必能寶 (PBI) 2009 Q4 法說會逐字稿

Ladies and gentlemen, good evening and welcome to the Pitney Bowes fourth quarter and full year 2009 earnings results conference call. All 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, Chairman, President and Chief Executive Officer; Mr. Michael Monahan, Executive Vice-President and Chief Financial Officer; and Mr. Charles McBride Vice-President Investor Relations. Mr. McBride will now begin the call with the Safe Harbor overview.

Thank you. Included in this presentation are forward-looking statements about our expected future business and financial performance. Forward-looking statements involve risks and uncertainties that could cause actual results to be materially different from our projections. More information about these risks and uncertainties can be found in our 2008 Form 10-K annual report and other reports filed with the SEC that are located on our website at www.PB.com, by clicking on our Company and Investor Relations. Please keep in mind that we do not undertake any obligation to update any forward-looking statements as a result of new information or future events or developments.

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

Thanks, Charlie, good afternoon and thanks for joining us today. Let me start by sharing some thoughts on our performance. Mike will follow with the details of our fourth quarter and full-year results, and then we will take your questions.

In 2009 we took definitive actions to position ourselves for long-term growth while also addressing the immediate challenges presented by an uncertain business environment. As a result, we achieved adjusted earnings per diluted share for the year of $2.28, which was near the high of our guidance range of $2.19 to $2.31. We enhanced productivity, reduced expenses, and increased the variability of our cost structure, all of which helped offset the impact of revenue declines driven by macro economic conditions. We produced year-over-year EBIT and EBIT margin improvements in four of our business segments - software, management services, mail services and marketing services. These actions also resulted in a $170 million reduction in reported SG&A expenses on a year-over-year basis. This will help us leverage revenue more efficiently as markets improve.

During the year, we took a balanced approach to our reinvestment into the business which has allowed us to remain very profitable and generate significant free cash flow. Our free cash flow was $889 million for the year, which exceeded our guidance range of $750 million to $850 million for the year. Free cash flow for the year benefited from lower levels of receivables and inventories, as well as reduced capital expenditures. For the 28th consecutive year our Board of Directors approved an increase in the quarterly dividend to $0.365 per common share for the first quarter of 2010.

As we exited 2009, we began to see some early signs of improved economic activity. There was an increased backlog of orders in our production mail business, our solutions sales activity increased during December in our mailing businesses, and a moderating decline in the total US mail volumes, especially within standard mail. Last quarter we announced our partnership with Hewlett-Packard to deliver the industry's only integrated print and mail solution into the market. The Pitney Bowes IntelliJet printing system leverages the trend towards increased usage of color to deliver higher value transactional and trans promotional mail that can help businesses grow revenues while reducing their mailing costs. As we announced today, production mail recently sold its first units of this exciting solution.

Additionally, in our software business we had an increase in the number of transactions over $500,000, many of which will be recorded as recurring revenue. In 2010, we will continue to expand our recurring revenue stream as we move more towards software as a service model. We believe that these activities signal some changing customer behavior yours and an affirmation of the value of our solutions in supporting our customers' growth and efficiency. Throughout the year we continued to invest in future growth through innovation, new products, partnerships, and enhancing customer-facing processes. We also initiated a comprehensive transformation process to lay the foundation for increasing long-term customer and shareholder value. This transformation is designed to give us the capacity to invest in future growth and the flexibility and organizational capability to succeed in a range of conditions.

Now let me turn it over to Mike for a discussion of the fourth quarter and our full-year financial results. Mike?

Thank you, Murray. Our revenue for the year was $5.6 billion which represented an 11% decline from the prior year, but was a 9% decline when you excluded currency effects. Reported revenue for the year was within our guidance range. Revenue was $1.5 billion for the quarter, a decline of 6% compared with the prior year. Revenue growth in this quarter had about a 3 percentage point benefit from currency.

Breaking down our revenue for the quarter between US and non-US operations, US revenue declined by 8% when compared with the prior year. Outside the US revenue declined by 3%, but was down 13% when you exclude the positive impact from currency exchange rates. Non-US operations represented 30% of total revenue in the fourth quarter. Adjusted earnings before interest and taxes, or EBIT, for the quarter, was $256 million. The adjusted EBIT margin for the quarter declined year-over-year to 17.6%, on lower revenue and a shift in the mix of business, but benefited from our cost management and productivity actions. Our adjusted EBIT margin improved by 50 basis points when compared with the third quarter. We reduced our costs as a percentage of revenue for equipment sales, software, business services, and support services, as well as lowering our SG&A expenses for the year, primarily because of the productivity improvements that we have put in place.

On a constant-currency basis, we had a year-over-year reduction in SG&A expense of $13 million in the quarter and $113 million for the year. EBIT margins improved sequentially for three consecutive quarters for production mail, software, and management services, and for two consecutive quarters for international mailing. These improvements in EBIT margins were a result of our continued focus on reducing our cost structure and increasing our operational efficiency. While we clearly have done a lot to improve our productivity we're committed to doing even more through our transformation program. Strategic transformation will enable us to improve the way we go to market and interact with our customers. Plus, we will put in place new processes and systems that will make our operations more efficient and more profitable.

When we add back depreciation and amortization to our adjusted EBIT, EBITDA for the quarter was $333 million, or $1.60 per share. Net interest expense in the quarter including financing interest was about $49 million, essentially flat to the prior year. The average interest rate in the quarter was about 4.2%, again comparable with the prior year. The effective tax rate for the quarter on adjusted earnings was 32.1%. This was lower than our tax rate on adjusted earnings last year which was 33.6%. While the tax rate can vary during the course of the year depending on timing and mix of business, the tax rate for the year on adjusted earnings was 33.7%, only slightly lower than our expected tax rate range for the year.

Adjusted earnings per share for the quarter was $0.64, compared with our adjusted earnings per share of $0.77 for the same period last year. The decline in earnings per share versus last year is primarily due to lower revenue and a shift in the mix of business. However, our adjusted earnings per share this quarter is 16% higher than our adjusted earnings per share of $0.55 in each of the first three quarters of the year. For the year, adjusted earnings per share was $2.28, which was near the high end of our guidance range of $2.19 to $2.31. Currency exchange rates compared with last year benefited our adjusted earnings per share by $0.01 this quarter but reduced our earnings per share for the year by $0.04. GAAP earnings per share per share included pretax restructuring charges of $36 million in the quarter and $49 million for the year. This represented $0.11 per share in the quarter and $0.15 for the year. Additionally, GAAP earnings per share in the quarter included a $0.01 benefits related to adjustments for certain leveraged lease transactions in Canada and a $0.06 per share loss for discontinued operations which is related primarily to interest on uncertain tax positions related to our former capital services business.

For the year, GAAP EPS includes non-cash, net tax adjustments of $0.05, primarily associated with out of the money stock options that expired during the year, and a $0.04 loss associated with discontinued operations. Free cash flow was $223 million for the quarter, which was comparable to the third quarter. For the full year free cash flow was $889 million, which exceeded our guidance range of $750 million to $850 million of free cash flow for the year. Free cash flow for the year benefited from lower levels of receivables and inventory, as well as reduced capital expenditures. During the quarter, we returned $74 million to our common shareholders in the form of dividends and paid $298 million in dividends for the year. We used commercial paper to reduce our preferred stock outstanding by $75 million. We made a $100 million contribution to our US pension fund and we contributed a total of $25 million to our UK and Canadian pension funds. As a result our commercial paper balances increased $56 million versus the prior quarter. However, because of our strong free cash flow for the year, we reduced overall debt by $242 million. About 77% of our total debt is fixed rate and 23% is floating rate.

Now, let me highlight a few points about our transformation program. In the fourth quarter we began to implement some of the initiatives identified by our project teams and we're in the process of finalizing the planning for other initiatives we will implement throughout 2010 and 2011. During the fourth quarter our restructuring charges were largely for severance costs related to the elimination of more than 300 positions across the Company. We continue to target net benefits of about $50 million in 2010, and annualized net benefits in the range of at least $150 million to $200 million by the end of 2011. As previously discussed, we expect the phased implementation of this program will occur over the next 18 to 24 months. Therefore, we expect to achieve the full annualized run rate of full benefits in 2012.

That concludes my remarks. And now Murray will provide some insight about our plans going forward and then we'll take your questions.

As you saw in our earnings release, we are reaffirming our 2010 guidance. We believe that the economy will gradually improve throughout the year, which should translate into a moderation in the decline of US mail volumes, especially in standard mail. We expect a greater percentage of our 2010 earnings will occur in the second half of the year, given the seasonality of our business in a more normal economic environment, the expected lessening of headwinds from lower financing revenue, as equipment sales begin to improve, and the increasing benefits from our transformation initiatives. We expect 2010 revenue to be in the range of flat to plus 3%, which includes approximately 2% benefit from currency. Adjusted earnings per diluted share are expected to be in the range of $2.30 to $2.50 for the year. Adjusted earnings per share excludes the expected impact of $100 million to $150 million of pretax restructuring charges associated with our transformation initiatives. This range also excludes an expected non-cash tax charge of approximately $0.07 per diluted share associated with out of the money stock options that expire principally in the first quarter of 2010.

On a GAAP basis we expect 2010 earnings per diluted share from continuing operations in the range of $1.75 to $2.11. We expect to generate free cash flow for 2010 in the range of $650 million to $750 million. Cash flow is expected to benefit from improved earnings and ongoing asset management, but will be partially reduced by an anticipated increased investment in finance receivables from higher levels of equipment sales. We believe that we are making the right moves to position ourselves to fully leverage the opportunities available in 2010 and beyond. We are fully committed to acting swiftly and decisively to transform our ability to deliver sustained long-term value for shareholders and for customers.

Thank you. Now lets open the line for questions

(Operator Instructions). Our first question is from the line of Julio Quinteros from Goldman Sachs, please go ahead.

Just real quickly, just trying to think through the order of spending. So assuming discretionary spending comes back into 2010, and you guys go talk to your clients, can you just help us put in some kind of order where are they going to spend first, and then ultimately where does the types of services that Pitney Bowes sell fall out? Do you spend on technology, software, infrastructure, and then mail meters? What I'm really trying to get to is how far in that cycle, if you will, of spending, will they get around to the types of products and services that you guys can provide? Any perspective on that will be helpful.

It is certainly always difficult to predict how tour customers will spend their money. But if we were to speculate, a couple of things. One, there have been deferrals on high-end production equipment, and that equipment is and has been aging, and we would expect them to look to enhance their productivity and enhance their communications to their customers, enhance our engagement into a high-end color print. Because we really see that as a market that will come out as the economy begins to accelerate. Because people are looking at how to generate more revenue from their customers. And this is a way of focusing on that.

On the second part of your question, around the metering business, I would think that customers would be more likely to react to new equipment than to lease extensions, and that would be a positive for us. So during uncertainty the extension of the lease which gives us lower up-front revenue but good profitability over the term, would probably switch to more investment in new assets. And I think that would just change with confidence in the market dynamics, and wouldn't be affected as a choice, because it's money that's already being spent. It's just a matter of changing the term and going to new assets.

And what about the software business, how early in the cycle would you guys consider the type of software products that you guys provide could see demand?

As we've seen there's been other predictions in the market that IT spend will start increasing. And certainly our software tools are right in there around the growth of customers' businesses, their ability to do analytics, and their ability to communicate more effectively with their customers. So we think that should follow the standard IT spend pattern.

Got it, great, thank you.

Question from Shannon Cross with Cross Research.

Thank you very much, good afternoon. My first question is just if you could give us a little more color in terms of the linearity during the quarter. Murray, you talked about things getting better. I'm just curious -- a a follow-up to the prior question -- I know we're all grasping at straws in terms of improvement here -- but did you see any slow-down in terms of people asking for lease extensions? Your backlog increased a bit at that point in time. Do you think it was truly new demand or perhaps more budget flush or people thinking about budgets? We're just trying to get an idea of how we should think about the year ramping from first quarter on. And then I have a follow up.

Hi Shannon, it's Mike. With respect to the mailing business, we saw a similar level of lease extensions in the fourth quarter as we did in the third quarter. So similar there. What Murray referred to some improvement in the mailing business, particularly in December, was around some of what we would call solutions products, so more of the mail creation, folding and inserting in an office environment. Those types of solutions. In terms of lease extensions, there was probably twice the level versus the prior year. So we've seen a leveling of that between the third and the fourth quarter, but it's still a higher level than the prior year.

I think, also, Shannon, what I was referring to is the higher written business in the DMT area, and in the software spaces. So one month does not a trend make. But as we looked at the month of December, we saw considerable positive, and we didn't hear anything that would suggest it had anything to do with budgeting, but rather the desire of customers to enhance their communication with their customers, and particularly in how they can generate revenue from their customer base. So it looks like a positive, but of course it's one month, and we'll be looking as we go through the first quarter, if that trend continues, particularly in the higher ticket, it will then have a ripple-down effect throughout the economy.

Is there anything we should think about with regard to this being an election year in terms of increased mail volume, or perhaps more demand for your direct mailing and software solutions? Is that anything that played in the past?

Certainly when there's election there is more communication that goes out. I would see it as one of the things that should dampen the decline that we have been experiencing to date. But I wouldn't see it as something that would create a major swing. Certainly as they spend money they have to communicate and direct mail is certainly one of the ways they do that.

And then my final question, can you talk a little bit, and maybe it's for Mike, about your thoughts on capital structure. Clearly your cash flow is extremely strong. Your thoughts on the commercial paper market, short versus long-term maturities. I know the board has to talk about share repurchase. But just any thoughts you have on cash usage and how you want your capital structure maybe as you go through the year?

Sure, obviously we're watching interest rates as everyone is. We've tended to keep our portfolio more long-term and fixed rate, and we think that that's been the right place for us to be in this environment. In terms of share repurchase, we do have an outstanding authorization of about $73 million, but we'll continue to be prudent in how we look to do that. So I would say given the current environment, we'll probably continue along the lines of the strategy we've used to date.

Even with almost $900 million in cash?

We're using that for various things. We're giving back to our shareholders as well as reinvesting in the business.

Okay. Thank you.

We have a question from Ananda Baruah with Brean Murray.

Along the same line of stability or improvement of the business, I appreciate the comment, it makes sense that you're still seeing a lot of lease renewals, lease extensions as opposed to renewals. But the equipment sales number is really good this quarter, at least it was up sequentially as much as one would expect in line with typical kind of seasonality. And the US mailing business for the first time in a couple of quarters is actually up. So could you maybe just talk about what the drivers of those two businesses were, the up sequentially relative in the context of you're still seeing two X the number of lease extensions as you did a year ago? And then I have a follow-up.

I think there is a couple things there. One, the lease extensions, although they hurt at the front, they do have benefit over time. So we're getting some positive longer-term effect out of the earlier lease extensions. We have seen more activity and, as I mentioned, there has been a lessening in the decline rate in mail, and that would show the potential for more confidence there. And then also we took new solutions to the market. If you think back to the beginning of the fourth quarter or the end of the third quarter, we launched a new series of mailing equipment, a new model of mailing equipment, and it's been very successful in the quarter.

Okay, great. So is it safe to assume, given your revenue guidance for 2010 that you've reiterated here, zero to 3%, say it's 1%, organic, and you saw both the mailing business and the equipment supplies up this quarter versus September, is it safe to assume given your 2010 revenue guidance, the December results, that we can feel free to model in those key businesses typical seasonal patterns for revenue even though they might be on the softer side given you are expecting slightly less dampening going forward in mail volume?

Yes, I think the guidance, obviously, on an annual basis that we provided considers seasonality as we would typically see in the business. So that's why we indicated expectations of a back half of the year being a bigger proportion of our revenue and profit than the front half of the year. And as you said, I think this quarter's reflective of that seasonality as well.

Okay. And then just this last one for me. Can you comment a little bit more on the timing of the $50 million savings benefit you expect to realize in 2010? And related to that, the SG&A dollars are a little bit higher than at least I have modeled this quarter. And maybe you could just discuss, they were higher than what you expected as well, maybe what the driver of that was.

On SG&A one of the drivers is the impact of currency. Currency was favorable this quarter, but obviously that had the impact of then increasing the SG&A expenses, as well. So when you factor that out, we actually would have reduced expenses by $13 million in the quarter. So in line with our expectations. In terms of your other question about the transformation benefits, in a program like this, as we started this late in 2009, really in a diagnostic phase as we described, and then obviously beginning to implement the plan, we would expect that those benefits are going to be less in the beginning of the year and obviously build as we implement the actions over the course of the year.

Okay, great, thanks, guys.

And we now have a question from the line of Chris Whitmore, Deutsche Bank.

Thanks very much. I wanted to follow up on the mail volume question. You mentioned the rate of decline for mail volume slowed in the quarter. Can you quantify that and maybe give us some color on the first-class mail versus standard mail?

Yes, in the quarter we saw, if you go back in the year, it was in the negative 14, and then it's declined and the non-quarter-ending we saw was in the negative 11 range. And the post office has been predicting 2010 to be as low as 6 and they're banding it at a 6 to 9 range. So we did see, although it wasn't a quarter-end number that we had, it was through the end of November, we did see a reduction in that rate, and from their predictions they're expecting it and we would confer with what they're predicting that there would be decrease in that rate.

Is that total mail or is that first-class mail?

That's in total mail.

I think in your prepared comments you mention that you're seeing a bit of a greater improvement in the standard mail. Is that correct? And maybe you can discuss what's driving the diversions between the two mail streams.

The standard mail actually had significant impact as the financial sector slowed down in going after their solicitation for growth. So we are starting to see some of that move back where companies are now focusing back into revenue growth and how they will get there. I think everyone is taking a reset in their economy, in their economic outlook, and they're saying we still need to grow revenue. And that's really what's starting to pick up the advertising mail as people move away from just cost management into saying,I'm managing costs but I now have to run with growing revenue. So that's, I think, what is driving the change on the standard side. Certainly during the time period there has been some substitution in first class that has occurred, but with the trans promo, we see opportunity to move back into the transactional space and provide opportunities for customers to grow their revenue, rather than just have it as an expanse. And that is really the intent of adding color print at a cost that's affordable and then incorporate into that the ability to deliver promotional messages that are focused on the recipient and what the recipient's interest is in. And we think that will have a longer-term positive in the retention of the first-class mail stream.

So based on your early analysis, what are the response rates for this type of targeted first class mail versus this type of targeted e-mail?

There's a very significant difference between the response rates of the two, but rather than us quoting numbers, we're looking to get external numbers on that, that we'll be happy to share with you as we get confirmation of them. But the comparatives of the companies we worked with is significantly higher and is valued on a cost performance basis. But we do want to get third-party validation rather than taking numbers that we might put out.

Okay. Thanks very much. One last one for me is around some of the recurring revenue streams like rental and financing income. What's your outlook in terms of the distribution throughout the year? To what extent does rental and financing income lag the expected recovery in equipment?

Yes, Chris, it's a good question. Generally we see, and I think you could see in the trend, of particularly the financing revenue, as it trended down over the last several quarters, really on the heels of the slow-down in equipment sales that we saw starting the fourth quarter of last year. So, generally, there's a two to four-quarter lag in those recurring revenue streams in terms of financing a rental where additional equipment sale will start to contribute to those and obviously fewer equipment sales will slow that down. So that's why we referred to the fact that as we see equipment sales come back we would see a lag, but some improvement in financing as we grow equipment sales.

Thanks very much. We have a question from Steve Surrell from Conning Asset Management.

Yes, good evening. You indicated you do expect some growth in finance receivables in 2010. Could you quantify that for us?

It is really going to be dependent upon the equipment sales growth. At the end of the day, I think we'll see typically, if we have an equal amount of sales year-over-year then that will keep us relatively steady. To the extent we can get some growth in the equipment sales line that should, particularly in our core mailing business, that has the highest lease sale ratio, that would drive the finance receivables.

Okay. And you indicated probably similar capital allocation approach as you have in recent quarters,so should we assume from that general or gradual continued reduction in total debt levels?

Given the free cash flow that we have, that would certainly be one of the things that we would be able to do with our excess free cash flow beyond obviously making our dividend payments and the other investments we might make in the business.

Okay. And given the pension fund contribution, could you comment on what your funding status was at the year end.

Sure. We're funded at about 90% both on a PBO and ABO basis. It's plus or minus 1% either side of that. So reasonably good shape there.

One last question. You recently announced the hire of a Joseph Timko as Chief Strategy and Innovation Officer. Can you elaborate what his role is going to be with the Company?

Sure, Mr. Timko has come onboard. We had David Dobson who was our Chief Strategy and Innovation Officer, and he has moved on to run our services business, and so Joe is going to be filling that space. He will be leading all of our ongoing strategy, development and initiatives from a strategic point of view, looking at how we can leverage our position across all of our businesses, and how we can take advantage of the capabilities that we have within our businesses in creating new combined solutions. At the same time he will be managing our advanced concepts and technology group, as well as our corporate marketing function. So he will be managing all of those functions on a go-forward basis.

Does this suggest any increase in the focus on M&A for growth over time?

I would not say it suggests anything specific from that point of view. We're very focussed on our organic opportunities, and certainly we're always looking at how we could accelerate our organic growth by the addition of other complementary goods and services. So I would not see it as specific signal.

Thank you very much.

I have a question from line of Shannon Cross, Cross Research.

Thank you, just a few follow-up questions. The first one is can you give us an idea, you talked about verticals before in terms of exposure from a revenue standpoint. I'm curious at this point what your exposure is to the financials and if you don't have it, we can always follow up.

I don't have a specific percentage. It has traditionally been a little more than 20%. I think in 2008 it was about 23% of our total revenue base, and that obviously varies by business. That being less in our core mailing business and higher in some of our bigger ticket items like the production mail business. Obviously it would be probably a bit less than that at this point but I don't have a highly accurate number at this point yet for 2009.

That's fine. And then can you talk a little bit about how -- and I'm sure it's on the margin -- but when you move to software as a service how we should think about the shift in terms of how that impacts the P&L.

In terms of our software business, there's two components to that business. There is a larger ticket component that's particularly focused around our address hygiene, address cleansing-type software products, and those have traditionally been sold more as a perpetual license with a sales value up front. We're looking at, as we both develop product that operates in the software as a service model, but also looking at pricing strategies, that provide our customers the ability to license that software over a period of time, what that will do is smooth the revenue in the software business over multiple years for a given customer, and provide a little bit higher level of recurring revenue stream in that business. So obviously in the short term we won't get as much immediate sales value, but we certainly get the benefit of that recurring revenue stream over time matching it to the development investments we make.

Great. And then my last question is just with regard to the restructuring you're doing and changes in your business, have you made any changes to your sales comp plans, how you're addressing the customers and how your comping the sales people to what they're actually driven to sell?

Our sales comp plans remain somewhat similar although we do have a more intense focus on the retention of our existing customers in ensuring that we continue to grow within our customer base. As to type of product and solution, we certainly are doing more within offering full solutions to customers, rather than point products. And so that is tailored into compensation and will continue to be an area we'll look to for long-term growth in.

Great. Thank you very much.

Our next question comes from the line of Ananda Baruah, Brean Murray.

Just a couple follow-ups. Murray, in terms of operating margins, now that it feels like the business is more stable, and I'm particularly thinking about the US mailing business, should we think of those margins at this point, until restructuring kicks in, as really moving with the revenue?

I think that there are two components for you to think about there. One is the operating margins from the equipment and services side. Those really have stayed pretty stable. The majority of the effect has got to do with the change in finance receivables. And so that's where the incremental leverage is. So I think you need to balance those two as you look at the overall margins. As we see equipment sales start to return, that will have, as Mike spoke, an affect on the finance receivables, and that's what gives the leverage. Now at the same time, the things we have done in changing the model and reducing costs, will give us incremental leverage when we see things change as we go forward.

Okay. Thanks. And I don't remember if this was addressed yet or not, but can you guys guide us, just touch on what was the driver of the rental and finance income being a little softer than typical this quarter?

It is really related to the history of equipment sales over the last four or six quarters where we had to lower equipment sales. What happens is as you have that run-off, obviously if you don't have lower equipment sales you have lower meter placements, that is going to reduce your rental revenue. On the financing side, as the financing asset balance comes down, there is less financing income. So that tends to lag a little behind the sales side of the equation. And obviously on the other side if you get sales improvement, that will begin to turn the corner on those recurring revenue streams.

Got it. But nothing fundamentally has changed what has been going on with the business or how you guys go to market.

No, it is reflective of the trend of the business over time.

Great. Thanks.

(Operator Instructions) We now have a question from the line of Lloyd Zeitman with Bernstein. Please go ahead.

Hi folks. The software as a service, is that going to require any additional PP&E investment on your part?

No, there shouldn't be substantial PP&E related to that. Obviously there is development costs but that's built into our overall development plans. In terms of software as a service, it often is provided through a third-party platform, so we would not have PP&E in the sense of building large server farms, or that type of thing.

And on that note, as far as PP&E, could you tell us what your capital spending was in 2009, and how that breaks down between rentals and PP&E?

Yes, it was about $170 million in the year in total, and it was roughly 50-50 between rental and other capital expenditures.

Okay. And as far as your finance operations, could you go through some of the metrics there and just give us an idea as to how that's performing?

Are you talking in terms of credit loss?

Credit losses, just overall credit quality.

Overall credit quality is good. I'd say in line with what we've seen throughout most of the year. Our provision expense in the fourth quarter was a bit higher, about $2 million to $3 million higher than the prior year. That's not necessarily related to higher write-offs but higher provisioning rate because we look over a period of time of performance of the portfolio, and provision against that and we found that that, as well as obviously identifying specific accounts, is the most effective way for us to provision. And obviously when you add years like 2008 and 2009, with the credit environment the way it is, into that mix, it drives you towards a higher provisioning rate, but we're very comfortable with the quality of the portfolio, the performance delinquency rates are good. So we don't see anything that concerns us around the portfolio.

Very good. Earlier you mentioned lease extensions are running at about twice last year's level. Is that correct?

That's correct. For the quarter. But pretty much in line with what we saw in the third quarter.

Okay. And if I remember correctly, I believe sometime maybe in the first half of the year I think you folks said that they were running about three times above prior-year levels. And I was just wondering if the trend were to hold, when would we reach a point where, let's say, it would be roughly flat on a year-to-year basis?

Yes, it would probably be about the second quarter of next year, because that three times was really based on the prior year having a relatively low level, and so in absolute numbers, probably by the second quarter into the third quarter we are at a run rate.

And the cost of equipment sales in the quarter was about 49%, which is really a marked improvement over what we've been seeing lately. And was that just productivity, or was there, lets say, was there some mix issues involved as well?

Yes, it's both. There's clearly some productivity in terms of the programs we've implemented over the last two years but in addition to that, there was somewhat lower percentage of production mail to mailing, which would, obviously, have an impact of improving the gross margin average.

Okay. And so then if this trend that you saw toward the end of the year with some improvement in production were to continue, that would have a negative impact on the margin but of course a beneficial impact to the sales line?

Yes, we really focus on the margins on a business by business basis because they have different profiles.

Okay. But so essentially that would be correct that we could see some shift in that to somewhat worse margin with better sales line?

I guess I would say it a little different, Lloyd, that if we had higher percentage of production mail, we would see lower relative average margin of those businesses.

Okay. I'll take your explanation. All right, thanks very much.

And at this time we have no additional questions in queue.

Thank you very much for the questions, and as we look at 2009, as I mentioned, we took definitive actions to position ourselves for long-term growth, while addressing immediate challenging business conditions. As a result we remain solidly profitable, generated strong free cash flow, reduced our fixed cost structure, invested for the future, as well as increased our dividend for the 28th consecutive year. We are fully committed to acting swiftly and decisively to transform our ability to deliver sustained long-term value for our shareholders and our customers. Thank you.

Ladies and gentlemen, this conference will be made available for replay after 7:30 PM today through February 18th at Midnight. You may access the AT&T Teleconference replay system by dialing 320-365-3844 and entering access code 141693. Those numbers again are 320-365-3844, with the access code of 141693. That concludes our teleconference for today and we appreciate your participation and you may now disconnect.