Welcome to the Deluxe Corporation First Quarter 2017 Earnings Conference Call. My name is Andrew, and I'll be your conference facilitator for today. [Operator Instructions]. As a reminder, today's conference call is being recorded. I would now like to introduce your first speaker for today, Ed Merritt, Treasurer and Vice President of Investor Relations. You have the floor, sir.

Thank you, Andrew, and welcome, everyone, to Deluxe Corporation's First Quarter 2017 Earnings Call. I'm Ed Merritt, Deluxe's Treasurer and Vice President of Investor Relations. Joining me on our call today is Lee Schram, our Chief Executive Officer; and Keith Bush, our Chief Financial Officer. At the conclusion of today's prepared remarks, Lee, Keith 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 projections are contained in the press release that we issued this morning as well as in the Forms -- in the company's Form 10-K for the year ended December 31, 2016. Portions of the 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 the Form 8-K filed by the company this morning. And 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. First, I would like to welcome Keith to Deluxe as our new Chief Financial Officer. As I said in our press release on March 13, I'm excited to have Keith as a strategic partner as we continue our positive transformation. Deluxe delivered a very strong quarter to start the year. We reported revenue and adjusted earnings per share above the upper range of our outlook in spite of a continued sluggish economy. Revenue grew 6% over the prior year quarter, driven by Financial Services growth of almost 11% and Small Business Services growth of 6%. Marketing solutions and other services revenues grew about 20% over the prior year and represented over 35% of total first quarter revenue. Adjusted diluted earnings per share grew 5% over the prior year quarter. We generated strong operating cash flow of $74 million for the quarter. And we have withdrawn about $740 million on our credit facility at the end of the quarter. We repurchased $15 million in common shares in the quarter. 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 cost-reduction commitment for the quarter. On April 4, we completed the acquisition of RDM, which will further enhance our Financial Services, marketing solutions and other services products set by adding more treasury management solution capabilities. In a few minutes, I will discuss more details around our recent progress and next steps, but first, Keith will cover our financial performance.

Thanks, Lee. Revenue for the quarter came in at $488 million, growing 6.2% over last year. Organically, revenue, where we exclude acquisitions, FX and other noncomparable items, declined about 1% and was a little better than our expectations. Revenue exceeded the high end of our previous outlook by $11 million, driven by approximately $8 million from FMCG, $1 million each from SBS and Direct Checks, and $1 million timing benefit from a very large financial institution that drove more check volume into the quarter from a late March cut-off on the change to pre or reduced check pricing. It is likely that some customers will not need to reorder checks over the balance of the year, so we believe this revenue is not incremental to the year. The FMCG incremental revenue of $8 million resulted from the conversion of FMCG's cash basis accounting to GAAP accounting, which affected the timing of our previous revenue outlook. Revenue was pulled forward from later quarters, but did not impact our expectation for the full year 2017 revenue. We now expect FMCG quarterly revenue to be a little more linear throughout the balance of the year. It is important to know that we exceeded the high end of our previous revenue outlook, excluding these items. Shifting to our segments. Small Business Services revenue of $308 million grew 6.1% 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, Canada and dealer channels grew. Financial Services revenue of $141 million grew 10.7% versus the first quarter of last year. Organically, Financial Services revenue declined about 5% for the quarter. Higher growth in marketing solutions and other services revenue more than offset the impact of lower check orders and…

Thank you, Keith. I'll continue my comments with a quick reminder of our strategic focus areas, an update on MOS revenue and then highlight progress in each of our 3 segments using our 4 strategic focus areas for a perspective on how we progressed in the first quarter and then what we expect to accomplish during the balance of 2017. In 2017, our primary focus continues to be profitable revenue growth for an eighth consecutive year and increasing the mix of marketing solutions and other services revenues. We are sharpening our focus to 4 strategic focus areas for 2017, including 2 each for Financial Services and Small Business Services, that we will provide regular updates on through the balance of 2017. I will review each of the 4 focus areas in a few minutes during the segment updates. Here is an update on our 5 subcategories framework for marketing solutions and other services. We ended the quarter about $10 million better than the top end of our previous outlook, driven primarily by the conversion of FMCG's cash basis accounting to GAAP accounting. As a reminder from our fourth quarter 2016 call, we are now providing a directional annual EBITDA margin profile in total and for each of the 5 MOS categories and adding an annual recurring revenue perspective. Note that we want to be cautious, given the extremely competitive landscape, in 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 our 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…

[Operator Instructions]. We'll be taking our first question from the line of Jamie Clement from Macquarie.

Lee, first question, as you all now have a remote deposit capability that's pretty strong, this may be a little bit of a stretch, but in any way does that help you market the checks business itself to financial institutions on the other side of the business? Or am I -- or is this a stretch?

I don't think we'd think of it that way. I think what we think of is just there's a market out there, Jamie, right now that, in this Remote Deposit Capture base, that's actually growing.

Yes.

And what we found with RDM is we bumped into them, they're a competitor of ours. They're based out of Canada but they primary sell in the United States. And they -- think of it as they have some things that they do really well, we have some things that we do really well. By bringing the 2 of us together, we have, what we believe, is an opportunity to get what's called more seats or think of it as just more the Remote Deposit Capture capabilities. So great team of people. We're really excited to have them part of the company and obviously, there's going to be opportunities to synergistically grow revenue and work our infrastructure between the 2, but we're really excited about it. And again, this is a growing market. We also think it's a market, Jamie, that is -- we're targeting the higher end of the bank -- the banking tiers, and so there's been some question about, well, are we trying to compete with the cores here? And the answer is no. The cores, as you know, are generally going to be more in the low to mid-market space. And our target in RDM with our own offer through WAUSAU and then now the RDM offer is really in the upper tiers. And so we think it's a space that's available to us and there is a richness in terms of opportunities there.

Okay. And so just I understand the math a little bit here, just based on -- I mean, obviously, it was a public company and there were some estimates out there, that kind of thing, I would have gotten to a number maybe more like $0.02 a quarter accretion from this. Is the difference here in intangible amortization -- and that would, by the way, be with no synergies from WAUSAU or the rest of the business. Is the difference between your estimate of about $0.02 for the year and the number I was just giving, is that intangible amortization?

Yes. And remember, we're doing some borrowing to buy, right? We use [indiscernible] cash--

Right.

But we also have some borrowing and, therefore, we have interest expense on that borrowing.

Okay. Fair enough. And then last question, if I will, and this has already kind of come up this morning. With the cost savings number that you gave out for the year, I think it was 60% coming from sales and marketing. Just so you guys can be clear here, because there were concerns like, Oh, gee, Deluxe isn't spending on sales and marketing this year. It's sounded to me in the prepared remarks that some of this savings is really just being more efficient with your spending. Can you just -- can you respond if you don't mind?

Yes. The way to think about it is for the longest time, Jamie, everybody said, all our cost reductions are coming from the check area and they're all coming from manufacturing. And now the way to think about it is -- by the way, we're still -- they're still coming from that, I think we said 30% on the call. But what we're doing is we're spending on sales and sales development and we're spending on R&D development as well. But what we're doing is we're getting more efficient and more effective. So as we have a new solution out there or as we integrate it into the company, we don't need, for example, a small business to have the same number of marketing people that were marketing -- e-mail marketing or marketing search engine optimization, or search engine marketing or web services. When we bring them in and we leverage across what we already have and we leverage the acquisitions, we're able to get the cost structure lower and more efficient. And by the way, that's what's also helping improve the profit margins and our EBITDA margins within the MOS category.

Our next question comes from the line of Joan Tong from Sidoti & Company.

I apologize, I hopped on the call a little bit late. So a lot of things that I'm going to ask, you might have answered that. But I just wanted to like talk about the FMG -- FMCG direct. You mentioned that you have some revenue pull forward from later quarters. Can you just go over the dynamics there? And was it dilutive this quarter or because of the pull forward, it was actually better than expected on the bottom line?

Yes, Joan, here's what we had to go through, as you know, we bought and closed the deal in December 31, I think or 30th was the date. And we knew that they historically, as a lot of small companies do, handle their books on a cash accounting basis. So what we had to do -- and literally we went through this in the whole quarter and then we were audited, as you can imagine, by our outside auditors on changing from cash accounting to GAAP accounting. And so we create a process for doing that and what happens is as you go through that -- and we not only looked at the quarter, but we also looked at the next three quarters -- and said, well, what do we expect to happen? And by doing all of that work we, in effect, adopted GAAP accounting, which we need to do, and appropriately have done. But what happens is that, in effect, changes the timing of how all that revenue is laid out through the quarters, including Q1. And we did mention in the -- or Keith mentioned in his comments that we ended up $0.01 dilutive in FMCG in the quarter. And you may remember, we also -- Keith also mentioned $0.07 dilutive is what we expected. So $0.6 of the improvement in our -- over the high end of what we outlooked, Joan, was the -- was this. And we also mentioned that we expect this to get more linear as the quarters ramp on through the balance of the year. But we also felt that this was still confusing to The Street, not because you're not trying to all get this right, because it is new, and so that's why we put out the additional third quarter; in effect, you can back into the fourth quarter and you have the total -- all quarters for the year. We just felt that clarity was needed here. And we're not going to go -- try to do 2 quarters out as we go forward, but we think this will help clean up all of the timing of all the FMCG stuff. And we feel very good about it and obviously, we're audited on this as well.

Okay. That's very helpful. And then the second question is related to brand awareness investment and obviously, you guys have been putting pretty good investment in the past. And how should we think about it going forward? Are you guys doing a little bit -- something a little bit different or is it really just a continuation and -- on the campaign that you have had in the past?

We're continuing on, I mentioned this as well, on this -- our small business revolution focus. We're doing another makeover this year in a city outside of Philadelphia named Bristol Borough, Pennsylvania, we're doing our web series. We're going back actually next week to Wabash, Indiana, to kind of how is the town doing? And the businesses there have gotten tremendous value from the work that we're doing. We're going to introduce some new marketing services capabilities to them. Joan, the challenge right now is everybody thinks we just spend the same amount every quarter on brand. We don't. And what happens is when we go and do a launch of a new town and we change the timing of it, we moved it forward this year, we actually mentioned that we are going to spend more in the first quarter, which we did, than we did last year. And we're now going to spend less than the second quarter, but that was going to happen. And we're going to spend more again in the third quarter when we do the full web series. So it just tends to spike up and down, but we are staying on that same pattern of those small business revolution, our wonderful partnership with Robert Herjavec and then our small town Main Street makeover work as well.

Okay, all right. And then regarding cross-selling opportunities, and maybe give us an update in terms of the progress there. You specifically called out Deluxe Marketing Suite, which has been a great platform for you guys for a couple of quarters already, with the logo design as well as the web design. It's kind of like some convergence there, so I want to ask you about that. And secondly, on the cross-selling opportunities in Financial Services, since you have a lot more like fintech solutions to sell, how should we gauge that going forward, maybe give us like maybe some sort of markers, like how should we look at it in the future in terms of cross-selling?

I'll give you two things to think about. First, in small business, what we're seeing is -- our goal is to start with a logo and if we can get the small business and -- it can be a new-in small business, but it also can be somebody who wants to refresh their logo, once we get that person to -- small business owner to, in effect, bite on a new logo, then our ability to take an add-on web hosting and web design, web hosting, search and then scale their marketing, we are -- the comments behind that I made, we're continuing to see improvements in the rate of once somebody's in and getting a logo, we're seeing higher and higher ability for us percentage-wise to then get them into a -- other web services. What we want to do, Joan, is get more -- more time, so to speak, so we can start figuring out how do we put some metrics behind this. If it's too early and you don't have enough small businesses coming in and doing all this yet, we don't want to put staff out there that might not be as strong over -- once we have more and more on. But we are seeing a good ramp here and it's very positive for us. To your comment on Financial Services, a really good example is we are actually seeing Datamyx capability that we're already bringing into our direct marketing print -- analytic print services. So that is the former -- you used to hear us talk about Cornerstone and ACTON, we are seeing customers there that were taking the analytics capability and Datamyx and actually doing more and more, and that really was the reason why we've actually bumped up a bit our data-driven marketing revenue for the year, because we are seeing more and more. And that is a pure cross-sell now for us. So those are a couple of examples that hopefully help you to give you a little more insight into why we are bullish about some of the work that we're doing, both in SB and FS.

We have time for one last question, that will come from Charlie Strauzer from CJS Securities.

A couple of quick questions for you. I'm sorry if you gave this out, but there was a lot of numbers. But the organic rate numbers on Small Business Services and MSO, if you have them?

We didn't give it. We gave about 1% down overall organic. And we gave a down 5% in FS. That was up -- I don't know what the number is, but we were up organic in SB, Charlie. And you said something about MOS.

No, sorry, MSO, marketing solutions and other.

In total, $172 million for the quarter.

Right. And was that -- so organically, is there any kind of color there?

We didn't give it, but we did indicate that we expected the organic growth in MOS for the year in the last couple of calls to be about 6% to 7% for the year.

Got it. Okay, great, and so basically it's unchanged for that. I got you. And then when you -- if you could talk about the adjusted numbers, the non-GAAP numbers, what are you assuming for tax rate in there and what should we assume for non-GAAP tax rate going forward as well for the year?

32.5% approximate is what Keith indicated.

That's for both GAAP and non-GAAP?

That's an adjusted number for the year.

Got it. Okay, great. And then for Q4, I know you talked about there's going to be -- definitely more kind of weighting towards Q4, and you kind of gave out some high-level drivers of that. But can you maybe expand a little bit more and give a little more color on what's causing the shift more to Q4 there?

Yes. The bottom line, again, is it starts with revenue. And we're getting more revenue there. We're also getting a richness in the profitability of that revenue as the year progresses on. And so not only do you get the margin benefit, but if the expense structure is the same or lower, Charlie, as you know you get leverage on that. Back to my comment that Joan asked about, brand, we're going to spend a lot less money in brand in the fourth quarter than we're spending in the third quarter. And we also have -- it's just a timing thing of how our -- many of our employee benefits time themselves through the year. And for whatever reason, the employee benefits, and there's a collective pool of a lot of things there, they're just smaller in terms of the dollar amount in the fourth quarter than they are in the third quarter and really in the balance of the year. So those are the big drivers. And remember, we had a bump-up last year in the fourth quarter, too, I think it was like $1.22; in Q3, $1.35, something like that. So it's a little bit more of a ramp this year, but there's a little bit more going on with brand and with employee benefits this year than historically we've seen.

Ladies and gentlemen, this now concludes our question-and-answer session for today. So I'd like to turn the call back over to management for closing comments.

Yes, let me just thank everybody for your participation and questions. We know it's a heavy release day today. So I want to leave you with 3 thoughts. First, we delivered a very strong first quarter; second, marketing solutions and other services revenue grew 20%; and mix improved to 35% of total company revenue, again, towards our goal this year of 38%, and then 40% in 2018; and finally, we have established a solid baseline first quarter. We believe this propels us towards revenue growth again in 2017 for the eighth consecutive year. And we're going to get back to rolling up our sleeves, get back to work, and again, we look forward to providing another positive progress report in our next call. And I'm going to have Ed go through some final housekeeping. We're going to be probably out more this quarter than I can recall. And I want to have him give some of the dates and some of the places that we're going to be.