Deluxe Corp (DLX) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2013 Deluxe Corporation earnings conference call. My name is Gwen, and I will be your operator for today.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host today, Mr. Ed Merritt, Treasurer and VP of Investor Relations. Please proceed.

Thank you, Gwen, and welcome, everyone, to Deluxe Corporation's fourth-quarter 2013 earnings call. I am Ed Merritt, Deluxe's Treasurer and Vice President of Investor Relations.

Joining me on today's call are Lee Schram, our Chief Executive Officer; Terry Peterson, our Chief Financial Officer. At the conclusion of today's prepared remarks, Lee, Terry and I will take questions from analysts.

I would like to remind you that comments made today regarding financial estimates, projections, and management's intentions and expectations regarding the Company's future performance, are forward looking in nature, 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 press release that we issued this morning, as well as in the Company's form 10-K for the year ended December 31, 2012.

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 on our Investor Relations website at www.Deluxe.com/investor. This information was also furnished to the SEC on form 8-K filed by the Company this morning. Any references to 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.

Thank you, Ed, and good morning, everyone. Deluxe delivered our fourth outstanding quarter of 2013. We reported revenue above the midpoint of our outlook, and adjusted earnings per share above the high end of our outlook.

Revenue grew 8% over the prior-year quarter, driven by small business services growth of 12%, and a record revenue growth rate in financial services of over 5%. Marketing solutions and other services revenues grew 20% over the prior year, and represented 25% of total fourth-quarter revenue. Adjusted diluted earnings per share grew 9.5% over the prior year.

We generated strong operating cash flow of $262 million for the year, and we were not drawn on our credit facility during the quarter, increasing our balance sheet cash position $76 million from last December. We also repurchased $15 million of common shares in the quarter, and nearly $49 million for the year.

We acquired Destination Rewards in late December to support our financial services customer acquisition strategy, and specifically to help financial institutions with reward and loyalty programs for their customers. We continued our brand awareness campaign to help better position our products and services offerings, and drive future revenue growth. We also advanced process improvements, and delivered on our $55-million cost-reduction commitment.

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

Thanks, Lee. Earlier today, we reported diluted earnings per share for the fourth quarter of $0.90, which included $0.07 per share for restructuring charges, an asset impairment charge of $0.06, and transaction cost of $0.01. Excluding these costs, adjusted EPS of $1.04 exceeded the upper end of our previous outlook, and was 9.5% higher than the $0.95 reported in the fourth quarter of 2012.

The restructuring charges are primarily for employee severance and infrastructure consolidations. The asset impairment charge related to a customer relationship intangible asset in the small business services segment, and the transaction charges were from the Destination Rewards acquisition.

Revenue for the quarter came in at $418 million, growing 8% over last year, and 5% sequentially from last quarter. All three of our business segments performed well compared with our expectations.

Small business services revenue of $285 million grew 12% versus last year, with approximately 9% organic growth in the quarter. While we continued to operate in a sluggish economic environment, we delivered growth in marketing solutions and other services, checks, and in our online Safeguard distributor and dealer channels. SBS revenue also benefited from previous price increases.

Financial services revenue of $86 million grew at a record pace of over 5% versus the fourth quarter of last year, with organic growth of 3%. Price increases, higher non-check services revenue, and revenue from HSBC, which is a new customer, more than offset the impact of lower check orders. Direct checks revenue of $47 million was down 9% on a year-over-year basis.

From a product revenue perspective, checks were $219 million, representing 52% of total revenue. Business products were $94 million, or 23% of total revenue, and marketing solutions and other services were $105 million, which was 25% of total revenue.

Gross margin for the quarter was 63.6% of revenue, which was down 0.9 points from 2012. Less favorable product mix, and increased material and delivery rates, were only partially offset by benefits from price increases, improvements in manufacturing productivity, and delivery initiatives, and lower medical expenses.

SG&A expense increased $8.6 million in the quarter, and was 42.7% of revenue compared to 43.8% of revenue in the same period last year. Benefits from our continuing cost-reduction initiatives and lower medical expenses in all three segments were offset by increased SG&A in small business services associated with acquisitions and commissions on increased revenue.

Excluding restructuring, impairment, and transaction charges, adjusted operating margin for the quarter was 21.2%, which was slightly up from the 21.1% generated in 2012. All three segments delivered strong operating margins compared to expectations.

Small business services adjusted operating margin of 18.6%, was up 0.7 percentage points over last year, due to better leverage on higher revenue. Financial services adjusted operating margin of 24.3% was up 0.5 points from 2012, due to better product and services mix, and cost reductions. Direct checks adjusted operating margin of 31.7% decreased 1 point from 2012, due to the decline in revenue, just partially offset by expense management initiatives.

Turning to the balance sheet and cash flow statement, for the year we increased our cash and cash equivalents balance by $75.7 million. This increase is after having used cash to acquire VerticalResponse, Acton, and Destination Rewards, and repurchasing $48.8 million of common stock.

Total debt at the end of the year was $641 million, down from $653 million at the end of 2012, primarily due to a change in the value of hedged debt. Cash provided by operating activities for the year was $261.5 million, a $17.5-million increase compared to 2012.

Higher payments for incentive compensation related to our 2012 performance, and higher income tax payments, were more than offset by lower VEBA contributions to fund future medical benefits, and lower interest and contract acquisition payments. Capital expenditures for the year were $37 million, and depreciation and amortization expense was $65 million.

On December 19, we acquired Destination Rewards in an all-cash transaction for $20.1 million net of acquired cash. The acquisition is expected to generate revenue of at least $15 million during 2014, and be $0.03 dilutive to EPS in 2014 after absorbing acquisition-related amortization expense. Transaction costs for this acquisition of $400,000 were recorded in the fourth quarter of 2013.

Looking ahead to 2014, we expect consolidated revenue on a full-year basis to range from $1.61 billion to $1.65 billion. Diluted earnings per share are expected to range from $3.90 to $4.10.

There are several key factors that contribute to our full-year outlook including: small business services revenue is expected to increase 6% to 8%, as volume declines in core business products are expected to be offset by benefits from our eCommerce investments; price increases; growth in our distributor, dealer, and major accounts channels; and double-digit growth in marketing solutions and other services offerings, which include VerticalResponse.

We expect financial services revenue to be plus or minus 2%, or roughly flat at the midpoint, driven by recurring check order declines of approximately 6%, and some pricing pressure, which we expect will be at least partially offset by continued growth from non-check revenue streams, including Destination Rewards, higher revenue per order, and a full year of HSBC; a direct checks revenue decline of approximately 10% to 11%, driven by check order volume declines; a continued sluggish economy; full-year cost and expense reductions of approximately $55 million net of investments; increases in medical expenses, material cost, and delivery rates; continued investments in revenue growth opportunities, including brand awareness, marketing solutions and other services offers, and enhanced Internet capabilities; lower interest expense in the fourth quarter; and an effective tax rate of approximately 34%.

We expect to continue generating strong operating cash flows ranging between $260 million and $275 million in 2014, reflecting stronger earnings and lower VEBA and incentive compensation payments, offset by higher contract acquisition and tax payments. We expect contract acquisition payments to be approximately $25 million.

2014 capital expenditures are expected to be approximately $40 million, slightly higher than 2013, as we continue to grow Deluxe. We plan to continue to invest in key revenue growth initiatives, and make other investments in order fulfillment and IT infrastructure. Depreciation and amortization expense is expected to be $64 million, including approximately $20 million of acquisition-related amortization.

For the first quarter of 2014, we expect revenue to range from $397 million to $405 million. Diluted earnings per share are expected to range from $0.91 to $0.96.

As we indicated on our third-quarter earnings call, each quarter in 2014 has the same number of business days as in 2013. Also, as a reminder, historically, direct checks has their strongest revenue quarter of the year in the first quarter.

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 business transformation. We also expect to maintain our current dividend level, and repurchase shares to offset dilution.

To the extent we generate cash flow in excess of these priorities, we plan to accumulate cash in advance of our 2014 senior note maturity. In anticipation of this maturity, we are evaluating repayment strategies, which, in addition to using cash on hand, may include renegotiating our credit facility or possibly issuing new debt.

We may also, from time to time, consider retiring outstanding debt through open market purchases, privately negotiated transactions, or other means. We believe our increasing cash flow, strong balance sheet, and flexible capital structure position us well to continue advancing our transformation.

I will conclude my comments with an update on our cost and expense reduction initiatives. Overall, we had another solid year, and we delivered on our commitment to reduce our costs and expenses in 2013 by approximately $55 million, bringing our total reduction since mid-2006 to approximately $490 million.

Looking ahead to 2014, we will continue our focus on the revenue growth phase of our transformation, but will not lessen our focus on cost and expense reductions. We expect to drive an incremental $55 million of cost reductions, net of investments, in 2014. Approximately 60% of the $55 million in expected reductions will come from sales and marketing, another 30% from fulfillment, and the remaining 10% coming from our shared services organizations.

Our focus in sales and marketing for 2014 will be on sales channel optimization, platform and tool consolidation, and leveraging order streaming and marketing efficiencies. We will also continue to improve the mix of paper catalog and online search engine marketing.

In fulfillment, we expect to continue our lean, direct and indirect spend reductions, further consolidate our manufacturing technology platforms, drive delivery technology and process efficiencies, reduce spoilage, further enhance our strategic supplier sourcing arrangements, and continue with other supply chain improvements and efficiencies.

Finally, for shared services infrastructure, we expect to continue to reduce expenses, primarily in IT, but we also have opportunities in finance and real estate. As an example, in IT we expect to finish the migration from our current outsourced IT infrastructure provider to a new provider early in the year. And we expect to receive not only more state-of-the-art technology and security capabilities, but also a reduced expense structure.

Now I'll turn the call back to Lee.

Thank you, Terry. I will continue my comments with a perspective on what we accomplished overall in 2013, then provide expectations for 2014 for our key revenue growth area, marketing solutions and other services, as well as a longer-term strategic perspective on revenue mix. I will then highlight progress in each of our three segments, including a perspective on what we plan to accomplish in 2014.

Deluxe grew revenue in 2013 for the fourth consecutive year, for the first time since 1996. We saw continued stability in our core check and business products, and improved our mix of faster-growing marketing solutions and other services revenues to 22% of total annual revenue.

We acquired VerticalResponse, Acton, and Destination Rewards to expand opportunities in higher-growth marketing solutions and other services. We also accelerated our brand transformation with our Work Happy campaign.

In addition to our strong print leadership, we continue to invest in our employment brand, in digital technology, and extending our sales channel reach and in our communities. We ended 2013 with over 4.5 million small-business customers, of which approximately 20% of them are marketing solutions and other services customers. And we served approximately 5,500 financial institutions.

In shared services infrastructure, we reduced costs, and improved the effectiveness of information technology, finance, human resources, real estate, and legal functions. Our intense focus on cost reductions has now delivered enterprise-wide savings of $490 million since mid-2006. We exited the year with more robust and innovative products and services, solidified processes, a better infrastructure, and improved financial results.

Our operating cash flow grew for the fifth straight year, allowing us to maintain our dividend, increase cash on hand, and pay cash for three acquisitions. We recognize that there is still a tremendous amount of work to do, but we made great strides in 2013.

As we enter 2014, our primary focus continues to be on profitable revenue growth, and increasing the mix of marketing solutions and other services revenues. We have created more differentiated technology-led check offers through investments in automated flat packaging, digital printing, high-security checks, and online portals and dashboards.

We also have significant growth opportunities in marketing solutions and other services. We will continue to assess potential small- to medium-sized acquisitions that complement our large customer bases with a focus on marketing solutions and other services.

We have strengthened our channels in small business to include financial institutions, online, retail, wholesale, distributors, dealers, and major accounts. Deluxe is now more capable of helping small businesses pursue their passion as a trusted provider of everything a small business needs to market and operate their business, and helping small- to mid-sized financial institutions with customer acquisition, risk management, and other value-add services offers.

Here is an update on our four subcategories framework for marketing solutions and other services. We ended 2013 at $343 million in revenue, a little stronger than our expectations, with mix in the four subcategories basically in line with our expectations. First, small business marketing finished 2013 at 40% of total marketing solutions and other services revenue, and is expected to represent approximately 38% in 2014, with expected growth in the mid-teens this year.

Key 2014 growth initiatives include scaling web to print by cross-selling to our PsPrint and core Deluxe customer bases, and continuing to add new customers through distributors, dealers, and major accounts. As some additional color, we have only penetrated web to print in about 5% of our distributor and dealer end customers. So there remain considerable penetration opportunities.

The second category, web services, which includes logo and web design, web hosting, SEM, SEO, email marketing, social and payroll services, finished 2013 at 32% of total marketing solutions and other services revenue, and is expected to represent approximately 32% in 2014, with expected organic growth rates in the low-teens.

Key 2014 growth initiatives and performance drivers include adding wholesale web telco and SEM, SEO major accounts, including several multi-million-dollar annual revenue telco and media customers that we have already secured; cross-selling to our retail base through bundled presence packages; adding more new customers, resellers and partners; reducing web design and SEM campaign cycle times and churn rates; and adding payroll services customers plus new features such as time and attendance applications.

This category is also our focus area for tuck-in acquisitions. We closed 2013 with approximately 730,000 web-hosting customers, and we expect to close 2014 with nearly 850,000, or up 16% from 2013.

The third category, fraud, security risk management, and operational services, finished 2013 at 22% of total marketing solutions and other services revenue, and are expected to represent approximately 19% in 2014, with expected growth rates in the mid-single digits. Key growth initiatives include scaling our Provent services, including adding new features for both national and community banks, and fraud and security offers for small businesses and direct to our consumers. It also includes adding Banker's dashboard customers, and providing a tablet solution.

Finally, other financial institution services finished 2013 at 6% of total marketing solutions and other services revenue, and are expected to represent approximately 11% in 2014, with expected growth rates in the very strong double digits. Key growth initiatives here include adding new financial institution customers in targeting and campaign services, SwitchAgent, and gift and reward cards, as well as scaling our latest acquisition, Destination Rewards.

We expect marketing solutions and other services revenues to be approximately $400 million to $410 million in 2014, up from $343 million in 2013, with organic growth in the low-teens. If achieved, this performance would translate to a total revenue mix of around 25% of revenue, and up from 22% in 2013, and 19% and 16% the previous two years.

We are also introducing today a strategic objective to increase marketing solutions and other services as a percent of total Company revenue to approximately 40% by 2018, with checks expected to represent approximately 40% of revenue, and business products expected to represent approximately 20% of revenue.

Here is an update on our brand awareness campaign. In 2013, we completed three waves of television, online digital, and print advertising. Those programs outperformed publishers' benchmarks for online ad click-through rates, and drove strong traffic to Deluxe.com, up 20% and almost 9 million video views.

We also continue to see strong conversions from resultant inbound calls, more than four times that of our conventional lead sources. We completed our small business brand awareness study late in the fourth quarter, and saw a number of very positive improvements in areas such as brand awareness, buying consideration, and likelihood to recommend. For example, for existing customers, we saw double-digit percentage improvements in familiarity with Deluxe as a website design and hosting services provider.

Our intent for 2014 is to continue our brand awareness campaign, including television, online digital, and print media. We plan to increase our focus on direct response marketing, as well as drive a more targeted local market concentration. This supports our approach of extending our marketing reach into a unified transaction and customer experience, enabling right-time solutions for our customers.

Now shifting to our segments. In small business services in the quarter, as expected, we did not see any notable improvements, as the economic climate for small businesses remains sluggish. We had a strong performance, however, as revenue grew 12%, or about 9% organically. Checks and forms performed well, and seasonal holiday offers performed slightly better than our expectations.

Our results from targeted customer segmentation in the call center improved. New customers from our financial institution Deluxe business advantage referral program and through our direct response campaigns remained strong.

Visitor traffic and average order value increased, and conversion rates remained strong. Our online Safeguard distributor and dealer channels grew revenue over the prior year.

We also saw strong growth in web, email marketing, and web-to-print services. Again, we ended the year with approximately 730,000 web hosting customers.

We continue to closely monitor the small business market. Optimism indices declined to start the quarter in October, but then rose in November and again in December, but they were collectively below mid-year 2013 readings.

A recent poll conducted by Gallup and Wells Fargo found that 23% of small-business owners are more optimistic about the future of their businesses going into 2014 than they were at the same time last year. Roughly half, or 49%, felt neither more or less optimistic; and 28% were less optimistic.

While slightly more small-business owners are optimistic about 2014 compared to results going into 2012, when the figure was 21%, opinions remain mixed. They continue to spend cautiously, although, positively, capital spending rose significantly in December, more in maintenance mode, and SMBs continued to scrutinize purchases and experience tight cash flow. Encouragingly, job creation readings were at the best since February 2006.

In summary, current optimism indices remain sluggish but trended higher exiting 2013. The good news is that other than taxes and regulation, increasing sales continues to be a small business owner's number one pain point, and our portfolio is significantly more robust now, with many offers to help them here. As the economy recovers, with the transformative changes we are making to deliver more services offerings to help small businesses get and keep customers, Deluxe is better positioned as that indispensable partner for growth.

Our focus for 2014 is on accelerating our brand transformation and significantly improving overall market awareness, while institutionalizing our brand promise for our customers, creating an effective end-to-end integrated technology customer experience, effectively acquiring and retaining customers, and optimizing sales channel effectiveness and channel marketing opportunities.

In financial services, for the year we saw the rate of decline of checks perform slightly below 6%, with a decline rate about 6% in the fourth quarter versus our outlook of 5% to 6%, with rates consistent across both the national and community segments, both in the fourth quarter and for the year. We had strong overall new acquisition rates, and our retention rates remain strong on deals pending in the current quarter, well in excess of 90%. We won several nice-sized revenue financial institution new check customers, including a multi-million-dollar one which also includes a Cornerstone targeting and campaign services solution. We also simplified our processes, and took complexity out of the business, while reducing our cost and expense structure.

Late in 2013, the Federal Reserve released their most recent payment study, and in it included a checks written decline rate from 2009 to 2012 of 8.8%. Our decline rate over the same period was around 7.7%, and we also note: Our decline rate through 2013 was significantly lower than this rate.

Looking ahead to 2014, we expect check units to be in a decline range of around 6%, or right in line with 2013 decline rates; retention rates to be well in excess of 90% on deals pending this year.

We have already extended all our large contracts through at least the end of 2014, except one, for which we expect to finalize terms shortly for a long-term renewal. We have slightly lower community bank contract dollars up for renewal in 2014 compared to 2013 entering the year; and we also continue to work a number of competitive RFPs, and expect a decision on several this quarter that are not in the outlook. We also implemented a price increase at the start of this year.

We made progress again in the quarter in advancing non-check marketing solutions and other services revenue opportunities. Fourth-quarter revenue grew at the highest organic rate of any quarter in 2013 in these non-check services, which include customer acquisition, risk management, and other profitability offers. In customer acquisition, and specifically our Cornerstone and Acton targeting and campaign services offers, we saw continued growth in new financial institutions.

For SwitchAgent, we continue to closely collaborate with our financial institutions to identify and execute product enhancements that further our vision for the most simple and efficient account switching and anchoring experience for financial institution customers. And we expect to introduce an enhanced, more electronified offer late in the first quarter of 2014. Banker's Dashboard also continued to perform well in the quarter.

Near the end of 2013, we also completed the acquisition of Destination Rewards, a leading rewards and loyalty program provider. This acquisition will enhance our customer acquisition and retention suite of offers.

In the customer acquisition and retention space, we now have targeting and campaign services offers through Cornerstone and Acton, an account activation and anchoring offer in SwitchAgent, and now an account activation and retention rewards and loyalty offering. Destination Rewards has developed a patented, innovative, zero-liability rewards and loyalty solution that is based upon an expansive merchant network for discounted retail goods and services.

Their offers drive customer retention, and influence behaviors at a fraction of the cost of traditional loyalty and incentive programs. Their largest customers include one of the largest financial institutions, as well as Humana and Experion. As you can see, strong momentum continues to build, and we expect strong double-digit growth in these marketing solutions and other services in 2014.

In direct checks, revenue was right in line with our expectations. We continue to look for opportunities to provide accessories, and other check-related products and services, to our consumers.

Although we have made significant progress with the Custom Direct integration, we are still working on a number of initiatives to create an integrated best-in-class direct-to-consumer check experience. As an example, we now have one integrated process for producing all direct-to-consumer checks. We continued to see a ramp in revenue-enhancement synergies through our call center scripting and upsell capabilities, as well as synergistic cost and expense reductions.

For 2014, we expect direct checks revenue to decline in the 10% to 11% range, driven by continued declines in consumer usage and a sluggish economy. We expect to reduce our manufacturing costs and SG&A in this segment, and drive our operating margins in the 30% range, while generating strong operating cash flow.

As we exit 2013 on the heels of an outstanding quarterly performance and a continued sluggish economy, we have made tremendous progress in transforming Deluxe, but we have many opportunities ahead of us in 2014. We believe we are well positioned entering 2014 for our fifth consecutive year of revenue growth.

Despite the sluggish economy, our financial discipline has enabled us to invest in people, technology, products, services, and our brand in order to position ourselves for sustainable revenue growth while continuing to improve profitability and operating cash flow. Our technologies and sales channels are stronger. Our digital technology services offer is more mature, our infrastructure better, and our management talent is deeper and aligned to grow revenue.

We know it is critical for us to be able to grow revenue again in 2014, and improve the mix of our marketing solutions and other services revenue, and we are well positioned to make this happen. We have developed a strong platform for long-term growth with the objective of transforming Deluxe to more of a growth services provider from primarily a check printer, thereby changing our product mix and resulting stock price multiple.

Before I open the call up for questions, I would like to take this opportunity to thank all of the Deluxe employees for their hard work, dedication, and simply outstanding performance in 2013. Thank you, Deluxers. Let's get off to a great start in 2014, and strive for five -- for five consecutive years of profitable revenue growth.

And now, Gwen, we will turn the call back to you, and open the line for questions.

(Operator Instructions)

Charlie Strauzer, CJS Securities.

Good morning.

Hello, Charlie.

Hello. Just a couple of quick questions, and I apologize if you gave this number. There was a lot of data that I was trying to keep notes on.

But did you give an overall organic growth rate? I know you give it for the small business segment, but did you have an overall growth rate in Q4 for organic?

We did not. We did not include an organic growth rate for the overall company. We just gave the pieces for the small business and Financial Services.

Got it. Is it possible to give us a rough sense of that?

I don't have the math right in front of me, but I can give you that later, Charlie. You can figure it out from the two segments that we provided.

Very good, and then Lee, you spoke about some RFPs that might be awarded or announced, I should say, in this current quarter. Can you give us a little bit more color behind that?

Are those mid-sized company contracts or large-sized ones? A little bit more information on that if you could.

We would consider more to be the national; one is a little bit larger than the other one. But I would consider them both nice opportunities for us, and we are continuing to work with them. And as I said, we expect a decision in the quarter.

And Lee, when you've had success in winning some new contracts in the past few years, what's the underlying theme for a bank making a switch like that? Is it the processes behind the scenes? Is a price?

Is a combination of that? Is it the breadth of services you now provide? What do you think is the main factors there?

Yes. I think it's all of those.

I think what we try to do is show the financial institutions that we're committed from a technology standpoint to continue to improve the way we produce checks and deliver checks. We also clearly bring the offers that we have and that we're expanding now in the financial institution space as well.

And then we clearly bring what we think is our differentiation in the way we help financial institutions penetrate and retain and expand the consumer reach of checks and getting more consumers to come to the financial institutions for checks. And then clearly, Charlie, it's the reach that we have and the offers that we have in that small business space that we also try to work with the financial institutions on through our Deluxe business advantage program.

And obviously we have to be in the game from a price standpoint or we wouldn't get to participate, so that's how I would look at it and summarize. For different banks, there's different reasons and different focus areas, but those are generally the things that we focus on.

That's very helpful. Thank you very much.

You're welcome.

Randy Hugen, Feltl.

Thanks. I wanted to talk about VerifyValid. How did the larger pilot program go there, and are you still seeing the same results with price purchasing incremental electronic checks, not a slowdown in the printed checks?

Yes. We've taken ourselves, Randy, out of what I would call the pilot mode now, and we are starting to roll this out to our customer base. And so what we've done is we've started it with our call centers, and so we actually have both inbound and outbound programs.

And another thing, as you know, we talk a lot about the differentiation in our channel reach, and what we've done, Randy, is we've also introduced it into the Safeguard distributor channel. And we are currently building out programs for our dealer channel, as well.

So we are not only trying to sell it through our core traditional channels. We're also -- and we have received orders from the distributor channel and some of the dealer channel at this point, as well. So the way we position it is, in addition to the checks obviously, the paper or the printed checks that we have, it's an alternative payment vehicle. And we're working with a number of major FIs for rollout and adoption, and we continue to be very enthusiastic about it.

And as we work our way through the year, we'll add some commentary throughout on how it is going. But I'd like you to leave the call thinking that we are enthusiastic about it and we're now into what I would call a full-blown -- more of a full-blown -- it is not all the way into -- it's early on at this point, but that's where it stands.

Great. And then for Destination Rewards, what are some of the largest verticals right now? And then can you just give us a little bit more information about how you see that company filling into your current client base?

Yes. We're really excited about this. We've done a lot of research in the rewards and loyalty space.

And one of the things that I want to give investors some confidence in first of all, Randy, is that people can think -- what does Deluxe know about these spaces? That would be -- from our traditional carriage, that would be a fair question.

But what, John, who runs the Financial Services segment, has done is bring in leaders and sales and product development talent, product management talent, that came from these areas. So what we've been able to do is really gain and learn a lot as we go through our assessment in this space.

As far as the verticals right now, I mentioned Humana and Experion. There are a couple of other names in the telco, in the media space, in the retail space, that we are working on right now to pilot, and then we just don't have permission yet to share those names. They are household names who you would recognize.

And then the largest customer, as I mentioned, is a large financial institution. Again, we do not have the liberty to share that name, but our desire is to expand, yes, vertically, but really start to focus into the financial institution space and principally in the -- below what I would call the top 25 financial institutions and then down into the Community Bank market.

This is an area of opportunity when you think about it, Randy, to partner in with some of our other offers and the targeting and campaign services and the account activation and just bring this suite of services to the -- again, principally, the regionals and the Community Bank markets. We're excited about it, and we think we've got a winning -- a value proposition with the DR folks and the DR team.

Okay. That makes sense. Just in thinking about your 2014 expectations overall, can you go over what you think needs to happen to come in towards the high end of the range and I guess what problems you might run into that could bring the numbers towards the lower end?

Yes. When it's early in the year, it's obviously difficult to try to get more predictive on where we are going to fit within that range. But the way to think about it is we have not built in a better world so to speak.

If you think about the range, obviously, if we are lower on the range at the 6% on Small Business Services, then where we've traditionally been, which last year we probably grew at 8% organically in small business, so that would be more of the top end. What would have to happen is just more of a sluggish -- sluggishness in the small business economy so to speak or what they are faced with and how they are looking at things.

The other thing I would say, Randy, is how we bring out the new services and the Financial Services space. So we guided a plus and minus 2% there, and I think it's all going to come down to how well -- we are enthusiastic. We are optimistic about what we are doing with the Actons and the Cornerstones and the Banker's Dashboard and Switch and DR, but some of these things and where the banking world is going to go will probably dictate a little bit of range around that.

So it's not for a lack of enthusiasm on what we've got out there on offers. It's more just tempered by not understanding -- there's a lot of mix -- I gave an interesting -- the Gallup and the Wells Fargo survey is just -- there's some optimism, there's some pessimism. And then there's this 50% feeling in the middle in small businesses.

So I guess that's the way that we are thinking about it right now. Clearly our desire is to get the Company to continue to grow as quickly as we can and yet be smart about the approach and how we're attacking it.

All right. Thanks. Great job this year, guys.

Thank you, Randy.

(Operator Instructions)

DeForest Hinman, Walthausen &Co.

Hi. I had a few questions. Can you just quickly go through the impairment charge in the fourth quarter and how it relates to the Small Business Services segment, and then also the restructuring charges in that segment as well? What's going on there?

Yes. The restructuring charge that we checked was related to mostly our cost reduction initiatives. We had some charges in the quarter related to consolidation of an outsourced IT provider.

We had also some consolidation efforts where we are bringing teams of people under more common and streamlined management structures, so there are some severance charges within that. That piece as well. And that's a fairly normal mix of the types of activities that we would be executing to deliver on our cost savings and to continue to move the transformation forward, so I think those are more normal types of expenses and charges that we would take.

On the asset impairment, that actually comes from a reporting unit within our Small Business Services segment, and it really essentially relates to -- back when you do acquisitions and have to value and allocate that purchase price, you have to make a lot of assumptions around the business and where you expect to get your customers. And virtually everyone we do, we make those sorts of assumptions, and this particular case, we had the business as it continued to develop and mature after we purchased it. We were seeing more of our leads and our referrals coming in from different sources and different places than we had initially assumed when we allocated that purchase price.

So the accounting rules foresee to go through a revisit on those periodically, and if those things have changed, they can trigger an impairment. So that's really what happened here.

The fact that that impairment charge was taken, it really has no impact as we are running and continuing to invest in that business. And it just really has no impact on the strategy at all, but it's really just an evolving set of assumptions, and it evolves and matures and --

Can you disclose at what acquisition that was?

We are not planning to disclose the exact acquisition because it doesn't have any impact on that business going forward or the strategy, but it does come from a reporting unit within small business.

Okay, and do you have any outlook for what the restructuring charges might be in FY14?

We pretty much take what we know because the accounting rules require you to do that. So if you were really contemplating generally get the recording. So we don't have an outlook or an expectation for next year for specific restructuring charges.

So as decisions get made and as things change and as we go after different opportunities, that could change throughout the year like it has in the past years. But right now, we've booked up and recorded everything we have in the works and are working on.

Okay. And this is a strategic question. I know a pretty sizable amount of our revenue comes through call centers. Do we have any metric in terms of how much revenue is coming strictly from online transactions, and if we have that, is there any type of target we are moving towards that we can point to?

Are you talking about small business? The banking? The Company?

I mean, can you talk about some of the ways you are looking at it? I think that would be helpful for everybody.

The way to think -- the way we think about it is can we -- I am going to talk about small business first. Because most of the banking comes through the online, and then if customers want support, we have call center support for that, as well. But a lot of it comes obviously through people online reordering their checks.

In the case of small business, here's our approach. If you think about the 4.5 million customers that we are selling to, and you think about where those customers are coming from, the largest customer in the small business space still comes through the financial institution through our Deluxe business advantage program.

But then between retail and wholesale and online and distributors and then the major accounts and our dealers and all that, all those are where we also get those 4.5 million small-business customers. The more we can grow that, the better right now.

And our goal is always to grow every one of those channels. Most of those channels actually grew both revenue and customers in 2013.

So that's how we look at is how -- and then the other way we look at is how do we get the lowest cost to acquire within what we are trying to do through offsetting and reassessing the channels and the reach that we have to our customers through those. That's how we look at it, and we don't -- we haven't given a specific -- X number exactly comes through this channel and that channel. We just give again an updated number at 4.5 million small businesses that we have.

Okay. Can you talk about how the hiring of Amanda Brinkman either builds on what you are already doing or changes what you are doing and how we're approaching the client? I guess from overall marketing perspective and then how we are approaching our online? Is there a real big opportunity to increase sales online and potentially save on the cost to acquire?

Yes. First of all, let me talk about Amanda.

We've had this role before. I've added to the role.

If you think about what I'm asking Amanda to do is first of all sit on the senior leadership team and bring an outside brand perspective and the rich background that she has through the public release. And I will not go through all that, but also get us buttoned down on how we bring the brand and our public relations and the way we communicate. For example, you are going to see her join Ed and I at a couple of the conferences that he's going to reference here at the end of the call because I want her to get a sense of how we even talk with investors and have that brand comes to life.

So I'm really excited to have her here. She's got a rich background in terms of working in the agencies also for large companies and has tremendous success with really bringing brands to life there and has been here a couple of weeks, and it's just wonderful to have her here.

Are we going to go more online? Yes. We are always trying to figure out how -- and our online is obviously growing at double-digit percentages every year as we continue to expand here.

But there's also -- this is why this channel is really important at Deluxe is using those channels most effectively. Sometimes it's better to be online for us.

Sometimes is better to have the call center people and wide conversation, and sometimes it's better to use a distributor or use a dealer or a partner or a major account to get our products and services out there. So you just have to think, 's how we're attacking it and addressing it and trying to make sure that -- how do we reduce the cost to acquire and get more customers in. And that's what we're trying to do across all those channels.

Okay. Thank you.

You're welcome.

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

Okay. I would just like to close with thanking everybody for their participation and the questions today, and the way I would summarize is that we delivered four outstanding quarters in 2013. We delivered our fourth consecutive year of revenue growth.

And we've established a solid foundation to grow our revenue again in 2014 for the fifth consecutive year. And as I normally say, we are going to get back, roll up our sleeves, get back to work, and we look forward to providing a positive progress report on our next earnings call. And I'm going to let Ed close with some updates on some of the places you will see us over the next couple of months.

Thanks Lee. Before we conclude today's call, I'd just like to mention that Deluxe's management will be participating at quite a few upcoming events in the first quarter where you can hear more about our transformation.

On February 11 and 12, we will be in Boston at the UBS small-cap conference. On February 24, we will be in Miami at the JPMorgan high-yield conference. On February 25 and 26, we will be in New York at the RW Baird business services conference.

On March 10 and 11, we will be in Phoenix with the Credit Suisse 16th annual global services conference. And on March 18 and 19, we will be in Boston at the Bank of America Merrill Lynch small-cap conference. Thanks for joining us on this call, and that concludes Deluxe's fourth-quarter 2013 earnings call.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your presentation.

You may now disconnect. Have a wonderful day.