必能寶 (PBI) 2010 Q1 法說會逐字稿

Good evening and welcome to the Pitney Bowes first quarter 2010 earnings results conference call. Your lines have been place din 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. Please go ahead, sir.

Thank you. Included in this presentation are forward-looking statements about our expected future business and financial performance. Forward-looking statements about 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 2009 Form 10-K annual report and other reports filed with the SEC that are located on our Web site 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 developments.

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

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 first quarter results, and then we will take your questions. During this quarter, we continued to take definitive actions to position ourselves for long-term growth. While also addressing the lingering impact on our business from the global economic uncertainty of the last two years. We are focusing on our distinct customer segments, making progress against our growth plans, and implementing a strategic transformation.

Revenue for the quarter was $1.3 billion, a decline of 2%, including a 3% benefit from currency. Adjusted earnings per diluted share was $0.55 compared with $0.55 from the prior year. This quarter's results reflect some signs of stabilization among our customer base, especially our large enterprise customers, as well as, to a lesser extent, among our small to midsize customer base. Notwithstanding the modest decline in revenues, year over year revenue performance during the quarter was our best since the third quarter of 2008. With improving trends in equipment sales and support services, which was fueled by demand from enterprise customers globally.

At year end, we had an increased backlog of orders in our production mail business. This quarter, the installation of those orders helped drive production mail's strong revenue performance in addition to the strong order flow during the quarter. We saw the same positive impact from enterprise customer activity in our mail services and our software solutions during the quarter as well. Among our small to mid-size customer base, our US mailing equipment sales during the quarter were essentially flat with prior year. However, solutions application sales were particularly strong within this customer segment, an improvement which we previously noted started in December in our US mailing business. We believe these developments are early signs of stabilization as US mailing experienced its best year over year equipment sales performance since the end of 2008.

These positive trends were offset by lower rental and financing revenue, which resulted in lower mailing revenue and EBIT growth, but consistent with our expectations as shared with you previously. As our equipment sales performance improves, the headwinds created by the impact of reduced equipment sales in prior periods on the financing and rental revenues should moderate. Along those lines, the April launch of our ConnectPlus customer communication series is an example of how we are investing for future growth by delivering new products and solutions to meet the distinct needs of our key customer segments. ConnectPlus is the industry's first web-enabled mailing system, and it reflects our intent to deliver a broader portfolio of business services to our customers in this segment. Our ability to bring an expanding portfolio of mailing, shipping, marketing and business services to customers in this segment is an important competitive differentiator from point solution meter providers.

We are continuing to invest in our future while reducing our cost of doing business through our strategic transformation program. We are implementing processes and systems to leverage our growth opportunities and address the needs of our distinct customer segments. As a result, gross margin improved year over year, and there was a reduction in the absolute dollar level of SG&A, or selling, general and administrative expense, versus the prior year. This was achieved despite reinstituting some employee related costs, which we reduced in 2009. The adjusted EBIT margin for the Company improved as a result of improvement in EBIT margins in six of our seven business segments during the quarter.

Now let me turn it over to Mike for a discussion of the first quarter financial results.

Thank you, Murray. Revenue was $1.3 billion for the quarter, a decline of 2% compared with the prior year. Revenue growth 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 5% when compared with the prior year. Out the US, revenue increased by 4%, but was down about 7% when you exclude the positive impact from currency exchange rates. In addition, if you exclude the impact of the timing of the postal rate increase in France, then revenue outside of the US would have declined 5%, similar to the decline in the US. Non-US operations represented 30% of total revenue in the quarter.

Adjusted earnings before interest and taxes, or EBIT, for the quarter was $230 million, which was slightly better than last year. The adjusted EBIT margin for the quarter increased year over year to 17%, despite lower revenue, as we continued to benefit from our strategic transformation, cost management and productivity actions. We reduced our cost as a percentage of revenue in the quarter for equipment sales, business service4s and support services when compared with the prior year. Selling, general and administrative costs, or SG&A, declined $7 million year over year. And on a constant currency basis we had a year over year reduction in SG&A expense of $22 million in the quarter. When you look at just our general and administrative expense, it declined $17 million year over year, and was 20 basis points lower as a percentage of revenue, excluding the effects of currency.

EBIT margins improved year over year in six of our seven business segments. That included international mailing, production mail, software, management services, mail services and marketing services. These improvements in EBIT margins were a result of our revenue growth in production mail, mail services and international management services, and our continued focus on reducing our cost structure and increasing our operating efficiency across all of the business segments. As expected, the EBIT margin in US mailing continued to be pressured by reduced rental and financing revenue, which will lag in improvement in US mailing equipment sales, as Murray discussed earlier.

While we have clearly done a lot to improve our productivity, we are committed to doing even more through our strategic transformation program. Strategic transformationing is enabling us to further 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 profitable. When we add back depreciation and amortization to our adjusted EBIT, EBITDA for the quarter was $309 million or $1.49 a share. Net interest expense in the quarter, including financing interest, decreased about $2 million when compared with the prior year, to $49 million. This was a result of a combination of a lower average interest rate and lower debt balances. The average interest rate in the quarter was about 3.9%, 30 basis points lower than the prior year.

The effective tax rate for the quarter on adjusted earnings was 34.7%. This was slightly higher than the tax rate on adjusted earnings last year, which was 34.2 %. We expect the tax rate on adjusted earnings could vary during the course of the year, depending on the timing and mix of business, within a range of 34% to 35%. The GAAP tax rate for the quarter was 45.8%. The GAAP rate was higher than the adjusted rate primarily for two reasons. First, we had an $8.6 million tax charge for out of the money stock options that expired during the quarter. Second, we had a $9.1 million tax charge related to the recently enacted healthcare legislation. We do not expect any further charges this year related to this legislation.

Adjusted earnings per share for the quarter was $0.55 which was equal to our adjusted earnings per share of $0.55 for the same period last year. Currency exchange rates compared to last year benefited our adjusted earnings per share by about $0.02 this quarter. GAAP earnings per share included pre-tax, restructuring charges of $21 million, or $0.07 per share in the quarter. Additionally, as noted, with regard to our GAAP tax results, GAAP EPS in the quarter included non-cash tax, net tax charges of $0.09 per share related to the items I noted earlier. GAAP EPS in the quarter also included a $0.02 per share loss for discontinued operations, which is related primarily to interest on uncertain tax positions related to our former capital services business.

Free cash flow was $294 million for the quarter, a 23% increase compared with the prior year. During the quarter, free cash flow benefited from reduced working capital requirements, lower capital expenditures, and lower finance receivables. However, the contribution to cash flow from finance receivables was $28 million less than last year. Also, you should note that in the first quarter of 2009, free cash flow was negatively impacted by $20 million from the unwind of interest rate swaps.

During the quarter, we increased our common stock dividend per share and returned $80 million to our shareholders. We reduced our commercial paper balances by about $122 million during the quarter to a balance of $99 million. About 79% of our total debt is fixed rate, and 21% is floating rate.

Let me now highlight a few points about our strategic transformation program. In the first quarter, we continued to implement some of the initiatives identified by our project team when we finalized the planning for other initiatives we'll implement throughout 2010 and 2011. During the first quarter, our restructuring charges were largely for severance costs related to the elimination of more than 500 positions across the Company. Since the program's inception, we have eliminated more than 900 positions. We've achieved net benefits of about $5 million during the first quarter, and continue to target net benefits of about $50 million in 2010. We expect the benefits to build throughout the year as we implement our plans. We're targeting an annualized net benefits for the full program in the range of at least $150 million to $200 million by the end of 2011, and we expect to achieve the full annualized run rate of benefits in 2012.

That concludes my remarks. Now Murray will discuss our guidance.

As you saw in our earnings release, we are reaffirming our 2010 guidance for revenue, adjusted earnings per diluted share and free cash flow. We are updating our guidance for GAAP earnings per diluted share to reflect the non-cash tax charge resulting from recently enacted healthcare legislation.

Let me review our guidance. We expect 2010 reported revenue to be in a range of flat to 3% growth. On a constant currency basis, we expect revenue in the range of a 2% decline to 1% growth. Adjusted earnings per diluted share is expected to be in the range of $2.30 to $2.50 for the year. This excludes the expected impact of $100 million to $150 million of pre-tax restructuring charges associated with our previously announced transformation initiatives. This also excludes expected non-cash tax charges of approximately $0.07 per diluted share associated with out-of-the-money stock options that expire principally in the first and fourth quarters of 2010, and a non-cash tax charge of $0.04 associated with the recently enacted healthcare legislation.

On a GAAP basis, the Company expects 2010 earnings per diluted share from continuing operations to now be in the range of $1.71 to $2.07. We expect that a greater percentage of our annual earnings will occur in the second half of the year, as equipment sales improve, and the impact of lower financing revenue moderates, as well as from the realization of benefits from our transformation initiatives. We continue to expect to generate free cash flow for 2010 in the range of $650 million to $750 million. During the year, we expect an increasing investment in finance receivables through higher levels of equipment sales, requiring a higher use of cash versus the prior year. We continue to realize the benefits of our ongoing actions to improve the infrastructure, the productivity and the profitability of the Company.

As the economy and business continues improve, we believe we are poised to take advantage of the profitable growth opportunities that lay before us. We're looking forward to talking about our growth strategies and the ways we are addressing the needs of our distinct customer segments at our upcoming investor update meeting on May the 11th in New York. More information on the meeting is available on the Investor Relations page of the Company's web site at www.PB.com/InvestorRelations.

Thank you and now let's open the lines for questions.

Thank you. (Operator Instructions). Our first question comes from Shannon Cross with Cross research. Go ahead, please.

Thank you very much. My first question is on the production side of the business. Can you talk about -- I'm curious about the whole business -- linearity in the quarter, where you're seeing things get a bit better as you got further along in the quarter. And then on the production side of the business, are there any verticals you can point to, or anything weaker or stronger than others? And then I have a couple of follow-ups. Thanks.

Thanks, Shannon. In production mail, as we mentioned in the fourth quarter, we started to see enterprise customers, and that was fairly well across the board but certainly financial services is where we saw significant change in their procurement of large ticket items. As we've mentioned over the last couple of years, we felt that at some point, that would have to release a demand that was building, and we saw that in the backlog in Q4, and then we saw that continue into Q1. So it would be more general in the enterprise segment on the large ticket; but certainly in financial services. The second part of your question was?

Linearity.

Specific to production mail, I think what Murray was saying is that we tend to see, particularly in the production mail business, we saw the demand come in. There is probably a 30 to 90-day lead time between order taking and the fulfillment of those orders. So, the reference to seeing the demand in the fourth quarter, fulfilling that in the first quarter, but continuing to see good demand throughout the first quarter.

And, Mike, can you talk a little bit about your cash flow thoughts for the rest of the year? Clearly finance receivables will become a use of cash. But how should we think about it, since your cash flow was so strong this quarter as we look forward because you maintained your cash flow expectations?

Yes. We maintained the cash flow expectations for a couple of reasons. As you mentioned, it was strong in the first quarter. The first quarter tends to be a strong quarter for us, as we saw last year, as well. A couple factors. One is our capital expenditures were relatively modest in the first quarter. We expect, as we implement, in our strategic transformation program, as we go forward, we will put some more capital into those related projects. But still expect to stay within the guidance range we gave of about $200 million to $225 million. So that's built into our expectations on an annual basis. The financial services as well play into the guidance.

And can you talk about PBMS, in terms of bookings, level of volume, how we should think about that business out-performing or under-performing as we come out of an economic downturn?

PBMS has continued to be very focused on improving their productivity; and you can see that in their EBIT numbers. So we saw a good gain on their margins. As you look across that business, Europe saw some good gains from new placements and in the US we also had reasonable net written business. However, there is still the lag on volume from the economic downturn, and that will stay there until we see volume come back. So I think, from a new business point of view, the business is progressing; but is still being held back on the volume basis.

Thank you very much.

Thank you. And next we have Julio Quinteros with Goldman Sachs.

Hi, thanks. It's Vincent Lin sitting in for Julio. You're beginning to see some stabilization of the SMB segment. Just wondering if you can provide more comments in terms of the improvement or the stabilization you're seeing, whether it's fewer number of customers going out of business, going away, or are you seeing an incremental amount of business formation, firmer pricing, et cetera. If you can differentiate the comments on domestic versus international, that would be great.

On the small business sector, we're seeing some stabilization; but I wouldn't infer that as growth in that sector, as to the number of businesses. I think that we've seen stabilization within those businesses and a little more willingness to begin some reinvestment in the business. But I'm still fairly cautious on that sector. And it's pretty common around the world. It varies country by country. But as consumer confidence has improved a little bit, so has the SMB sector. Where consumer confidence is weak, the SMB sector is really fairly much related to that.

Okay. And secondly, just related to the full year guidance, obviously it was maintained versus your original guidance, but I think this quarter specifically you single out that it's going to be more weighted toward the second half. Just wondering if you can comment on the relative visibility on the guidance versus the last time you guys talked about it and whether the pace of recovery is a little bit slower versus your initial expectations?

First, I think we have consistently said it would be stronger in the second half than the first half of the year. So I don't think there's any change there. And there's no change in what we would have anticipated from first to second half.

Okay. And then my last one is on the software segment, just wondering, the impact from the transition to an newly based pricing.pricing. How much of the transition should we still expect in the coming quarters, or is there still going to be some headwind, as we move into the second half of the year? Thanks.

As we look at the software segment there will be more annuity based pricing, and then you'll see incremental software as a service. I think you need to start considering software across the board is moving more to software as a service. And although we have a large base that we'll continue to have in that space, we will continue to see expansion in service contracted revenue.

We'll go to Ananda Baruah with Brean Murray.

Thanks for taking the question. I have a few of them. Murray, it's the second quarter in a row you have specifically talked about underlying trends in certain segments. US mailing, production mail, looking a little better. And you obviously reaffirmed the revenue guidance of flat to up 3% for the year. You were down 2% year over year this quarter. So I was interested, can you give us maybe your take on which segments you think will be the ones that will lead to zero to 3% growth and the visibility you have or the confidence you have in those segments and how you'll view that as you go forward?

Sure. As we look at it, and we started seeing this in Q4, is the enterprise segment is starting to show growth. We're seeing that through into Q1. We would expect the enterprise segment to continue to grow and start moving back to more typical growth patterns. In the SMB segment, we have seen stabilization there. And as we mentioned, US mailing equipment sales was basically flat, which has been a significant improvement. Then we have launched new products in that area which we expect to be beneficial as we go through the year. That's the ConnectPlus series of products that were introduced a couple of weeks ago, which puts web-based applications into the market, and is really the first web-based mailing product. So we expect that to be a positive influence in the SMB segment as we go forward, and that should have some change in the number of renewals versus replacement, particularly in the upper segment.

So as we've discussed previously, as you have the lease extensions, it's good for us in the long run, from a profitability point of view, but when it comes to the renewals, they actually will generate more revenue for us and we should see that benefit as we move throughout the year. We've also mentioned that as equipment sales go up, we do also then start seeing an offset on the headwind on finance revenue. So we've had the headwind from lower equipment sales over the last couple of years. As equipment sales grow, that will start eating into that headwind, as well. So those are the combinations that we see on a go-forward.

Great. Thanks. The extent to which you saw some improvement in these trends through the quarter, were they more positive than you thought they would be when we were entering the quarter?

I think that, as we mentioned in Q4, that we weren't calling it a trend at that point. If you go back to when we had planned the year, it was meeting what we had expected in the plan. So I think that I wouldn't call it a big surprise but it's nice to see that it actually did come in and that we're actually seeing some change in the environment with our customers.

Okay. Got it. My next one, piggybacking off of that is, the reaffirmation of the guidance obviously a positive, this early into the year. But given the net positive underlying revenue trends and the reaffirmation on the revenue guidance, and the reaffirmation of the cost save guidance of $50 million, which I believe translates to $0.17, $0.18 per share. If you back that out, what's implied in the annual guidance, the midpoint of the annual guidance would actually be a $0.10 cent decline annually in EPS. So can you just walk us through some of the pushes and pulls that would actually get you to the midpoint of the guidance ex the cost savings? The assumption right now is you'll do the cost savings for the year.

The reason we give a guidance range is, obviously we're trying to prepare for a number of potential scenarios and outcomes based on business activity, economic environment and other factors, including benefits from our transformation program. I would say that obviously, Murray mentioned there's year over year cost growth that we build in productivity for. We have the financing and rental revenue lag that has a higher margin associated with it. We try to factor all of those things in and obviously different scenarios of growth in the ranges that we provided. So that's really the basis of those ranges.

Okay, Mike. I appreciate that. Is it fair to say that if you did the 0 to 3%, that you would then likely do the upper half of the guidance range, or there's so many moving parts around some of the modeling that it's not as straightforward as saying just that?

As you know, we're early in the year yet, and obviously there's a lot of factors that play into it. That's why we reaffirmed the guidance range.

Okay. Last one for me. Can you guys talk about some of the ways in which you feel you may be positioned defensively relative to what some of the potential secular headwinds are out there in the industry regarding mail volumes and folks paying bills online and stuff like that?

Sure. I think there's a number of areas that we've been fairly effective with. One is in mail services. You see that we have continued growth there, and a portion of that is due to our shift towards standard mail, and standard mail is now seeing some recovery, and we've been focusing on that sector in which we've had a very low percentage. There's a very low percentage of that mail that's been in the work share space. So that would be one area in the enterprise.

As you move into the SMB space, the ConnectPlus product, which we'll show to you at the Investor Day, is a product that opens a number of other opportunities. Number one, it doesn't just do metered mail. It can also do permit mail, which is an area which we have not done much in. With full-color printing, allows for printing return addresses and logos on the envelope, eliminating the need for preprinted envelopes. So that's a cost saving for customers that actually we would get a piece of from the device. And then also it provides the ability to move to marketing on the envelope. So it takes the device from being a productivity device to a device that affects other places within the marketplace. So the dependency with that type of product will move from purely an evidencing platform to a broader-based platform. And then, as I mentioned, it is the first web-enabled. So it has a full touch screen on it, which enables web-based services of which we're launching web-based services with the product, and that, again, increases the range of items that can be dealt with on the machine, whether it's shipping applications, whether it is addressing, et cetera. There's a range of applications. So we're moving from just supplying a platform that does postal evidencing to a much broader platform that will be less dependent on just the evidencing component.

Got it. Thanks a lot.

Thank you. We have a question from Chris Whitmore with Deutsche Bank.

Just following up on that last question and last answer. I'm curious to learn more about this product. To what extent does it require customers to make significant changes to their existing work flows? It sounds like it has a pretty long sales cycle. Can you maybe talk about the sales cycle and the amount of customer change that needs to happen in order to adopt that product?

I think in its full implementation, it could have a longer sale cycle but it's available in a number of configurations. So it will install at basically the same cost, and act like a traditional mailing machine. At the same time, it has the built-in functionality to go beyond that, which opens another market segment for the product, and that market segment, when you're doing more marketing and doing more customization on the envelope, could take a little more time. However, what we found -- and, again,, a couple weeks isn't very much, but we're seeing very strong customer reaction to the ability to eliminate pre-printing on the envelope, which is a pretty straightforward item to change. That's much easier than adding the marketing, because different people would be involved, but in the mail room, that's straightforward. When it comes to the web-based services, a lot of those services, they would be going after with other things or other manner in their business, in different areas. So that provides that on the same platform and eliminates the need to go outside of the platform.

Okay. So to what extent do you expect this to alleviate the pressure on the mix trend you've been seeing within your installed base? Is this a second-half event, or are we looking at 2011?

As we said, we would expect and have expected that this product will affect the back half of this year, and that we will see the finance receivables starting to move back as we place these products rather than in lease extensions, because it gives people a reason to add a new product rather than continuing with the old. It provides more capabilities, and it addresses their need to have their envelopes opened and deliver more effective information to their customers.

On the financing piece, has there been a change in your strategy around financing? I would have expected your finance receivables to actually be up year over year given the strength in equipment in Q1. Why such a long lag effect?

Yes, Chris. The lag effect is really a factor of the absolute balance of finance receivables coming down over time. When you look at a year over year comparison, since we had lower sales activity in the prior year of activity, that would lower the assets off of which we would generate finance income. So that's the primary factor. A secondary factor would be that in our credit business where we provide lines of credit to customers, through the economic downturn we actually cut back on those lines of credit to manage delinquencies and write-offs. So we took proactive actions. We felt it was a prudent action to reduce that exposure during that period of time. So those two factors obviously drive that. As we see improvement in mail volumes, that would bring more activity back into the line of credit business, because generally customers use that to purchase postage. Then, at some point in the future, if we decide to increase those lines of credit, obviously that would make more credit available to customers. The leasing side of the business, obviously, as Murray said, you need growth in the sales side of the business in order to return growth to the financing income; but that will ladder in as the finance receivables grow over time if we have the equipment sales.

Chicken and egg question here. Is the lack of financing or available financing impacting your equipment business or vice versa?

It hasn't really impacted the leasing side of the business. And quite honestly, what we've seen is a contraction in the amount of revolving activity people do generally, and I think that's true on the consumer side as well as in the small business side who tend to act like consumers, where they've pulled back in their business activity. We would expect they do less revolving. So that's a natural expectation of the cycle we're in. From a leasing perspective, we meet virtually all of the customers' needs from a leasing perspective.

And have you changed your terms at all, more or less aggressive with terms and conditions?

We haven't really changed our terms and conditions. What we've done is been more aggressive around collections. If we see a risk of delinquency, we've refined our credit scoring processes to make sure we filter out any potential bad credit. So we try and catch it at the front of the process, and then be proactive if and when somebody becomes delinquent.

The last one for me is a question on the US mail business. You said equipment in that business was flat year over year; but revenue ex currency was down 8% after down a similar amount last year, a pretty easy compare. Can you give us a little more color, if it wasn't equipment what was so weak, and at what point does that start to reverse? Is it purely financing, or is there something else going on there?

Yes. It's driven principally by financing. Financing was down 14%. And then supplies and rentals were about at the average. And then support services, which is more closely tied to equipment sales was only down to about 4%. So support services being the maintenance contract activity on equipment.

Thank you very much.

We'll go to Lloyd Zeitman with Bernstein

Hi, folks. Your supplies revenues, I would have expected possibly something a little higher on that as activity overall would pick up. Could you talk about that at all, and how do you see that number in the first quarter, and have you changed your expectations for this particular category at all?

Lloyd, I think supplies is in line with our expectations, given the fact that we did continue to see mail volume declines in the first quarter versus the prior year. So that lower level of activity would translate into lower usage of supplies over time. Obviously, as we go forward and place new equipment, the supplies would follow that. As Murray mentioned in the new product, not only do we have traditional postaling, but we have the opportunity for color ink as well as we build an install base.

So then, I would imagine you're expecting, on a sequential quarter basis, that this number should improve over the course of the year?

We think the two key things that will drive that will be mail volume improvement and installed base of meters. As you know, the low end of the marketplace has been slower to respond, and so we don't see the same number of new business starts in that, that would be appropriate for our lowest end product. So those are the things that would drive the supply stream in the future.

Okay. Cost of support services, that came in at almost 64%, which is really out of line with what we've seen over the last few years. Was there anything unusual in there at all ?

In terms of support services, I think we did have an adjustment to that related to parts and supplies on equipment repair, and there was a reclass associated with that. I think it was about $19 million. Butt that was a reclass between cost of sales and cost of support services. So no impact on the total gross margin or the EBIT margin. But we thought it was more appropriate to associate those with the cost of service.

So that was between cost of support services and equipment sales?

Correct.

Okay . And essentially, all of your guidance is the same as it was three months ago. And I think, given overall within the economy, I think most people are pleasantly surprised at what we've seen in terms of first quarter results. I was just wondering, is there any difference in terms of the pieces that you put together to get your total guidance? Is it any different today than it was three months ago? And if so, could you give us some ideas as to what has

As I said earlier, the guidance contemplated a number of different scenarios that included economic conditions that could vary over time, including the potential for improvement as well as a number of other factors across the businesses. So the reason we reaffirmed the guidance is that we feel that our outlook is maintained in that range.

And on the financing side, things are looking pretty much the same as they did three months ago?

In the financial services side?

Right, in terms of credit quality measures.

Yes. In fact, on a year over year basis, we've seen about a 30-basis point improvement in delinquency rates, and write-offs and provisioning are in line on a year over year basis.

Okay. Thank you.

Thank you. We have a follow-up from Shannon Cross.

Thank you very much. Just want to talk about cash and cash usage, thoughts on share repurchase, acquisitions. If there's any more color you can give us and where you think you should be from a short-term versus long-term debt situation as we come out of this -- I don't know what we were in, a recession, I suppose.

Sure. In terms of optionality around cash usage, obviously, if we look at the range of cash, we project free cash flow. Beyond paying our dividends and the capital expenditures and all, we believe there's probably plus or minus $300 million of excess free cash flow. We continue to look at the options of enhancing our business through targeted acquisitions, as we've done in the past. And we continuously look at the opportunities around share repurchase. That's a conversation obviously that's had with the board. And we continue to have authorization outstanding of about $73 million. So I would say those remain viable options for us. Obviously we feel the credit markets are more favorable today than they were a year ago.

And I'm just curious, what's the push-back from the board at this point in time on share repurchase, or is it just something you haven't discussed recently?

I wouldn't say there's any push-back. Obviously we have the authorization outstanding. It's just a matter of a judgment as we go through in terms of what's the right use of the capital. The one other thing I should mention is obviously we've been using capital around our transformation program, both around the severance related costs as well as I mentioned the capital expenditures we have planned for for the year.

Okay. Thanks.

We also have a follow-up from Ananda Baruah. Go ahead please.

Mike, just a point of clarification on the reallocation of the costs between support services and equipment sales. So is that the new baseline? Is that the new margin now for each of those line items?

Yes. In fact, I'm glad you asked the question, because we did put on the investor relations Web site two years of quarterly information with the restatement of that. So anybody that wants to get that information to update their model it is available on the investor relations Web site.

It's not available right this second but it will be available within the day.

Is that by quarter for '08 and '09, when you say two years?

That's correct.

Okay. Thanks.

(Operator Instructions). We have no one else in queue. Please go ahead with any closing remarks.

Thank you. The quarter's results reflect some signs of stabilization among our customer base, particularly, as I mentioned, in the large enterprise customers, as well as small to midsize customers. Overall, revenue performance during the quarter was our best year over year performance since the third quarter of 2008, driven by improving trends in equipment sales and support services revenue among our enterprise customer base. Essentially flat equipment sales in US mailing represent its best equipment sales performance since the end of 2008, and that was led by strong sales of solutions applications. In April, we launched our ConnectPlus customer communications series as an example of how we're investing for future growth by delivering new products and solutions to meet the distinct needs of our key customer segments. We're continuing to invest in our future, while at the same time reducing our costs of doing business as we implement our strategic transformation program. The adjusted EBIT margin for the Company improved as a result of the improvement in EBIT margins in six of our seven business segments this quarter.

We're looking forward to seeing you at our investor update on May the 11th. Thank you and have a great evening.

Thank you. And, ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.