Deluxe Corporation (DLX) Q1 2017 Earnings Report, Transcript and Summary

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 very strong Datamyx alternative lending growth in the prior year. Direct Checks revenue of $39 million was down 6.9% from last year and slightly above our expectations. From a product services revenue perspective, check revenue was $222 million, representing 46% of total revenue. Marketing solutions and other services was $172 million or about 35% of total revenue. In forms and accessories were $94 million or about 19% of total revenue. Gross margin for the quarter was 63.3% of revenue and was down slightly from 2016. The impact of acquisitions and higher delivery material costs were only partially offset by the benefits of previous price increases and improvements in manufacturing productivity. SG&A expense increased 7.6% in the quarter and as a percent of revenue, ended at 44.4% compared to 43.9% last year. Benefits from our continuing cost-reduction initiatives in all 3 segments as well as a $6.8 million gain on the sale of 2 small company-owned businesses sold to the distributor network were more than offset by increased SG&A associated with recent acquisitions. $2.5 million in legal settlement and expenses in the Financial Services segment and higher brand awareness spend. Excluding restructuring, transaction-related and asset impairment charges in both 2017 and 2016, adjusted operating margin for the quarter was 18.9%, which is lower than the 20.4% generated in 2016. Small Business Services adjusted operating margin was very strong at 19.1% and better than the prior year, driven by $6.8 million gain on sales, but partially offset by the higher acquisition and brand awareness spending. Financial Services adjusted operating margin of 14.8% was down 6.3 points from 2016. In addition to check usage declines, the $2.5 million legal settlement and expenses and loss of revenue and operating income from Deluxe Rewards highlighted on the fourth quarter earnings call contributed 2.5 points of the variance. Another 2.4 points was driven by the SG&A deleveraging of recent acquisitions, even though they were positive to operating income, including acquisition and amortization. Finally, profitability in the Datamyx declined as Q1 2016 was very strong due to strength in the alternative lending market. You may recall, we then saw mail volume from alternative lenders drop by 1/3 in the second quarter of 2016. All these were only partially offset by cost reductions. Direct Checks adjusted operating margin of 32.1% decreased 3.3 points from 2016, driven by lower order volumes and the timing shift of marketing spend to the first quarter to optimize response rates; and was only partially offset by cost reductions. Diluted earnings per share for the first quarter were $1.16, which included $0.09 per share for restructuring, transaction and asset impairment charges. Excluding these items, adjusted diluted EPS was $1.25, and 5% above the $1.19 reported in the first quarter of 2016, and $0.08 above the high end of our previous outlook. Higher revenue from FMCG drove $0.06 of the favorable $0.08 variance. And FMCG was only $0.01 dilutive to earnings per share compared to our previous outlook of $0.07 dilutive. Our tax rate for the quarter was lower than expected, and this drove a $0.03 benefit against our previous outlook. The flow-through from favorable SBS and Direct Checks revenue and the very large financial institution free checking elimination drove $0.02 of favorability. These favorable benefits to the high end of our outlook total $0.11; and were offset by $0.03 of Financial Services legal settlement and expenses that were not in our outlook. Turning to the balance sheet and cash flow statements. Total debt at the end of the quarter was $73. -- or excuse me, $739.5 million, down from $758.6 million at the end of 2016. Cash provided by operating activities for the quarter was $74.3 million, a $1.6 million increase compared to 2016, driven by higher earnings and lower contract acquisition payments that were partially offset by higher income tax payments, higher interest payments and higher payables. Capital expenditures for the quarter were $11 million and depreciation and amortization expense was $29.6 million. On April 4, 2017, we announced the completion of the acquisition of RDM Corporation for approximately $70 million in cash. We continue to expect RDM to contribute approximately $19 million in revenue and add roughly $0.02 per share to earnings before transaction and restructuring costs. The expected results of RDM were included in our full year 2017 outlook issued on January 27, 2017. We financed the acquisition through a combination of cash on hand and a draw on the credit facility. Now moving to our outlook. We are tightening our previous consolidated revenue outlook for the full year to a range from $1.945 billion to $1.975 billion or about 5% to 7% overall growth. We are also tightening our adjusted diluted earnings per share to an expected range from $5.15 to $5.30. 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 small tuck-in acquisitions, partially offsetting our growth or expected volume declines in core business products; our strategic 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 15% to 17%, 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 the expected loss of about $10 million in Deluxe Rewards revenue, primarily due to the departure of Verizon; recurring check order declines of 5% to 6%; and some pricing pressure. In Direct Checks, we expect revenue to decline approximately 9%, driven by lower check order volume stemming from secular declines and check usage. We expect a continued sluggish economy and expect full year cost and expense reductions of approximately $45 million net of investments; increases in material costs 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 32.5%. We expect to continue generating strong operating cash flow, ranging between $330 million and $350 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 initiatives and make other investments in order fulfillment and IT infrastructure. Depreciation and amortization expense is expected to increase to approximately $123 million, including approximately $75 million of acquisition-related amortization. For the second quarter of 2017, we expect revenue to range from $476 million to $484 million and adjusted diluted earnings per share are expected to range from $1.23 to $1.28 per share. In comparison to the first quarter, we expect earnings per share to be higher at the high end of the range, driven by lower brand spend and increased cost reductions driven by shared services. For the third quarter of 2017, we expect revenue to range from $483 million to $492 million and adjusted diluted earnings per share are expected to range from $1.20 to $1.25 per share. We added an outlook for the third quarter at this time, but not as a change in practice going forward. As we want to ensure investors understand the quarterly timing as it has been impacted by the quarterization of FMCG's revenue and earnings since it is new to the Deluxe business. Finally, in comparison to the third quarter, quarter 4 adjusted diluted EPS is expected to be significantly higher, driven by volume and leverage from our highest revenue quarter of the year, lower employee benefits expense in highest cost-reduction quarter and significantly lower brand spend. 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 repurchasing common stock. To the extent we 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. I will conclude my comments with an update on our cost and expense reduction initiatives. Overall, we had a solid start to the year. As we basically delivered on our cost and expense reduction towards our approximately $45 million annual commitment, net of investments. Approximately 60% of the expected reductions will come from sales and marketing, another 30% from fulfillment and the remaining 10% coming from our shared services organizations. Our focus on 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 spending 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, legal and real estate. Now I'll turn the call back to Lee.

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 multiyear customer contracts similar to our FI check contracts, annual maintenance services contracts, recurring monthly fees and long-standing customer relationships. Also note that we expect MOS to total company revenue to be approximately 38% this year, including over 16% of total company revenue in the even higher multiple fintech space. First, small business marketing solutions 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. Q1 revenue was slightly better than our expectations. The second category, web services, which includes logo and web design, web hosting, SEM, SEO, e-mail marketing, social and payroll services, 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 and payroll services as well as continuing tuck-in capability acquisitions. Q1 revenues met our expectations. The third category, data-driven marketing solutions, is expected to represent approximately 19% in 2017, with expected triple-digit growth rates and expected EBITDA margin slightly above the overall average. Key focus areas for growth in this category includes scaling direct marketing analytic print services, Datamyx and FMCG. Again, driven by FMCG timing, Q1 revenue was well above our expectations. The increase in our outlook range was primarily driven by direct marketing analytic print services. The fourth category, treasury management solutions, is expected to represent approximately 15% in 2017, with an expected 24% to 27% growth rate, and expected EBITDA margins slightly below our overall average. Q1 revenue was slightly better than our expectations. The decrease in our outlook range was driven by some lengthening of sales and contracting cycles, as FIs are spending more time assessing on-premise to full outsourcing. As well as we have seen some shift from on-premise onetime license revenue to more recurring outsource revenue models, which are preferred, but in the short term, it can lead to less revenue. The fifth category, fraud, security, risk management and operational services, is expected to represent approximately 14% in 2017. With expected declines of around 10% driven by Deluxe Rewards revenue reductions, as highlighted earlier, and EBITDA margins well above our overall average. Key focus areas in this category, in addition to our standard fraud and security offerings, include scaling profitability, strategic sourcing, eChecks, Deluxe Rewards and SwitchAgent. Q1 revenue met our expectations. We expect marketing solutions and other services revenues 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 2 years. We continue to target increasing MOS 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, as expected, we did not see any notable improvements as the economic climate for small businesses remained sluggish, in spite of improved optimism. However, revenue grew 6%. Checks were above our expectations, while forms and accessories were below our expectations. Average order value and conversion rates increased. Our online major accounts, Canada and dealer channels grew revenue over the prior year. We also saw growth in small business marketing solutions and web and payroll services. We continue to closely monitor the small business market. Optimism indices that increased dramatically in December, closing at 106, remained high throughout the quarter, finishing at 105 in March. Clearly, there is a boom in optimism for the economy following the new President. Small businesses are signaling that they expect better market conditions and, therefore, increased business activity and capital spending. Sales expectations looking out 3 months did soften a bit. So although small business owners are more optimistic right now, they want to start seeing some proof that positive changes will come. Clearly, if this more optimistic trend continues, this bodes well for us. However, in summary, although current optimism indices indicate accelerating growing optimism for small business owners, it is important we see more sustainable trends and then the results manifest in the small business marketplace. For Small Business Services, our 2 focus areas are payments and marketing solutions and web services. First, for payments and marketing solutions, we are focused on core check retention and acquisition and developing incremental retail customer acquisition channels. We, again, ended the first quarter slightly better than our expectations for checks. We also made progress in profitably scaling integrated marketing on-demand solution offers with first quarter revenues slightly better than our expectations. In addition, we closed two marketing solution opportunities, 1 with a large real estate company and the other with a large financial services company. Revenue here with roll out and ramp over the balance of this year. Finally, we are focused on scaling eChecks, eDeposit and other payment and workflow solutions, such as variable check printing and remotely created checks. For eChecks, we continue to look to build out opportunities with financial institutions, medical and insurance payment processors, accounting services and software providers and other document management and payment solution companies. In the first quarter, we reached agreement with a company in the medical and insurance payment processing space on a rollout that will start in the second half of 2017. 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 Q1, we also saw a continued strong cross-sell ramp in logo customers, who became web design customers as well. With all marketing services offers now being fulfilled through our Deluxe Marketing Suite. In operating services, we are focused on scaling payroll services and continuing to evaluate "early-in business" and other operational annuity growth solutions. In Q1, Payce Payroll revenue and profitability was roughly in line with our expectations. Finally, we are focused on continuing to accelerate our brand awareness transformation with a clear linkage to marketing and revenue-generating capabilities. In 2017, we are continuing our small business revolution focus and partnership with Robert Herjavec from Shark Tank as well as our Main Street town makeover. In Q1, the public selected Bristol Borough, Pennsylvania as the winning town. And we have already completed the selection process of which small businesses specifically we will work with there. We will be capturing all the marketing makeover work we're doing in a web series. As well as during Small Business Week next week, we will be returning to Wabash, Indiana to see the progress in the businesses from our first makeover and to share more marketing services capabilities. We are also linking clicks to smallbusinessrevolution.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 2 strategic focus areas for 2017. First, retail banking, which includes checks and data-driven marketing solutions. In the first quarter, we saw the rate of decline of checks perform a little better than we expected at less than 4%. For 2017, we expect check units to be in a decline range of 5% to 6%, declining at a faster rate as the year progresses, and overall slightly worse than 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. Our retention rates remained 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 have now extended all our large contracts to at least the end of 2017. And we are running at a little better pace than the first quarter of 2016 on renewing bank contracts. 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 1 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-add data, leveraging it with smart analytics purpose-built solutions to target specific customer segments for specific product offerings with multichannel 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 sole focus to the financial services market right now. Data-driven marketing solutions performed well in the quarter driven by FMCG. 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 solution space and continue prospects to grow revenue. The second FS strategic focus area is commercial banking, and includes scaling treasury management solutions. In treasury management solutions, our 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 for efficiency and effectiveness fits right in our sweet spot. In Q1, treasury management solutions revenue was approximately $23 million and slightly better than our expectations. On April 4, we have also announced the close of our acquisition of RDM, which we indicated was already in our previous outlook for approximately $19 million in revenue for the year. We're excited about RDM, as their Remote Deposit Capture capability further enhances our robust suite of best-in-class treasury management solutions, strengthens our value proposition and improves our market position. 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. For 2017, we expect marketing solutions and other services revenues to be approximately 55% of total FS revenue, with the following at the midpoint of the FS revenue range, data-driven marketing solutions, including Datamyx and FMCG, approximately $137 million; treasury management solutions, including WAUSAU, FISC, DSS and RDM approximately $150 million; and fraud, security and risk management and operational services, approximately $62 million. In Direct Checks, revenue finished slightly better than 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 continued to see a ramp in revenue enhancement synergies through our call center scripting and upsell capabilities as well as synergistic cost and expense reductions. For 2017, we expect Direct Checks revenue to decline in the 9% range, driven by continued declines in consumer usage in 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 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 delivering operating margins in the low to mid-30% range, while generating strong operating cash flow. As we exit the first quarter on the heels of a very strong quarterly performance and a continued sluggish economy, we have made tremendous strides in transforming Deluxe. But we still have many opportunities ahead of us in 2017. We believe we are well positioned in 2017 for our eighth consecutive year of revenue growth. Despite the sluggish economy, our financial discipline has enabled us to invest in people, technology, products, services and our brands 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 offer is more mature; our infrastructure, 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. Now Andrew will open the line for questions now.

[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.