必能寶 (PBI) 2004 Q2 法說會逐字稿

Good afternoon, and welcome to the Pitney Bowes second quarter 2004 earnings conference call. Your lines have been placed in a listen-only mode during the conference call until the question-and-answer segment. Today's call is also being recorded. If you have any objections, please disconnect your lines at this time. I would now like to introduce your speakers for today's conference call, Mr. Michael J. Critelli, Chairman and Chief Executive Officer; Mr. Bruce P. Nolop, Executive Vice President and Chief Financial Officer; and Mr. Charles F. McBride, Vice President, Investor Relations. Mr. McBride will now begin the call with a Safe Harbor overview.

Thank you and good afternoon. Let me remind you that you can find today's earnings press release and the attached schedules on our web site at www.pitneybows.com/investor relations. The forward-looking statements contained in this presentation involve risks and uncertainties and are subject to change based on various important factors, including: changes in international or national, political or economic conditions; timely development and acceptance of new products; timing of potential acquisitions, mergers or restructurings; gaining product approval; successful entry into new markets; changes in interest rates; and changes in postal regulations, as more fully outlined in the company's Form 10-K annual report filed with the Security and Exchange Commission.

Additionally, if there are any non-GAAP measures discussed during this call, there will be a reconciliation of those measures to GAAP measures located on our web site at www.pb.com/investor relations. Now, our Chairman and Chief Officer Mike Critelli will review with you the results for the quarter. Mike?

Thank you, Charlie and good afternoon. Our second quarter results were on target as revenue and diluted earnings per shares met guidance and we continued to see the benefits of enhancing our core business and executing or growth strategies. During the quarter, revenue grew 6% to $1.21 billion, and net income was 134.7 million, or 58 cents per diluted share, representing a 14% year-over-year increase.

Excluding a $10 million after-tax charge as part of our previously announced restructuring program, net income was 145.1 million, or 62 cents per diluted share. Cash from operations was 239 million, and free cash flow was 180 million after subtracting $72 million in capital expenditures and excluding $14 million in payments associated with our restructuring initiatives. In addition, we generated approximately $31 million in cash from sales of non-core, capital services assets.

These sales were consistent with our strategy to reduce our non-core financing activity, while looking for exit opportunities that benefit our shareholders. These sales favorably impacted revenue and EBIT in the capital services segment and are why we came in at the high end of our guidance for revenue and EPS. Overall, non-core capital services contributed 3 cents per diluted share this quarter, compared with 4 cents per diluted share in the second quarter of 2003. Excluding these sales, our revenue growth would have been about 5% and our adjusted EPS would have been 61 cents.

We used $39 million of our cash during the quarter to repurchase approximately 892,000 shares and also reduced debt by 39 million. The positive trends which we saw in the first quarter continued as global mail stream continued to lead the way with strong performance from small and medium-sized mailing systems, supplies, payment solutions, and mailing services such as presort. Our digital mailing systems continued to help our international operations produce good revenue growth.

The quarter's revenue trends reflect the ongoing, changing mix of the product line where a greater percentage of the revenue is coming from more fully-featured smaller systems, supplies, payment solutions, software and services, and less from larger system sales. It also means that over time, a greater proportion of our revenue will be stream revenue versus up-front sales revenue. Global enterprise solutions results were paced by continued, good market acceptance of our advanced inserting equipment.

PBMS margins continued to improve on a sequential basis, and we saw increasing demand in the legal, government, and financial services verticals. We're also seeing some very good trends in written business. Our strategic use of acquisitions to deliver long-term customer and shareholder value continued with the closing of the Group 1 acquisition last week. This acquisition supports all of our growth strategies and positions to us build our customer communication management capability.

Including the recently completed Group 1 acquisition, we expect year-over-year revenue growth for the third quarter 2004 to be in the range of 7 to 9%, and for the full year 2004 to be in the range of 6 to 7%. Excluding restructuring charges, we expect diluted earnings per share to be in the range of 62 to 64 cents for the third quarter 2004 -- 62 to 64 cents, and we reaffirm our full-year diluted earnings per share guidance of $2.44 to $2.51. Thank you. And now we'd be happy to answer your questions.

Okay. Operator? Hello?

Thank you, sir. [Operator instructions.] Our first question comes from Julio Quinteros. Please go ahead.

Good evening, guys. I wanted to start off with just kind of the -- maybe dig in a little deeper on the discrete revenue lines. As I look at all of the components, it's looks like almost everything I have modeled, you guys came in just a touch lighter with the offset, obviously, being the non-core financing side. Can you maybe characterize the -- sort of the trajectory through the quarter and maybe give us a sense on how things finished.

Were things pushed out? Did we get the same kind of pushout delays that we had seen maybe in some of the other areas of technology, specifically within software and hardware? I'm just kind of wondering if you guys could kind of characterize how the sales sort of ramp kind of took its course through the course of the quarter.

Okay, Julio. I would say that our supplies sales and our small business sales came in very strong. Our DMT sales, very high-end, came in very strong. In the -- I'd say at the high end of the desktop mailing space and the mail center activities, we saw a -- I would say a decided shift toward more software revenue base that pushed -- in other words, for the same amount of sales quota credit that we would give to our sales professionals, we saw a movement of some portion of that to software, which, although it is a sale, it is a deferred stream revenue kind of sale.

We also saw more push toward professional services and away from product -- not away from product sales, but in terms of a greater share of the mix being software and professional services for the same amount of quota credits. So the amount of quota credit was not exceptional one way or the other, but the mix of it definitely did shift towards software and professional services.

Mike, if I can add, just -- this is Bruce -- just one other point. Julio is that the results came in according to our forecast. So in other words, there wasn't a surprise at the end of the quarter. This was how we had been forecasting.

Yeah, we had had a -- I think the second quarter last year had some pretty strong prior -- was probably one of the stronger quarters a year ago, so as opposed to the first quarter, which had a weak -- there was a weak first quarter in terms of the economic environment that we faced; I think the whole country faced. So second quarter was definitely stronger a year ago than the first quarter was a year ago.

Great. Okay. And then maybe on the -- on the non-core financing for the -- on outlook for the rest of the year and for the quarter, what is -- what's your expectation then for future asset sales? I mean, is that something we can model or is that just going to be a variable that you will have to sort of, kind of work through as the quarter kind of progresses here?

It is going to be opportunistic; although, I might note that since the quarter ended, we sold about $7 million of which equaled our book value on two United airplanes aircraft, which reduced our domestic aircraft exposure, as of this date, to around the $25 million range. We -- we're around 33 million at the end of the quarter and with payments and with that sale, we're down to around 25 million of exposure on domestic commercial aircraft, which includes, by the way, a very large chunk that is -- we classify our FedEx plane as domestic commercial aircraft.

So we're in excellent shape in terms of our domestic commercial aircraft exposure but unfortunately, there's no simple way to model this. These are truly opportunistic sales.

Okay. Great.

During the quarter the $13.8 million operating lease sale, which under the accounting rules, all of the amount of the value of that lease gets booked as revenue.

Understood. And I guess maybe just one of the parts of the final -- the first question that I asked was just if you could juxtapose your own results relative to maybe what we saw in software and in hardware land in terms of deferrals, pushouts, anything along those lines that you guys might have felt at the end of the quarter.

You know there was some of that. I would say the one place where we see it is in our -- in the mailing -- in the mail stream solutions segment, in the -- what we call our distribution solutions business, our deliverability product line is being very well received by customers, but there is a lot of customization, and there's a lot of -- when I say customization, we plan --there's -- let's say we're gong to come out with a standard release later or late in the third quarter that's going to incorporate a lot of features that we've learned about from some of our early installations of the product.

So that is taking longer and there's a backlog of potential written business and software revenue that rides on our next release. So it's not so much customers delaying decisions as it is us learning from early installations that we need to standardize more feature and functionality in our next release, and we've delayed that release to a little bit later in the quarter.

Great. Thank you.

You're welcome.

Thank you. Our next question comes from [Lloyd Zemin.] Please go ahead.

Hi there, folks. How are you?

Fine, thanks.

Good. Let's see, forgive me if I ask you a question regarding something you spoke about. I came in a little late. Let's see, regarding DMT, you mentioned a large backlog of orders. Could you give us some idea, and let's say book-to-bill terms, is the backlog growing, falling? How does that look in terms of demand relative to revenues?

The backlog of orders for DMT in the second quarter was consistent with the backlog in the first quarter. Meaning that we -- you know, we had revenue growth of 15% for the quarter and we do expect positive revenue growth trend for DMT to continue. And having just closed on Group 1, we obviously expect that as the year goes on, we'll see more and more synergy opportunities for Group 1. that we haven't yet taken advantage of, and haven't yet articulated.

So we feel very good about the prognosis for DMT, both the second half of the year and first half of next year, but I also would point out that the nature of DMT revenue growth is that it does have potential for lumpiness giving the timing of the installation of large inserting systems. But the backlog is strong.

And regarding Group 1, could you remind us again, what impact do you expect for the rest of this year from the acquisition?

Given the fact that initially there will be integration expenses, and obviously, the interest expense for the acquisition, and the fact that we will not immediately realize all of the synergy potential, we expect it to be about half a cent dilutive in each of the third and fourth quarters. We expect it to be accretive, somewhat accretive in 2005.

Okay. Thanks very much.

Sure.

Thank you. Our next question comes from Chris Whitmore. Please go ahead with your question.

Thanks a lot. Two quick questions. First, if we look back over the past five years, the global mailing business has averaged a 5% sequential improvement in Q2 versus Q1. This quarter it looked a bit flattish. Should we read anything into that? Are we seeing different seasonal trends in that business? Were there any demand issues in that segment, et cetera. And then secondly on Group 1, what is the revenue contribution you are expecting for Q3 and Q4? Thanks a lot.

Q3 is $24 million revenue contribution. I assume Q4 is -- Bruce, it's --

It will be a little bit more because it will be the full three months. So it will be roughly 35 million.

Yeah, so Group 1 and for the reminder of the year around $59 million. I don't think you -- there are two things you've got to keep in mind about GMF this year. One was, we did have -- just to get into a little detail -- we had marketing programs in the second quarter last year that were designed to address a sizable number of leases that were coming to a certain point in their term that had been done at the end of the first phase of meter migration.

We put in programs to lock in those leases and those customers, so we had a little bit of full forward and a very strong second quarter last year compared to -- and this year was a more normalized year. But -- so -- and -- whereas -- and first quarter last year was an unusually weak quarter versus second quarter last year.

But the other -- so both of those are sort of unusual items. I would say the secular trend item is the noticeable shift towards more stream revenue in the software space versus product sales, software, as well as professional services. And that does have some impact on the revenue recognition timing. Not the amount of revenue, and, indeed over time, we may actually get more revenue from the software and the services, but certainly the timing.

Just to follow up on that, you mentioned meter migration. Maybe it would be helpful to get some color on where we are in the the migration cycle. How many meters are out there that need to be installed? What is the size of the install base, and how far along on a percentage basis are we on migrating to the new meters?

Well, the simplest way to understand it is since we're moving to digital, what percentage of the base is digital, and I believe it's around 71% now. And there's a phased process of migrating the different meters to -- from the -- you know, the electronic to the digital. We have about, oh, let's say, we have about 378,000 electronic meters that have to migrate to digital. And there is various -- there are multiple end points, so it's very difficult for me to tell you exactly how many for each of the different end points, but I would say that they are -- the transition is on plan.

There hasn't been a front loading of the migration any greater than we anticipated, and we do not, at this point, anticipate a rush in the last few weeks toward the end of any of these deadlines; that is we're trying -- we are obviously trying to smooth this out, and we will keep you apprised of our progress over time.

Great. One final question. There's been a new product that your competitor has been pretty optimistic about. Have you seen any impact from new, competing offerings in the high-end digital meter space?

No, not really. No. We've maintained share there. No. I haven't seen any -- I mean competitors -- one of the issues you have, competitors will announce a product and we have a hard time finding it out there in the market place, initially when they are announced. We have not gotten any noise from our field operations about competitors actually delivering any block-buster products.

Okay. Great. Thanks a lot.

Sure.

Thank you. Our next question comes from the line of Jay Vleeschhouwer. Please go ahead.

Thanks. Good evening. A couple of questions. First on the services side, when you take into account your presort and outsourcing and other similar kinds of services, could you give us some sense in terms of what you are seeing with respect to the number of engagement or the profitability of the engagements?

Going into the year you had talked about trying to improve your services profitability but it'd also be interested in terms of what you are seeing in terms of the pipeline or the amount of work that you are doing.

Let me separate those two. PSI continues to do very well. Revenue in the quarter was around $35 million. It was an increase of about 30% versus prior year. Its margins were double digit this quarter and margins improved over the prior year for any sites that PSI has owned for more than one year -- I'm sorry for the sites that they've owned for more than one year. And PSI is now up to 25 sites in 24 cities and we are continuing to see strength in the PSI part of the business. PBMS is very definitely, as we have talked about, in a transition process.

In terms of the demand, we -- written business is, indeed, improving. We did not lose any major accounts. Volume in the business, in terms of click charges, definitely continued. What we saw in the first quarter in terms of stabilizing and there appear to be some indications of increase during the quarter. And we have, in the last month or so, gotten some awards of some fairly large contracts.

So we feel positive about the -- some of the developments in PBMS. We continue, obviously, to see margin pressures both in initial bids and renewals, but the good news is that the written business, the shrinkage business, and the lost business margins are now relatively similar, whereas, a year or two ago, we were generally losing or shrinking in the high margin areas and gaining lower margin business. It's now sort of equalized. But we are continuing to see strong competition.

Okay. As a follow-up, in your prepared remarks you referred to payment solutions as being among one of your better areas in the quarter. Could you elaborate on that in terms of the amount of customer assets that you have under your management, in effect, as part of those various accounts that you offer, and perhaps talk about the kind of utilization that customers are making of those kinds of payment solutions.

Well, let me just frame the issue and then I'll ask Bruce to talk to the actual amounts of purchase power reserve account. But the -- you know, there are a couple of things that I would note about payment solutions. One, that we continue quarter by quarter to increase our penetration of payments for metered mail into one or the other of our solutions, either our credit solutions or our reserve account, which is a prepayment solution. We continue to see growth in the quarter of carrier billing payment solutions.

We're getting some growth now in the permit bail payment solutions; although it's still a very small number, it is catching on. And we just launched on a pilot basis, a new solution called Business Essentials, which is designed to focus on a limited range of supplies and other incidentals that small businesses use in the mail and document management space, and that just launched the first of July.

So this cumulative -- the cumulative effect of all of that is double-digit revenue and even higher double digit EBIT growth in that business.

And just to add a little bit, Mike, to your general comments, the size of the reserve account, and that is the balances that large enterprise customers keep with us, is about 400 million. And off that amount, 300 million is lent to smaller businesses in the form of the payment solutions that Mike alluded to.

Overall, during the quarter, compared to a year ago, they had double-digit growth in revenue in this segment of the our business, and had improved margins because you are getting more operating leverage on the infrastructure.

All right. To follow up just on that point, if, let's say, interest rates increased by, I don't know, 25, 50 basis points over the next half year or so, could you just walk us through what the effect would be on that business and then on your pretax income?

Well, on payment solutions, since the reserve account is paying very fixed rate, very low interest, interest rate increases don't affect us at all. In the other parts of the business I'll let Bruce talk more generally about interest rate movements.

Yeah, we definitely -- as Mike said, this is the part of the business that actually is self-funding. That's why I put the two together, the reserve account and the payment solutions. And in fact, we have a cash balance in the Pitney Bowes bank. So to some extent we even benefit as interest rates rise because of the cash balance.

But -- but your over -- the thrust of your question is correct, though, that generally, when interest rates rise that is a negative for us because the coupons on our captive financing for Pitney Bowes products tend not to rise or fall with interest rates while, of course, the funding that we do.

And as a result, what we've done over the last year is we fixed a greater portion than we would normally. We, at the end of this quarter, about 63% of our debt was fixed rate and that insulates it somewhat. But having said that, you know, you still have 37% of your debt which is going to be floating, and so that we will have exposure to each interest rate rise.

I would say that in the first half of this year, interest rate -- or interest expense was a tail wind. It's probably going to be more neutral in the second half of the year. Based on what we hear about the movement -- the anticipated movement of interest rates -- I would say it's well within the range contemplated by our guidance and our budgets.

All right. And last year, your press release refers to improvement in Germany, which you did not comment upon in the first quarter, or didn't see in the first quarter. How much of a swing factor was that for revenues and maybe talk about your expectations for that market and Europe on the whole for the rest of the year?

Yeah, we had a good quarter in Europe overall. In fact, international generally had a good quarter. The exception was Canada, which declined slightly on an organic basis, but Europe on an as-reported basis, was -- Bruce maybe you can sort of give some -- where we were in Europe on a reported and organic basis.

On an organic basis, we were up about -- just in Europe, I guess -- 8% organically and about 18% including the effects of foreign exchange, and considerably better improvement in EBIT because of the operating leverage we're getting.

Yeah. And Canada was the one outlier, and that was a result of, I think, some strong prior year comparisons. And I would say -- there was an earlier question about are we seeing any delays in big orders, and we did see that in Canada.

Now, I didn't answer about Canada when I answered the earlier question, because it really wasn't material to the company as a whole, but we did see some of that. So the result of that is we are optimistic that Canada is going to have good revenue growth the second half of the year; revenue and profit growth the second half of the year. So Canada actually is an opportunity for us.

Yeah, and just to elaborate on Germany, what we saw there was a swing that before it had been declining year-over-year, that this quarter there was organic growth in Germany and there was also significant improvement in profitability.

But, really, the overall scheme of things it wasn't --

Right.

-- it was not a major factor, but that's good. It wasn't as a drag.

Thank you very much.

Your next question comes from Carol Sabga. Please go ahead.

Thanks. Just a couple of questions. First on revenues, if you could just give us the components for the company as a whole and then for global mailing specifically, what was acquisitions, what was foreign exchange and therefore, what was organic growth?

Bruce, do you want to take that one?

Sure. Carol, probably -- let's start with the company as a whole. If you say for the company at 6.4, if you do organic, in other words stripping out three things: stripping out the currency, acquisitions, and the capital services effects that we talked about, the number would be 1.6.

Okay.

And currency itself was about 2.2 of that.

Got it.

And then for -- you wanted the global mailing segment?

Yeah, you gave us maybe global mailing. The better way to ask it is just what did organic --

I'll give you the two.

Okay.

Global mailing the total revenue growth was 4.8.

Mm-hmm.

The organic was 1.6. And for Enterprise Solutions, it was 6.8 was total, organic was 1.7.

Thank you. And within global mailing, how did the U.S. do organically?

The U.S. was slightly positive, and the international was quite strong.

Okay. And talking with the -- I wanted to focus a little bit more on the product mix that you saw in global mailing, with more of the revenues coming from smaller product lines and software, instead of larger systems. Was that product mix a reflection of the type of customer that is buying now, or is it some customers trading down in equipment and services they have been buying?

I think certainly if you talk to the -- when you say global mailing, I'm assuming you're referring to -- you're excluding the -- you're not talking about the DMT customers that are buying -- you know, that we had a very good quarter. Let's say the mail center customers, there's no question that the very large businesses are probably consolidating more, and just as in the world out there you're seeing more shared facilities we see the same thing.

So let's say our DM 900 and 1000s would replace some mid-range and maybe more paragons, and there would be fewer of the large systems today because of consolidation. In the mid-range, you might see some right-sizing and downshifting going on because the features and the functionality that we have along the way, both the mid-range and the DM-100i which we launched in January, are comparable to what used to be a mid-range in terms of features and functionality.

So it's not -- it's downshifting in the sense that our lower-end products have much of the features and functionality that are mid-range products used to have, but we get higher prices for the lower-end products, we get -- and I would say overall, we're getting more revenue streams.

But there's no question that pure product sales revenues, if you were to isolate that in the old, you know, global mailing business, are, you know -- there's -- there's a definite set of trends there, where the product sales are probably flattening out and more of the growth is going to come from the software and the services.

Okay. But would it be right to say that you haven't seen, kind of the trading down because the volumes at a cross range of customers are declining significantly?

There's some of that going on. Let me -- if you look at the -- if you look at mail trends, and we're beginning to see some -- the -- and let me just talk about mail trends because it will make clear what -- what I'm saying about -- it will make it easier to understand what I will say about mailing equipment and volumes.

What we call an overall first-class mail volume is flat to slightly declining but not noticeably declining. But there is a divergence between what is called automation mail, which is the -- let's say if somebody is using their mailing machine to do 5,000 monthly bills, that mail is actually growing again slightly. But the random single mail piece from each desk in the corporation will be called a single piece mail volume that doesn't go into an automation mail stream is declining, and it's declined a few percentage points compared to a year ago.

What that means is that there is some downshifting from where people are more interested in features and functionality. From middle volume to lower volume, there's still a need for large systems but because of consolidation, there's greater productivity where customers are, instead of having, let's say where they might have had 10 paragons in 10 locations being used half the time, they are going to six DM-1000s in one location, being fully utilized.

So -- but the automation mail, meaning where there's high volume production mail, that actually is, in the improving economic environment, that's increasing. And marketing mail in the second quarter increased. Postal service numbers show that that's what they call the standard mail, which is predominantly marketing mail. If I believe the numbers -- and, you know the number they show is about a 7% increase over prior year.

Okay.

So the service bureaus are definitely seeing an uptick and I think that's also why DMT is seeing an uptick.

Okay.

But the sweet spot of the middle volume postage meter, there is a downshifting where we are getting more value from the features and the functionality, and the value-added services, but clearly not as much umph into the middle volume product line.

So per customer, in that kind of -- the customer that was buying this mid-level product line, as they downshift,do you get over the life of the sale, do you get the same revenue or is it slightly lower do you think?

That's a hard one to answer. I would say that it has the potential, when you look at the fact that we're selling payment solutions, supplies, the value-added services, and over time some software packages, it has the potential to be greater. But that's dependent on how long they keep the stuff and so we believe present valuing, and it should be greater over time, but it's obviously -- you know this is a belief, and it's a little too early to tell.

Okay. And my last question is on restructuring. You said that you were going over the programs right now for the third and the fourth quarter. I don't know if I'm reading too much into that statement, but are you thinking about potentially expanding the restructuring from the one that was announced over a year ago? I think it was 115 million.

When you say expanding, yes, we might extend it because when we announced it a year ago we obviously did not anticipate the -- you know, having to, let's say, stretch out some of our initiatives to make sure that we could get the Sarbanes-Oxley certification in place. And, you know, so there are some programs that we have made a deliberate decision to push into the 2005.

If there is restructuring, which is certainly possible in 2005, it obviously is going to be a smaller scale, or it could be on a smaller scale than what we have this year. But we really have not scoped it and we will -- when we provide the 2005 guidance, we will talk about restructuring. But Sarbanes-Oxley, as well as the ongoing acquisition integration, has made it desirable for us to stretch out the implementation of some of our programs.

Thank you very much.

You're welcome.

Thank you. Our next question comes from Shannon Cross. Please go ahead with your question.

Hi. Good afternoon, guys.

Yeah.

Just a couple of quick questions and then a more strategic one. Bruce, how much of your debt is effectively fixed? So including swaps?

That would -- the 63% that I gave you includes the effect of swaps.

Okay. And then what's going on with your bad debt reserve? I think when I spoke with you last, you said you were seeing an improvement in terms of delinquency. Have you been cutting back on the reserve?

We have not been changing the reserve considerably. We've been reallocating in certain areas but as a general principle, you're right, that we have been seeing good effects in our delinquency and have been adjusting, but not like a significant change in the bad debt calculation.

Okay. And then, Mike, maybe could you go over just where we stand in terms of the regulations in front of Congress as the postal reform and how comfortable and confident you feel it will be passed this year, even though we're in an election year.

I -- I'm -- I think there's a -- I continue to believe that there's a reasonable probability of postal reform legislation this year or next year. The timetable was, believe it or not, set back by the week that -- it was a tight time schedule in any event to get it done this year, and the time lost from the Ronald Reagan funeral and the shutdown of our government for a week, made it considerably less likely that it will be this year.

But there continues to be good momentum towards postal reform and the key people involved in that who are the committee chairs of the -- and the ranking members of the House and the Senate committees, as well as the leadership of the House and the Senate on both sides continue to be optimistic that it will happen. But I would say that the likelihood going back three months and not having any knowledge of what would happen with the Ronald Reagan, there's less optimism that it will happen before the election; although it still could.

We have another bite at the apple in the session that will begin right after Labor Day and go through the early part of October, and we are going to give it the full court press but I would say have to say we're not assuming that it will get done before the election. There is also, depending on the results of the election, always a potential for a lame duck session, and we -- if there were such a session, we'd be more optimistic that it could get done this year but there's no way to predict whether there will be.

Okay. So when should we assume,sort of drop dead, it won't get done. Is that October or --?

By mid-October, we will know one way or another whether it will get done this year. So by the time we reconvene for the their quarter earnings release, we'll be able to give you a very clear reading on whether it will happen. And again, subject to the proviso that if there's some need to reconvene Congress after the election, it has a chance of going into a lame duck session.

But we're not -- that we wouldn't know but we could tell you that by mid-October, that it is or isn't going to happen this year. And -- but even if it doesn't, there's a lot of bipartisan momentum to get it done in 2005.

And would that be early in '05?

That's very difficult to predict because it depends on what happens in the election.

Okay.

If there were to be no changes in the leadership of the House and Senate -- and I, frankly, cannot envision that the leaders are going to get voted out of office, so they say that the U.S. House of Representatives is only -- has about -- has less turnover than the old Soviet Polit Bureau. And assuming that's the case, I would say that there would be continued momentum toward the passage of this bill.

Okay. Great. Thanks.

Thank you. Our next question comes from Dell Warmington. Please go ahead.

Yes, quick question. Now that Group 1 is [inaudible,] what portion of your revenue do expect to come software in '04 and in your long-term model?

I think it -- you know, I always hesitate to answer a question like that, because it -- you know, we refer to software, there's a lot of embedded software in our hardware products that we have chosen to not separately designate as software revenues, but if you look at pure application software, probably about 5% of our revenue is in software. But again, given the fact that it's largely stream revenue, that's something that we expect to grow faster than product sales but not necessarily be very noticeable day one.

And I'm not sure if I missed it but did you folks say what exactly is the currency impact on this quarter?

I think today, if we just look at a snapshot of the software revenues, Group 1 does have a good foundation for business abroad, but a vast majority of their revenue comes from the United States. So I would say they're very little currency impact and most of our software revenue comes from the United States.

And, again, even though we expanded our distribution solution software outside the United States, again, we would expect it to come from a straight -- be stream revenue, so I think that realistically, relatively little currency impact.

Okay. And one last question. [Inaudible]in terms of CapEx, what does that consist of?

Bruce, do you want to talk to that?

Yeah, it's -- the major components would be, first, rental equipment, that as we restore our equipment base for digital equipment that would be number one, and that was about 29 million. Secondly, is you have a lot of investment related to the transformation programs; these are the new systems we're putting in, and so it's the software related to that. That would be probably the next component, you know, roughly a third. And then the final major component would be for our management services business, where you have equipment that's on customer sites and that would be the other third.

Thanks a million.

Thank you.

Thank you. Our next question is a follow-up question from Lloyd Zemin. Please go ahead.

Hi, could you tell us the impact of foreign exchange on earnings per share?

Yeah, it was about a penny.

Okay. And also the asset sale, the impact on net income from that. Was that about half a cent?

Well, I mean, I think overall, that the -- that's what we said, Lloyd, in the beginning, is that's what put us at the top end of the range.

Yeah.

So without the asset sales in capital services, we would have been at the 61 cents, not 62.

Yeah.

Okay. Fine.

It tipped us over. So even though it wasn't a full cent it tipped us over the -- into 62.

Okay. And last but not least, could you give us maybe a little bit of color regarding your efforts to broaden the customer base for PSI?

Yeah. The -- we're in five districts today and we are going through a learning process of, among other things, an efficient mail collection system, joint sales calls, qualifying the customer base, and doing the marketing. And we're getting very positive feedback in the five districts in which we sell PSI solutions. We're adding customers but more importantly, about one out of every three of those customers we get an incremental high-end global mail system -- you know, like a mailing machine sale out of it.

We plan to expand to a majority of our districts in total within the next 12 to 18 months as we are learning about the different models in which to do business. So we are very pleased by this, but it clearly -- given the fact that it only affected five districts in the second quarter,actually, we went into the fifth district during the quarter -- we're going to stick -- we're going to accelerate the rate of expansion going forward.

Okay. Thank you.

Thank you. And our next question is a follow-up question from Carol Sabga. Please go ahead.

Just two questions. With the Group 1 acquisition complete, are you going to take a breather from acquisitions and integrate it, or should we expect are you still looking at acquisitions over the next, sort of 12 month period?

We are always looking at acquisitions and, frankly, in a perfect world we'd do things on our time frame. But we know what we want and when they become available is sometimes not completely within our control. But we are very mindful of our acquisition capacity and not going beyond that capacity.

Although I would say that if we go back to 2001, we did about $537 million of -- added about $537 million of revenue, and did over $600 million in acquisitions. And we're far better able to absorb acquisitions today than we were then because of a lot of the transformational work we did over the last three years with our IT systems.

But we would like to do a more measured and staged number of small to medium-sized acquisitions. We do not have any plans on the horizon to do any mega-acquisitions that would fundamentally change -- you know, fundamentally use up our capacity to do acquisitions.

And my other question was on capital services. Bruce, I don't know if I did bad math, but if you adjust for the asset sales this quarter in capital services, it still looked like, sequentially, the revenues from that business were flat to slightly up and I would have expected them to be down. Is there a reason for that? And, again it could have been bad math.

Partly is with -- when you say sequentially, are you doing year-over-year?

No. Q1 to Q2.

Okay, yeah, because that would have PG. It -- the operating lease had roughly 14 million of revenue. And so without that, it shouldn't be -- and there were some other asset sales in addition, that's what we were saying, we were lumping them together as asset sales and it included a real estate transaction as well.

Okay. Okay.

And that's what totaled up to the one cent. That's what, perhaps, is a little bit confusing.

Okay. Thank you.

Yeah. But, I mean, just overall, it -- no change in the basic business. I just want to reassure everyone, we are definitely not making any investments or doing any of that business. As Mike said, we're just being opportunistic in terms of asset sales and also reducing our exposure, whenever possible, to assets such as airplanes.

Okay. Thanks.

Thank you. And presenters, there appears to be no further questions at this time.

Okay. Well, we thank all of you. We'll look forward to speaking with you again in October to report on our third quarter results. So thank you very much for your involvement and and interest in Pitney Bowes.

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