Deluxe Corp (DLX) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Deluxe Corporation fourth-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this call is being recorded. I would now like to turn the call over to Ed Merritt, Deluxe's CFO, Treasurer, and Vice President of Investor Relations. You may begin.

Thank you, Michelle, and welcome everyone to Deluxe Corporation's fourth-quarter 2016 earnings call. I am Ed Merritt, Deluxe's Interim Chief Financial Officer, Treasurer, and Vice President of Investor Relations. Joining me on today's call is Lee Schram, our Chief Executive Officer. At the conclusion of today's prepared remarks, Lee and I will take questions.

I would like 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 projections 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, 2015.

Portions of the financial and statistical information that will be reviewed during this call are addressed in more detail in today's press release, which is posted on our Investor Relations website at 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, or as part of our remarks during this call.

Now I'll turn the call over to Lee.

Thank you, Ed, and good morning, everyone. Deluxe delivered our fourth strong quarter of 2016. Revenue grew almost 4% over the prior-year quarter, driven by small business services growth of 5%, and financial services growth of 4%.

Marketing solutions and other services revenues grew 13% over the prior year, and represented almost 36% of total fourth-quarter revenue. Adjusted diluted earnings per share grew 7% over the prior-year quarter.

We generated strong operating cash flow of $319 million for the year, and we were drawn $759 million on our credit facility at year end. We repurchased $10 million in common shares in the quarter, and $55 million for the year. 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 $50 million cost reduction commitment. On December 30, 2016, as already reported on our January 6 call, we completed the acquisition of FMCG which will further enhance our financial services marketing solution, and other services product set by adding more data-driven marketing capabilities. In a few minutes, I will discuss more details around our recent progress and next steps, but first, Ed will cover our financial performance.

Thanks, Lee. Earlier today, we reported diluted earnings per share for the fourth quarter of $1.11, which included debt extinguishment costs of $0.15 per share, acquisition, transaction-related costs primarily for the FMCG acquisition of $0.05 per share, and restructuring charges primarily for employee severance of $0.04 per share. Collectively, these costs were $0.24 per share. Excluding these costs, adjusted diluted EPS of $1.35 was 7.1% higher than the $1.26 we reported in the fourth quarter of 2015.

Revenue for the quarter came in at $480 million, growing 3.6% over last year, and over 5% sequentially from last quarter. The growth rate excluding recent acquisitions was about 2%. Small business services revenue of $318 million grew 4.8% versus last year, despite a continuing sluggish economic environment. We delivered growth in marketing solutions and other services, and from a channel perspective, our online major accounts and dealer channels grew.

Financial services revenue of $125 million grew 4.3% versus the fourth quarter of last year. Excluding revenue from acquisitions, financial services growth would have been about 1% for the quarter. Higher marketing solutions and other services revenue more than offset the impact of lower check orders, and direct check revenues of $36 million was down 7.8% from last year, and in line with our expectations.

From a product and services revenue perspective, check revenue was $210 million representing 44% of total revenue. Marketing solutions and other services was $173 million, or about 36% of total revenue, and forms and accessories were $97 million, or about 20% of total revenue. Gross margin for the quarter was 63.2% of revenue, and was slightly better than 2015. Higher delivery and material costs were more than offset by the benefits of previous price increases, and improvements in manufacturing productivity.

SG&A expense increased 3.9% in the quarter, and as a percent of revenue ended at 43.2% compared to 43.1% last year. Benefits from our cost -- continuing cost reduction initiatives in all three segments and lower incentive compensation expense were more than offset by increased SG&A associated with recent acquisitions. Excluding restructuring and transaction-related charges in both 2016 and 2015, adjusted operating margin for the quarter was 20.9%, which was better than the 20.5% generated in 2015. Small business services adjusted operating margin was strong at 18.9%, and basically in line with the prior year.

Financial services adjusted operating margin of 22.1% was up 2.1 points from 2015, driven by improvements in marketing solutions and other services margins and cost reductions, partially offset by check usage decline. Direct checks adjusted operating margins of 34.9% decreased 0.8 percentage points from 2015, driven by lower quarter volumes.

Now I'll turn to the balance sheet and cash flow statement, at year end total debt outstanding was $759 million, up from $629 million at the end of 2016. The 2016 ending balance included $428 million drawn against our revolving credit facility, and $330 million in term loans. Cash provided by operating activities for the year was $319.3 million, an $9.7 million increase compared to 2015, and at the high end of our outlook. Higher earnings and lower interest payments were partially offset by higher income tax and contract acquisition payments, as well as an incentive payment in 2015 from a previous acquisition.

Capital expenditures for the year were $47 million, and depreciation and amortization expense was $92 million. Other significant financing and investing activities in 2016 included refinancing our $200 million 6% notes due in 2020 with lower rate credit facility debt, investing $271 million in acquisitions, the largest one being FMCG, and repurchasing $55 million of common stock, as well as distributing $59 million to shareholders through dividends.

Looking ahead to 2017, we expect consolidated revenue on a full-year basis to a range from $1.935 billion to $1.975 billion, or about 5% to 7% overall growth. Diluted earnings per share are expected to range from $5.10 to $5.30 per share. There are several key factors that contribute to our full-year outlook, including small business services revenue is expected to increase 3% to 5% with expected growth in our online, dealer and major accounts channels, price increases, double-digit growth in MOS offerings, and continued tuck-in acquisitions.

Partially offsetting our growth are expected volume declines in core business products, our decision to eliminate around $15 million of low margin business, and the negative impact of foreign exchange rates. We expect financial services revenue to increase 13% to 16%, driven by continued growth in MOS categories including data-driven marketing solutions, and treasury management solutions, as well as continued small tuck-in acquisitions. Partially offsetting our growth is expected -- the expected loss of about $10 million in Deluxe Rewards revenue, primarily due to the departure of Verizon, and our recurring check order declines of 5% to 10%, as well as the pricing pressure.

In direct checks, we expect revenue to decline approximately 9% to 10%, driven by lower check order volume stemming from secular declines in check usage. We expect a continued sluggish economy, and expect full-year cost and expense reductions of approximately $50 million net of investments, increases in material costs and delivery rates, continued investments in revenue growth opportunities including brand awareness, marketing solutions, and other services offers and enhanced internet capabilities. And an effective tax rate of about 33% representing approximately $0.02 of dilution per share, compared to 2016 tax rate.

We expect to continue generating strong operating cash flow ranging between $335 million and $355 million in 2017, reflecting stronger earnings and lower interest payments, partially offset by higher tax and employee benefit payments. We expect contract acquisition payments to be approximately $23 million. 2017 capital expenditures are expected to be approximately $45 million or in line with 2016, 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 increase to approximately $127 million, including approximately $79 million of acquisition-related amortization. For the first quarter of 2017, we expect revenue to range from $469 million to $477 million, and adjusted diluted earnings is expected to range from $1.12 to $1.17 per share.

As we indicated on our January 6 call, we expect FMCG to be dilutive in the first quarter by approximately $0.07 per share, and we plan to spend approximately $0.02 per share more on brand marketing in the first quarter of 2017, compared to the first quarter of 2016. This brand spending for our previously announced second small-business mainstream make-over contest which has already started and will culminate with the public voting for the winning town in the first quarter of 2017.

Now 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 transformation. Additionally, we expect to continue paying a quarterly dividend, and periodically repurchase common stock. To the extent we do generate excess cash, we plan to reduce the amount outstanding against our credit facility. We believe our increasing cash flow, strong balance sheet, and flexible capital structure position us well to continue advancing our transformation.

Now I'll conclude my comments with an update on our cost and expense reduction initiatives. Overall, we had another solid year, and delivered in our commitment to reduce our costs and expenses in 2016 by approximately $50 million. Looking ahead into 2017, we will continue our focus on revenue growth phase of our transformation, but we'll not lessen our focus on cost and expense reductions. We again expect to drive approximately $50 million of cost reductions net of investment in 2017. Approximately 60% of the expected reductions will come from sales and marketing, another 30% from fulfillment, and the remaining 10% coming from our shared services organization.

Our focus in sales and marketing for 2017 continues to be on sales channel optimization, platform and tool consolidation, leveraging sales and marketing efficiencies, including integrations from recent acquisitions. In fulfillment, we expect to continue our lean direct and indirect spend reductions, further consolidate our manufacturing and 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. Now finally, for shared services infrastructure, we expect to continue to reduce expenses primarily in IT, but we are also working opportunities in finance, legal, and real estate.

Now I'll turn the call back over to Lee

Thank you, Ed. I will continue my comments with the perspective on what we accomplished overall in 2016, look ahead to 2017 including framing our four strategic focus areas for the year, and review our key revenue growth area, marketing solutions and other services. I will then highlight progress in each of our three segments, including a perspective on what we plan to accomplish in 2017.

Deluxe grew revenue in 2016 for the seventh consecutive year for the first time in 20 years. We saw continued stability in our core check and product businesses, and improved our mix of faster growing marketing solutions and other services revenues to over 33% of total annual revenue. We acquired InkHead, Payce Payroll, Data Support Systems and FMCG to expand opportunities in higher growth marketing solutions and other services.

In addition to our strong print leadership, we continue to invest in our brand in digital technology and extending our sales channel reach, and in improving our infrastructure. We ended 2016 with 4.4 million small business customers, of which approximately 29% of them are MOS customers, and now serve approximately 5,600 financial institutions.

Operating cash flow grew for the eighth straight year, allowing us to pay our dividend, repurchase shares, refinance our long-term debt, and invest in acquisitions. We recognize that there is a tremendous amount of work to do, but we made great strides in 2016. As we enter 2017, our primary focus continues to be profitable revenue growth for an eighth consecutive year, and increasing the mix of marketing solutions and other services revenues.

We are sharpening our focus to four strategic focus areas for 2017, including two each for financial services and small business services that we will provide regular updates through the balance of 2017. I will review each of the four focus areas in a few minutes, during the segment updates.

In order to provide more visibility to our expanding MOS revenue, we are adding two new categories previously included in the other FI services category, and moving the balance that was in other FI services to the fraud, security, risk management and operational services category. We are also providing a directional annual EBITDA margin profile in total, and for each of the five MOS categories, and adding an annual recurring revenue perspective.

Note that we want to be cautious, given the extremely competitive landscape, in not providing a more precise EBITDA margin profile, but we want investors to understand that as our MOS business approaches 40% of total revenue, that our MOS EBITDA margins are also now approaching our overall Company average. We estimate that approximately 70% of the MOS revenue is recurring, with some of the MOS categories recurring at a rate closer to 95%.

In many MOS products and services, we have multi-year customer contracts similar to our FI check contracts, annual maintenance services contracts, recurring monthly fees, and long-standing customer relationships. Also note that we expect MOS to total Company revenue to be 38% this year, including over 16% of total Company revenue in the even higher multiple fintech space. We ended 2016 at over $617 million in MOS revenue, or about 16% growth over 2015.

First, small business marketing solutions finished 2016 at 39% of total MOS revenue, and is expected to represent approximately 34% in 2017, with expected growth of approximately 3% to 5%, and EBITDA margins well below our overall average. Key 2017 growth initiatives include profitably scaling integrated marketing on-demand solution offers, left to print, retail packaging and promotional products.

The second category, web services, which includes logo and web design, web hosting, search engine marketing, search engine optimization, email marketing, social, and payroll services, finished 2016 at approximately 19% of total MOS revenue, and is expected to represent approximately 18% in 2017, with expected growth rates of 15% to 19% and EBITDA margins moderately below our overall average. Key 2017 growth initiatives include scaling our integrated Deluxe Marketing Suite across all customers and channels, and scaling web, including payroll services, as well as continuing tuck-in capability acquisitions.

The third category, data-driven marketing solutions finished 2016 at 8% of total MOS revenue, and is expected to represent approximately 18% in 2017 with expected triple-digit growth rates, and expected EBITDA margins slightly above the overall average. Key focus areas for growth in this category includes scaling, direct marketing analytic print services, Datamyx and FMCG. The fourth category, treasury management solutions finished 2016 at 15% of total MOS revenue, and is expected to represent approximately 16% in 2017, with an expected 28% to 31% revenue growth, and expected EBITDA margins slightly below our overall average.

The fifth category, fraud, security, risk management and operational services finished 2016 at 19% of total MOS revenue, and is expected to represent approximately 14% in 2017, with expected declines of around 11%, driven by Deluxe Rewards revenue reduction as highlighted earlier, and EBITDA margins well above our overall average. Key focus areas in this category, in addition to our standard fraud and security offerings include scaling profitability, strategic sourcing, eChecks, Deluxe Rewards, and SwitchAgent.

We expect marketing solutions and other services revenue to be approximately $735 million to $755 million in 2017, up from $617 million in 2016, with an expected 19% to 22% growth rate. If achieved, this performance would translate to a total revenue mix of 38% of revenue, and up from 33% in 2016, and 30% and 26% the previous two years. We continue to target increasing marketing solutions and other services as a percent of total Company revenue to approximately 40% in 2018, with checks expected to represent approximately 40% of revenue, and forms and accessories expected to represent approximately 20% of revenue.

Now shifting to our segments. In small business services, we have two strategic focus areas, payments and business solutions, and web services. Overall, for SBS in Q4 as expected, we did not see any notable improvements, as the economic climate for small businesses remains sluggish, however, revenue grew almost 5%.

Checks and forms were slightly below the high end of our expectations, and as mentioned on our January 6 call, seasonal holiday offers performed below our expectation. Average order value and conversion rates increased. Our online, dealer and major accounts channels grew revenue over the prior year. We also saw growth in small business marketing solutions, and web and also payroll services.

We continue to closely monitor the small business market. Optimism indices improved monthly throughout the quarter, ending up dramatically in December at almost 106 which is the highest rate since 2004. Clearly, there is a boom in optimism for the economy, following the presidential election results. Small businesses are signaling that they expect better market conditions, and therefore increased business activity in capital spending. Clearly, if this more optimistic trend continues, this bodes well for us. However, in summary, although current optimism indices indicate accelerated growing optimism for small business owners, it is important we see more sustainable trends, and then the results manifest in the small business marketplace.

Now to our two focus areas, starting with payments and business solutions. We are focused on core check retention and acquisition, and developing incremental retail customer acquisition channels. We ended the fourth quarter slightly below our expectations for checks. We are also focused on profitably scaling integrated marketing on-demand solution offers, with the largest opportunity in major account verticals including retail, healthcare, financial services, hospitality, service franchises, automotive, real estate and telcos.

Fourth-quarter revenue was lower than expected at the high end of our previous outlook, driven by shortfalls in major accounts and distributors. Finally, we are focused on scaling eChecks, eDeposit and other payment and workflow solutions, such as variable check printing and remotely created checks. Our focus on eChecks continues to be in building out opportunities with financial institutions, medical and insurance payment processors, accounting services and software providers, and other document management and payment solution companies.

Our second focus area is web services, with a focus on digital marketing services through improved customer experience and cross-sell, including use of our integrated Deluxe Marketing Suite across all customers and channels, while continuing to build out partnership and acquisition web services opportunities. In Q4, we saw a continued strong cross-sell ramp in [logo] customers who became web design customers as well, with all marketing services offers now being fulfilled through our Deluxe Marketing Suite. In operating services, we are focused on scaling payroll services, and continuing to evaluate early in business, and other operational annuity growth solutions.

In Q4, Payce Payroll revenue was in line with our expectations, while profitability similar to Q3 was better in the fourth quarter compared to expectations. Finally, we are focused on continuing to accelerate our brand awareness transformation, with a clear linkage to marketing and revenue-generating capabilities.

In 2017, we are continuing our Small Business Revolution focus and partnership with Robert Herjavec from Shark Tank as well as our Main Street town make-over. This year's town will be selected by the public from among five cities. We will be doing a web series, as well as helping small businesses with marketing make-overs. We will be linking smallbusinessrevolution.org to our resource center, and then to Deluxe.com as we start to focus on driving revenue-generating capabilities.

In financial services, we have two strategic focus areas for 2017. First, retail banking which includes checks and data-driven marketing solutions. In the fourth quarter, we saw the rate of decline of checks perform less than 4%, which translated to the year also being less than 4%. Our retention rates remain strong on deal spending in the fourth quarter. We simplified our processes and took complexity out of the business, while reducing our costs and expense structure.

For 2017, we expect check units to be in a decline range of 5% to 6%. Now Ed mentioned earlier mistakenly 5% to 10%, it's actually 5% to 6%, or slightly worse than our 2015 decline rates. We understand that it is important for us to maintain low decline rates, but given the size of the FS checks business now and the growth in MOS, every 1% decline in FS checks now only has about a $2 million annualized impact on revenue.

We have now extended all our large contracts through at least the end of 2017, and we have about 10% fewer community bank contracts up for renewal in 2017 compared to 2016, and we have more competitive opportunities coming up. We also implemented a small price increase at the start of this year. Today we are providing at least one of our key FS solutions to 95 of the top 100 US banks. The market for data-driven marketing spend is expected to grow 9%, with digital marketing spend by financial institutions expected to grow on a CAGR basis close to 13% through 2020.

We are focused here on selectively sourcing value add data, leveraging it with smart analytics purpose-built solutions to target specific customer segments, for specific product offerings with multi-channel capability. Think of it as just the right amount of data and analytics to be a difference maker for our customers. We believe there is no other marketing services provider bringing this deep and sole focus to the financial services market right now.

Data-driven marketing solutions performed well in the fourth quarter, and as we discussed on our January 6, 2017 press release and call, we are excited to add FMCG to Deluxe. Our focus in 2017 is on leveraging Datamyx data and analytics, together with marketing services campaign execution to accelerate outsourced campaign targeting, and multi channel execution, as well as scaling FMCG and leveraging synergistic opportunities with Datamyx. With the addition of FMCG, we are very excited about the data-driven marketing solutions space, and continued prospects to grow revenue.

The second FS strategic focus area is commercial banking, and includes scaling, treasury management solutions. In treasury management solutions, our largest opportunity is in managing payment acceptance and risk, irrespective of payment type, reconciling and matching payments, resolving exceptions, and then posting payments to keep receivables current. This receivables management work of automating and outsourcing workflow, innovation, and solutions for efficiency and effectiveness fits right in our sweet spot. In Q4, treasury management solutions revenue was approximately $25 million which exceeded our expectations.

Our October acquisition of DSS slightly overperformed in the quarter, including adding three new FI customers. Our focus in treasury management solutions in 2017 is on profitably scaling revenue and integrating acquisitions already completed, plus assessing and executing tuck-in acquisitions, along with scaling FMCG opportunities in commercial banking.

For 2017, we expect marketing solutions and other services revenues to be approximately 55% of total FS revenue, with the following at the approximate midpoint of the FS revenue range: Data-driven marketing solutions including Datamyx and FMCG, approximately $133 million; Treasury management solutions including Wausau, FISC and DSS approximately $119 million; and fraud, security and risk management and operational services, approximately $65 million.

In direct checks, revenue finished 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, as well as work on a number of initiatives to create an integrated best-in-class direct-to-consumer check experience. We continue to see a ramp in revenue enhancements synergies through our call center scripting and upsell capabilities, as well as synergistic costs and expense reductions.

For 2017, we expect direct checks revenue to decline in the 9% to 10% range, driven by continued declines in consumer usage, and a sluggish economy, and the lack of carryover reorders from our earlier decision to eliminate marketing expenditures that no longer met our return on investment criteria. We anticipate that marketing solutions and other services revenue, which is primarily fraud and securities offers for this segment to be about 10% of direct check's revenue. We continue to reduce our manufacturing costs and SG&A in this segment, and continue to deliver operating margins in the low to mid 30% range, while generating strong operating cash flow.

As we exit 2016 on the heels of a strong quarterly performance and a continued sluggish economy, we have made tremendous progress in transforming Deluxe, but we still have many opportunities ahead of us in 2017. We believe we are well-positioned entering 2017 for our eighth 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 offers, more mature, our infrastructure better, and our management talent is deeper, and aligned to grow revenue. We have developed a strong MOS platform for long-term growth, with high recurring revenue streams and improving adjusted EBITDA margins, as we continue to transform Deluxe to more of a growth services provider from primarily a check printer, thereby changing our product mix and resulting stock price multiple.

Here is an update on the CFO search. I have initially interviewed a number of potential candidates, and have seen several of these a second time, as well. I am making good progress, but it is critical that I get this position right, and so I am being very thoughtful and diligent here. Interest is very high for this position. So I do expect that I will complete the search, and hopefully be able to announce a new CFO by the next earnings call.

Before I open the call up for questions, I would like to take this opportunity to thank all Deluxe employees for their hard work, dedication, and simply outstanding performance in 2016. Thank you, Deluxers. Let's get off to a great start in 2017, as we aim for an eighth consecutive year of profitable revenue growth.

Now Michelle, Ed, and I will open the call up for questions.

(Operator Instructions)

Jamie Clement, Macquarie.

Lee, Ed, thanks very much for taking my questions.

Absolutely.

Lee, I was wondering can you expand a little bit on some of the comments you made on the January 6 call about First Manhattan's desire to market to small businesses, and obviously the information on 4.5 million small business customers that you all have managed to accumulate over the years, what's the long-term plan there, if you don't mind expanding?

Yes, right now as I mentioned, their mix of revenue is about 45% in that commercial business space, which is the largest percent of their results. And that's where they have had a tendency, Jamie, to lead with their -- if they are getting into an FI for the first time, they tend to lead there because they just have great data and information on small businesses and businesses in general. And it's just an area that allows them to hit a high ROI in terms of what they do. So that will continue to be their focus, as well as the consumer deposit area, the credit card area, and the other areas as well.

What we expect is -- the worst thing that you can do Jamie, when you buy somebody, and you bring them in, is to kind of throw them into the middle of the bigger company. And just say, it's a free-for-all. What you want to do is make sure that you're focused initially, and they're getting acclimated to just how we report, our language, how we talk, and not messing around with anything -- the great things that the First Manhattan team is doing. So that's our focus in the near-term.

But as this evolves, as I mentioned, and you picked up and remembered well from the January 6 call, is we believe there is an opportunity to bring the data and information that we have on those 4.4 million small businesses, with the information that they have in their data capability, and sit down and bring those together. And figure out how do we bring more overall, both services to the financial services space, as well as services to the small business services segment.

So that is our objective and that's how we are thinking about it. That is not something -- like I said January, boom, we're going to hit on, because we want to make sure this is integrated, and it's working really well, and not upsetting the huge momentum and growth that they have in their business. But over time, Jamie, that's where we see this going.

Okay. Thank you for that. If I can ask one more question, just shifting to SBS, as you all continue to emphasize cross-selling among MOS customers within SBS, other than stuff like the mainstream make-over stuff that people like me would see, that would be obvious to us, what are the other things that you're doing from a marketing and brand realization perspective, that should help that process?

Yes, remember, that we think the advantage we have is all those channels. So we have the banking channel that gives us the small business customers, we have our online channels. We have the dealer channel, the distributor and the major accounts channels. So within all of those, we have various initiatives that we drive to market ourselves, whether it's online things that we're doing, whether it's feet on the street things that we're doing. So all of those channels are doing various marketing programs to generate awareness of what we're doing, in addition to the overall brand awareness work that we're doing.

One thing that we did not put in the commentary that Ed and I were talking about last night is, Ink, who is a very prominent small business and entrepreneurial-focused company and magazine and online media, just named us number six, I believe in their top nine shows to watch for 2017, all around the Small Business Revolution. So we view that as another positive thing, along with again the things I mentioned earlier about all the channel focus that we have.

And Jamie, the last thing I'll add, as I mentioned in the prepared comments is this whole small business Deluxe Marketing Suite, where we're getting more and more of our products and services in there, is making it easier and easier for a small business owner to go in, get their logo from us. And then see a populated say, five to seven page website, with their logo on it, in the kind of the industry that they're in. And then, also being able to see their logo on an email marketing as well. So that is becoming another vehicle for us to be able to get out in front of small business owners as well. There's a lot there, but a lot of good focus areas for us.

Okay. Guys, I really appreciate the time. Thanks very much.

You're welcome, Jamie.

Joan Tong, Sidoti & Company.

How are you guys doing?

Hey, Joan.

Hey, just a couple of things here. Lee, you mentioned, and obviously we know that, we saw the index small business confidence number have shot up pretty nicely last month, definitely get people excited. I mean, you see the stock market has been reacting very favorably, ever since the announcement of the new administration.

So I'm just wondering for your 2017 guidance, obviously it seems like you're kind of couching some of the positive things that we have seen, even though it could be just like very short period of time that we are seeing these type of positive pop. So I'm just wondering, are you trying to be a little bit more conservative, and there might be upside should the environment really starting to work out nicely for you guys, perhaps may be in the second half of 2017?

Yes, I'm from Cleveland, Ohio, originally, but I'm actually from Missouri on this (laughter). I want to -- show me. I -- it's interesting, I've been spending a lot of time the last two days listening to other CEOs and what they're saying, and some of them are out there being very bullish, a lot of them are in the show-me stage as well. We are absolutely watching that. As I mentioned in the prepared remarks, Joan, we're excited. We think this bodes well for us, if this stays there, but it has got to become a sustainable trend.

Small business owners -- and we're talking to them every day, and I'm listening to them. They don't automatically jump because there's enthusiasm and energy, and just start buying like crazy. Yes, some might, but they take time and they're very thoughtful and smart about what they're doing.

So we have built kind of -- we have not built a more aggressive posture. As Ed commented in his comments, on our assumptions -- we have not done that. So if things do continue to go better, Joan, is there upside? I would tell you there is, but at this point in time, we are from Missouri, we want to be shown that before, we're willing to go -- go any more aggressive here.

That makes sense. Thank you. Got it. And then moving on to their marketing solution and other services, that particular slide, page 15 on the slide deck. Thank you so much for the additional information regarding the expected -- I'm sorry, the estimated recurring revenue as a percentage, and also the margin profile.

So I'm just going down all the different segments, sub segment within that category. And there's obviously certain areas that below the corporate EBITDA margin, and obviously, these are -- most of them are acquired businesses. Can you maybe just talk to whether you have seen improvements throughout the years, that ever since you acquired this business, have you seen the EBITDA improvement? And also which category, do you think that has the most opportunity to maybe structurally improve their margin going forward?

Yes, Joan, thanks for giving us the call out on this. We spent a lot of time, really Ed and I, thinking through this. As you know we're on a lot with investors, you help us, and certainly, the Jamie's and Charlie's and Josh's as well. We just felt that breaking, first of all, those two categories out -- and now these are all $100 million businesses, was a really helpful thing for the investor.

We also felt that giving some more color on the EBITDA margins overall, and then where they are relative to our total is. And the reason why we did that is, Ed and I are convinced that the average investor is not understanding that as we get 38% this year, and head towards that 40%, that our overall EBITDA margins are only moderately below the Company average right now. And so, that was the reason why -- and we also wanted to -- we kind of sporadically answered questions on, what's recurring and not as far as revenue. So we just wanted to come clear, and just give a little better perspective on that.

As far as, have things improved over time? The answer is absolutely yes, and I would argue pretty much in every category. And why is that? As we bring these in, integrate the acquisitions or the pieces together, we keep getting opportunities as the revenue scales for more efficiencies across the board. So it could be in web services where we had historical marketing people that were in each of the acquired businesses, and now we're saying, we can leverage each other a lot better. We can leverage the support that we put behind the infrastructure for services in those categories as well.

So I would tell you that all of them are improving. One of the areas that we have the richest opportunity is in small business marketing, because they're well below right now. And you saw our move in January 6 to announce, look, those were some of the categories we were not seeing some of the returns that we were looking at, were very low. And by the way, well below doesn't mean they're losing money by any extent. These are still double-digit operating margins -- or EBITDA margins. But we're going to continue to work each of these categories, as we continue to transform the Company. And I think there's opportunities across the board here in the five categories to keep getting better overall.

That's good. Thanks for the color. If I can just throw in a final one question that I have here, it's regarding checks. Another good quarter, if you look at financial services, check volume down less than 4%. As a matter of fact, the Federal Reserve had a -- put out a new study. The last time, they had it was 2012, and then they put out another one, updating the past three-year period. And it just seems to us that the check volume decline has been continuing, coming down in terms of the narrowing of this check decline.

So I just want to see your view -- obviously, you talked about 5% to 6% in terms of check declines for financial services, and you mentioned that the magnitude is smaller, just because the size is getting smaller for that particular segment. But still just want to see, if you have a view on that going forward, maybe really get into some sort of inflection point that it would be declining a lot slower?

Yes, Joan, I think you set it up really well. We obviously have seen the Fed study. The initial study will come out with their more comprehensive report, and we performed right in line, with what we saw in the Fed study. In fact one of the things that is interesting, Joan, is that the consumer check usage actually declined a little bit more within the overall, compared to the small business usage. And that's been a trend we've seen for some time, when you kind of average everything. And you don't yet see that in the Fed study, but we see it, and certainly, the competitors out there see the same thing.

So why the -- for why in the last year, why 5% to 6%? We just think that there's so much out there with continued electronification right now, and so many different choice that are coming at you every day, with the potential for the new payment rail to be out there, we just think that it's smart on our part, to assume that the 5% to 6% is a smarter play. Now as we said, if it's up 1% less than that annually, it's about $2 million, so it's not going to be a huge impact plus or minus on the business.

But we just think that's a smart way of guiding where we are, setting up our business, and again that's where we think we see things best. Will it asymptote and slow down, boy, we sure hope it does. We also got a chuckle out of the front page Wall Street, waiting in line at retail establishments to write checks. And we, of course, said bring it -- keep doing that, we love when people do that.

So we just think that we can't yet predict that Joan, I mean to be honest. We can't yet say this is asymptoping and the 4[%] will become stable at 4%, or go to 3% or whatever. So we just think it's prudent, and therefore we guided the 5% to 6%.

All right. Thank you, Lee, thank you, Ed. Thank you so much.

You're welcome.

Charlie Strauzer, CJS Securities.

Hi, good morning. Hey, just looking at the results for Q4, you mentioned the 2% quasi-organic number. Is that for SBS or for the overall company?

Total.

Got you. Do you have the number of that was going on with SBS? I don't think I caught that or not.

I don't think we do. I think, Ed, you mentioned 1% for FS, so it's got to be in the 2% range in order to make that work.

That makes sense. When I look at the full-year 2017 guidance, and the growth rate assumptions you have in there, can you kind of give a sense of the organic assumptions that go behind that?

We would say it's about flat. So the 5% to 7% overall is about -- we believe it's in the flat range.

Got it. And then, by segment, is it more kind of the same as well, or in terms of like FS and SBS?

It would be, well, again, as you know in direct checks it's down, exact numbers we gave you.

Right.

In the other two segments, I would say that the small business is growing a little bit, whereas financial services is declining little bit.

Got it. Okay. And then, talking a little bit more about the recurring revenue stats, which I thought were very helpful, thank you. Can you maybe expand little bit more on the types of things that you kind of view as recurring, and more short-term versus long-term recurring, can help us a little bit more, with some more color there?

Sure. So Charlie, if you think of web services you think of where we are hosting customers, and every month they pay us a set fee. And as long as they stay on and don't churn out, that is what is absolutely a recurring stream. The same thing in the case of payroll services. There's initial set up fee when you're bringing a new small business on, but then there's a recurring monthly fee for that. The same thing goes on -- I'm just going to jump around here a little bit, but banker's dashboard. You sign a bank up, they access the dashboard, and there's a set monthly fee for that.

There's basically a set fee for Deluxe Rewards. You established a relationship with a financial institution, and then there's a payment -- there's a little bit of spiking up and down for the supplier income on the merchandising and the gift cards, but that's pretty darn stable as well. Same thing when you launch a campaign for First Manhattan, or a campaign for Datamyx, that is a stable, predictive -- as long as there -- you have that customer, and you stay in that market, there's a very strong predictability. A lot of our fraud and security offers work the same way.

Really the only thing, Charlie, that's a little -- and you see it on the chart, a little more transactional in nature is the small business marketing. That's where we get the little bit more the lumpiness in our results. And if we generally, are having a harder time being predictive, it's generally in that area.

And by that I mean, somebody can come along and do an integrated marketing campaign for their small business. They can do everything, from full color to promotional materials for it, but then they can move away from that. And then, it's -- you may not see that for another quarter, another year. So there's a little bit more transactional nature to that.

But again, a lot of what we're doing now -- I just think the investors have been missing this a bit -- and we haven't been as clear. And I think we're just saying, here's a better way to look at it, and here's a little more clarity for everyone.

That's very helpful. Thank you very much.

You're welcome.

Jamie Clement, Macquarie.

Gentlemen, if I may on page 15, the fraud security risk management and operational services, that row, the Verizon business, you're obviously -- that's being reflected in the outlook for 2017. I'm wondering why though, if that was a minus 10[%], I'm wondering why the rest of that business wouldn't be growing in 2017?

A little bit, Jamie, because of the fraud offers around the check business.

Okay. Got it.

The checks are declining, that's really the --

Okay, so just the inherent link there?

The inherent link there, yes.

Okay. All right, thanks a lot. I appreciate that.

You're welcome.

There are no further questions, I would like to turn the call back over to Lee Schram, CEO, for any closing remarks.

Thank you everyone for your participation and your questions today. I've got three summary comments. First, we delivered four strong quarters in [2016]. Second, we delivered our seventh consecutive year of revenue growth. And third, we have established a foundation for growing revenue again in 2017 for the eighth consecutive year. We're going to now roll up our sleeves, we're going to back to work, and we look forward to providing a positive progress report on our next earnings call. And now, I'll turn it over to Ed for some final housekeeping.

Thanks, Lee. Before we conclude the call today, I just want to mention that Deluxe will be participating in the following conferences the first quarter, where you can you hear more about the transformation. On March 21, we will be attending the Telsey Advisory Group spring consumer conference in New York City. Thank you for joining us, and that concludes the Deluxe fourth-quarter 2016 earnings call.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.