Deluxe Corporation (DLX) Q3 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Deluxe Corporation Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today’s conference call is being recorded. I would now like to turn the conference over to Mr. Ed Merritt, Treasurer and Vice President of Investor Relations. Please go ahead.

Thanks, Candis, and welcome everyone to the Deluxe Corporation’s third quarter 2015 earnings call. I’m Ed Merritt, Deluxe’s Treasurer and Vice President of Investor Relations. Joining me on today’s call are Lee Schram, our Chief Executive Officer; and Terry Peterson, our Chief Financial Officer. At the conclusion of today’s prepared remarks, Lee, Terry and I will take questions if there are any. I’d like to remind you that comments made today regarding financial estimates, projections and management’s intentions and expectations regarding the Company’s future performance are forward-looking in nature, as defined in the Private Securities Litigation Reform Act of 1995. These comments are subject to risks and uncertainties, which could cause actual results to differ materially from those projected. Additional information about various factors that could cause actual results to differ from those projected are contained in the press release we issued this morning, as well as the Company’s Form 10-K for the year ended December 31, 2014. The financial and statistical information that will be reviewed during this call is addressed in greater detail in today’s press release, which was furnished to the SEC on the Form 10-K filed by the Company this morning. The press release is also posted on our Investor Relations website at deluxe.com/investor. Any references to non-GAAP financial measures are reconciled to the comparable GAAP measures in the press release. Now, I’ll turn the call over to Lee.

Thank you, Ed, and good morning everyone. Q3 was yet another strong quarter and we are now well-positioned to grow revenue for the full year of 6% despite a continued sluggish economic environment. If achieved, 2015 will represent the sixth consecutive year of revenue growth. The last time we achieved sixth consecutive years of revenue growth, dates back 19 years to 1996. We’ve reported revenue in the third quarter in line with our outlook and adjusted earnings per share exceeded the high-end of our outlook. Revenue grew more than 6% over the prior year quarter, driven by financial services revenue growth of 20% and small business services revenue growth at 4%. Small business services revenue was negatively impacted by foreign exchange headwinds and initial challenges with a migration to a start-of-the-art new eCommerce platform that is now running very well. Checks and forms performed well. And marketing solutions and other services revenues grew 29% over the prior year. Adjusted diluted earnings per share grew a very strong 13% over prior year and we generated strong operating cash flow of $72 million for the quarter. We repurchased $47 million of common stock in the quarter. We continued our brand awareness campaign with the release of our full length Small Business Revolution documentary to help improve our brand awareness and perception. We also advanced process improvements and delivered on our cost reduction expectations in the quarter. We will celebrate our official 100 year anniversary on November 23, 2015 with the ringing of the opening bell at the New York Stock Exchange. We also announced on October 19th that we acquired Datamyx, which will further enhance our financial services, marketing solutions, and other services product set by providing valuable marketing tools and other analytical services, our customers need to help them grow their business. In a few minutes, I will discuss more details around our recent progress and next steps. but first Terry will cover our financial performance.

Thank you, Lee. Earlier today, we reported diluted earnings per share for the third quarter of $1.13, which included $0.03 per share for restructuring and transaction related charges. Excluding these costs, adjusted EPS of $1.16 exceeded the upper end of our previous outlook and was 12.6% higher than the $1.03 reported in the third quarter of 2014. The restructuring and transaction related charges are primarily for employee severance, the closer of a leased facility, and small acquisitions in the quarter. Revenue for the quarter was $440 million, which was an increase of 6.4% over last year, or about 2% excluding the impact of the Wausau acquisition. Small business services revenue of $289 million grew 3.9% versus last year, despite a continuing sluggish economic environment and unfavorable foreign exchange rates, which negatively impacted revenue growth by 1.2 percentage points in the quarter, as well as initial challenges in the quarter from an internal migration to a new state-of-the-art eCommerce platform that is now running very well. We delivered growth in marketing solutions and other services. And from a channel perspective, our online Safeguard distributor, major accounts and dealer channels all grew. Small business services revenue also benefited from price increases implemented in the first quarter. Financial services revenue of $111 million grew 20.4% versus the third quarter of last year, and would have been about flat excluding Wausau. Higher marketing solutions and other services revenue driven by Wausau and Deluxe Rewards, price increases and revenue from Zion’s Bank more than offset the impact of lower check orders. Direct Checks revenue of $40 million was down nearly 7% from last year and in line with our expectations. From a product revenue perspective, checks were $216 million, representing 49% of total revenue; forms, accessories and other business products were $92 million or 21% of revenue; and marketing solutions and other services were $132 million, which was 30% of total revenue. Gross margin for the quarter was 63.8% of revenue, which was up slightly from 2014. The increase was primarily driven by previous price increases, improvements in the services revenue margin, and improvements in manufacturing productivity to partially offset by product revenue mix and higher delivery and material costs. SG&A expense increased $13.9 million in the quarter, which was 43.1% of revenue compared to 42.5% of revenue in the same period last year. Benefits from our continuing cost reduction initiatives in all three segments were offset by increased SG&A and financial services associated with the Wausau acquisition, and our efforts to grow the small business distributor channel. Excluding restructuring and transaction related charges in both 2015 and 2014, and the asset impairment charge in 2014, adjusted operating margin for the quarter was 20.8%, which was down slightly from the 21.2% generated in 2014. Financial services and Direct Checks delivered operating margin better than our exceptions, while small business services margin was in inline. Small business services adjusted operating margin of 18.4% was down 0.1 percentage point from the prior year. Financial services adjusted operating margin of 21.9% was down 1.3 points from 2014, driven by Wausau acquisition amortization expenses and check usage declines, partially offset by continued cost reductions. Although Wausau was accretive to earnings in the third quarter, the financial services adjusted operating margin was negatively impacted 2.4 points from the business. Direct Checks adjusted operating margin of 35.3% increased 1 percentage point from 2014, driven by a higher mix of reorders and lower costs, which more than offset the lower order volume. Turning to the balance sheet and cash flow statements, total debt at the end of the quarter was $519 million, which was down $35 million or 6% from December 2014, and included the impact of repurchasing $47 million of common stock in the quarter. Cash provided by operating activities for the first three quarters was $217.9 million, a $14.6 million increase compared to the first three quarters of 2014. The increase was driven primarily by improved operating performance and lower interest payments, partially offset by higher income tax and performance based compensation payments. Capital expenditures for the first three quarters of 2015 were $29.5 million, and depreciation and amortization expense was $54.4 million. On October 19, we announced that acquired 100% of privately held Datamyx or $160 million net using a draw on our expanded credit facility. During the remainder of 2015, the acquisition is expected to generate revenue of approximately $7 million and be approximately $0.04 dilutive to adjusted EPS after absorbing acquisition related amortization expense. In addition, we estimate that transaction expenses of approximately $0.02 per share will also be recorded in the fourth quarter. Given our performance in the third quarter, the addition of Datamyx adjusting for the unfavorable impact from a stronger U.S. dollar and a slightly weaker expectation for the upcoming holiday season offerings in small business. We are adjusting our consolidated revenue outlook range for the year to $1.765 billion to $1.775 billion. We are also modifying our adjusted diluted earnings per share to an expected range of $4.51 to $4.57, which excludes $0.20 related to restructuring, debt extinguishment, and transaction related costs. There are several key factors that contributes to our full year outlook including small business services revenue is expected to increase 4% to 5% as volume declines in core business products, lower SEM, SEO revenue from our decision announced in the third quarter of 2014 to exit unprofitable business, and an unfavorable foreign exchange rate impact of approximately $11 million are expected to be more than offset by benefits from our eCommerce investments, price increases, growth in our Safeguard distributor, dealer and major account channels and double-digit growth in marketing solutions and other services offerings. We expect financial services revenue to increase 15% to 16% driven by continued growth from marketing solutions and other services revenue including Wausau, Deluxe Rewards, and Datamyx, higher revenue per order and a full year of Zion’s, partially offset by recurring check order declines of slightly over 6% and some pricing pressure including the impact of the large customer renewal early in the second quarter of 2014. A Direct Checks revenue decline of 6% driven by lower check order volume stemming from secular declines in check usage and eliminating marketing expenditures that no longer meet our return criteria, a continued sluggish economy, full year costs and expense reductions of approximately $50 million net of investments, increases in medical expenses, material costs and delivery rates, continued investments in revenue growth opportunities, including brand awareness, marketing solutions and other services offers and enhanced Internet capabilities, lower interest expense and an effective tax rate of approximately 34%, which assumes that the 2015 research and development tax credit legislation is enacted before year end. We expect to continue generating storng operating cash flows and it tightened our estimate for the year to a range of $300 million to $305 million in 2015, which reflects additional transaction and restructuring related payments versus the prior outlook. Compared to 2014, stronger operating performance and lower interest payments partially offset by higher tax, transactional related and performance based compensation payments are the primary drivers of the increase. We continue to expect annual contract acquisition payments to be approximately $15 million. 2015 capital expenditures are expected to be approximately $40 million, about the same as 2014, as we continue to invest in key revenue growth initiatives and make other investments in order fulfillment and IT infrastructure. Depreciation and amortization expense is expected to be approximately $77 million, including approximately $33 million of acquisition related amortization. For the fourth quarter of 2015, we expect revenue to range from $456 million to $466 million. Adjusted diluted earnings per share are expected to range from $1.18 to $1.24, which excludes $0.02 per share related to Datamyx transaction related cost. In comparison to the third quarter, revenue is expected to be higher in the fourth quarter, primarily due to seasonal holiday spending, tax forums, some small business healthcare forums rollouts, and a continued ramp in marketing solutions and other services revenue including again $7 million from the Datamyx acquisition. Adjusted EPS is expected to increase, primarily from higher revenue. Shifting to our capital structure, in conjunction with the acquisition of Datamyx earlier in the month, we exercised our option in the existing credit facility and expanded its total size to $525 million. As of the date of the acquisition, we were drawn approximately $428 million on our expanded credit facility. Looking ahead, we expect to maintain our balanced approach of investing organically and through small to medium-sized acquisitions in order to drive our growth transformation. Additionally, we expect to continue paying a quarterly dividend and periodically repurchase common stock. To the extent, we generate excess cash. We plan to reduce the amounts outstanding against our credit facility and we may, from time to time, consider retiring additional outstanding debt through open market purchases, privately negotiated transactions or other means. We believe our increasing cash flow, strong balance sheet, and flexible capital structure position us well to continue advancing our transformation. I’ll conclude my comments with an update on our cost and expense reduction initiatives, which again are coming from all three business segments. Overall, we had a solid third quarter as we delivered on our expected cost and expense reductions towards our $50 million annual commitment, net of investments. Approximately 55% of the $50 million in expected reductions will come from sales and marketing, another 40% from fulfillment and the remaining 5% coming from our shared services organizations. Our focus in sales and marketing for 2015 continues to be on sales channel optimization, platform and tool consolidation, leveraging sales and marketing efficiencies, including integration from recent acquisitions. In fulfillment, we expect to continue our lean, direct and indirect spend reductions, further consolidate our manufacturing technology platforms, drive delivery technology and process efficiencies, reduce spoilage, further enhance our strategic supplier sourcing arrangements, and continue with other supply chain improvements and efficiencies. Finally, for shared services infrastructure, we expect to continue to reduce expenses, primarily in IT, but we are also working opportunities in finance and real estate. Now, I’ll turn the call back to Lee.

Thank you, Terry. I will continue my comments with an update on our key revenue growth area, marketing solutions and other services, including some details on the Datamyx acquisition. I will then highlight progress in each of our three segments and finally provide some context looking forward to 2016, including strategic focused areas. Our primary focus continues to be profitable revenue growth and increasing the mix of marketing solutions and other services revenues towards our goal of 40% by 2018. Here we will focus on growing organically as well as continuing to assess potential small to medium-sized acquisitions that complement our large customer base and add new technologies. We have strengthened our channels in small business to include financial institutions, online, retail, wholesale, Safeguard distributors, dealers and major accounts. Deluxe is now more capable of helping small businesses pursue their passion as a trusted provider of a growing suite of products and services of small business needs to market and operate their business, and helping financial institutions with customer acquisition, fraud, security and risk management, and commercial and treasury services offers. Here is some color on our latest acquisition. Datamyx is a premier technology enabled marketing data and analytics provider, specializing and helping financial services institutions to find, convert and grow customers. Their solutions are powered by a proprietary software-as-a-service platform that leverages thousands of attributes, tri-bureau credit, and other risk related data, as well as sophisticated analytics, enable their customers to create measurable marketing programs that attract and engage highly targeted, qualified consumers. Datamyx helps customers maximize response rates, increase marketing efficiencies, growth revenue, and improve customer retention. They have a highly advanced technology platform that provides actionable insights that help maximize return on investment for customer acquisition, cross-selling, and retention marketing strategies. Again, we expect revenue for the balance of 2015 to be approximately $4 million and expect this will be about $0.04 dilutive to adjusted EPS this year. Next year, we expect revenue to be approximately $42 million with strong double-digit EBITDA margins. And we expect Datamyx to be slightly dilutive by about $0.01 per share, and be dilutive in total less than six months from the acquisition date. Strategically, this acquisition strengthens our commitment to the financial institution market, marking another meaningful step forward in our evolution to becoming a more diverse provider of financial services FinTech solutions to our financial institution clients. Datamyx employes a subscription based pricing model that drives repeat sales of data services with nearly 90% of monthly recurring revenue. We believe this provides us with a sizable, sticky, growing, annuitized services business. As of Boca Raton based company, this is a strong fit with our same city Deluxe Rewards base business. Datamyx’s largest customers include Quicken Loans, Commerce Bank, and Capital One. In summary, with access to a proven player in growing markets, this acquisition enhances our competitive position as a FinTech provider, and in line with our strategy will further increase our marketing solutions and other services revenue mix. With this acquisition, we now believe that our two largest segments representing over 90% of our revenue are well positioned for organic growth. We are really excited about this acquisition and welcome Datamyx employees to the Deluxe team. Here is an update on our four sub-categories framework for marketing solutions and other services. We ended the third quarter right in line with our expectations in revenue with mix in the four sub-categories basically in line with our expectations. First, small business marketing is expected to represent approximately 39% of revenue in 2015 with expected growth in the mid-20s this year, driven by scaling web-to-print and marketing solutions offers, as well as the fourth quarter traditionally is our strongest quarter for retail packaging and promotional products. In the third quarter, strong double-digits growth was driven by new wins in the financial advisor, real estate and service franchise association verticals that are using our comprehensive marketing solutions offers. The second category, web services, which includes logo and web design, web hosting, SEM, SEO, email marketing, social and payroll services, is expected to represent approximately 21% of revenue in 2015, with expected decline rates in the mid-single digits, but low single-digit growth excluding our earlier announced decision to exit some unprofitable revenue in the SEM/SEO space and the impact of foreign exchange rates. In the third quarter, we saw strong double-digit growth in direct web services offers and growth on a constant currency basis and payroll services. We closed the third quarter with approximately 910,000 web hosting customers. We also acquired Jumpline, a very small web services business that provides us with strategic control panel or commonly called C-panel technology capabilities. The third category, fraud, security, risk management and operational services is expected to be about flat in 2015 and represent approximately 16% of revenue. Key focused areas for growth in this category, in addition to our standard fraud and security offerings include performance management by adding Banker’s Dashboard customers including tablet and new credit solution offers as well as strategic sourcing new financial intuition wins. In addition, we also expect growth from scaling eChecks with opportunities ranging from adding eChecks to our distributor, dealer and major accounts channels to also scaling in many areas where we do not sell paper checks today. Q3 was our best revenue quarter ever for eChecks, and we have opportunities with larger financial institutions, paper rebate, medical and insurance clearing houses and other document management and payment solution companies. 20% of all eCheck customers are new customers, who have not purchased a paper check from Deluxe in the last six years. Finally, other financial institution services are expected to represent approximately 24% of revenue in 2015, with expected growth rates in very strong double-digits. Key growth initiatives here include adding new financial institution customers and targeting and campaign services, and scaling Deluxe Rewards, Wausau financial services, and our latest acquisition Datamyx. We expect marketing solutions and other services revenues to be approximately $533 million in 2015, up from $427 million in 2014, with growth of approximately 10% excluding the Wausau acquisition. If achieved, this performance would translate to a total revenue mix of around 30% of revenue, up from almost 26% in 2014, and 22% and 19% the previous two years. We continue to target growing marketing solutions and other services as a percent of total company revenue to approximately 40% by 2018 with checks expected to represent approximately 40% of revenue and business products expected to represent approximately 20% of revenue. Now, shifting to our segments, in small business services in the quarter, as expected, we did not see any notable improvements as the economic climate for small businesses remains sluggish and foreign exchange rates continue to deteriorate. Revenue grew 4% and was negatively impacted by foreign exchange headwinds, as well as challenges from the migration to a new eCommerce technology platform with checks and forms, the primary product shortfall drivers, to the high-end of our revenue outlook. Results from targeted customer segmentation in the call center improved and average order value and conversion rates improved. Our online Safeguard distributor, dealer and major accounts channels grew revenue over the prior year. We also saw growth in small business marketing solutions, web and payroll services, while SEM/SEO services declined in line with our earlier decision to exit some unprofitable channels. Again, we ended the quarter with approximately $910,000 web hosting customers. We continue to closely monitor the small business market and so far the economic indices appear to be consistent with our previous expectations and what we planned into our outlook. Optimism indices increased slightly to start the quarter in July and continued to improve in August, but basically ended unchanged in September, rising only 0.2 points. Optimism momentum in the fourth quarter of 2014, shifted downward in the first quarter and then continue to shift further downward in the second quarter, but improved slightly in the third quarter. The outlook on business conditions expectations continues to be negative, and the percentage of small businesses planning capital outlays over the next three to six months ended at a weak 25% reading. In summary, current optimism indices remains sluggish. The good news is that other than taxes and regulation, increasing sales continues to be a small business owner’s number one pain point and our portfolio is significantly more robust now with many offers to help them here. As the economy recovers with the transformative changes we are making to deliver more services offerings that help small businesses get and keep customers. Deluxe is better positioned as that indispensable partner for growth. In financial services, we saw the rate of decline of checks perform just over 6%. We continue to expect the unit decline rate for the year will be just over 6%. We had strong overall new acquisition rates and our retention rates remain strong on deals pending in the current quarter. We simplified our processes and took complexity out of the business while reducing our cost and expense structure. We made progress again in the quarter in advancing non-check marketing solutions and other services revenue opportunities. Wausau revenue was approximately $19 million, which met our expectations, and we had strong bookings in the quarter, helping us to build backlog. Some that will rollout in the fourth quarter, but most that will rollout in 2016. We already have about 6% higher backlog at the end of Q3 this year compared with last year that is targeted for 2016 revenue. So we are encouraged about growing Wausau revenue in 2016. Deluxe Rewards continued to perform very well in the third quarter, including starting a new customer pilot opportunity. For 2015, we expect non-check marketing solutions and other services revenues to be approximately 37% of total FS revenue, driven by Wausau revenue of approximately $75 million; fraud, security risk management and operational services revenue of approximately $40 million; Deluxe Rewards revenue of approximately $30 million; and targeting campaign and activation services revenues of approximately $23 million. Overall, we continue to be pleased with the Wausau acquisition. Wausau was $0.02 accretive to diluted – to adjusted diluted EPS in the third quarter and we expect it to be slightly accretive in the fourth quarter and for the full year. In Direct Checks, revenue met our expectations. We continue to look for opportunities to provide accessories and other check-related products and services to our consumers, as well as work on a number of initiatives to create an integrated best-in-class direct-to-consumer check experience. We continue to see a ramp in revenue enhancement synergies through our call center scripting and up-sell capabilities, as well as synergistic cost and expense reductions. Our direct checks expectations for the year are slightly better. Previously, we guided to a decline of 6% to 7%, but now we believe the decline will be closer to 6%, driven by continued declines in consumer usage in a sluggish economy. We anticipate that marketing solutions and other services revenue, which is primarily fraud and security offers for this segment, to be about 10% of Direct Checks revenue. We expect to reduce our manufacturing cost and SG&A in this segment and continue to deliver operating margins in the low-to-mid 30% range, while generating strong operating cash flow. As we exit the third quarter on the heels of a strong performance in a continued sluggish economy, we have made tremendous progress in transforming Deluxe, but we still have many opportunities ahead of us. Looking ahead to the fourth quarter and into 2016, we believe our portfolio is even better positioned to deliver continued sustainable revenue growth. As our technologies and sales channels were stronger; our digital technology services more mature; our infrastructure better; and our management talent is deeper and aligned to grow revenue. We have developed a strong platform for long-term growth with the objective of transforming Deluxe to more of a growth services provider from primarily from primarily a check printer, thereby changing our product mix and resulting stock price multiple. 2016 we are planning for what we expect to be a seventh consecutive year of revenue growth of approximately 4% to 6% including the Datamyx acquisition are almost 2% to 3% organic growth compared to 2015. This is expected to produce adjusted diluted earnings per share growth ranging from approximately 5% to 8%, including an expected $0.01 per share dilution from Datamyx. With the assumption that we will invest more in brand awareness, benefit from a reduction in interest expense and have a tax rate roughly comparable to 2015. To give some more color on our revenue thinking. We are planning on consumer checks through financial institutions to decline approximately 6% to 7% on a secular basis. On top of this, we have extended all large financial institution contracts through at least 2016, with the exception of one that we are working to extend. And we have about 20% pure community bank contracts upper renewal in 2016 compared to 2015. And we have more competitive opportunities come in due. In business products, we expect to expand existing organic initiatives in shop Deluxe, our Canadian business into add distributors, dealers and major accounts. In marketing solutions and other services, we expect organic revenue growth roughly in the low double-digits. To give some more color here under the thinking. If we annualize 2015 expected revenue organically grow roughly in the low double-digits and add revenue from the Datamyx acquisition is full imply a targeted marketing solution and other services revenue to total revenue mix of approximately 34% for the year. We are excited with our progress here. And with the more collaborative economy and continued possible additional tuck-in acquisitions with catalyst, we could potentially grow marketing solutions and other services even faster toward our goal of 40% of revenue mix by 2018. We also expect our cost and expense reduction initiatives to continue in 2016. From a housekeeping standpoint each quarter in 2016 has the same number of business days as of 2015. Also, as a reminder, the first quarter is traditionally Direct Checks strongest revenue quarter of the year. And in line with our earlier comments on Datamyx’s dilution, we expect Datamyx to be dilutive to Q1 by approximately $0.01. It is extremely important for us to see how the fourth quarter progresses and to closely monitor the marketplace and economy over the next three months before proving more specific outlook details for 2016. Finally, we are introducing today eight strategic focused areas including three for financial services and five for small business services that we will provide regular update on through the balance of 2016. Here is a little color of each starting with financial services. The first strategic focused area is retail banking and includes checks, marketing services, and rewards, loyalty. For checks, our focus is on improving retention rates and gaining share. From marketing services, our focus is on leveraging, Datamyx data and analytics together with marketing services campaign execution to accelerate outsourced campaign targeting and multi-channel execution. For rewards and loyalty, our focus is on profitably growing Deluxe Rewards revenue. The second FS strategic focus area is commercial banking and includes treasury management and profitably growing Wausau revenue and assessing and executing tuck-in acquisitions along with assessing other adjacent opportunities in commercial banking. The third FS strategic focus area is performance management and includes scaling, Banker’s Dashboard and strategic sourcing. Next for small business services, we have created a four quadrant matrix to frame four of the five strategic focused areas. First, for market your business products which includes small business marketing solutions, our focused areas are profitably scaling integrated marketing on demand solution offers. With the largest opportunity and major account verticals including automotive, financial services, healthcare, hospitality, real estate, service franchises and telcos. Second, market your business services which includes web services offers, our focused areas are improving operating income by optimizing product portfolio, channels and operations. Delivering partnerships an acquisitive opportunities that will “double down” on existing capabilities and address gaps within our portfolio like cPanel where we just completed the Jumpline technology tuck-in acquisition, and providing our integrated Deluxe marketing suite across all customers and channels. Third, for operate your business products which includes checks, forms and accessories, our customer acquisition and retention, and improving Safeguard distributor process and profitability. Fourth, operate your business services which includes primarily fraud and security, eChecks and payroll services, and where our focus is on scaling eChecks, assessing adjacent offer extensions like checks and eChecks for eDeposit, variable check printing and remotely created checks and payroll time tracking and billing as well as continuing to evaluate potential partnership and acquisition operating services opportunities. The fifth small business services opportunity is continuing to improve brand awareness. Before I give a little sense of where we are headed in 2016, let me first share a current progress update. Our intent for 2015 has been to raise brand awareness by leveraging our 100-year anniversary through a purposeful content-based campaign. To celebrate our 100th year, we are telling the stories of 100 small businesses across the country through a documentary and photo essay series. These stories have been released throughout the year via our social channels and live on SmallBusinessRevolution.org. We have now released nine mini documentaries and 77 photo essays through the third quarter. The reaction has been very positive and has resulted in quite a bit of earned media attention with nearly 1.4 billion impressions and 430 new stories on radio, television and print. We also released a full length documentary at the end of September emphasizing the importance of small business in America. This 25 minute film featured small business owners from our 100 stories, as well as key small business experts including the U.S. Small Business Administration Maria Contreras-Sweet, David Bobbitt from SCORE and other small business authors and experts. Robert Herjavec from Shark Tank was also featured in the documentary and joined us in the small business revolution providing great advocacy and visibility for our movement with the media and with social media. We are very pleased with our results and will continue to build momentum around the small business revolution in the fourth quarter and into 2016. In 2016 we will be telling more stories and packaging great advice for other small business owners from the 100 businesses that we featured in 2015. We will also be producing a web series with Robert Herjavec that showcases small businesses, while incorporating marketing lessons from Deluxe. Another exciting partnership with Robert as their key has enlisted Deluxe to provide marketing support to the businesses key investing on Shark Tank. We see these efforts as a great platform to continue to increase our brand awareness with the small business community. Now Candis, will pass and then Terry, Ed and I will open the line up for any questions.

[Operator Instructions] And our first question comes from Jamie Clement of Macquarie. Your line is now open.

Lee, Terry, Ed, good morning.

Good morning Jamie.

Hi, Jamie.

So, you provided a lot of extra information on the call and I think if I get the transcript, I might be able to actually get an answer to this question. But I’m fair I will just ask you this now anyway. If you look at FI, I don’t know where you want to look at on a nine months to-date basis or just for Q3. So free Datamyx, on the plus side, you got growth and services, you got the Zions Bank ad and then on the negative side you got just ordinary ongoing decline in check volume. So I think in the prepared remarks, you said that without Wausau, revenue organically would have been about flat in the third quarter. Did I hear that right?

Correct.

Yes, Jamie that is correct, it was about flat. And that is actually a trend that we’ve seen since the beginning of the year. So this is really our third quarter in a row now, well, that’s been flat, throwing out the impacts of the Wausau acquisition, which is the only acquisition in that segment causing non-comparability.

Okay, so then, I mean, listen I mean investors can make their – make up their own minds and this in – obviously between Zions and SunTrust and Citizens you have some account wins in recent years but let’s say, we were to say, okay, well, we don’t want to model in a big account win every year. If we try to strip out the impact of Zions on this year, what does that kind of – what does that rate of decline look like organically in Q3 or the nine months, whatever you want it…

Let me do this Jamie, let me go back to what we mentioned in the script here and talk about where we think we are going here. So by being able to – we’ve been asked a lot of questions even very public about this. Do we have enough services new technologies, new financial technology within FS to be able to get it to grow organically?

Right.

And I’ve been very candid with investors and with – in public we’ve asked and talked about this, the answer up till now I think is no. we’re getting close, but that’s what I’ve said, that’s the goal. We talked about that openly. The reason why we think that’s the goal is that we got small business growing. If we can now get financial services growing organically, we now have 90% plus the company growing organically. And we believe that the Datamyx deal, when it runs its course then runs the sweep, obviously you’ll have a non-comparable year-on-year. But when it runs its course and when yet as we believe and Wausau as we believe and the less rewards as we believe and our other offers that we have. We have some other fine services offers behind there. Scale, we believe we have the ability now to get organic growth as we look forward, and this is exciting for us. We got to execute, we understand that, but we have the opportunity now that we able to do that and that’s without any further large account wins.

Right. Okay, that’s very helpful. And what you just said – a second question just on SBS now, if I may. The eCommerce platform you talked about it a few times in your prepared remarks, what is that doing for customers – previously they weren’t getting. Can you talk about kind of the functionality and really what the benefit for them?

Let me explain what happened here. This is a shoot ourselves in the foot. What happened is we have a technology that we’ve build this platform off of. And it’s a wonderful technology. But what we’ve done over time as we customize it way too much along the way, so we made the decision. This is extremely thought-through decision of moving to the latest technology where all the customization change is no longer there. So it’s a clean standard offer. And the actual production is at between my marketing team and my IT team went really well. The foolish thing that I think we did is we assumed protection. We assumed that all of the helpful things that we think this will mean from customers. Think of it everything from easier checkout being able to find things on the site, this is the shop Deluxe site being able to take that and can fix things that they want, need, we bet a little too heavy in the quarter on that. And again, as we said in the script, our year on this one, but we’re through it, we got it working well now. We’re excited about what we’ve done. We probably just expected a little too much perfect execution on this compared to how we should have thought about it.

Okay.

But behind us we’re excited about it, and we think this will be great and what we’ve already seen is really helpful for our customers as we move forward.

Okay, that is – that’s very helpful. Let me get back in the queue. Thanks very much for your time as always.

You’re welcome, James.

Thank you. And our next question comes from Joan Tong of Sidoti and Company. Your line is now open.

Good morning. How are you guys doing?

Hi, Joan.

Hi, good, Joan.

Very good. I’m glad that you finally come to the conclusion that like you have all the right tools and segments to grow your – business to grow your financials over the segment. We’ve been watching it closely. The organic growth has been flat nd actually you stopped the decline of three quarters already. So going forward, we have position for growth as well and I’m glad that you finally come to the conclusion. And so how about like a little bit on the margin side, we know that financial services are going to grow and we look at the operating margin, it’s still a little bit weak compared to last year. We understand that you still have loss all day and now you have Datamyx going forward. How should we think about operating margin for financial services over the next couple of quarters?

Yes, Joan, we did mention in the prepared remarks. I mentioned that the Wausau impact even though it was $0.02 accretive to EPS from a margin perspective, it still did pull that average margin down in financial services by 2.4 percentage points. So, really, what you’re seeing there is the continued run through of the amortization expense from the – primarily from the Wausau acquisition that is pulling that down a little bit. So those amortization expenses will temper over time as we see lower amounts coming through. But all said and done, we don’t expect significant changes in the margin there. Last year, if you were to go back some of our calls from last year, last year [indiscernible] things happening that that gave us a little better than expected margin in a couple of the quarters that we did not expect to repeat. So kind of in that low 20s, it’s kind of a really good and probably a spot that you should expect on a go forward basis as well.

Okay, okay. That’s fair. And then Lee, on the small-medium sized – small and medium business segment, I think in the past you mentioned that like some of the growth of the channel business, it’s going to be a little bit back-end loaded. And so have you seen the growth materialize other than like the challenges you are seeing in the eCommerce and all that that actually drag your growth rate for this quarter and you lower like small medium of business growth rates by 1%. But just in terms of the channels, just want to get some color as to…

Yes.

Whether we see the materialization there?

Yes, well, first of all the biggest reason why dropped is that the exchange rates has continued to go against us, right. So if we recorded a true organic growth in that segment – look at the quarter 3.9% growth, 1.2% hit from foreign exchange, we have been up over 5%. So that is really the primary driver of it, Joan, in the near-term, why we made that adjustment. It’s just map off of unfortunately where the exchange rates have moved. Then back to your question on where is it going, the seasonality. As we kind of said in the prepared remarks, we have historically seen a stronger fourth quarter when some of those small business marketing solutions around retail packaging and around the holiday offerings that we have both E holidays, as well as paper holiday check or paper holiday card offers. And then we just hope to see the natural progression in other small business marketing promo, apparel and all that. That’s really where you get the bigger fourth quarter impact. But what’s starting to happen here and we mentioned on the last call and we highlighted today and the comments in the quarter, but we also highlighted it is a focused area for next years. We are starting to see a small business marketing catalyst to what we call it as major accounts channel, I tried to laid out all the verticals and what we hope to do as we move forward is to be able to showcase wins that we’re seeing in there which are continuing and I mentioned several wins in those, being able to get some of those public names out there. And then talking more and more about what we’re doing to build everything from business cards, the small business marketing to email marketing services to web services and packaging those all up, and using that as a catalyst for growth on that space. It happened again this quarter. Look at – I said we had very strong growth there. We predicted strong growth in the year to continue, so like that a lot. We did mention that we’re a little concerned with the holiday season and it’s just the things that you read too. So for example, the National Retail Federation came back and said, yes, we expect growth, but we expect less growth now this year than we had before. So we’re just tendering a bit. We think it’s just smart – given what’s going on in the sluggish economy and some of those offers are in that space. So we did a little slight tweak there in that that we mentioned in the prepared remarks as well. So bullish on this like it, like what we’re doing and now got that focus with hope we’ll be able to use as a platform, we’ll be able to talk to investors as we move forward in the next year.

Right, right, that’s fair. And then in terms of like, you know, maybe I’m drilling down a little bit like further. The web services business is a little bit weak. We understand that like the decline is due to the search business. But I think that like you’re kind of lapping that one year anniversary towards the year-end. So how should we think about it maybe in 2016 that part of the business? Can we finally see some growth there?

Yes, we’ll see growth. And then we’re not trying to get it down to the sub-categories growth numbers next year, Joan, but absolutely we expect growth there. And this Deluxe marketing suite and some of the stuff that we’re putting in there and the way we’re bringing at all, all those offers together between the logo and the web and the email marketing. And then I’ll also talk as we get into the [indiscernible] about other partnerships and capabilities that we’re adding and we’ll get added into the fourth quarter. That will help us to get more growth as we go forward. So, yes, we’re excited about it. We’ll clear the search from last year and we’ll get some growth there in the New Year.

And Joan that category to the web services is also where we saw FX impact, negative impact…

Okay.

That further brought that category down this year.

Okay, got it. And then finally, Terry, can you just remind us again like what is the drag for foreign exchange as well as the tax rate that you anticipate for the full year in terms of bottom line?

Yes, the FX on a year-over-year basis for the full year is $11 million and that’s just under about $3 million of operating income impact as well as on profitability. And so $11 million for the full year, and about just under $3 millions of operating income.

And then for tax rate?

And then the tax rate – the tax rate kind of at that 34% that – that its a higher rate versus what we had last year. It’s roughly about $0.06 dilutive to the tax rate that we had last year.

Okay, great.

And again, I just want to remind you to that that does assume that just a R&D credit legislation that that still have to be passed yet for 2015 period. Our assumption in that guidance does assume that that legislation does get enacted before the end of the year.

Okay, all right. Thank you guys.

Thank you, Joan.

Thank you. And our next question comes from Tim Klasell of Northland Securities. Your line is now open.

Hi, great. Thank you very much. Just wanted to dive into some quick questions on Datamyx before a few broader questions here. I missed it, you guys said it’s the 2016 revenue expectation?

$42 million.

Okay. And you mentioned it’s going to be $0.01 dilutive. But if we ex-outs the amortization what was the cash flow contribution? I’m assuming it would be positive.

Very – yes, yes, very positive.

Okay.

Very positive and then – as we mentioned in the prepared comments Tim, there’s very strong EBITDA margins.

Got it, got it. Then jumping over to some of the other details, the marketing initiatives that you no longer met your return, what sort of marketing initiatives is that?

Within direct to consumer?

Yes.

Yes. Look here the kind of – we have to think about all the ways we can get a consumers. We can send an email out through our list that we have to the remaining people, the right way obviously, The Consumer Protection Act right way so to speak. We can also put things in flyers and print. We also have relationships with the people through what we call freestanding inserts Tim, where we can put something out there. What we look at, as we constantly challenging ourselves with all those various kinds of direct marketing which ones returned better than others. And this is a Doggett way of just staying after this all the time. And so what we do as we make decisions on which things are good for us, which things are not, and that we – I’m not going to tell you exactly which ones we’ve stepped away from, but there’s things that we’ve stepped back from. And we think there are smart moves we’ve been able to continue to see good revenue there based on the decline rates of the consumer checks and yet good place in terms of our profit profile.

Okay, good. And then getting the financial services back to growth, the one question I’ve gotten is you had the unit declines of just a little over 6% for this year. How about the revenues? Do you often been able to outpace that by selling higher value checks in options? How’s the revenues on…

Yes, it’s declined less than that. And the reason is a couple, I mean overall it’s declined less than that, and it goes back to a little bit to Jamie brought up around. We’ve been able to get some nice wins added to that. But it’s also when we’re able to make a price change for passing on – generally as per passing on the postal delivery rate increases they have or productivity improvements that we have with the way that our financial institution runs their check program. Tim, we can give them a cost reduction benefit and therefore get a little bit more revenue for doing that. So those are the kinds of things, I don’t have an exact number I don’t think [indiscernible] so but anyway it would be less than that, Tim.

Okay, good. And then finally I think that your target of 40% MOS revenues or revenue 40% – of your revenues coming from MOS by 2018. Or if I look at what you’re going to do in 2016 and sort of a put on the 10% growth rate, you could get there it seems like with organic or you would need to do anymore acquisitions.

Yes, it’s really interesting, we said – this is a question that’s been asked consistently and we responded consistently that we say a little bit not a lot. We don’t need some big thing to get us there, if we can continue to execute. But we get a little help along the way, which we’ve been seeing here and that’s the way we’re thinking about. But you’re right, we don’t need a lot, we just need to continue to execute and get the growth on the things that we’re doing. And imagine if we could get some other catalyst as we said in the prepared remarks. That gives us even more of an opportunity.

Okay, good enough. Thank you very much. Appreciate your time.

You’re welcome Tim.

Thank you. And we have time for one last question. It will come from the line of Charley Strauzer of CJS Securities. Your line is now open.

Charley?

Mr. Charley, your line is now open.

Hello.

Hi, Charley.

Okay, I’m sorry, can you hear me [indiscernible] couple of questions on Datamyx, if we can continue on that a little bit, can you give us a sense of the growth rates of that business over the last few years both in sales and profitability. And also maybe a little bit better definition of what very strong double-digit EBITDA margins look like?

I think of it is, they have been growing very nicely double-digit revenue and double-digit operating or EBITDA growth over the last, we’re not going to give a specific numbers to you Charley. Here is – we thought we could get push down on this. The best way that I would describe it and I want to leave it this for now, because we are introducing something we know – careful competitively here is better than the average Deluxe 25% EBITDA margins.

Okay, that’s very – that’s helpful. And then, I know you mentioned that also too when you’re talking about the MOS and the other services in the growth rates is that very strong double-digit growth there, can we assume the same types of growth there as well or is that they different…

Yes.

Okay, got it.

Yes.

Great. And then any sense in all what the amortization would look like from Datamyx in terms of the amortization of intangibles.

It’s going to take it from that strong EBITDA and it’s going to take it down to a penny dilutive.

Right.

Normal tax rate seems a little bit for interest expense and the borrowing and that will get you pretty close.

Got it, okay great. [Indiscernible]. And then on the slide deck you had on I think page – talked about SBS key strategic opportunities gave out kind of percent of revenues for SBS. And I was hoping maybe you can give us a little bit sense of kind of the growth rates behind those kinds of quadrants if you could?

Won’t yet, Charley, because we’re not giving full 2016 guidance yet at this point in time, but we will – we’ll try to do that and we’re going to try to use it as a – and probably that’s just fits very nicely into the four cut that we kind of show today excluding the – actually three of those were getting in there. We’ll just – we’ll clarify that as we go forward. Those percentages are in there or what we expect the mix based on the current modelling of 2016, but we’re not going to giving specific growth rates yet at this point.

Got it. I’ll wait for those to come out next year. And then probably lastly, the rate on the $428 million of debt under revolver; do you have kind of a sense of rate on that?

Yes, today we’re paying about 1.7% on that.

Excellent. Okay, thank you very much.

You’re welcome.

Thank you and I’m showing no further questions at this time. I’d like to turn the conference back over to Mr. Schram for any closing remarks.

Let me just thank everybody for your participation. We got a lot of questions – probably, three or four sub-questions each personnel that was just great. And just in summary I’ll leave you with four thoughts. First, we delivered our third strong quarter this year. Second, we are now positioned to deliver our sixth consecutive year of revenue growth. Third, we added Datamyx, which enhances our marketing solutions and other services portfolio. And finally, we have established a solid foundation to grow revenue again in 2016. So we’re going to roll up our sleeves. We’re going to get back to work and we look forward to providing another positive progress report in our next earnings call. And I’m going to turn it over to Ed for some final housekeeping.

Thanks, Lee. Before we conclude today’s call, I’d just like to mention that Deluxe management will be participating at several upcoming events in the fourth quarter where you can hear more about our transformation. On November 16, we will be in San Francisco at the UBS Global Technology Conference. On November 23, we will be at the New York Stock Exchange ringing the opening bell. And on December 3, we will be in Scottsdale at the Credit Suisse 19th Annual Technology Conference. Thanks for joining us and this concludes the Deluxe third quarter 2015 earnings call.