Deluxe Corporation (DLX) Q4 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Deluxe Corporation Fourth Quarter 2016 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 be given at that time. [Operator Instructions] As a reminder, this call is being recorded. I'd now like to turn the call over to Ed Merritt, Deluxe's CFO, Treasurer and Vice President of Investor Relations. You may begin.

Thank you, Michele, and welcome everyone to the Deluxe Corporation's fourth quarter 2016 earnings call. I'm Ed Merritt, Deluxe's Interim Chief Financial Officer, Treasurer and Vice President of Investor Relations. Joining me on today's call is Lee Schram, our Chief Executive Officer. At the conclusion of today's prepared remarks, Lee and I will take questions. 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. As such, 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 projections are contained in the press release that we issued this morning, as well as in the company's Form 10-K for the year ended December 31, 2015. Portions of financial and statistical information that will be reviewed during this call are addressed in more detail in today's press release, which is posted on our Investor Relations website at deluxe.com/investor. This information was also furnished to the SEC on Form 8-K filed by the company this morning. Any references to non-GAAP financial measures are reconciled to the comparable GAAP financial measures in the press release or as part of our remarks during this call. Now, I'll turn the call over to Lee.

Thank you, Ed, and good morning, everyone. Deluxe delivered a fourth strong quarter of 2016. Revenue grew almost 4% over the prior year quarter driven by small business services growth of 5% and financial services growth of 4%. Marketing solutions and other services revenues grew 13% over the prior year and represented almost 36% of total fourth quarter revenue. Adjusted diluted earnings per share grew 7% over the prior-year quarter. We generated strong operating cash flow of $319 million for the year and we were drawn $759 million on our credit facility at year end. We repurchased $10 million in common shares in the quarter and $55 million for the year. We continued our brand awareness campaign to help better position our products and services offerings and drive future revenue growth. We also advanced process improvements and delivered on our $50 million cost reduction commitment. On December 30, 2016 as already reported on our January 6 call, we completed the acquisition of FMCG which will further enhance our financial services marketing solutions and other services, products set by adding more data-driven marketing capabilities. In a few minutes I will discuss more details around our recent progress and next steps but first Ed will cover our financial performance.

Thanks Lee. Earlier today we reported diluted earnings per share for the fourth quarter of $1.11 which included debt extinguishment costs of $0.15 per share, acquisition transaction-related costs primarily for the FMCG acquisitions of $0.05 per share and restructuring charges primarily for employee severance of $0.04 per share. Collectively these costs were $0.24 per share. Excluding these costs, adjusted diluted EPS of $1.35 was 7.1% higher than the $1.26 reported in the fourth quarter of 2015. Revenue for the quarter came in $480 million growing 3.6% over last year and over 5% sequentially from last quarter. The growth rate excluding recent acquisitions was about 2%. Small business services revenue of $318 million grew 4.8% versus last year despite a continuing sluggish economic environment. We delivered growth in marketing solutions and other services and from a channel perspective, our online major accounts and dealer channels grew. Financial services revenue of $125 million grew 4.3% versus the fourth quarter of last year. Excluding revenue from acquisitions, financial services growth would have been about 1% per quarter. Higher marketing solutions and other services revenue more than offset the impact of lower check orders and Direct Checks revenue of $36 million was down 7.8% from last year and in line with our expectations. From a product and services revenue perspective, check revenue was $210 million representing 44% of total revenue. Marketing solutions and other services was $173 million or about 36% of total revenue. And forms and accessories were $97 million or about 20% of total revenue. Gross margin for the quarter was 63.2% of revenue and was slightly better than 2015. Higher delivery and material costs were more than offset but benefits of previous price increases and improvements in manufacturing productivity. SG&A expense increased 3.9% in the quarter and as a percent of revenue ended at 43.2% compared to 43.1% last year. Benefits from our continuing cost reduction initiatives in all three segments and lower incentive compensation expense were more than offset by increased SG&A associated with recent acquisitions. Excluding restructuring and transaction related charges in both 2016 and 2015, adjusted operating margin for the quarter was 20.9% which was better than the 20.5% generated in 2015. Small business services adjusted operating margin was strong at 18.9% and basically in line with the prior year. Financial services adjusted operating margin of 22.1% was up 2.1 points from 2015 driven by improvements in marketing solutions and other services margins and cost reductions partially offset by check usage declines. Direct Checks adjusted operating margin of 34.9% decreased 0.8 percentage points in 2015 driven by lower order volumes. Now turning to the balance sheet and cash flow statement. At year-end total debt outstanding was $759 million up from $629 million at the end of 2016. The 2016 ending balance included $428 million drawn against our revolving credit facility and $330 million in term loans. Cash provided by operating activities for the year was $319.3 million, a $9.7 million increase compared to 2015 and at the high-end of our outlook. Higher earnings and lower interest payments were partially offset by higher income tax and contract acquisition payments, as well as an incentive payment in 2015 from a previous acquisition. Capital expenditures for the year were $47 million and depreciation and amortization expense was $92 million. Other significant financing and investing activities in 2016 included refinancing our $200 million, 6% percent notes due in 2020 with lower rate credit facility debt. Investing $271 million in acquisition, the largest one is FMCG and repurchasing $55 million of common stock, as well as distributing $59 million to shareholders through dividends. Looking ahead to 2017, we expect consolidated revenue on a full-year basis to range from $1.935 billion to $1.975 billion for about 5% to 7% overall growth. Diluted earnings per share are expected to range from $5.10 to $5.30 per share. There are several key factors that contribute to our full year outlook including small business services revenue is expected to increase 3% to 5% with expected growth in our online dealer and major accounts channels, price increases, double-digit growth in MOS offerings, and continued tuck-in acquisitions partially offset in growth our expected volume declines in core business products, our decision to eliminate around $15 million of low margin business and the negative impact of foreign exchange rates. We expect financial services revenue to increase 13% to 16% driven by continued growth in MOS categories including data driven marketing solutions and treasury management solutions, as well as continued small tuck-in acquisitions. Partially offsetting our growth is expected lot of about $10 million in Deluxe Rewards revenue primarily due to the departure of horizon. And we are recurring check order declines of 5% to 10% as well as some pricing pressure. In Direct Checks, we expect revenue to decline approximately 9% to 10% driven by lower check order volume stemming from secular declines in check usage We expect a continued sluggish economy and expect full-year cost and expense reductions of approximately $50 million net of investments. Increases in material cost and delivery rates, continued investments in revenue growth opportunities including brand awareness, marketing solutions and other services offers and enhanced Internet capabilities and an effective tax rate of about 33% representing approximately $0.02 of dilution per share compared to 2016's tax rate. We expect to continue generating strong operating cash flow ranging between $335 million and $355 million in 2017 reflecting stronger earnings and lower interest payments partially offset by higher tax and employee medical payments. We expect contract acquisition payments to be approximately $23 million. 2017 capital expenditures are expected to be approximately $45 million or in line with 2016. As we continue to grow Deluxe, we plan to 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 increase to approximately $127 million including approximately $79 million of acquisition related amortization. For the first quarter of 2017, we expect revenue to range from $469 million to $477 million and adjusted diluted earnings is expected to range from $1.12 to $1.17 per share. Now as we indicated on our January 6 call, we expect FMCG to be dilutive in the first quarter by approximately $0.07 per share and we plan to spend approximately $0.02 per share more on brand marketing in the first quarter of 2017 compared to the first quarter of 2016. This brand spending is for our previously announced second small business Main Street makeover contest which is already started and will culminate with the public voting for the winning talent in the first quarter of 2017. Now shifting to our capital structure, 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 do generate excess cash, we plan to reduce the amount outstanding against our credit facility. We believe our increasing cash flow, strong balance sheet and flexible capital structure position us well to continue advancing our transformation. Now I’ll conclude my comments with an update on our cost and expense reduction initiatives. Overall we had another solid year and deliver on our commitment to reduce our costs and expenses in 2016 by approximately $50 million. Looking ahead into 2017, we will continue our focus on revenue growth base of our transformation but will not lessen our focus on cost and expense reductions. We again expect to drive approximately $50 million of cost reductions net of investments in 2017. Approximately 60% of the expected reductions will come from sales and marketing and other 30% from fulfillment and the remaining 10% coming from our shared services organizations. Our focus in sales and marketing for 2017 continues to be on sales channel optimization, platform and tool consolidation, leveraging sales and marketing efficiencies, including integrations 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. Now finally for shared services infrastructure, we expect to continue to reduce expenses primarily in IT but we are also working opportunities in finance, legal and real estate. Now I’ll turn the call back over to Lee.

Thank you, Ed. I'll continue my comments with perspective on what we accomplished overall in 2016. Looking ahead to 2017 including framing our four strategic focus areas for the year and review our key revenue growth area, marketing solutions and other services. I will then highlight progress in each of our three segments including a perspective on what we plan to accomplish in 2017. Deluxe grew revenue in 2016 for the seventh consecutive year for the first time in 20 years. We saw continued stability in our core check and product businesses and improved our mix of faster growing marketing solutions and other services revenues to over 33% of total annual revenue. We acquired InkHead, Payce Payroll, Data Support Systems and FMCG to expand opportunities and higher growth marketing solutions and other services. In addition to our strong print leadership, we continue to invest in our brand in digital technology and extending our sales channel reach and in improving our infrastructure. We ended 2016 with 4.4 million small business customers of which approximately 29% of them are MOS customers and now serve approximately 5600 financial institutions. Operating cash flow grew for the 8th straight year allowing us to pay our dividend, repurchase shares refinance our long-term debt and invest in acquisitions. We recognize that there is a tremendous amount of work to do but we made great strides in 2016. As we enter 2017, our primary focus continues to be profitable revenue growth for an 8th consecutive year and increasing the mix of marketing solutions and other services revenues. We are sharpening our focus to four strategic focus areas for 2017 including two each for financial services and small business services that we will provide regular updates through the balance of 2017. I will review each of the four focus areas in a few minutes during the segment updates. In order to provide more visibility to our expanding MOS revenue, we are adding two new categories previously included in the other FI services category. And moving the balance that was in other FI services to the broad security, risk management and operational services category. We are also providing a directional annual EBITDA margin profile in total and for each of the five MOS categories and adding an annual recurring revenue perspective. Note that we want to be cautious given the extremely competitive landscape and not providing a more precise EBITDA margin profile but we want investors to understand that as our MOS business approaches 40% of total revenue that are MOS EBITDA margins are also now approaching our overall company average. We estimate that approximately 70% of the MOS revenue is recurring with some of the MOS categories recurring at a rate closer to 95%. In many MOS products and services, we have multiyear customer contracts similar to our FI check contracts, annual maintenance services contracts, recurring monthly fees and longstanding relationships. Also note that we expect MOS to total company revenue to be 38% this year including over 16% of total company revenue in the even higher multiple FinTech space. We ended 2016 at over $617 million in MOS revenue or about 16% growth over 2015. First, small business marketing solutions finished 2016 at 39% of total MOS revenue and is expected to represent approximately 34% in 2017 with expected growth of approximately 3% to 5% and EBITDA margins well below our overall average. Key 2017 growth initiatives include profitably scaling integrated marketing on-demand solution offers, web to print, retail packaging and promotional products. The second category web services which includes logo and web design, web hosting, search engine marketing, search engine optimization, email marketing social and payroll services finished 2016 at approximately 19% of total MOS revenue and is expected to represent approximately 18% in 2017 with expected growth rates of 15% to 19% and EBITDA margins moderately below our overall average. Key 2017 growth initiatives include scaling our integrated Deluxe marketing suite across all customers and channels and scaling web, including payroll services, as well as continuing tuck-in capability acquisitions. The third category, data driven marketing solutions finished 2016 at 8% of total MOS revenue and is expected to represent approximately 18% in 2017 with expected triple digit growth rates and expected EBITDA margins slightly above the overall average. Key focus areas for growth in this category include scaling, direct marketing analytic print services, Datamyx and FMCG. The fourth category treasury management solutions finish 2016 at 15% of total MOS revenue and is expected to represent approximately 16% in 2017 with an expected 28% to 31% revenue growth and expected EBITDA margins slightly below our overall average. The fifth category fraud, security risk management and operational services finished 2016 at 19% of total MOS revenue and is expected to represent approximately 14% in 2017 with expected declines of around 11% driven by Deluxe Rewards revenue reduction as highlighted earlier and EBITDA margins well above our overall average. Key focus areas in this category in addition to our standard broadened security offerings include scaling profitability, strategic sourcing, e-checks Deluxe Rewards and switch agent. We expect marketing solutions and other services revenue to be approximately $735 million to $755 million in 2017 up from $617 million in 2016 with an expected 19% to 22% growth rate. If achieved this performance would translate to a total revenue mix of 38% of revenue and up from 33% in 2016 and 30% and 26% the previous two years. We continue to target increasing marketing solutions and other services as a percent of total company revenue to approximately 40% in 2018 with checks expected to represent approximately 40% of revenue and forms and accessories expected to represent approximately 20% of revenue. Now shifting to our segments. In small business services we have two strategic focus areas, payments and business solutions, and web services. Overall for SPS in Q4 as expected, we did not see any notable improvements as the economic climate for small businesses remain sluggish. However revenue grew almost 5%. Checks and forms were slightly below the high-end of our expectations and as mentioned on our January 6 call, seasonal holiday offers perform below our expectations. Average order value and conversion rates increased. Our online dealer and major accounts channels grew revenue over the prior year. We also saw growth in small business marketing solutions and web and also payroll services. We continue to closely monitor the small business market. Optimism indices improved monthly throughout the quarter ending up dramatically in December at almost 106 which is the highest rate since 2004. Clearly there is a boom in optimism for the economy following the Presidential election results. Small businesses are signaling that they expect better market conditions and therefore increased business activity and capital spending. Clearly if this more optimistic trend continues this goes well for us. However in summary, although current optimism indices indicate accelerate growing optimism for small business owners is important we see more sustainable trends and then the results manifest in the small business marketplace. Now to our two focus areas starting with payments and business solutions. We are focused on core check retention and acquisition in developing incremental retail customer acquisition channels. We ended the fourth quarter slightly below our expectations for checks. We're also focused on profitably scaling integrated marketing on-demand solution offers with the largest opportunity in major account verticals including retail, healthcare, financial services, hospitality, service franchises, automotive, real estate, and telcos. Fourth quarter revenue was lower than expected at the high-end of our previous outlook driven by shortfalls in major accounts and distributors. Finally we are focused on scaling e-checks, e-deposit and other payments and workflow solutions such as variable check printing and remotely created checks. Our focus on e-checks continues to be in building out opportunities with financial institutions, medical and insurance payment processors, accounting services and software providers, and other document management and payment solution companies. Our second focus area is web services with a focus on digital marketing services through improved customer experience and cross-sell including use of our integrated Deluxe marketing suite across all customers and channels while continuing to build out partnership and acquisition web services opportunities. In Q4 we saw a continued strong cross-sell ramp and logo customers who became web design customers as well with all marketing services offers now being fulfilled through our Deluxe marketing suite. And operated services we are focused on stealing payroll services and continuing to evaluate early in business and other operational annuity growth solutions. In Q4, Payce Payroll revenue was in line with our expectations while profitability similar to Q3 was better in the fourth quarter compared to expectations. Finally we are focused on continuing to accelerate our brand awareness transformation with the clear linkage to marketing and revenue-generating capabilities. In 2017 we are continuing our small business revolution focus in partnership with Robert Herjavec from Shark Tank, as well as our Main Street Town makeover. This year's town will be selected by the public from among five cities. We will be doing a web series as well as helping small businesses with marketing makeovers. We will be linking small business revolution.org to our resource center and then to deluxe.com as we start to focus on driving revenue-generating capabilities. In financial services we have two strategic focus areas for 2017. First, retail banking which includes checks and data-driven marketing solutions. In the fourth quarter we saw the rate of decline of checks performed less than 4% which translated to the year also being less than 4%. Our retention rates remain strong on deals pending in the fourth quarter. We simplified our processes and took complexity out of the business while reducing our cost and expense structure. For 2017 we expect check units to be in a decline range of 5% to 6%. Now Ed mentioned earlier mistakenly 5% to 10% is actually 5% to 6% or slightly worse than our 2016 decline rates. We understand it is important for us to maintain low decline rates but given the size of the FS checks business now and the growth in MOS, every 1% decline in FS checks now only has about a $2 million annualized impact on revenue. We have now extended all our large contracts through at least the end of 2017 and we have about 10% fewer community bank contracts up for renewal in 2017 compared to 2016 and we have more competitive opportunities coming up. We also implemented a small price increase at the start of this year. Today we are providing at least one of our key FS solutions to 95 of the top 100 U.S. banks. The market for data-driven marketing spend is expected to grow 9% with digital marketing spend by financial institutions expected to grow on a CAGR basis close to 13% through 2020. We are focused here on selectively sourcing value at data, leveraging it with smart analytics purpose built solutions to target specific customer segments, for specific product offerings with multi channel capability. Think of it as just the right amount of data and analytics to be a difference maker for our customers. We believe there is no other marketing services provider bringing this deep and soul focus to financial services market right now. Data-driven marketing solutions performed well in the fourth quarter and as we discussed on our January 6, 2017 press release and call, we are excited to add FMCG to Deluxe. Our focus in 2017 is on leveraging Datamyx data and analytics, together with marketing services campaign execution to accelerate outsourced campaign targeting and multichannel execution, as well as scaling FMCG and leveraging synergistic opportunities with Datamyx. With the addition of FMCG we are very excited about the data driven marketing solutions space and continued prospects to grow revenue. The second FS strategic focus area is commercial banking and includes scaling, treasury management solutions. And treasury management solutions are largest opportunity is in managing payment acceptance and risk irrespective of payment type, reconciling and matching payments, resolving exceptions and then posting payments to keep receivables current. This receivables management work of automating and outsourcing workflow innovation and solutions or efficiency and effectiveness fits right in our sweet spot. In Q4 treasury management solutions revenue was approximately $25 million which exceeded our expectations. Our October acquisition of DSS slightly over performed in the quarter including adding three new FI customers. Our focus on treasury management solutions in 2017 is on profitably scaling revenue and integrating acquisitions already completed plus assessing and executing tuck-in acquisitions along with scaling FMCG opportunities in commercial banking. For 2017 we expect marketing solutions and other services revenues to be approximately 55% of total FS revenue with the fouling of the approximate midpoint of the FS revenue range data-driven marketing solutions including Datamyx and FMCG approximately $133 million, treasury management solutions including WAUSAU, FIs and DSS approximately $190 million and fraud, security and risk management and operational services approximately $65 million. In direct checks revenue finished right in line with 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. For 2017, we expect direct checks revenue to decline in the 9% to 10% range driven by continued declines in consumer usage and a sluggish economy and the lack of carryover reorders from our earlier decision to eliminate marketing expenditures that no longer met our return on investment criteria. We anticipate that marketing solutions and other services revenue which is primarily fraud and securities offers for this segment to be about 10% of direct check's revenue. We continue 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 2016 on the heels of a strong quarterly performance and a continued sluggish economy, we have made tremendous progress in transforming Deluxe but we still have many opportunities ahead of us in 2017. We believe we are well-positioned entering 2017 for our eight consecutive year of revenue growth. Despite the sluggish economy, our financial discipline has enabled us to invest in people, technology, products, services and our brand in order to position ourselves for sustainable revenue growth while continuing to improve profitability and operating cash flow. Our technologies and sales channels are stronger. Our digital technology services offers more mature. Our infrastructure is better and our management talent is deeper and aligned to grow revenue. We have developed a strong MOS platform for long-term growth with high recurring revenue streams and improving adjusted EBITDA margins as we continue to transform Deluxe to more of a growth services provider from primarily a check printer thereby changing our product mix and resulting stock price multiple. Here is an update on the CFO search. I have initially interviewed a number of potential candidates and have seen several of these a second time as well. I am making good progress but it is critical that I get this position right and so I am being very thoughtful and diligent here. Interest is very high for this position so I do expect that I will complete the search and hopefully be able to announce a new CFO by the next earnings call. Before I open the call up for questions, I would like to take this opportunity to thank all Deluxe employees for their hard work, dedication and simply outstanding performance in 2016. Thank you Deluxer's. Let’s get off to a great start in 2017 as we aim for an eight consecutive year of profitable revenue growth. And now Michelle, Ed and I will open the call up for questions.

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

Lee, Ed thanks very much for taking my questions. Lee I was wondering can you expand a little bit on some of the comments you made on the January 6 call about First Manhattan's desire to market the small businesses and obviously the information on 4.5 million small business customers that you all have managed to accumulate over the years. What's the long-term plan there if you don’t mind expanding?

Right now as I mentioned their mix of revenue is about 45% in that commercial business space which is the largest percent of their result and that's where they have had a tendency Jamie to lead with their - if they are getting into an FI for the first they tend to lead there because they just have great data and information on small businesses and businesses in general and it's just an area that allows them to hit a high ROI in terms of what they do. So that will continue be their focus as well as the consumer deposit area, the credit card area and the other areas of them as well. What we expect is - the worst thing you can do Jamie when you buy somebody you bring him in as to kind of throw him into the middle of the bigger company and just say you know it's a free for all. What you want to do is make sure that you're focused initially and they are getting acclimated to just how we report, our language, how we talk and not messing around with anything that the great things that that the First Manhattan team is doing. So that's our focus in the near term but as this evolves as I mentioned and you picked up and remember well from the January 6 call is we believe there is an opportunity to bring the data and information that we have on those 4.4 million small businesses with the information that they have in their kind of their data and capability and sit down and bring those together and figure out how do we bring more overall full services to the financial services space, as well as services to the small business services segment. So that is our objective and that’s how we’re thinking about it. That is not something like I said January boom, we’re to hit on because we want to make sure this is integrated in and working really well and not upsetting the huge momentum and growth that they have on earth in their kind in their business but over time Jamie that’s where we see this going.

Okay, thank you that. If I could ask just one more question just shifting to SBS, as you all continue to emphasize cross-selling among MOS customers within SBS other than stuff like the main stream makeover stuff that people like me would see and it would obvious to us. What are the other things that you're doing from a marketing and kind of brand realization perspective pushing off that process?

Yes, remember we think the advantage we have is all those channels Jamie, so we have the banking channel that gives us small-business customers, we have our online channels, we have to the dealer channel, the distributor and the major accounts channels. So within all those we have various initiatives that we drive to market ourselves whether it’s online, things that we’re doing, whether it’s feet on the street things that we’re doing. So all of those channels are doing various marketing programs to generate awareness of what we're doing in addition to the overall brand awareness work that we're doing. One thing that we did not put in the commentary that Ed and I were talking about last night is Ink who is a very prominent small business and entrepreneurial focus in our company magazine and online media just named us numbers six I believe in their top nine kind of shows to watch for 2017 all around the small business revolution. So we view that as another positive thing along with again the thing I mentioned earlier about all the channel focus that we have. And Jamie the last thing I’ll add as I mentioned in the prepared comments is this whole small business, Deluxe marketing suite where we’re getting more and more of our products and services in their is making it easier and easier for a small business owner to go in get their logo from us and then see a populated say five to seven-page website with their logo on it and that kind of the that they're in and then also being able to see their logo on email marketing as well, so that is becoming another vehicle for us to be able to get out in front of small business owners as well. So it's last there but a lot of good focus areas for us.

Okay, go it. I really appreciate the time. Thanks very much.

Our next question comes from Joan Tong of Sidoti and Company. Your line is open.

And Ed, how are you guys doing?

Hi Joan.

Hi, just a couple of things to your. Lee you mentioned and obviously we know that we saw the index this small business, confident number have shot up pretty nicely last month definitely get people excited and you see the stock market has been reacting very favorably ever since the announcement of the new administration. So I'm just wondering for your 2017 guidance, obviously it seems like you kind of coaching somewhat of the positive things that we have seen even though could be just like a very short period of time that we are seeing these type of positive top. So I'm just wondering are you trying to be a little bit more conservative and there might be upside should like the environments you are really starting to work down nicely for you guys perhaps maybe in the second half of 2017?

Yes, I'm from Cleveland, Ohio originally but I'm actually from Missouri on this. I want to show me and I – it's interesting I have been spending a lot of time in the last few days listening to other CEOs and what they are saying and somewhere out there being very bullish, a lot of them are in the show me stage as well, we are absolutely watching that as I mentioned in the prepared remarks Joan we are excited we think this bodes well for us if this stays there but this is got to be commerce sustainable trend. Small business owners we're talking to them every day and I'm listening to them. They don’t automatically jump because there is enthusiasm and energy and just start fine like crazy, some might but they take time as they are very thoughtful and smart about what they are doing. So we have built kind of - we have not built a more aggressive past year. As Ed commented in his comments there are assumptions we have not done that. So if things do continue to go better, Joan is there are upside, I would tell you there is. But at this point in time, we are from Missouri, we want to be shown that before we are willing to go any more aggressive here.

That makes sense. Thank you. Got it and then moving onto the marketing solution and other services, that particular slide on Page 15 on the slides, thank you so much for the additional information regarding the expected - I'm sorry the estimated recurring revenue as a percentage and also the margin profile. So I'm just going down like all the different segment, sub segments within that category and there are obviously certain area that below like the corporate EBITDA margin and obviously these are - most of them are acquired businesses, can you maybe just talk to like whether you have seen improvements throughout the years that ever since you acquired this business, have you seen the EBITDA improvement and also which category you think that have the most opportunity to sort of like maybe structurally improve the margin going forward?

Yes Joan, thanks for giving us the call out on this. We spend a lot of time really Ed and I thinking through this. As you know we are out of line with investors you help us and certainly Jamie and Charlie's and Josh as well and we just felt that breaking first of all those two categories out and now these are all effect of $100 million businesses, it was really helpful thing for the investor. And we also felt that kind of giving some more color on the EBITDA margins overall and then where they are relative to our total is and the reason why we did that is Ed and I are convinced that the average investors not understanding that is we get 38% this year and head towards that 40%, our overall EBITDA margins are only moderately below the kind of the company average right now. And so that was the reason why and we also wanted to, we kind of sporadically answered questions on what's recurring and not as far as revenues. So we just wanted to come clear and just give a little better perspective on that. So, as far as, how things improved over time the answer is absolutely yes, and I would argue pretty much in every category and why is that. As we bring these in, integrate the acquisitions we're the pieces together, we keep getting opportunities as the revenue scales more efficiencies across the board. So it could be in web services where we had historical marketing people that were in each of the acquired businesses, and now we're seeing, we can leverage each other a lot better. We can leverage the support that we put behind the infrastructure for services and those categories as well. So, I would say that all of them are improving. One of the areas that we have the richest opportunity is in small business marketing because they are well below right now and you saw our move in January 6 to announce - look those were some of the categories we were not seeing some of the returns that we were looking at very low and by the way well below doesn’t mean they’re losing money by any expense. These are still double digit operating margins or EBITDA margins but we're going to continue to work each of these categories as we continue to transform the company and I think those opportunities across the Board here in the five categories to keep getting better overall.

That’s good. Thanks for the color and then if I can just - final one question I have here regarding check, another good quarter if you look at financials of the check volumes is down less than 4% as a matter of fact these federal reserve actually had a - put out a new study the last time they had it was 2012 and then they put out another one updating the past three year period and that seems to us that like the check volume decline has been continuing coming down in terms of the narrowing of the check decline. So I just want you to see your view obviously, you talk about 5% to 6% in terms of check decline for financial services and you mentioned that the magnitude is smaller just because the size is getting, like smaller for that particular segment but still just want to see if you have a view on that going forward maybe you’re really getting to some sort of inflection point that we would be declining a lot slower.

Yes, Joan I think you set it up really well, we’ve obviously seen the fed study, the initial style will come out in more comprehensive report and we performed right in line with what we saw in the fed study. In fact one of the things its interesting Joan is that, the consumer check usage now actually declined a little bit more within the overall compared to the small business usage and that’s been a trend we have seen for some time, when you kind of average everything and you don't yet see that in the fed study but we see it and certainly the competitors out there see the same thing. So, why -why last year why five to six, we just think that there's so much out there with continued electronic application right now and so many different choices and they’re coming at you every day with the potential for the new payment where it will be out there, we just think that's it's smart on our part to assume that, the 5% to 6% is a smarter play. Now as we said, if it’s a 1% less than annually it's about $2 million. So it’s not going to be a huge impact plus or minus on the business but we just think that's a smart way of guiding where we are, setting up our business in and again that’s where we think, we see things past. We would ask them to open slowdown where we hope it does. We also got a chuck a lot of the front page Wall Street waiting in line in retail establishments and writing checks and we of course said bring, keep doing that, we love them people do that. So, we just think that we can't yet predict that Joan. Be honest we can't yet say this is add some toping and the four will become stable at four or three or whatever so, we just think it's prudent and we, therefore we guided the 5% to 6%.

All right, thank you, Lee, thank you Ed. Thank you so much.

Our next question comes from Charlie Strauzer of CJS Securities. Your line is open.

Hi, good morning. Just looking at the results for Q4 you mentioned 2% kind of organic numbers that for SBS or for the overall company?

Total.

Got you. And do you have the number of what was going on with SBS, I think I don’t know if I caught that or not…

I don't think we do, I think Ed you mentioned 1% for FS, so it's got to be in the 2% range in order to make that work.

That makes sense. And when I look at the full year 2017 guidance and kind of the growth rate assumptions you have in there, can you kind of give us sense of kind of the organic assumptions if I go behind that?

We would say it's about flat, so the 5% to 7% overall is about we believe it's in the flat range.

Got it. And then by segment is it more kind of the same event as well or in terms of like FS and SPS?

It would be well again as you know in Direct Checks it's down, the exact numbers we gave you. In the other two segments I would say that the small business is growing a little bit whereas financial services declining a little bit.

Got it, okay. And then talking a little bit more about the recurring revenue which are very helpful, thank you. Can you maybe expand a little bit more on the types of things that you kind of view is recurring and kind of more short term versus long term recurring, can you help us little bit more about with some color there?

Sure. So Charlie if you think of web service, you think of where we are hosting customers and every month they pay us a set fee and as long as they stay on they don’t churn out where that is what absolutely are recurring stream. Same thing in the case of payroll services, there is initial set up fee when you are bringing a new small business on but then there is a recurring monthly fee for that. The same thing goes on - I'm going to just jump around here little bit, but bankers dashboard you sign a bank update, access the dashboard and there is a set monthly fee for that. There is basically a set fee for Deluxe rewards. You established a relationship with the financial institution and then there is a payment, there is a little bit of spiking up and down for the supplier income on the merchandizing and the gift cards but that's pretty darn stable as well. Same thing when you launch a campaign for First Manhattan or a campaign for Datamyx that is a stable predictive as long as there, you have that customer and you are staying in that market, there is a very strong predictability, a lot of our fraud and security offers work the same way. Really the only thing Charlie that's a little and you see it on the chart, little more transactional in nature is the small business marketing. That's where we get the little bit more of the lumpiness in our results and if we generally are having a harder time being predictive, it's generally in that area and by that I mean somebody can come along and do an integrated marketing campaign for their small business. They can do everything from full color to promotional materials but then they can move away from that and then it's - you may not see that for another quarter, another year. So there is a little bit more transactional nature to that. But again a lot of what we are doing now and I just think the investors have been missing this a bit and we haven't been as clear and I think we are just saying here is a better way to look at it and here is little more clarity for everyone.

That's very helpful. Thank you very much.

Our next question is a follow up from Jamie Clement of Macquarie. Your line is open.

Gentlemen if I may, on page 15 the fraud security risk management and operational services, is that - the horizon business you are obviously – that's being reflected in the outlook for 2017. I'm wondering why if that was minus 10, I'm wondering why the rest of that business wouldn't be grown in 2017?

Little bit Jamie because of the fraud offers around the check business.

Okay, got it.

That's really the check…

Okay. So just the inherent link there.

Inherent link there, yes.

Okay. All right, thanks a lot, I appreciate that.

There are no further questions, I would like to turn the call back over to Lee Schram, CEO for any closing remarks.

Thank you everyone for your participation and your questions today. I will get just three summary comments, first we delivered four strong quarters in 2016, second we delivered our seventh consecutive year of revenue growth, and third we have established a foundation for growing revenue again in 2017 for the eighth consecutive year. We're going to now roll up our sleeves, we’re going to get back to work and we look forward to providing a positive progress report on our next earnings call. And now I’ll turn it over to Ed for some final housekeeping.

Thanks Lee. Before we conclude the call today I just want to mention that Deluxe will be participating at the following conference in the first quarter we can hear more about the transformation. On March 21, we will be attending the Telsey Advisory Group Spring Consumer conference in New York City. Thank you for joining us and that concludes the Deluxe fourth quarter 2016 earnings call.

Ladies and gentlemen, thank you participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.