back over to Lee.

Okay. I'll just close by thanking everybody for your participation and we even got some new questions in here today in from people, so we really appreciate that. So, we're going to get back to work here and again we look forward to having another positive progress update on our next earnings call.

Thank you, Lee. This is a reminder that a replay of this call will be available until May 7 by dialing 888-286-8010. When instructed, provide the access code 12038330. 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 morning, or good afternoon.

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.