必能寶 (PBI) 2011 Q1 法說會逐字稿

Good morning and welcome to the Pitney Bowes first quarter 2011 earning results conference call. (Operator Instructions) 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. Good morning. 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 2010 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 statement 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 first quarter. Murray?

Good morning, and thanks for pulling yourselves away from coverage of the Royal Wedding to join us. Let me start by sharing some thoughts on our performance and Mike will follow with the details on our first quarter results and then I'll discuss the rest of the year. Afterwards we'll take your questions. During the quarter, we continued to gain momentum in our plans for long term growth as we made progress against several initiatives that we discussed at year-end. For the third consecutive quarter, both equipment sales and software revenues grew. The continued improvement in equipment sales was lea by increasing demand from high volume mailers to update their hardware and software production platforms. Our growth in software was fueled by global demand for data analytics and location intelligence solutions.

The increase in software revenue was also supported by the growing recurring revenue stream related to the increasing per of multi-year licensing agreements. While revenues for the quarter benefited from these increases in equipment sales and software, it was offset by the expected lower recurring revenue streams related to our SMB Solutions Group. We have previously explained that lower SMB equipment sales in past years created a head wind that reduces our supplies, rentals, and financing revenue streams. We anticipate that these headwinds will continue to diminish as equipment sales improve. As expected, the declines in the SMB recurring revenue streams did moderate in this quarter. During the quarter, we continued to reap substantial benefits from our ongoing strategic transformation program. The program is delivering improvements in customer processes and infrastructure, cost savings as well as an enhanced ability to deliver new products and services. The savings and the investments made possible by strategic transformation will enable us to continue to introduce a number of new customer communications management solutions for SMB and enterprise customers this year.

Earlier in the quarter, we announced Volly, our secure digital mail delivery system. We have continued to get positive feedback from all stakeholders and make progress with partners. We introduced additional CCM Solutions for enterprise customers, including the expansion of our IntelliJet production print line and Portrait Miner 6.0 software for predicting customer behavior. We are providing SMB customers with the industry's only family of cloud based solutions including PB Smart Postage and PB Smart Connections, an e-mail, marketing and communications platform.

In addition, earlier this week, we announced SendSuite Live, a new web-based shipping platform that strengthens our market leadership in the transportation management services shipping marketplace. We also continued our progress in the stabilization of our base business in the quarter. Positive trends including continued gains in customer retention and ongoing placements of new products such as our Connect+ web-based communications system. Connect+ has already been launched in Canada, UK, and Australia, and its global rollout will continue throughout 2011. Overall, SMB equipment sales declined, however, in part due to the phased movement of a select group of customers to alternate sales channels. These channels will best serve their needs as we continue to offer more products and services online. Consistent with prior shifts, we saw improving sales productivity throughout the quarter. We expect our channel transition initiatives to drive longer term growth through greater engagement of small business customers with our new web-enabled solutions. These moves are also helping to create a more efficient cost structure as we align the value of the sales with the cost of the delivery channel. These are all important contributing factors to our projected stabilization in this business in 2011.

Let me now turn it over to Mike for a discussion from our first quarter financial results.

Thank you, Murray. Our revenue for the quarter was $1.3 billion, a decline of about 2% on a reported basis when compared with the prior year and a decline of about 3% when you exclude the impact of currency. Breaking down our revenue for the quarter between US and non-US operations, US revenue declined by about 5%. Outside the US, revenue on a reported basis increased 4% versus the prior year. Excluding the impact of currency, revenue outside the US increased 1%. Non-US operations represented 32% of total revenue. At this point I'd like to note two unusual events that occurred this quarter. First, on February 7, there was a fire at our pre-sort processing facility in Dallas, Texas. While all employees are safe, the site was completely destroyed and we estimate lost revenue and EBIT of about $7 million each in the first quarter. We expect continued adverse impacts to both revenue and EBIT in the second and third quarters until the new facility is fully operational. For the full year, we expect total revenue for the Company to be impacted by about 0.5%.

It's expected that the earnings associated with the lost revenue and the costs related to outfitting a new facility will be fully covered by insurance proceeds in future periods. To date, we have received a $15 million advance from the insurance company, however the accounting rules are such that this advance and future insurance proceeds cannot be recognized in earnings until the final settlement of the insurance claim. If the insurance claim is not settled in the current year, we estimate 2011 adjusted earnings could be reduced by $0.07 to $0.09 per diluted share.

The Company's response for the fire was impressive on many levels. While the loss of the facility impacted our ability to qualify customer's mail at the highest level of discount, our national network enabled us to quickly reroute mail and convert other capacity to process first class mail and has resulted in retention of virtually all of our customers. The facilities permanent replacement is expected to be operational in the second quarter and at previous productivity levels by the end of the third quarter. The rest of our network continues to process increasing volumes of both first class and standard class mail from new and existing customers. Excluding the impacts of the Dallas fire, pre-sort related revenue for the quarter grew and the EBIT margin continued to improve.

Second, of course, is the tragic earthquake and tsunami in Japan. Our condolences go out to all those who have been impacted. With respect to our business, about 1% of our total revenue is from Japan so the impact on revenue and earnings in the quarter was minimal. We had no product supply issues in the first quarter and based on current conditions, do not expect any disruptions in our supply chain in the second quarter. We're actively working with our supply chain partners and have a number of strategies in place to mitigate potential disruptions in the second half of the year.

Turning to adjusted earnings before interest and taxes or EBIT for the quarter. It was $211 million which was about 8% lower than last year. EBIT margin was about 16%. EBIT margin was affected this quarter by the costs associated with the Dallas fire and by our planned investment in Volly, our secure digital mail service. Excluding these impacts, EBIT margin would have been 16.7%. We continue to see the benefits of our productivity initiatives in our selling, general and administrative costs or SG&A. SG&A in the quarter declined by more than $13 million when compared with the prior year and for the second consecutive quarter, SG&A improved year-over-year as a percentage of revenue and declined 40 basis points this quarter to 32.5%. SG&A benefited not only from our ongoing productivity initiatives but also from lower credit losses which we have seen continue to improve. EBIT margins improved year-over-year in four of our seven business segments for the quarter, including both our SMB business segments. These improvements are a result of our continued focus on increasing our operating efficiency across all of our business segments.

We are reaping the benefits of the strategic transformation actions that we have taken since the fourth quarter of 2009 and we continue to implement additional actions that are enabling us to improve the way we go to market, interact with our customers and develop new products. We continue to put in place 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 $280 million or $1.37 per share. Net interest expense in the quarter including financing interest was $51 million, a modest increase of $2 million when compared with the prior year. The average interest rate in the quarter was 4.81%, 53 basis points higher than the prior year due to changes in our debt portfolio mix. The effective tax rate for the quarter on adjusted earnings was 29.9%. The lower tax rate in the quarter was primarily the result of a tax benefit arising from a favorable conclusion of a non-US tax examination. We continue to expect the average tax rate for the year on adjusted earnings to be in the range of 33% to 35%.

The GAAP tax rate for the quarter was 30.9%. Adjusted earnings per share from continuing operations for the quarter was $0.53 which compares with our adjusted earnings per share of $0.55 for the same period last year. Our earnings per share of $0.53 this quarter was reduced by $0.04 per share as a result of more than $0.02 per share for estimated costs related to the Dallas fire and by more than $0.01 per share for our investment in Volly. GAAP earnings per share for the quarter included restructuring charges that totaled $0.08 per share in the quarter. GAAP earnings per share for the quarter also included a $0.01 per share non-cash tax charge for out of the money stock options that expired during the quarter and a $0.01 per share loss from discontinued operations.

Free cash flow was $286 million for the quarter. In comparison to the prior year, free cash flow for the quarter benefited from lower tax payments, tax refunds, and a reduction in our finance receivables partly offset by higher Capital Expenditures as we invested in the business. During the quarter we returned $75 million of cash to our shareholders in the form of dividends. We reduced our commercial paper balances this quarter versus the fourth quarter by about $8 million to a balance of $42 million. About 86% of our total debt is fixed rate and 14% is floating rate. Let me now highlight a few points about our strategic transformation program.

In the first quarter, we continued to implement initiatives identified by our project team. In the first quarter our pre-tax restructuring charges of $26 million were primarily for severance costs related to the elimination of about 800 positions across the Company. As noted when we gave guidance last year, we're now targeting annualized net benefits for the full program in the range of $250 million to $300 million by the end of 2011 and we are on track to achieve the full annualized run rate of benefits by 2012. That concludes my remarks. Now Murray will discuss our guidance.

Thanks, Mike. We are reaffirming our full year guidance for revenue, adjusted earnings per diluted share, GAAP earnings per diluted share, and free cash flow. We expect 2011 revenue, excluding the impacts of currency, to be in the range of flat to 3% growth. Our projected return to revenue growth for the year is due in part to the initiatives I outlined at the beginning of this call. All designed to drive new growth opportunities and to stabilize our base business. In 2011, we anticipate generating incremental earnings of $0.32 to $0.34 (sic - see press release) per share from operations growth and productivity, excluding the impact of SMB stream revenues. As noted previously, we expect lower SMB stream revenues as a result of lower equipment sales in prior periods to negatively impact earnings by $0.25 to $0.30 per share. This will result in comparative earnings for the year of $2.25 to $2.40 per share. Additionally, we plan to invest $0.05 to $0.10 per share to develop the market for Volly. As a result, we expect 2011 adjusted earnings per share from continuing operations in the range of $2.15 to $2.35. On a GAAP basis, we expect 2011 earnings per diluted share from continuing operations in the range of $1.80 to $2.10. This includes the expected impact of $0.25 to $0.35 per share for restructuring charges associated with strategic transformation. Guidance excludes any financial impact due to the fire at our pre-sort facility as outlined in Mike's discussion. We expect to generate free cash flow for 2011 in the range of $750 million to $850 million. We anticipate lower free cash flow in 2011 as compared to the prior year because of increased investment in finance receivables during the year. Higher investment in finance receivables is expected in relation to higher levels of equipment sales and higher levels of capital expenditures associated with investments in business growth. Conditions in the first quarter underscored our belief that the business and economic environment will be characterized by gradual improvement at varying rates by sector and geography; however, we remain focused on investing in solutions which enable businesses to manage both physical and digital communication channels with their customers while continuing to streamline and enhance our operations and processes.

I'd just like to make one correction. I said $0.32 to $0.34 as far as our incremental growth and that was actually $0.32 to $0.42 per share for operations growth and productivity excluding the impact of SMB stream revenues. Thank you, and now, let's open the lines for questions.

(Operator Instructions) Your first question comes from the line of Ananda Baruah from Brean Murray. Please go ahead.

Hi, guys, good morning and thanks for taking the question. I guess just a couple things, if I could. Murray, could you I guess just clarify the comments around the small to medium business channel shift? I just want to make sure that we're clear on exactly the dynamics with that.

Sure. As we look at the SMB market and how the customers prefer to be served, whether it is by direct sales or by inside sales, we determined at the beginning of the year to shift a fair number of accounts into inside account management rather than direct account management. This creates a short-term disruption as we shift the accounts and reestablish those connections, so that created a negative in January. We saw it start moving back in February and March and this is what normally has happened as we have had these types of shifts in the past, so we expect an initial reduction and then the curve to come back and we're pleased to see it returning back to where we expect it to be. This will give us the long term benefits of how the coverage is delivered and how the customers are interacted with and it will also enable us to take our cloud based solutions to that customer group in a much easier and cost effective manner.

Got it. Is the expectation that it be the transition be completed exiting the June quarter?

The transition has been completed and we're just in the adjusting and we would expect in the second quarter to be back to normalized. This was sort of what we had planned during the year as we looked at how we shift the business and so we see it as a plan, on plan and aren't seeing dramatic surprises there.

And you can see how it coincides with the number of the recent product announcements we've had as well.

Got it. Thanks and then I guess the demand, the incremental demand you are seeing from high volume mailers, it sounds like -- in your comments you spoke to both hardware and software strength. I guess on the hardware side, wouldn't you really see as the demand drivers, aside from economy just becoming -- stabilizing and is there anything, I guess different on the software side that you see happening this time around that you hadn't seen in the past that's leading to incremental software adoption? Thanks.

Sure. As we look at the high volume segment, if you recall a number of years ago, there was a hold back in procurement there, so that has been coming back. Secondly, we have the leading integrity products in the marketplace. That is moving forward, also we're seeing customers looking at how to do more transpromotional work in these areas so particularly, when you look at financial services and insurance, they're the areas that have been accelerating back. Now, that also coincides with the switch back to growth in total mail volume, so if you recall, in '09, mail was down 15%. It was down 9% last year and in the last quarter, it was up 1.3%, so we're starting to see the follow on benefits from that transition and the need for people to accelerate the quality of what they're delivering in mail so that's sort of from the global hardware side. On the software side, the continuing expansion we have in data analytics and location intelligence is providing us with some very positive and unique offerings to customers that are very exciting for them, so they're adopting those and then we have our multi-year contracts which have been a negative for a couple of years but now that stream revenue is coming in and we're continuing to see the acceleration of those multi-year contracts and then finally, as I mentioned we introduced the portrait, the Newport rat analytic software. The combination of the portrait tools with our existing tools provided a much richer relationship in our customers, so we're seeing that as a continuing positive trend as we offer a much broader range of services to our customers.

Thanks, and that's helpful, thanks and just last one for me I guess. Just regarding the potential impact, I guess well the impact -- the situation in Dallas and you mentioned that I guess the potential impact in totality is $0.07 to $0.09 and it's not baked into your guidance so as we move through the year, what kind of visibility would you guys have I guess into how progress is coming along and what will you be willing to share with us, just so we can minimize any opportunity or risk of getting surprised towards the end of the year on what's going on there? Thanks.

Sure. We feel very confident about that range in terms of the impact because it's really based on what we know we can qualify the mail at in our prior facility and the process we need to make to get the mail to qualify at that level again, and it's really having the new facility up and running. We're quite confident that we have insurance coverage that will keep us whole on this. We really have a question of the timing of when we can recognize those insurance proceeds versus the impact in the business, but we are well on our way to having the new facility in place. We'll be up and running in the second quarter and it takes several months to kind of iron out the processing to get it to full productivity but we expect that certainly in the fourth quarter we should be running at prior levels of productivity and if anything with a new facility and all, the opportunity to do even better. So we think this is -- it's quite measurable in terms of the impact on the business and if everything works out well, we would recognize the proceeds in the year but if not we think we'll be at the end of the day held, kept whole in terms of those events.

Is there any likelihood that we get into the fourth quarter and then you sort of realize that like the whole thing is not going to be settled and we just -- you just kind of end up getting caught short at the end?

I think there's two separate issues here. One is our view on having our facility up and running. That is in full flight in terms of a project to get it up and running and it's something we, as you know, have nearly a network of nearly 40 locations, have a lot of competency in putting new facilities together and getting them running effectively. The question on the insurance I think is much more one of timing of accounting recognition as opposed to the validity of the claims.

Okay, thanks.

Part of the recognition is we've already received $15 million from companies in advance.

Your next question comes from the line of Hale Holden from Barclays Capital.

Hi, I had two. I don't know if it's going to be possible for you to break this out but to what extent are your mail volumes associated with local advertising and the reason I'm asking is seeing a lot of media companies come out with lower local advertising and there seems to be an increasing secular shift there so I was wondering if it's having an impact on your clients buying decisions at all or not, and then I have a follow-up.

Yes, the majority of our mail is not local mail. Certainly there is some but that would tend to be on the metered side which doesn't really affect the advertising. In the large production shops, we don't really see any significant effect there.

Thank you, that's helpful and then a second one is with sort of the tone shifting and a path to revenue growth, have your thoughts on what the appropriate balance sheet leverage changed at all or the potential for maybe increased shareholder returns in some form?

Well, I think in terms of shareholder returns, obviously we provide a very good dividend return so we think that's an important part. We think actually the return to growth will hopefully have a positive impact on the equity return. In terms of leverage in the balance sheet, that's something that we are managing as we go along. We have over the last few years brought our debt levels down in line with some of the reduction in our finance receivable base as that stabilizes and as we see it return to growth. Obviously, there will be a little bit more leverage associated to that. We also have certain cash usages that we'll apply our excess cash to. Obviously, we have the payments from our transformation program which we estimate to be about $100 million. We do plan some pension contributions this year for both our US and international plans in the neighborhood of about $145 million, and we also have share authorization outstanding from the Board that we have available to us, that's about $150 million of authorization that we said we will look at utilizing over 12 to 18 months, so -- and then obviously, other investments potentials in the business to help drive that growth. So we try and manage a portfolio of those things to balance the utilization of cash in the business. We think the ratings we have today are appropriate ratings in terms of sustaining the business over the long term.

Thank you very much. I appreciate it.

Your next question comes from the line of Chris Whitmore from Deutsche Bank. Please go ahead.

Thanks very much. Wanted to drill down on growth expectations for the balance of the year. In aggregate you were down about 3% organically. Compares get more difficult and more challenging in the back half of the year. I'm just trying to understand how you go from negative 3% in Q1 to exiting to something much higher growth rates to meet that overall number. Any color there?

Sure. Let me address a couple pieces. One, obviously we expect to see continued moderation in the recurring revenue streams which has been one of the bigger contributors to the headwinds and we did see improvement in the first quarter relative to prior year comparisons and we expect to see those continue to improve. In the -- you've seen a number of new products that we've put into the marketplace around our core mailing business. The global expansion of Connect+ as well as some of the SMB related products. We've seen strong growth in our software business and expect to continue to see performance out of that. The PBMS business which has had revenue challenges in part because of some substantial lost contracts last year will see better compares in the second half of the year, and our mail services business we believe continues to have good performance opportunities obviously with the impact of Dallas, so generally speaking, we see improving trends from a revenue perspective, new products and services that are being brought to the market that should allow us the opportunity for growth in the balance of the year.

You've shown a few quarters of equipment sales growth. Is your installed base of meters in the field or the value of that installed base growing at this point?

That sort of varies by country, Chris. We actually have now seen Canada turn positive in number of meters in the field. The US is not turned to positive meter growth yet but the decline has been slowing significantly as we have been retaining more of our customers and continuing to accelerate in placements, so -- and then as you go around the world, you see similar trends in the UK, France, Germany, and Australia, as to how those are moving. At the same time, we have got meter approval in Brazil, so we'll see the expansion of the meter base in Brazil and we also have now received approval in Italy to put in remotely managed meters. They've had to be non-connected up until now and we've received our first significant orders there to begin that transition, so I think from a base point of view, we're seeing a slowing and heading back towards positive, positive in a few places and then expansion into a number of new markets.

What do you think that rate of erosion is at this point in that installed base, across the Company?

I have to do a calculation on that, Chris. Rather than just pull it out, I'd sooner calculate it and get back to you on it.

Okay, thanks a lot. My last question is on gross margin. You're in the midst of a pretty significant restructuring program yet gross margin was down by about 2 full percentage points year on year and was below my expectation. I'm just trying to understand some of the gross margin pressures you're seeing in the business will get better. Thanks so much.

Yes, Chris, it's a good question. The answer is really one of mix. The first quarter is always a quarter with the least level of sales growth and we had good growth in some businesses and some regions where we have lower gross margin, so we don't see or expect margin deterioration issues as much as we see an improving revenue mix going forward and a greater contribution from sales in the out quarters, we should see better performance on the gross margin line.

Is there a target for the full year gross margin that we should be thinking about?

We tend not to look at it in the aggregate that way as much as we look at it on a unit by unit basis and as you saw, we had improving EBIT margins in four of the seven businesses. Those are in part driven by improving gross margins, so I would say if you look at prior year, full year as a guideline, we should be looking for equal or improving.

Okay, thanks very much.

Your next question comes from the line of Shannon Cross from Cross Research. Please go ahead.

Thank you very much. Good morning. My first question, on management services you talk about a pipeline that's improving. Can you give some more clarity and just sort of how you're thinking about the contracts that you might be signing? I remember a few years ago when you got aggressive in that business and clearly it dampened margins so how should we sort of think about your balancing revenue growth within management services against margin potential?

Sure. In terms of looking at management services, I think a good view into that would be an announcement we made just yesterday about a partnership with EMC, and utilizing their Captiva software for new solutions. Those are technology based solutions that we believe have greater margin potential than traditional labor based services. So while our pipeline still includes some of our traditional products and services, we're looking at more technology based services that tend to be more off site than on site and so it's going to be a mix of those types of things, the traditional products along with some of the new technologies and new partnerships that allow us a different margin profile in that business as we go forward, and that really applies around the whole CCM or customer communications management strategy that we've laid out.

Okay, great and then on the cash side of things, given that you did a significant -- you generated a lot of cash in the first quarter and I realize some of it is not necessarily non-recurring or maybe will reverse itself, but I'm curious as to sort of what you think are the dampening impacts as we go through the year, clearly I would assume equipment sales which will then theoretically use some cash for finance receivables will be in there. Is there anything else we should really focus on in terms of pressure on cash and I guess you also talked about CapEx but anything specific or incremental to those two that we should think about because it seems like your cash flow is on a really solid track this year.

Yes, I don't see anything that's of a high order of magnitude that would be dampening. I mentioned a couple of the uses that we would expect over the course of the year. CapEx increases year-over-year would be modest, our total CapEx last year was only about $125 million to $130 million and we estimate that could be $125 million to $175 million this year, so a little increase. Part of that will be around new systems and solutions that we're launching across the business and some of it is around mail services, facility fit out but don't see anything changing dramatically from what we saw in 2010 other than the things that you cited.

Okay, and then on the Connect+ side of things, can you talk about sort of where you think you are in terms of penetration of that? I know you -- I think you've rolled it out across your domestic salesforce, sounds like you're moving through other regions but I'm curious because it seems like it's getting good traction, so how should we think about Connect+ and is this something that can provide some underlying support for the next year or so, and then are there technologies within that that you plan on deploying down market or I'm not sure if there's a way to go up market with them but how should we think about it?

Sure. As you look at Connect+, it continues as you said to gain market traction in the markets we've launched it in and in particular, we're seeing the shift towards more and more color on the device, so the early launch in the US have low color penetration. It was in the 10% to 20% range. It's now in the 50%, 60% range so we expect to see that continue to ramp which is both good for equipment sales and then it is also good for long term supply revenue, so we expect that shift to continue and then as we mentioned we've launched it in Canada, UK, and Australia. We will be launching it in a number of other significant markets, particularly France and Germany a little later this year as it's approved there. That will continue its positive global impact. At the same time, it is a web-based platform and so we'll be able to continue to go back to that customer base and expand the capabilities that are available on it with new software options that we have out there.

Okay, and then from a competitive standpoint, how are you sort of seeing the competitive landscape market share? Any color you can give us on pricing, just how is your sort of I guess kind of like that large competitor out there, how are things going vis-a-vis them? Thank you.

As we look at the margins within each segment, we are seeing margins staying constant, so we're not really finding any effect in the marketplace from price, I think is what you're indirectly asking, so I think that pricing is holding, and if anything with the Connect+, we're able to move that price positively because of the incremental functionality, particularly around color which no one else in the market has, so we expect to continue to gain traction as a result of that and then back to your earlier question about the capabilities inside of Connect+, and its leverageability. We are already beginning the leverage of that with the PB Smart products at the low end in the SMB space, so we're taking capabilities from there and opening it into other market segments and we will continue to do that with web-based offerings that will enhance our existing customer implementations either directly through the device or as incremental software around their existing devises.

And then my final question given some of the concerns on the economy or I'm not quite sure what's going on out there in the world right now, but you guys tend to have somewhat of a look. I'm curious about linearity during the quarter if things get better, worse, any comments you want to make on how April is looking. Are we feeling more comfortable as you went through the quarter in terms of the level of business activity? Thanks.

As you put it, until everybody knows for sure, it's pretty hard to make predictions, but we have seen the enterprise side of the business continue to remain strong in written business. It does vary globally as different markets, particularly in Europe, with the credit items that occur. It does have some varying effect but in general, the enterprise segment has continued to show positive signs. The SMB area is much slower. We aren't seeing same type of positive reaction in the SMB space as far as opening up from a spending point of view, so that remains something that we have basically put into our plan that it will remain sort of where it is. On the positive side though, we do see markets like Asia as being very strong and it is not that big of a component of our business but it's very positive and very helpful as we see the market growth and the expansion there.

Great. Thank you very much.

I'd just like to go back to Chris's question that I left unanswered on the installed base of meters. This is all meters globally. In the US in last year, the meter population declined 7% and as you look at it at this current quarter, it was down in the 6% range, so we're starting to see a decline in the US. Globally, it is positive in a number of countries and generally less than 6%, so the US is about just over 50% of the global market of installed base, so it would say the decline is moderating around the world and it would be somewhere down in the under 6%. If I was to pull a guess, it would be in the 3% to 4% range and then the other component of that is the majority of that reduction has been in the very low end of the meter line which is the lowest revenue side of the product line. Now, that's why as you noticed we introduced Smart Postage. Smart Postage goes directly into that low end both below our existing meters and up to the meter and then adds a shipping component, so it is a complementary product. We'll be adding to our existing meter customers and expanding, so we see that as an offset in the low end. Certainly at the high end, the Connect+ product is gaining in placements in that space, so we're seeing the high end as more stable and the low end as we've had the economic issues around the world for small business has been a negative. We see that decline slowing and then the Smart Postage, our cloud-based offering will actually begin to address that as we go through this year.

Your next question comes from the line of Lloyd Zeitman from Bernstein. Please go ahead.

Good morning, folks. I'm surprised no one has asked about Volly yet, so I guess I will.

Sure. Volly continues to be an exciting product and as we said back at the beginning of the year, we launched it so we could go out and begin building the relationships and connectors which -- with high volume mailers and then we would not take it into the market until we had put those connectors in place, so we're well along the path of partnerships with our installed customer base. We're continuing to develop those relationships and build the tools with them to create the ability to place the mail into Volly. We are still expecting to go to the consumer market some time late in the third quarter. We will launch it earlier as an internal trial with PB employees and then look to go to market in the third quarter.

At the same time, we did bring in a President of that business who comes from the digital marketplace and he is also continuing to look at the offering as we are planning to launch it and making any appropriate adjustments that would enhance it from a digital acceptance, so the traffic and volume around it and people wanting to participate continues to grow from both a mailer and consumer side but we do need to build the connectors for the mail producers before it will have value to consumers, so we are still on the track we have planned. We still see it as an exciting product and we'll look to see how we begin the adoption curve later in the year.

Thank you.

Your next question comes from the line of Ananda Baruah from Brean Murray. Please go ahead.

Hi, guys, thanks for the follow-up. I guess along those lines, could you guys just give us a sense, I mean you've announced Volly which is consumer facing and you've done stuff on the business side like Smart Postage and some of these other things and I guess could you give us a sense or maybe kind of if you could put a wrapper if that's possible around what the totality of the sort of new solutions strategy is going to be going forward, what's the best way for us to think about sort of how you're trying to shift things sort of between where you are today and where you think you'll be when you reach critical mass with some of these newer solutions. Thanks.

Sure. What we announced late last year is our commitment to the customer communication management space and all of our new products and services are tailored around that. Our products historically have been involved in connecting our customers to their customers. We are taking that connection and expanding it with our software tools, new hardware tools, and our cloud based tools to enhance that communication in both physical and digital forum, so you'll see all of our offerings coming out based around customer communication management, helping our customers more effectively communicate with their customers to enhance and build their relationships in both physical and digital form and the ability to have that in multiple digital forms, so we're saying this is a broad based communication tool. We're leveraging our expertise and capability across it and as we go forward we'll see much more, you'll look at Connect+, it starts with the ability to put promotions on the outside of the envelope. Smart Postage does the same. You have Smart Connections which brings digital communications in. You have Volly which starts connecting physical and digital together and creating those communications. You have all of our software tools which enhance those communications and then the addition of the analytics because you can do all those things and wonder whether it's succeeding or not and that's where the whole data analytics comes in which ties it back to again, how do I communicate to my customers. So I think about it as every one of our customers is looking to retain their customer base, expand their offerings to their customer base, and find new customers, and that's what the mail has traditionally done and that's what we're doing as we expand into a hybrid world of both physical and digital.

And Murray, have you guys I guess thought through or would you be willing to share with us the extent that you've thought through, sort of I guess whether it's two years or two to five years or whatever the right time frame is like what kind of mail volumes needs to be at whether it's like slightly positive or slightly negative and what equipment sales needs to be at for you guys to generate I guess the services revenue growth sort of off of all of the new services that you're going to be offering to make the business model work?

Well, I think there's a couple of inherent pieces there, and we'll have an analyst day where we'll outline all of the new goods and services and road map and how that ties together. That will be probably in September. So that will give you a better view of all of the new goods and services but as you think about it, the way we look at it, the number of messages between customers and their customers is not declining. It is really a matter of how it's delivered in either physical or digital form. We're now launching into a hybrid mode where we will help our customers deliver those messages in whichever form their customers choose to receive it and we believe the business model is such that we will be able to have the same or more from the digital than we had from the physical, so regardless of speed and transition as we're now moving into the digital side of the communication, we believe that declines will be offset and taken up on the digital side, so it's hard to predict what that long term mix shift is, but what we're doing is positioning the Company so we're attacking the total delivery channel and not just one side and that will give us the ability to both offset any shifts and to create growth as we expect the offerings.

And then the other thing I would just note is that BCG had done a review of expectation of mail volumes 10 years out and what we've seen in terms of mail volumes settling out are numbers that are actually right in the range of their long term predictions, which is a very modest decline overall, over time, but with positives in standard and some declines in first class. So I think the numbers in the last quarter are actually even a little better than the averages, so we looked at that as a guide and then obviously we'll modify along the way as we learn about any other changes in the overall marketplace.

Thanks, Mike. So if the BCG study turns out to be more or less accurate, I guess that -- it sounds like the implication or the inference is that that would be good enough to allow your business model to work.

That's correct.

Thanks.

(Operator Instructions) At this time there are no further questions.

Thank you. As we discussed we continued to gain momentum in our plans for long term growth. We had the third consecutive quarter of equipment sales and software revenue growth. We continued to reap substantial benefits from our ongoing strategic transformation program. We've introduced a number of new customer communication management solutions for both the SMB and the enterprise segment. We continued our progress in the stabilization of our base business in the first quarter. We're seeing continued gains in customer retention, ongoing placements of new products such as our Connect+ web-based communication system, and moderating declines in the SMB recurring revenue streams. As a result, we are on track for achieving our guidance targets for the year. Thank you and have a great quarter.

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