必能寶 (PBI) 2007 Q4 法說會逐字稿

Good afternoon, and welcome to the Pitney Bowes fourth quarter 2007 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. Murray Martin, President and Chief Executive Officer, Mr. Bruce Nolop, Executive Vice President and Chief Financial Officer and Mr. Charles McBride, Vice President, Investor Relations. Mr. Mechanic bride 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 ad the attached schedules on our website at www.PB.com/Investor Relations. The forward-looking statements contained in this presentation involve risks and uncertainties and are subject to subject to change based on various factors including changes in international and 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 and is more fully outlined in the Company's Form 10-K annual report filed with the Securities and Exchange Commission. Additionally, if there are any non-GAAP measures discussed during the call such as adjusted earnings per share, earnings before interest in taxes, or EBIT, free cash flow, and organic revenue, there will be a reconciliation of those measures to GAAP measures located on our website.

Now our President and Chief Executive Officer, Murray Martin will start with an overview of the quarter. Murray?

Good afternoon. Thank you for joining us for today's quarterly results announcement.

I will share a few thoughts on the quarter and the year and Bruce will follow with a financial overview of the fourth quarter and the year as well as an update on our transition initiatives. I will conclude with our outlook for 2008 and then we will open the line for questions.

Overall, 2007 was a year of continued progress and transformation. We have taken steps to anticipate the changing environment and to enhance our long term success. We enriched our offerings and delivered more value through our strategic expansion into faster growing segments of the mail stream. We continued our focus on operational efficiency, free cash flow and expense management while accelerating some planned actions to deliver long term value.

While we faced some challenges in the second half of 2007, we remained confident that our progress in expanding and transforming our business positions us for bottom line growth and increased shareholder value. Our results highlighted the outstanding success of our growth strategies and the timeliness of the transition initiatives that we began implementing in the fourth quarter. Both our annual revenue of $6.1 billion, and our fourth quarter revenue of $1.7 billion were in line with our expectations.

Adjusted earnings per share was better than expected for both the quarter and the year at $0.72 and $2.72 respectively. The free cash flow for the year of $924 million was substantially better than we had originally projected. As we saw throughout 2007, the quarter's results were led by strong performances from our mail services and our software segments. Growth in mail services continues to be driven by presort and cross border mail services as well as enhanced operating leverage.

Our software segment's fourth quarter performance was paced by strong customer demand across the portfolio and in software solutions outside of the U.S. As a result, we closed more large software contracts, that is in excess of $1 million, than ever before, including the largest single software order in our history. As we explained in our last earnings call, we did anticipate weaker results in our U.S. and international mailing segments during the fourth quarter.

Our U.S. mailing segment continued to be adversely affected during the quarter by the level of meter migration activity when compared with the prior year. A shift in the timing of revenues due to the second quarter postal rate change and continued economic weakness, particularly in the financial services sector. In the international segment, revenue growth was impacted by expected difficult comparisons in Europe and in Canada.

We did, however, experience sequential improvements in EBIT margins, though the year-over-year comparisons continue to be hampered by the incremental expenses related to the outsourcing of our order and financial processing in Europe. Overall, we are pleased that we took action and are on track with the results that we discussed with investors in November.

Before I discuss our outlook for 2008, Bruce will provide an overview of our financial results.

Our revenue was $1.7 billion for the quarter, which was an 8% increase from the prior year and within our guidance range of 6% to 9%. Foreign currency contributed about 4% and acquisitions about 5% to our revenue growth. For the quarter, our revenue in the U.S. grew by 1% while our revenue outside the U.S. grew by 25%. For the year, our revenue was $6.1 billion which represents a 7% increase from the prior year. This also was within our guidance range of 6% to 8%.

Our earnings before interest and taxes or our EBIT for the quarter was $310 million. Our EBIT margin was 18.7% which was lower than the prior year but up from the third quarter. The decline in our EBIT margin from the prior year was primarily due to a lower gross margin which reflects a shift in mix. Also, our SG&A expense ratio was up slightly this quarter when compared with the prior year but this was solely related to currency and acquisitions. If you exclude these factors, SG&A was actually down for the quarter and our ratio of SG&A to revenue declined by 0.2%.

If we add back depreciation and amortization, our EBITDA for the quarter was $408 million which was close to the $414 million of EBITDA in last year's fourth quarter. Our adjusted earnings per share in the quarter was $0.72, which compares with our guidance of $0.67 to $0.71 and $0.77 in the same period last year. For the year, our adjusted earnings per share was $2.72 which compares with our guidance of $2.67 to $2.71 and was $0.03above the $2.69 for the prior year.

Our adjusted earnings per share was affected by higher interest expense due to increased levels of debt outstanding and the fact that last year we had interest income on a large cash balance that resulted from the capital services divestiture. This cash balance contributed about $5 million of interest income to last year's fourth quarter results. Also, our effective tax rate on adjusted earnings increased to 34.9% for the quarter as we increased our estimated tax rate for the year from 34.1% to 34.3%. This had an adverse impact of $0.01 per share for the quarter.

Our shares outstanding this quarter were about 3% below what they were in last year's fourth quarter. Our GAAP earnings per share for the quarter included $1.02 of charges for our previously disclosed initiatives and $0.01 charge for aligning map info with our accounting procedures. Our GAAP earnings per share also included a gain of $0.05 per share from discontinued operations. This relates to a favorable adjustment in tax reserves for the capital services assets that were divested last year.

Our free cash flow was $374 million for the quarter and $924 million for the year. There were four things that drove the substantial increase in our free cash flow in comparison with last year's results in our previous guidance. First, we are seeing the benefits of increased management attention on working capital and as a result we generated about $30 million of cash from working capital during the year.

Second, we had lower capital expenditures when compared with the prior year which was due to a reduced need to add new rental assets as meter migration winds down. We also sold a training facility in Atlanta during the fourth quarter for net proceeds of $30 million. Third, we had much lower net investments in finance receivables, which reflected strong growth in customer deposits as well as the impact of lower equipment sales.

Finally, we had higher than anticipated tax refunds as a result of favorable settlements in the U.S. and foreign jurisdictions. We used $72 million of our cash during the quarter to pay dividend to shareholders and repurchased $120 million of stock. We acquired 3.1 million shares during the quarter and this brought our total share repurchases for the year to $400 million. During 2007, we returned $689 million to our shareholders through dividends and share repurchases. We have $407 million of share repurchase authorization remaining and are on track to complete this program by the middle of 2008.

As a result of our strong free cash flow, we were also able to reduce our debt by $159 million during the quarter to a total of $4.8 billion. About 80% of our debt is fixed rate and 20% is floating rate. During the quarter, we recorded $292 million of charges in connection with the initiatives that we announced on November 15th. We took $170 million of non-cash charges for asset impairments which are primarily related to write-offs of rental assets, inventories and residual values associated with the transition of our product line.

We also recorded $32 million of non-cash tax adjustments primarily related to a valuation allowance for net operating losses outside the U.S. The remaining $90 million of charges are cash restructuring charges for the anticipated severance associated with the elimination of positions. We have identified about 1,300 net positions that will be eliminated and over 100 open jobs that will not be filled. About half of these scheduled job reductions are outside the U.S. On an after-tax basis, the charges amounted in total to about $220 million in the quarter, which is equal to $1.02 per share.

We expect to realize $70 million in benefits from the transition initiatives in 2008 and we intend to reinvest the majority of these benefits in programs to enhance customer value and gain operational efficiency. We will realize $125 million in pretax annual benefits from the actions identified to date and we remain committed to our target of $150 million of benefits in 2009.

Finally, I want to explain an anomaly in our GAAP income statement for the fourth quarter where we are showing a tax provision at the same time as we are showing negative earnings. This is is due to the tax adjustment I noted earlier as well as the effect of net operating losses in France and Germany.

So that concludes my remarks and now Murray will provide more insight about our plans going forward.

We view 2008 as a year of opportunity. We are excited about the opportunities for growth and value creation ahead, and believe that we are taking the right actions to successfully manage the lingering conditions that we identified at the end of 2007. That is why we are reaffirming the 2008 guidance that we provided in November.

We expect revenue growth in the range of 6% to 9% and adjusted diluted earnings per share from continuing operations in the range of $2.80 to $2.90. As we discussed in November, the significant activity levels generated from the rate change which occurred in the first half of 2007 will impact our comparisons for the first half of 2008.

We expect that the ongoing focus on our strategic priorities will result in a stronger second half of the year. In 2007 our earnings per share were evenly split AT 50% in each half of the year. In 2008 we expect that split will be more like the pattern of 2006, which was 46% and 54%. In closing, this year, we will continue strengthening our growth platforms, we will execute our transition initiatives, we'll focus on operational efficiency, enhance customer experience and innovation while leveraging our more diverse portfolio of products, software and services in new ways.

We will now take your questions.

Thank you. (OPERATOR INSTRUCTIONS)

And our first questions comes from Matt Troy with Citi. Please go ahead.

Good evening, couple of questions. Wanted to get my hands around how to think about the domestic mail piece going forward three, five years. When the dust settles on the events of the last couple of quarters, I am just wondering you have historically given us an organic growth rate in that business. I thought it was something 3%, 4%, or maybe it was 1%-3%, a lot of numbers in my head today. But when the dust settles and you kind of figure out more what the run rate business looks like, is that going to be a lower number than you have given in the past, higher or about equal?

Hi, Matt, it's Murray.

In the past we have said one to three and we anticipate that will slide a point and be in the zero to two range. As we look forward. As I'd mentioned earlier, we do have that lower number of leases outstanding through the third and fourth and first and second quarter of '08. That comes back to about neutral in the third and then goes positive in Q4 forward.

Okay, and why structurally the lower growth rate? Is it just the maturity of the business, is it a few placements fall out a result of migration, or are the one or two things you can point to as to why you lose a point on that?

I think, Matt, you have hit on a number of the items. One, there has been more functionality put into lower speed equipment, which makes it much more cost effective for the customer. And so as a result, instead of having to buy up, they can now buy mid-range and accomplish their tasks with all the feature and functionality. So technology has enabled the customer to see better performance in the band that they would require, rather than having to go up. So I think that would be the major event, the number of placements are staying in the same ballpark. It is really the reshaping of the customers' installed base.

Right, and you can offset that with higher growth in software and services through and around that installed base?

Correct. That is exactly right.

On the second question. Neopost, they have shadowed you fairly well over the last couple quarters in terms citing similar market conditions. I was just wondering, it's been a while I think since anyone asked, do you see Neopost as a more relevant competitor now relative to let's say when they put Neopost and Ascom Hassler together? Are they becoming more of a competitor or is it pretty stable in terms of how you guys line up, and how do you measure that, is it point chair, is it incremental placement gain? Just help me--how we get a better sense that the share is pretty stable?

As we look at it the share remains very stable. There has not been any significant share so we don't see anything specifically different there. We will continue to innovate with new products and technology and continue to lead in the marketplace as we have throughout our history.

So we don't see anything where we would slow down our investment into new and better products and innovation that would allow for any change in the North American mix. As we look on a global basis, we continue to see opportunity where we are expanding our share. So we look at that as continuing opportunity in the international marketplace.

Last question?

Matt one other thing I would add--this is Bruce.

As Murray said, we generally measure our placements in market share by number of meters outstanding, but in some cases Neopost is adding revenue per meter that we already have. For example, they are doing more financing. It is possible that they will look differently than us but not gaining market share.

Okay. Last one for me, managed services, evaluating strategic alternatives, I know it is early days, but what have you learned? What kind of interest is out there? I know, again, it is early, but is the interest below, at our above where you would have expected? That would be part one, and then two, are you just looking at managed services? Murray, you're a savvy operational guy, are you looking at the whole book of business, are you really just focused on the alternatives for managed services?

First of all, let me answer the two questions. One, on managed services, I would say that what is clear is we have a good solid business that performs very well in its sector and is a desirable asset. So that is how I'd characterize management services. It then becomes in this market what is the best option for that asset, and we would look to be able to give more specific responses on that in the second quarter.

Okay.

So that is where we would be there.

Secondly, to other pieces of the business, I believe in continuously evaluating all of your assets and we will--we are and will continue to do that on a regular basis. So that we will always be looking at what will enable us to maximize the value of the business.

Okay. Thanks, Bruce. Thanks Murray.

Thank you.

And our next question comes from the line of Jay Vleeschhouwer from Merrill Lynch. Please go ahead.

Thanks, good afternoon.

First question is Murray, can you comment on conditions in vertical markets other than financial services if there is any update there? Second, on the equipment side, first a short term question. To what extent did business that did not close in the third quarter get closed in the fourth quarter? And your comment about the mixing down, the down shifting of equipment in answer to Matt's question. It is interesting but it's not necessarily a new trend, is it? Or are you suggesting that perhaps the down mixing is becoming more exacerbated?

I got to try to remember all of your questions, Jay. So--you want to give them one at a time?

Sure, sorry.

First the verticals other than financial services.

Yes, in the verticals outside of financial services. Certainly financial services has had the most damage in this period of time but it does have rollover effects in other areas, and so we do not see the same magnitude of effect as we did in the others. But places like retail certainly follows right along that pattern. So, I would say some not as much. Basically where we had anticipated it to be in those areas.

Okay.

You're next one was?

On the equipment side.

On the downsizing.

Right, and then whether any of the Q3 business that missed got closed in Q4?

On the equipment, that has been historical. So on the equipment, that has been historical, however, we've been introducing new products with new technology at an accelerating rate which offers the functionality. So the technology that has become available and allowed us to do that has accelerated a little more quickly than what we would have anticipated. So that is really one item. And the other, of course, is the ending of migration, which would also have a slight adjusting effect when you compare on a year-over-year basis.

Okay.

As to Q3 to Q4, we have seen, I would say--when I talked in Q3, there was some suspension particularly in the financial services sector. And certainly we said then and believe that those can't stay indefinitely and we have seen some activity, but not to the level that we would yet expect. So, it is--it is not staying out there permanently, it is coming in, but still not at the rate that we are looking for in the longer term.

All right. Just a couple last ones. With respect to PBMS can you comment at all on how your signings looked in the quarter, and since you announced your exploration of strategic options, have there been any changes or difficulties in terms of employee retention, the effectiveness of executing contracts in place? Anything of that kind where people might be re-evaluating their future with that part of the Company?

PBMS is a leadership company in its industry, and as such, it continues to lead, it has a solid management team, which is committed to the business and committed to its future direction, whatever the best strategic option there is. They look at it as whatever is the best strategic option will also be the best for the business and for their customers. Therefore, they are in a very good position to talk to their customers about being the leading provider in that space and that being a continuing case regardless of who the shareholders are if there was to be a transition.

So we are not seeing any issues there as far as retention and expansion. And our business continues to be writing well, as you can see our results are still positive in that space. And we expect it to go along with the forecast that we had put in place, that it will continue to grow.

And lastly for me on the software business, you pointed out the strength in the quarter. How would you rank the effects of any or all of just seasonality cross selling pursuant to the integration of the organization or just overall better new product introduction, selling effectiveness and so forth?

Well, as you are aware, the software business, I don't know whether you would call it seasonal, but it does sort of come in waves, and that certainly is there. I don't think there is any particular seasonality around it. I do believe that the consolidation that we have put in place of Group One and Map Info to create a much larger and more dynamic software business is giving us strength in the marketplace, it's giving us linkages between the products. It is giving us more depth in the customers and exposing more products to other customers. So, your point about cross sell, etc., yes that leverage is starting to occur, and I think we are only starting to see the value of what will come in that business as it aggregates into a very powerful software company.

Okay. Thanks, Murray.

Thank you.

Our next question is from Caroline Sabbagha with Lehman Brothers. Please go ahead.

Thanks. Can I dig a little bit deeper please into the U.S. mailing numbers? It seems like the trends worsened from the third quarter. I know you didn't have--in the third quarter you mentioned that it was not a full quarter of a weak economy, etc., but it seem like going from negative 3% almost to negative 9% is the worsening of trends so I was trying to figure out what happened within that and within U.S. mailing, how much were equipment sales down?

I don't know that we have the equipment sale handy, Carole, but let me just deal with the first part of your question and we'll see if we can get you the other answer. If you look at it from Q3 to Q4, first of all, there was some residual shape base to the beginning of Q3 and you did not have the financial effect for the entire quarter.

Secondly, if you recall last year, Q4 was a very substantial quarter. So you had also a slight anomaly of a very large Q4 from a comparison last year which would have been higher than our trend and that is really where you would see the shift.

Yes, and Carole, just the number of equipment sales was down about 25% , and just to say why would it be that much? First is, as Murray mentioned, you had the end of meter migration, and last year that was a fairly significant component, and that is going fall through. Secondly is the lease expirations.

As we mentioned, just as you look at what comes due and as we talked in the call last quarter the way it works is if a customer enters into a new lease, even if it is the same equipment, that produces what would be equipment sale for accounting purposes. So you get kind of a magnifying effect, and that is why the revenue that's reported for accounting tends to be more--have more fluctuations than the actual cash flow that we're getting from customers, and that's why you get sometimes, like this quarter, you will get a disconnect between what looks like on an accounting perspective, what is looking like from an economic or cash flow

Okay.

One other thing I'd mention too--before I lose it, also, with meter migration, shifting from electronic to digital you had a significant increase in supplies revenue and that tapered off because, again, that was really at the end of 2006. So every quarter is not growing as fast as we did in the past.

And then if you look at what the U.S. mailing did for the year sort of to try to even out the second quarter anomaly. What did it do overall organically for the year and what was equipment sales like for the year? I don't know if it is easy to get those two numbers.

The first one on the organic, it was a decline of a little bit over 1%.

Okay.

About 1.5%. And equipment, let's call it 10% decline.

And then it seems like the economic--the weakening economy had a little bit more of an impact on U.S. mailing because your other businesses seem to have improving trends versus what they saw in the third quarter. Why would you think it is mostly impacting mailing? Is that the one that's most exposed to financial markets? I thought maybe management services may have been.

Carole, I don't think that I would say that that is the economic. That has to do with the shifting in the lease space and what is available for renewal and for trade up more than the economic. So certainly there is some economic effect in there but it is more on what we would see, and as we discussed last quarter, that we have a lower set of opportunities in Q4, Q1 and Q2.

So, what we were telling you in Q3 is that that trend will be there and we won't pull those leases forward by trying to finance the customer early. They need to fall in their regular chain. So you had your time shift in Q2 and also you had the meter migration completion, which creates that--about 12 month spot in our five-year cycle of lease renewals, and that is much bigger effect than the economic effect.

Than the economic. Okay, and then my last quick question is you kind of talked about what the quarterly seasonality is going be next year but you did not give quarterly guidance for 1Q. Are you stopping doing that and why? Unless I missed it.

Yes, we are giving annual guidance and we will be as open as we can in providing you with transparency of information and what our trends look like going forward. As we and our board have looked at what the trends are in this regard, we believe that the best practice is to move to an annual guidance. So we are moving to annual guidance, but we will continue to have a high level of transparency and work with you in working on your models as you go forward.

Thank you very much.

Thank you.

Our next question is from Shannon Cross with Cross Research. Please go ahead.

Hi. Good evening.

First question I had, just with regard to your production mailing segment, you talked about strength in the U.S., and I am sorry--I lost it here. There was one other region, was it Asia, and weakness in Europe I think? If you could just provide any more color on what is driving the strength there and how we should think about it as we go into 2008. Again, with--if you compare that to obviously some of the weakness you saw in the U.S. mailing segment?

As you look at Asia, Asia is continuing to perform very, very well. And in all sections, and we are seeing, as the economy evolves in Asia, it is now moving to the point where high volume mail is becoming practical from a high end hardware point of view.

They are now looking for more and more efficiencies, but more than that, the integrity that we deliver with our systems to ensure that the right pieces of paper are in the right envelope and then tying that together with our software. So you will continue to see growth in that area as their economy continues to progress very well, and as the infrastructures build in those areas. So we see that as a long term.

In the U.S., we continue to see positive effects from the new products and services that we introduce in the DMT marketplace. We also see the value of the integrity that we bring with the linkage of the software and hardware that we can deliver that is really not available to the same extent as elsewhere, and it has placed us in a significantly different competitive position. As we switch to Europe, in Europe the market has not moved as quickly to adopt the higher integrity solutions, and we expect that that will continue to move forward, particularly as you see the market now looking at how to effect transpromo, and that is putting promotional information right in the print stream and inserting it in the envelope. So we see this as a trend.

I just got back from Europe, and the trend is also starting there. I talked with a variety of people and they are now starting to look at something totally different than they had before, which is transpromo. The other item in the U.S. is we have had increasing enthusiasm about our Relia-vote systems. That is vote by mail.

We have a high-security system that ties an end-to-end linkage together, and we are getting more and more traction with that product in different states and in local governments to facilitate all of their interim voting requirements. So, although it works within the federal system, a lot of the application there is on different state-wide voting areas. So that is another area that is continuing to be very positive in this segment for us.

Is there any--is that something that should ramp? It is probably relatively small but will it ramp as we get closer to the election or is it just sort of a continual shift that people are making?

I think it is more of a continual shift. It will continue to ramp, but it won't necessarily accelerate around the election. This is more of a long term trend which enables the populous to be involved in government in a much easier form. So rather than having to be on a certain date and a certain location, this ensures that everybody has access, it is a controlled system. So we are seeing a greater and greater level of adoption throughout the U.S. and we would expect that trend to continue and accelerate going forward.

Okay, and then can you remind us--I think you started to see this earlier than a lot in terms of the economic slow down, but there has been more and more talk about fewer credit card mailings and obviously a tightening there. How should we think about the impact to your business, obviously it's hurting U.S. mailing, but in sort of how far along do you think we are in terms of the tightening in situations like that? I know just to sort of gauge how much further, I guess, pressure from maybe the credit card side or the financial side do you think can go?

Well, first, let me respond by saying most of the mail that we are involved in includes a transaction. So it is not quite as sensitive as if we were in the mass mailing business. We have not that high a percentile. Certainly we sell software for list cleansing, and document preparation, etc., but the bulk of our revenues tend to be around transactional.

So, if there are four pages instead of five that could have some effect, but normally you will still get a bill regardless of the economy. And that's what has always made Pitney Bowes a much softer float in negative environments. It does not get hit quite the same. Similarly, it does not get quite the benefit on an up market because that volume stays relatively constant. We have seen some in the other spaces, but again, we are more a fringe in that area than directly involved.

Okay, great, and then maybe, Bruce, could you talk a little about--obviously you listed a number of factors that improved cash flow during 2007. Can you talk a little bit about the puts and takes there, the lower finance receivables, etc., and what we should think about carrying forward in 2008 and if there is--do you think opportunity for upside to the number that you provided especially given the outperformance this year?

Yes, I would say just comment first of all on 2008. Our main presumption is that working capital, finance receivables, and taxes will return to more normal levels, and so that drives the forecast. In other words, we don't think that this level of free cash flow is sustainable just from a systemic point of view.

In addition, there were a couple of areas that will change in '08. One is, as I mentioned in '07, we had the sale of the training facility which is in Atlanta and that was $30 million. So that will not repeat, and also because we are taking the transition initiatives on our product line, we will have to spend more on rental assets than we did this year. So we estimate roughly $50 million swing in '08 compared to '07.

So that is why it may look like we are going down in free cash flow, but it is coming from a base. That does not mean there is not potential upside particularly in the three areas that I mentioned. Working capital, which we're going to continue to focus on, finance receivables to the degree that if sales do not come in as much as expected, the good thing about the Pitney Bowes business model is cash flow goes up because you are not putting as many finance receivables. And also taxes another area where we are always looking for ways to defer expenses. That is kind of a philosophical overview of it.

Okay, great. Thank you very much.

Thank you.

Our next question is from Julio Quinteros with Goldman Sachs. Please go ahead.

Hi, this is Kim sitting in for Julio.

I was just wondering on your revenue guidance and your visibility, how comfortable are you in terms of visibility and your guidance, given the take down last quarter?

As we said last quarter, we spent a fair amount of time looking forward and wanted to be sure that we had solid ranges, and I think you can see from our fourth quarter that we are pretty accurate in projecting where our ranges are. Of course, you never are going say you are going be perfect, but we think that we have done a very good job of forecasting what is realistic in the current environment. Now there was a positive of significance or a negative of significance, we would talk to that, but we think we are in pretty good understanding of what will happen through 2008, given a continuation of current conditions.

Okay. Great. Thank you.

Our next question is from [Amanda Barrio] with Banc of America. Please go ahead.

Hey, thanks a lot guys, it's actually [Anun Debrua] from B of A.

Just a quick question again on U.S. mailing. On equipment, is it fair to say, or I guess I want to get your opinion on whether you feel that it was a little bit weaker this quarter than you originally anticipated?

No, no, we don't want to leave you with that impression. When we gave the revised guidance and that was as of the end of last quarter, we fully expected U.S. mailing to be that low. We did not give specific guidance with respect to U.S. mailing for the quarter, but if we had, it would have been consistent with where we came out.

That was--if you recall, we took our time before we gave new guidance for the fourth quarter because we wanted to be sure we had it. So we went through and actually looked at all the leases coming due and had a very good handle on what was coming. And so, just want to reinforce there were no surprises this quarter. If anything the only surprise was upside on software where from what we expected and expense controls a little bit better, which is why we came in slightly above our guidance range.

Thanks. That is helpful. And if I recall, did you provide sort of an 2008 kind of guidance range previously for U.S. mailing?

We did not.

You did not. Okay, and then just regarding your recurring revenues, I was just wondering, what are the recurring revenue aspects of maybe the financial services vertical versus some of your other verticals? And then maybe the recurring aspects of your enterprise business versus your mid-market business, the differences there?

Yes, the way I would say is that--that the difference in recurring revenue versus not would not be a function necessarily of the vertical. It would relate more to the type of products being sold, and in general, in U.S. mailing, it is a recurring sales approach in the sense that a customer signs up and they have a monthly payment and for accounting purposes, we record much of that as a sale. So even what we call non-recurring which is for accounting, a sale in the context of U.S. mail is much more of a long term relationship with the customer.

Where you have one off sale that would tend to be more in the high volume mailers such as in production mail and those would be--have a high percentage of financial services. Financial services is also fairly high in our management services business which is very much longer term contracts. So all that is a long way of saying that I don't think that looking at vertical markets is a good way to really distinguish between recurring and non-recurring revenue.

Okay, got it. It is more along the product lines but then there are certain product lines that might sell more predominantly into different verticals?

That is correct, exactly right.

Okay, thanks, and how much of your 6% to 9% revenue forecast for '08 is organic?

We think it's probably going to be in a range of 2% to 5%.

Okay, great, and then just one last one for me, I guess going back to Carole's original question--actually Matt's original question about the secular long term kind of growth opportunity for U.S. mailing equipment. And I guess you are saying now it might look like 0% to 2% versus 1% to 3% in (inaudible) because of the increased functionality. Should we take away from that that nothing--sort of the current dynamic not withstanding, your sense is that nothing about the inherent secular demand opportunity is really changing?

That is correct. We are seeing that things are staying fairly stable as to where they have been other than the areas we have touched on.

Okay. Thanks a lot.

Thank you. There are no further questions at this time.

I am sorry, we do have one last question from Chris Whitmore with Deutsche Bank. Please go ahead.

Thanks very much.

In response to an earlier question, you seem to suggest that the weakness in U.S. mailing would be about a four quarter phenomenon. First, did I hear you correctly, did I understand that commentary correctly, and if so, why would it recover after this 12 month period? Thanks.

Chris, we run five-year leases, and they renew at the end of the five years. So--or slightly before. So we can actually see the flow of business that is coming in, and the--what causes the cycle to change is when you have meter migration and you get changes that pull things around in the standard flow.

So I would say on the current trend, five years from now, we will have a similar valley because of the way it flows. So as we trend out the five-year bookings, we can tell what is coming up and the opportunity there is there for it, and so that is what has caused the shift in the current period. It actually goes back four and a half years from when that occurs, and that is why we can see when it comes positive. So, we can see that on an ongoing basis.

So maybe you can help me understand why we were surprised a quarter ago. If you have such good visibility on the timing of these lease renewals and the U.S. mailing business is the primary area of disappointment, why didn't we see this coming, and how can we have confidence again that it reaccelerates going forward? Is there a technology driver what, is there a regulatory driver, etc.? Thanks.

I think there is really two things, and as I said back at the end of Q3, the first was we did not really account for what happened with leases when they had partial lease upgrades which is what occurred in the Q1 and Q2 of last year. And what I mean by that, to try and simplify it is if you have a piece of equipment three years into a five-year lease, and we upgrade that equipment for you with technology, which is what we did in Q1 and Q2 of last year, instead of trading that earlier, you actually extend the time before the trade up.

You say I just got the upgrade to the equipment, and therefore, I won't trade it on the regular schedule, I will let it go a little longer. That actually is where we had not anticipated that there would be a change in the timing of when people upgrade their leases as a result of what happened in Q1 and Q2. That was the major change that we saw, and it was something we have now got in our models, but we had not put anything like that into prior modeling.

And then, of course, the second part was the economic effect. So it was really the two one on top of the other, but we did not have that in the model. We now have it in the model, and so as there are any future similar changes, we will see when it will occur and then, of course, the economic effect which causes people to extend their leases rather than put in a new piece of equipment, which gives us the same revenue flow on a stream basis but it does not give us the sale recognition that you would have when you change the piece of equipment.

From a profitability point of view, it is of course very good when you expand the same unit in place. So those are really the three items that occurred that we now have a better way of looking at and projecting.

And in terms of any technology or regulatory drivers that--coming in the future, in the next 12 to 18 months to drive upgrades?

What we actually see there is nothing real specific, but as I also spoke in November, we are moving to persistent connected devices and we see a lot of value that will occur in the coming years in that area and we are working very closely with the postal service in creating new values by having devices connected that can be changed and modified on a much more frequent basis.

And so, we will be--instead of having a hard wired device, we will have softer devices that can migrate much more quickly; and the customers will see benefits in that as far as their costing and capability as the postal service continues to roll out full phase scanning, particularly here in the U.S., and that will be there in Q2 of '08 and as a result, the ability to scan the bar codes and take action on those will be greatly enhanced.

So we see that as more of a natural program rather than a forced one. And we believe that it is better to have a natural value curve creation rather than a forced mandate which causes irregularities in the market.

Okay, final question was on equipment margins. Equipment margins were about four points below what I had modeled. What is your outlook for equipment margins going forward?

Thanks and that is it.

When you say equipment margin, I think you are looking at mix, and so, I think it really would be more a function of the mix between U.S. mail, which is the meter business, and production mail; and we don't see any changes in the margin on equipment for each business. The only exposure is to what degree the mix changes.

Thank you.

We do have a follow up question from Anun Debrua with Banc of America. Please go ahead.

Thanks, guys.

Just one more high level one. I guess how would you characterize the state of--or your feel for the state of the economy today versus what you had baked into your forecast back in November? Thanks.

I think we are seeing basically what we had forecasted at the time. I believe we saw it a little earlier than many people saw it because when you look at our business, it is very involved right early in where the transactions are originated; and so we probably saw it earlier and we have not seen any major trend or anything that has changed from where we had seen it in the end of the third quarter. So we are seeing a fairly constant state at this point.

Okay, thank you.

And we do have a question from [Jake Hemmini] with Morgan Stanley. Please go ahead.

Hi, it looks like you have about $550 million of notes maturing in 2008 and it looks like you're going to do another--close to $400 million of share repurchases plus a dividend. So the three of those combined are about $1.2 billion of cash needs and you're going to generate at the mid-point 650 of free cash flow. Can you kind of just bridge me to how you are going to finance the gap there?

Yes, well I would say a couple things.

First is, you may want to look at cash flow over a two year period. In other words, we had in 2007 extraordinary free cash flow. So if you add the free cash flow that we achieved in 2007, plus what we expect in 2008, you can see that we can accommodate all of the dividends, the share repurchase that we've announced to date and the cash portion of the restructuring. All that is accommodated by the free cash flow either that we have already generated or that we are projecting for 2008. So the first premise is that you do not have that same issue.

Second is, we will use commercial paper as part of it. We think that part of our offset to an economy is the floating rate, and as I mentioned, we have 80% fixed rate and 20% floating which is a much higher ratio than we typically would have, so we can use that.

And then, the other thing that creates an uncertainty is just to what extent we do anything with management services. Until that gets resolved we do not want to lock into any particular financing strategy.

How much commercial paper do you have outstanding currently?

We have about 500 million outstanding.

Okay. Thanks.

Thank you.

And we do have a question from Edward Donahue with One Invest. Please go ahead.

Good afternoon, gentlemen.

Question with regard to one of the previous callers was talking that--asked a question whether there was any regulatory element as a driver going forward and I was just wondering how phases three and four, which is on the U.S. postal site, which is supposed to be the digitalization ending in December '08, whether you see that as a driver or not?

We have done a pretty good job of moving our devices and I think we can tell you what we have got left. We have got 40,000 units left, which out of our base is not that big a number. So, we would expect to see a good portion of those change, but, as I'd previously mentioned, since this was a long migration, it did not have quite the same anomaly as we had in some of the others.

The only real anomaly was when they introduced shape based which was not part of meter migration and stuck that in the middle. That had an effect on the business, but the migration is really flowing through our normal lease upgrades; and we might see a little bit at the end of the year but in general it would just flow through our normal business.

And if I may ask a question about the competitors then, do you see those similar trends with some of your competitors? Especially Neopost?

I think that if you look at competitive basis, there is a higher percentile of the base that would be open for opportunity.

Very nicely put. Thank you. Okay, I am going bed now. Thanks a lot.

Thank you and there are no further questions.

Thank you very much.

As I mentioned as we look forward in 2008, we see opportunity. Certainly we have come through some challenges back in Q3, but I think as we have exhibited in Q4, we had a very strong handle on exactly what was happening within our business, where the opportunities were and set appropriate forecasts going forward. As a result, we are able to over achieve on the forecast that we delivered on--on our earnings, and significantly on our free cash flow.

As we look forward in 2008, we look forward to continuing to be able to not only meet our objectives but to deliver enhanced value, and that will be our continuing focus. We are over 90% identified on our transition initiatives program. So we see that within our sights to get to the numbers that we have talked about and to deliver the value.

To continue at the same time to enhance our strength as a company, to enhance our capabilities and to deliver more value to our shareholders because that inevitably between our shareholders and our customers is what is going create the strength and the future of this company. So thank you very much for taking the time out this evening to speak with us, and we look forward to sharing more good news with you in the future.

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