必能寶 (PBI) 2010 Q4 法說會逐字稿

Please stand by for a realtime transcript. . Good evening and welcome to the Pitney Bowes fourth quarter and full year 2010 earnings results conference call. The 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 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 a Safe

Okay thank you, good afternoon, 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 materially differ from our projections. More information about these risks and uncertainties can be found in our 2009 annual Form 10-K 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 developments. Now our Chairman, President and Chief Executive Officer, Mr Murray Martin, will start with an overview of the quarter and the year. 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 on our fourth quarter and full year results, and I will provide 2011 full year guidance. Please note that we have provided slides related to the guidance discussion as part of the Web cast found in the Investor Relations section of the Pitney Bowes website. After the presentation we will take your questions.

As we anticipated, 2010 was a year in which we had stronger performance in the second half of the year, as we saw some initial signs of stabilization in various sectors and geographies. During the year, we continued to execute our strategic transformation program in order to lay the foundation for sustained growth and value creation for customers and shareholders alike. Our transformation initiatives are giving us a more variable cost structure, improved customer processes and infrastructure, as well as greater financial flexibility to continue investing in our future.

Our fourth quarter performance reflects our overall journey to transform the business for enhanced growth. During the quarter, against the backdrop of an uneven global business climate, we continued to make investments and new technologies, enhance the customer experience and streamline our operations. The benefits from our ongoing actions also helped position us for future growth in our small and medium business, and our enterprise business solutions groups.

One key milestone in improving the trends for the core business during the quarter was year-over-year improvement in equipment sales. This was the second consecutive quarter of year-over-year equipment sales growth in our global SMB operations and on a consolidated basis. Growth and equipment sales in the second half of the year was paced by customer retention gains and new product placements, led by our Connect Plus Web based communication system. In fact, Connect Plus placements represented about 20% of US mailing equipment sales in the fourth quarter. We continue to roll out Connect Plus throughout Europe and Canada in 2011.

Another positive indicator for SMB group was the continued moderation in the decline of financing revenue, resulting in its lowest rate of decline in overall revenue in eight quarters. During the quarter, enterprise business solutions group had positive year-over-year revenue growth for the second consecutive quarter, driven by good performance in production mail, software, and mail services.

In our software business, it is a testament to the growing demand for analytics and customer communication management software that we are able to grow revenue while continuing to build a recurring revenue stream through more multi-year licensing agreements. The majority of our larger software sales were in multi-year agreements, which will benefit stream revenues in future periods. Software revenue would have grown at double digit pace if these deals had been sold as one-time licenses.

Our investments in digital and cloud-based solutions, like Connect Plus and our recently introduced Volly secured digital mail system, are helping us lay the foundation for sustained growth and value to customers and shareholders. Throughout the coming year we well continue to deliver more new solutions which will help SMB and enterprise customers manage their physical and digital communications with their customers.

We continued to have excellent free cash flow for the quarter of $289 million, and $961 million for the year. We are pleased to note that our Board has taken two actions which will result in enhanced returns to our shareholders. For the 29th consecutive year, the Board of Directors approved an increase in the quarterly dividends, the dividend will increase to $0.37 per common share for the first quarter of 2011. The Board also approved an increase of $100 million to our share repurchase authorization of $50 million for a total of $150 million, which we plan to utilize over the next 12 to 18 months. Let me now turn it over to Mike for a discussion about our fourth quarter and our full year financial results.

Thank you, Murray. Our revenue for the year was $5.4 billion, a 3% decline on both a reported and a constant currency basis, and in line with the guidance we provided. Revenue was $1.4 billion for the quarter, a decline of about 1% when compared with the prior year, both on a reported and a constant currency basis.

Breaking down our revenue for the quarter between US and non US operations, US revenue declined by about 2%. Outside the US, revenue on a reported basis increased about 1% versus the prior year. Excluding the impact of currency, revenue outside the US increased 4%. Non-US operations represented 31% of total revenue.

I also want to note that we had a reclass between two revenue lines during the quarter. We reclassified $4 million in revenue from rentals to financing. The revenue was associated with the bundling of fees from our meter customers through access of our purchase power product. The reclassification was related to revenue in both 2009 and 2010. Excluding this reclassification, financing revenue would have declined 5%, a moderation from previous declines, and rentals revenue would have declined 7% in line with our recent experience.

Adjusted earnings before interest and taxes, or EBIT, for the quarter was $258 million, which was about 1% higher than last year. EBIT margin was 40 basis points better than last year. We continue to see the benefits of our productivity initiatives, both in the cost of revenue lines and in our selling, general and administrative costs, or SG&A. In particular, SG&A costs were reduced significantly this quarter.

SG&A in the quarter declined by about $23 million when compared with the prior year. And for the first time in year, SG&A improved as a percentage of revenue. A decline of 110 basis points to 38 -- 31.8%, when compared to the prior year. SG&A benefited not only from our ongoing productivity initiatives, but also from lower credit losses which we have seen throughout the year. For the year, SG&A costs declined by $36 million on a reported basis, and $57 million on an organic basis.

EBIT margins improved year-over-year in four of our seven business segments for the quarter, and five of our seven business segments for the year. These improvements are the result of our continued focus on increasing our operating efficiency across all of our business segments. Strategic transformation is enabling us to improve the way we go to market, interact with our customers, and development new products. Plus, we are putting in new processes and systems that will make our operations more streamlined and profitable, allowing us to better leverage future revenue growth.

When we add back depreciation and amortization to our adjusted EBIT, adjusted EBITDA for the quarter was $330 million, or a $1.62 per share. Net interest expense in the quarter, including financing interest, was $51 million, an increase of $2 million when compared with the prior year. The average interest rate in the quarter was 4.23%, about 22 basis points higher than the prior year, due to lower commercial paper balances.

The effective tax rate for the quarter on adjusted earnings was 33.0%. This was higher than the tax rate on adjusted earnings last year, which was 32.1%. The higher tax rate in the quarter was a result of the mix of business between the US and international operations. The average tax rate for the year on adjusted earnings was 33.2%. The GAAP tax rate for the quarter was 39.5%, and the tax rate for the year was 38.5%. Write offs of deferred tax assets associated with stock compensation are included in these rates.

Adjusted earnings per share from continuing operations for the quarter was $0.66, which was $0.02 higher than our adjusted earnings per share of $0.64 for the same period last year. Currency exchange rates did not have a significant impact on earnings for the quarter. For the year, adjusted earnings per share was $2.23, which exceeded our guidance range of $2.15 to $2.22. Currency exchange rates increased adjusted earnings per share by $0.02 for the year.

GAAP earnings per share included pre tax, restructuring and asset impairment charges that totaled $79 million in the quarter and $182 million for the year. This represented $0.27 per share in the quarter, and $0.59 per share for the year. GAAP EPS also included a $0.03 tax charge for out of the money stock options that expired during the quarter. For the year there was a $0.13 tax charge related primarily to out of the money stock options that expired during the year, and to healthcare legislation that was enacted at the beginning of the year. Additionally, GAAP EPS included a $0.05 and a $0.09 per share losses from discontinued operations in the quarter and the year respectively.

Free cash flow was $289 million for the quarter and $961 million for the year, which exceeded our annual guidance of $700 million to $800 million. In comparison to the prior year, free cash flow for the year benefited from improved working capital and reduced capital expenditures. During the quarter we returned $83 million of cash to our shareholders in the form of dividends and $320 million for the year.

As noted in the press release, the Board of Directors approved an expansion of $100 million to the Company's share repurchase authorization, increasing it from $50 million to $150 million, which we plan to utilize over the next 12 to 18 months. We reduced our commercial paper balance this quarter versus the third quarter by about $82 million to a balance of $50 million. About 85% of our total debt is fixed rate and 15% is floating rate.

Let me now highlight a few points about our strategic transformation program. In the fourth quarter, we continued to accelerate the implementation of initiatives identified by our project team and have added other initiatives that we'll implement throughout 2011. During the fourth quarter, our pre-tax restructuring charges of $79 million included $24 million for pension and retiree medical curtailment related charges. The remaining pre-tax restructuring charges were largely for severance costs related to the elimination of about 340 positions across the Company.

We are achieving greater net savings than was originally anticipated from our strategic transformation program, as a result of identifying incremental opportunities and disciplined implementation. Therefore we have achieved benefits of approximately $120 million for the full year, net of system and related investments, and now expect total benefits from the program to be about $100 million more than originally targeted.

We are now targeting annualized net benefits for the full program in the range of $250 million to $300 million by the end of 2011. And expect to achieve the full annualized run rate of benefits in 2012.

So, that concludes my remarks. Now Murray will discuss our guidance. Murray?

Thanks, Mike. In 2011 we expect a business economic environment characterized by gradual improvement at varying rates by sector and by geography. While businesses are still more cautious with spending, especially in the SMB solutions group, our experience in the second half of the year shows they have become more willing to invest in solutions that help them grow their business and enhance their efficiency. It is against this backdrop that we project a return to revenue growth in 2011, due in part to a number of initiatives designed to stabilize our base business and to drive new growth opportunities.

Let's turn to the first slide. We expect 2011 revenue, excluding the impacts of currency, to be in the range of flat to 3% growth as compared to 2010's 3% decline. I noted our two consecutive quarters of year-over-year improvement in equipment sales earlier. We anticipate continued improvement in equipment sales during 2011, driven in part by the positive outlook for sales of new solutions, like the Connect Plus communications system, and continued positive growth in production mail.

We also expect growth in several other areas in 2011. These include growth in software revenue, due to the increasing demand for term based licenses of CCM software solutions. Expansion in mail services and new CCM solutions across our enterprise business portfolio.

As we have previously discussed, lower equipment sales during previous years will continue to affect financing, rental and supplies revenue streams. However, we expect moderating declines in these recurring revenue streams related to our SMB solutions group as equipment sales continue to improve.

The next slide illustrates how we expect our earnings per share from continuing operations in 2011 to compare to 2010. In 2011, we anticipate generating incremental earnings of $0.32 to $0.42 per share from operations growth, excluding the impact of SMB stream revenues. Lower SMB stream revenues, as a result of lower equipment sales in prior periods, are expected to negatively impact earnings by $0.25 to $0.30 per share. The resulting comparative earnings for the year are in the range of $2.25 to $2.40 per share, which compares to $2.23 per share of adjusted earnings for 2010. We also plan to invest $0.05 to $0.10 per share to develop the market for Volly, a secured digital mail system, which I will discuss shortly. As a result, we expect 2011 adjusted earnings per share from continuing operations will be in the range of $2.15 to $2.35.

Slide three shows our expected 2011 earnings per diluted share from continuing operations on a GAAP basis in the range of $1.80 to $2.10, as compared with $1.50 for the prior year. GAAP earnings include the expected impact of restructuring charges of $0.25 to $0.35 per share in 2011, which is associated with our strategic transformation program.

On slide four, we show our 2010 free cash flow and our expected 2011 expected free cash flow range of $750 million to $850 million. We expect slightly lower free cash flow in 2011 because of anticipated increased investment in finance receivables, as equipment sales grow, and higher capital expenditures associated with investments in business growth.

On slide five, the next slide, you will see that we are now projecting $100 million increase in the expected net benefits from the strategic transformation program. As Mike discussed in 2010, we achieved net benefits of $120 million, which was substantially in excess of our original target. Our original target for 2010 was to achieve benefits, net of investments in the business of at least $50 million. In 2011, the total cost for the program are expected to remain within the original range that we provided, although we have narrowed the range by $50 million.

We are now estimating costs for the strategic transformation program in the range of $300 million to $350 million. While notably the total pre tax benefits for the program are projected to increase by $100 million to a range of $250 million to $300 million. This anticipated increase in benefits is expected to come from further process automation, channel alignment, and reduced infrastructure costs, as well as a continuation of our efforts to streamline product development.

I want to end today's presentation with a few words about how we are investing some of the anticipated increased benefits from strategic transformation in 2011.

Slide six notes a few highlights about Volly, our recently announced secured digital delivery service that we launched last month. As businesses worldwide look to grow their relationships with existing customers and attract new customers, their communications become even more important. We are focused on helping businesses of all sizes manage their critical communications with existing customers and prospects. That is why we believe that investing in the market development of Volly is a foundational investment in CCM, customer communication management, as a long-term growth opportunity for Pitney Bowes.

We know that today's communication landscape is increasingly a mix of physical and digital communications. Volly is a prime example of how we can integrate physical and digital communications to provide secure on-line management of information and offers. With Volly, mailers can have mail with physical addresses, delivered digitally to customers who opt in. Consumers will be able to receive and pay bills, browse and purchase from catalogues, as well as find and download relevant coupons and discount offers, all on line in one convenient site.

We have begun partnering with premier mailers who will use Volly to provide their customers with a choice in how they receive communications. When it launches later this year to consumers, consumers will be able to manage all of these activities from almost anywhere, using their computers, their SmartPhones, and their tablets.

2010 was a year in which we continued to make progress and lay the foundation for continued growth. We are excited about continuing to reap even greater benefits from our actions in 2011, and leveraging our streamlined organization and improved processes to invest in and to take advantage of the growth opportunities that we see ahead. Thank you. Now let's open the line for questions.

(Operator Instructions)Ananda Baruah.

Thanks, guys, for taking the questions. Apologize for the background noise; I'm in an airport. A couple things if I could, the first one is, Murray or Mike, you mentioned that you got benefits from both lower credit losses and from leasing costs. And just wondering how much of this will recur in 2011 versus being one time?

Yes, we have seen consistent improvement in credit losses over the last, at least four quarters. And that is really reflective of the overall improvement in the economic environment. So, barring any significant changes in the overall economic outlook, we think that we should see similar types of credit loss levels in 2011.

Okay, great, and then just wondering, Mike, if you could go back over what the incremental investment is going to be in Volly. And to the extent that there is something that is going back into SMB as well. Sounds like you're increasing the cost save target from the restructuring actions in 2011 pretty substantively, but particularly given the revenue growth guidance of flat to up 3%, it seems like a lot of that is -- well, is going to get offset by incremental investment, given what your EPS guidance is.

So, could you just go back over that, and maybe talk about how we should think about the balance of the investment in 2011.And just to dovetail off of that, is this type of investing something that we should expect going into 2012, as well? Thanks.

Yes, let me differentiate a couple of things.When we talk about strategic transformation, we talk about it in terms of net benefits. In other words, we're achieving even greater benefits, but reinvesting a good portion of that into process improvement, into systems that we need to automate processes, and even in product development types of things.

We have highlighted this Volly investment really because it is the development of a new market. And really creating a long-term opportunity, as Murray mentioned, for the Company. So, it is a different type of investment than we have traditionally been making against the net benefits in strategic transformation.

One of the other things we tried to highlight is obviously the impact of the recurring revenue streams in our SMB business, which have been improving on a relative basis over the last several quarters. And we expect that to continue and improve, but to have a negative impact on a year-over-year basis.

What I would note, though, is that as we get this far along in the transformation of our business, we have been able to maintain very strong overall margins in the business, while really shifting our dependence on different revenue streams. We have seen a significant growth in software that is highly recurring, and we've seen rentals and supplies becoming a smaller part of our overall revenue mix. So, we think in total we're getting good growth in earnings out of the net benefits. At the same time, we're transforming the business and ending this transformation with still very strong margins.

Thanks, and just to clarify, what was the investment you said you intended to make for Volly this year?

It would be $0.05 to $0.10.

$0.05 to $0.10. Okay, great, I'll stop there and get back in the cue.

Yes, that $0.05 to $0.10 is market development, and not the product development. The product development is really already included in 2010 and 2011, as we net out the benefits from strategic transformation. So, we see a difference between developing products, which is part of our normal business, and then going out and developing a new market around the consumer interaction with their billers.

Thank you. Shannon Cross.

Thank you very much for taking my questions. I just wanted to follow-up on the Volly questioning. Can you give us a little bit more on the business model; how long you expect it to be dilutive to earnings?

As we look at Volly, there are a number of things. First of all, as we stated, as we talk to billers, we are already involved with over 70% of the transaction billers in the marketplace. And those billers have both digital and physical delivery. The digital delivery is in the 10% to 12% of all transaction mail.

What that does is provide opportunity as billers look to have a different cost alternative. And our business model will be such that it will be lower cost than physical, but since it is a secure environment, which aggregates for the consumer, it will have a cost to it, and that is where the revenue stream will come from. At the same time, we will be offering coupons, which we'll have a revenue stream from. And we'll have catalogues, which will have a revenue stream, as well. So, those are the three streams, Shannon.

As we look to launching this later in the year to the consumer side; the launch that we had earlier this year was to billers. Because we need to bring the content on first before we go to consumers. As we move into the second half of the year and begin the roll-out of consumers, that is when we'll start to see the first pieces of revenue. And then it will build.

I would anticipate that it depends on what the curve of adoption is, as to how we choose to invest. That is why we put flexibility in the range. And we'll be able to answer your question more specifically as we get later in the year, and we see how quickly consumers are willing to adapt to this model. And as they do, we would either see it taking off without a lot of support, or it will require more support. So, I think we'll have to answer that around mid-year to third quarter, as we see the first results as to how steep the curve of adoption could be, or whether it has a longer tail before the high rise in adoption.

Just to clarify, too, the revenue sources would come from the bill and statement providers and marketers. It would be a free service to the consumer.

Thank you.Chris Whitmore.

Thanks, I wanted to follow up on the added restructuring reinvestment. Back of the envelope suggests the incremental $100 million is about $0.35 to EPS, yet we're guiding for earnings to be about flat sequentially. I am just trying to understand, if you expect to grow the top line, why wouldn't underlying EPS growth occur in the business? Thanks.

Sure, I think, Chris, if you look at chart 2 that we provided, what we showed is that the benefits from growth in the business, that would be both revenue growth and the benefits of strategic transformation, would contribute $0.32 to $0.42, which your $0.35 calculation falls in that range. We highlighted the fact that there is about a $0.25 to $0.30 negative impact related to SMB recurring streams. That provides you with a net change in guidance, on a comparative basis to 2010, of $0.02 to $0.17, which reflects the benefits of growth in the business. And then we have identified an incremental investment in Volly, again, giving you a range of $2.15 to $2.35. So, I think incorporated in that guidance is the benefits of growth in the business.

When we look at the highest margin pieces of the business, rentals, supplies and so forth, it seems as if this is in a longer-term decline period. Are we in a situation where you need to identify $0.30 of annual cost savings to maintain earnings from here? Is that the right way to think about it?

No, I don't think it is, because we're actually seeing a declining impact related to those lines. And so if we looked at 2009, 2010, the impact was greater. We expect it to be less in 2011, and all things being equal, marginal in 2012.

And the other thing I would point to is that if we look at rentals as percentage of total revenue, it is about 10%. Supplies is only about 5% to 6%. So, even small declines in those numbers are not going to make a big impact. And we're growing revenue streams like software, which is now 8%, and actually has, even in the fourth quarter of this year, higher margins than both supplies and rentals.

Do you think the value of your installed base will stabilize this year, or perhaps even grow?

Yes, the important thing for us is to see the sales revenue turn positive, because that really is what provides the basis for the recurring revenue streams. And that is why we felt it is important to see the growth over the last couple of quarters, and projecting that growth into 2011. The other is, obviously, we'll continue to look at bringing new products and services to the marketplace that would serve that customer base, as well.

I think, Chris, as we have noted at a couple of the calls and the investor meetings, that we expect a tail from the drop that we had about three years ago. And that is what that run-off is on the finance income, the supplies and the rental. And as we stated then, with the moderating of that decline, which began earlier, and then the net positive that we've begun seeing, the tail of that negative will decline. And it has been declining between 20% and 35% per year over the last number of years. And we expect that to continue, so that negative will continue to shrink as we go forward.

Okay, thank you very much.

Thank you. Shannon Cross.

Thank you, I apologize, my cell phone, I'm on an iPhone, AT&T, not Verizon yet, so it dropped. My second question is, talk a little bit about what you're seeing in small business?

Sure.

And then also mid-sized business with Connect Plus.

Sure, as we look at it, and I guess if we take small business and look at it in two segments, the very small business and then the small- to mid-sized business, we are seeing some differences there. The very small business segment, which is still a large piece of that small business customer base has actually still remained fairly stagnant as to its ability to buy. So, we still are not seeing a big change in what we have been calling a very not-positive growth position. We are not seeing those businesses spend.

However, as we move up to the mid-level and higher of the small business, which are really the areas where Connect Plus addresses, that business segment is now looking to reach out to create more business. So, the Connect Plus as we launch that, is not only processes the mail, but it gives a vehicle of advertising on the front of the envelope, creating open ability. And that customer group is seeing that advantage, and that is why we're seeing the Connect Plus sales accelerate. And as I mentioned, we saw 20% of our sales in the quarter being in the Connect Plus, which considering its segment size, is very significant. And we see that continuing.

On the enterprise side, we're continuing to see the positives of enterprise spending more. It does vary by geography around the world. We see a little more hesitancy in Europe than we do in America at the moment. It fluctuates as you can see from the announcement of different things that are happening around the world. But overall, I would say the enterprise segment is moving back to positive acquisition. The mid-size is looking not so much for efficiency, but revenue growth opportunities. So, products and services that leverage that are seen as positive. And the very small business segment is still not -- we're not seeing any positive growth in that segment.

Okay, thank you, that was very helpful. And then Mike, can you talk a little bit about how should we think about normalized free cash flow? Clearly, 2010 was very strong. 2011, you're guiding strong as well. The puts and takes, just anything you can give us to how we should think about over the next few years, the free cash flow that the Company can generate, assuming a 0% to 3% revenue growth?

Yes, I think if you recall in the last couple of years when we gave baseline guidance, we were $650 million to $750 million as a baseline range. And that assumed that finance receivables would be relatively flat. The guidance you see in 2011 I think is reflective of a strong performance in managing working capital, capital expenditures actually a little bit higher than 2010 assumption. We really did a good job of managing the capital. But we know we have investments to make to achieve that extra $100 million of strategic transformation benefit. So, that is factored into our guidance as well. There was some small one-offs in 2009.

So, we think 2011 is reflective of the underlying strength of the business. If we have strong sales growth in terms of leased assets, beyond 2011, then that may bring that number down a bit. But that would be only a very positive thing because of the long-term benefits of the streams that that would produce.

Okay, great, and one last question, just on the over-achievement that you are seeing in terms of the cost savings, do you think you were just too conservative when you initially went about it? Because $100 million is a lot of incremental cost savings. I am just curious if this was a surprise, or you had a range and it was at the high end?How we should think about that?

Sure, when you enter a program like this, you analyze a lot of the business, and you create some estimates of what you can do. It is not until you really get into the program, and really begin to implement that you know for sure what you are capable of doing. And the positive virtue of this type of program is it continues to -- you continue to identify incremental opportunities as you implement along the way.

So, I think while we were conservative relative to what we thought we can do, as we got into the program and started to realize the benefits, we were also able to identify additional opportunities. So, I think it is a skill set that we have built into the organization. And we look to continue to do -- be efficient and effective, and focus on variable costs as we go forward.

I think, Shannon, also in that regard, in a more normalized environment it might have been more difficult to have an organization move as quickly on the benefits. But when everyone within an organization sees what is happening in the world, it is much easier to bring everyone rallying around what needs to be done, and let's just get it done and not drag out getting things done.

So, we have been able, as Mike said, to bring some programs forward, and add incremental programs, and have the whole organization aligned around doing this quickly and effectively, particularly when they see us investing back in the business to make this sustainable. It is an easier thing to take things out than to ensure they stay out, and that you put in the processes and the capabilities to ensure sustainability. And as the organization sees that happening, and sees the capabilities going forward, an enthusiasm does build that allows you to accelerate, and we have experienced that.

Great, thank you very much.

Thank you. Ananda Baruah.

Thanks, guys. Hi, Mike, I was wondering if you could walk through the dynamics of the small and medium business recurring revenue slowdown that you were talking about that could impact this year?

Sure. Basically the three key revenue streams from a recurring nature that are around our core business are the supplies business, the rental business, and the financing business, or revenue streams. Those revenue streams are really, in many ways, linked to both the installed base, as well as the leased-asset base that we have on the books. And over the last few years, as we have highlighted, we had a contraction in equipment sales through the economic downturn. What that did is allowed certain finance receivables to run off, and we were not replacing them at the same rate. And when you have that contraction in the base, you lose some of the rental revenue associated with that, or if a customer downtrades and gets a smaller meter.

The financing revenue is tied to the earnings off of that asset base. So, if it has come down, that finance revenue is going to be somewhat less, and obviously supplies are tied to usage. And we saw some mail volume contraction.

So, those things have a, I'll say a lag effect, relative to when you see the decline in sales activity. And so, since a typical lease period is four years, we have some lag effect that runs off. And I think we identified, at the analyst day, that we thought there was a 12- to 18-month lag effect or thereabouts to the recurring revenue streams after sales begin to turn positive. And since we've seen sales turn positive in the latter half of [2010], if we assume they continue to be flat to positive in 2011 as we have in our guidance, then we should see that lag effect continue to diminish.

What we wanted to do is call it out clearly, and separate it from the underlying strength in the business and the growth in the business and the contribution of strategic transformation, so that it was something you could clearly see from those line items. And quite honestly, I think if you look back over the last several quarters, and look ahead as we go announce earnings, the expectation is that we will see improving trend in those lines.

Okay, that is very helpful. Thanks a lot. I appreciate that. Just two more, if I could, on the investment in 2011 in Volly; is that something that we should expect to continue into 2012 in a way that it will need to be called out, or will you then be offsetting -- do you think you will be offsetting the investment with revenue by then?

I think it is a little early to tell. We'll be able to give you a better view of that as we get forward further in the year. I think from a conservative point of view, you would carry it forward. But we'll give you a better indication as we get into the second half of the year, as to how long we would assume a net negative in investment as that curve starts to kick in.

Great, last one for me, Murray, if I could, just on buy back, looks like you guys are ramping up the buy back a little bit here. And the language you guys used on the call is, you intend to use the full $150 million over the next six quarters. Can you just clarify that as a statement, number one?

And then number two, we have gotten the sense, the investment community over the last 12 months, that you guys are actually -- you view ongoing buy back quite favorably, as long as the cash flow generation is there to back it up, and you feel good about the business. So, might we expect ongoing increases in the authorization now as part of the business practice for the foreseeable future? Thanks.

Yes, Ananda, as you know, we try and take a balanced approach to returning capital to shareholders. And obviously increase in dividend is a vote of confidence by management and the Board about our ability to generate free cash flow and deliver a return to our shareholders. We think share repurchase is one tool available to us.

And the authorization, again, I think is a statement by the Board that if and when we find it valuable to repurchase shares, we have the $150 million of authorization available. And the 12 to 18 months is a timeframe over, I think is relatively consistent with how we utilized it in the recent past. We did $100 million in 2010. So, I think that is the framework in which we should look at it.

I think also, Ananda, as we consider this, certainly we are generating and expect to generate continued strong cash flow, which as we've said, would be utilized for dividends, for share repurchase and for expansion in the business. We have really held back on external expansion in the business. We did acquire Portrait last year, which is proving to be an excellent addition to our portfolio, supplying us with great products and growth.

So, I would say, as we have previously stated, that it depends on what opportunities are available or not available. And we take all of that into consideration in deciding what to do with that cash. So, it will continue to be a balanced approach as we look at things from what we do with -- as we're doing here, organic investment in the business to grow some very exciting future revenue streams, as well as adding capabilities that will continue to grow the business.

As Mike noted, we have had a very significant shift in our business. This quarter, the enterprise segment went over 50% of the business. We have been able to maintain, even with that shift, the very significant margins and being able to hold our EBIT margins in the same range as we have transitioned the business. So, I think we have had a very effective move that we had planned in the business. It is continuing to execute. And we'll continue to utilize the same strategies of share repurchase, dividends, and investment in the business and new opportunities.

Excellent. Thanks, guys, thanks a lot, appreciate it.

(Operator Instructions)And speakers, we have no further questions in queue at this time.

Thank you all for joining us. Just a little summary, as you heard, in 2010 we saw improving trends across our business. In the small-business group, we have had two consecutive quarters of growth in equipment sales, led by Connect Plus and production mail. And as Mike discussed, that is very important to us. On our looking forward in the enterprise space, we have had two consecutive quarters of positive year-over-year revenue growth, led by production mail software and mail services.

We achieved $120 million in net benefits, which was up significantly from where our target had been. Our adjusted earnings per share for the year was $2.23, which was in excess of our guidance. We had excellent free cash flow supporting the enhanced returns to our shareholders, giving us the 29th consecutive year of dividend increases. Our share repurchase authorization was increased to a total of $150 million.

And then as we look at 2011, in 2011 we're looking at a return to revenue growth. Moderating declines in that SMB revenue stream that we have talked about. And then looking at projected net benefits growing to $250 million to $300 million from transformation, which is up $100 million.

Planned investments in Volly, which is a very exciting market development. And I would encourage you to go to volly.com and see what the product and solution is, and how it migrates over time. And then continued, very strong free cash flow as we go into 2011.

So, overall, I think it was a great end to 2010, positions us for 2011, of setting a great foundation for us to build off of as we move 2011 and beyond. So, thank you all. And look forward to speaking with all of you in the future.

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