Pitney Bowes Inc. (PBI) Q1 2011 Earnings Report, Transcript and Summary

Good morning, and welcome to the Pitney Bowes First Quarter 2011 Earnings Results Conference Call. [Operator Instructions] I would now like to introduce your speakers for today’s conference call: Mr. Murray Martin, Chairman, President and Chief Executive Officer; Mr. Michael Monahan, Executive Vice President and Chief Financial Officer; and Mr. Charles McBride, Vice President, Investor Relations. Mr. McBride will now begin the call with a Safe Harbor overview.

Thank you, and good morning. Included in this presentation are forward-looking statements about our expected future business and financial performance. Forward-looking statements involve risks and uncertainties that could cause actual results to be materially different from our projections. More information about these risks and uncertainties can be found in our 2010 Form 10-K annual report and other reports filed with the SEC that are located on our website at www.pb.com by clicking on Our Company and Investor Relations. Please keep in mind that we do not undertake any obligation to update any forward-looking statements as a result of new information or developments. Now, our Chairman, President, and Chief Executive Officer, Murray Martin will start with an overview of the first quarter. Murray?

Good morning, and thanks for pulling yourselves away from coverage of the royal wedding to join us. Let me start by sharing some thoughts on our performance, and Mike will follow with the details on our first quarter results, and then I'll discuss the rest of the year. Afterwards, we'll take your questions. During the quarter, we continued to gain momentum in our plans for long-term growth as we made progress against several initiatives that we discussed at year end. For the third consecutive quarter, both Equipment Sales and Software revenues grew. The continued improvement in Equipment Sales was led by increasing demand from high-volume mailers to update their hardware and software production platforms. Our growth in Software was fueled by global demand for Data Analytics and Location Intelligence Solutions. The increase in Software revenue was also supported by the growing recurring revenue stream related to the increasing number of multiyear licensing agreements. While revenues for the quarter benefited from these increases in Equipment Sales and Software, it was offset by the expected lower recurring revenue streams related to our SMB Solutions Group. We have previously explained that lower SMB Equipment Sales in past years created a headwind that reduces our supplies, rentals and financing revenue streams. We anticipate that these headwinds will continue to diminish as equipment sales improve. As expected, the declines in the SMB recurring revenue streams did moderate in this quarter. During the quarter, we continued to reap substantial benefits from our ongoing Strategic Transformation program. The program is delivering improvements in customer processes and infrastructure, cost savings, as well as an enhanced ability to deliver new products and services. The savings and the investments made possible by Strategic Transformation will enable us to continue to introduce a number of new Customer Communications Management solutions for SMB and enterprise customers this year. Earlier in the quarter, we announced Volly, our secure digital mail delivery system. We have continued to get positive feedback from all stakeholders, and make progress with partners. We introduced additional CCM [Customer Communications Management] solutions for enterprise customers, including the expansion of our Intellijet production print line and Portrait Miner 6.0 software for predicting customer behavior. We are providing SMB customers with the industry's only family of cloud-based solutions, including pbSmartPostage and PbSmart Connections, an email marketing and communications platform. In addition, earlier this week, we announced SendSuite Live, a new web-based shipping platform that strengthens our market leadership in the transportation management services shipping marketplace. We also continued our progress in the stabilization of our base business in the quarter. Positive trends, including continued gains in customer retention and ongoing placements of new products such as our Connect+ web-based communications system. Connect+ has already been launched in Canada, U.K. and Australia, and its global rollout will continue throughout 2011. Overall, SMB equipment sales declined, however, in part, due to the phased movement of a select group of customers to alternate sales channels. These channels will best serve their needs as we continue to offer more products and services online. Consistent with prior shifts, we saw improving sales productivity throughout the quarter. We expect our channel transition initiatives to drive longer-term growth through greater engagement of small business customers with our new web-enabled solutions. These moves are also helping to create a more efficient cost structure, as we align the value of the sales with the cost of the delivery channel. These are all important contributing factors to our projected stabilization in this business in 2011. Let me now turn it over to Mike for a discussion from our first quarter financial results.

Thank you, Murray. Our revenue for the quarter was $1.3 billion, a decline of about 2% on a reported basis when compared with the prior year, and a decline of about 3% when you exclude the impact of currency. Breaking down our revenue for the quarter between U.S. and non-U.S. operations, U.S. revenue declined by about 5%. Outside the U.S., revenue on a reported basis increased 4% versus the prior year. Excluding the impact of currency, revenue outside the U.S. increased 1%. Non-U.S. operations represented 32% of total revenue. At this point, I'd like to note 2 unusual events that occurred this quarter. First, on February 7, there was a fire at our presort processing facility in Dallas, Texas. While all employees are safe, the site was completely destroyed, and we estimate lost revenue and EBIT of about $7 million each in the first quarter. We expect continued adverse impacts to both revenue and EBIT in the second and third quarters until the new facility is fully operational. For the full year, we expect total revenue for the company to be impacted by about 0.5%. It's expected that the earnings associated with the lost revenue and the costs related to outfitting a new facility will be fully covered by insurance proceeds in future periods. To date, we have received a $15 million advance from the insurance companies. However, the accounting rules are such that this advance and future insurance proceeds cannot be recognized in earnings until the final settlement of the insurance claim. If the insurance claim is not settled in the current year, we estimate 2011 adjusted earnings could be reduced by $0.07 to $0.09 per diluted share. The company's response to the fire was impressive on many levels. While the loss of the facility impacted our ability to qualify customers' mail at the highest level of discount, our national network enabled us to quickly reroute mail and convert other capacity to process first-class mail, and has resulted in retention of virtually all of our customers. The facility's permanent replacement is expected to be operational in the second quarter and at previous productivity levels by the end of the third quarter. The rest of our network continues to process increasing volumes of both first-class and standard-class mail from new and existing customers. Excluding the impact of the Dallas fire, presort-related revenue for the quarter grew and the EBIT margin continued to improve. Second, of course, is the tragic earthquake and tsunami in Japan. Our condolences go out to all those who have been impacted. With respect to our business, about 1% of our total revenue is from Japan, so the impact on revenue and earnings in the quarter was minimal. We had no product supply issues in the first quarter, and based on current conditions, do not expect any disruptions in our supply chain in the second quarter. We are actively working with our supply chain partners, and have a number of strategies in place to mitigate potential disruption in the second half of the year. Turning to adjusted earnings before interest and taxes or EBIT for the quarter, it was $211 million, which was about 8% lower than last year. EBIT margin was about 16%. EBIT margin was affected this quarter by of the costs associated with the Dallas fire and by our planned investment in Volly, our secure digital mail service. Excluding these impacts, EBIT margin would have been 16.7%. We continue to see the benefits of our productivity initiatives in our selling, general and administrative costs or SG&A. SG&A in the quarter declined by more than $13 million when compared with the prior year. And for the second consecutive quarter, SG&A improved year-over-year as a percentage of revenue, and declined 40 basis points this quarter to 32.5%. SG&A benefited not only from our ongoing productivity initiatives but also from lower credit losses, which we have seen continue to improve. EBIT margins improved year-over-year in 4 of our 7 business segments for the quarter, including both our SMB business segments. These improvements are a result of our continued focus on increasing our operating efficiency across all of our business segments. We are reaping the benefits of the Strategic Transformation actions that we have taken since the fourth quarter of 2009, and we continue to implement additional actions that are enabling us to improve the way we go to market, interact with our customers and develop new products. We continue to put in place new processes and systems that will make our operations more streamlined and profitable, allowing us to better leverage future revenue growth. When we add back depreciation and amortization to our adjusted EBIT, adjusted EBITDA for the quarter was $280 million or $1.37 per share. Net interest expense in the quarter, including financing interest, was $51 million, a modest increase of $2 million when compared with the prior year. The average interest rate in the quarter was 4.81%, 53 basis points higher than the prior year due to changes in our debt portfolio mix. The effective tax rate for the quarter on adjusted earnings was 29.9%. The lower tax rate in the quarter was primarily the result of a tax benefit arising from a favorable conclusion of a non-U.S. tax examination. We continue to expect the average tax rate for the year on adjusted earnings to be in the range of 33% to 35%. The GAAP tax rate for the quarter was 30.9%. Adjusted earnings per share from continuing operations for the quarter was $0.53, which compares with our adjusted earnings per share of $0.55 for the same period last year. Our earnings per share of $0.53 this quarter was reduced by $0.04 per share as a result of more than $0.02 per share for estimated costs related to the Dallas fire and by more than $0.01 per share for our investment in Volly. GAAP earnings per share for the quarter included restructuring charges that totaled $0.08 per share in the quarter. GAAP earnings per share for the quarter also included a $0.01 per share noncash tax charge or out-of-the money stock option that expired during the quarter, and a $0.01 per share loss from discontinued operations. Free cash flow was $286 million for the quarter. In comparison to the prior year, free cash flow for the quarter benefited from lower tax payments, a tax refund and a reduction in our finance receivables, partly offset by higher capital expenditures as we invested in the business. During the quarter, we returned $75 million of cash to our shareholders in the form of dividends. We reduced our commercial paper balances this quarter versus the fourth quarter by about $8 million to a balance of $42 million. About 86% of our total debt is fixed rate, and 14% is floating rate. Let me now highlight a few points about our Strategic Transformation program. In the first quarter, we continued to implement initiatives identified by our project team. During the first quarter, our pretax restructuring charges of $26 million were primarily for severance costs related to the elimination of about 800 positions across the company. As noted, when we gave guidance last year, we're now targeting annualized net benefits for the full program in the range of $250 million to $300 million by the end of 2011, and we are on track to achieve the full annualized run rate of benefits by 2011. So that concludes my remarks. Now Murray will discuss our guidance.

Thanks, Mike. We are reaffirming our full year guidance for revenue, adjusted earnings per diluted share, GAAP earnings per diluted share and free cash flow. We expect 2011 revenue, excluding the impacts of currency, to be in the range of flat to 3% growth. Our projected return to revenue growth for the year is due in part to the initiatives I outlined at the beginning of this call, all designed to drive new growth opportunities and to stabilize our base business. In 2011, we anticipate generating incremental earnings of $0.32 to $0.34 per share from operations growth and productivity, excluding the impact of SMB stream revenues. As noted previously, we expect lower SMB stream revenues as a result of lower equipment sales in prior periods to negatively impact earnings by $0.25 to $0.30 per share. This will result in comparative earnings for the year of $2.25 to $2.40 per share. Additionally, we plan to invest $0.05 to $0.10 per share to develop the market for Volly. As a result, we expect 2011 adjusted earnings per share from continuing operations in the range of $2.15 to $2.35. On a GAAP basis, we expect 2011 earnings per diluted share from continuing operations in the range of $1.80 to $2.10. This includes the expected impact of $0.25 to $0.35 per share for restructuring charges associated with Strategic Transformation. Guidance excludes any financial impact due to the fire at our presort facility as outlined in Mike's discussion. We expect to generate free cash flow for 2011 in the range of $750 million to $850 million. We anticipate lower free cash flow in 2011 as compared to the prior year because of increased investment in finance receivables during the year. Higher investment in finance receivables is expected in relation to higher levels of equipment sales and higher levels of capital expenditures associated with investments in business growth. Conditions in the first quarter underscored our belief that the business and economic environment will be characterized by gradual improvement at varying rates by sector and geography. However, we remain focused on investing in solutions which enable businesses to manage both physical and digital communication channels with their customers, while continuing to streamline and enhance our operations and processes. I'd just like to make one correction. I said $0.32 to $0.34 in -- as far as our incremental growth, and that was actually $0.32 to $0.42 per share for operations growth and productivity, excluding the impact of SMB stream revenues. Thank you. And now, let's open the line for questions.

[Operator Instructions] Your first question comes from the line of Amanda (sic)[Ananda] Baruah from Brean Murray. Ananda Baruah - Brean Murray, Carret & Co., LLC: I guess just a couple of things, if I could. Murray, could you, I guess, just clarify the comments around the Small & Medium Business channel shift. I just want to make sure that we're clear on exactly the dynamics of that.

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

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

And you can see how it coincides with a number of the recent product announcements we've had as well. Ananda Baruah - Brean Murray, Carret & Co., LLC: Got it. And then I guess on the -- I guess, the demand, the incremental demand you guys are seeing from high-volume mailers, it sounds like, I mean, in your comments you spoke to both hardware and software strength. I guess on the hardware side, what do you really see as the demand drivers, I mean, aside from economy just becoming -- just stabilizing. And is there anything, I guess, different on the software side that you see happening this time around that you hadn't seen in the past that's leading to incremental software adoption?

Sure. As we look at the high-volume segment, if you recall a number of years ago, there was a holdback in procurement there. So that has been coming back. Secondly, we have the leading integrity products in the marketplace. That is moving forward. Also, we're seeing customers looking at how to do more transpromotional work in these areas. So particularly, when you look at financial services and insurance, they're the areas that have been accelerating back. Now that also coincides with the switch back to growth in total mail volume. So if you recall, in '09, mail was down 15%. It was down 9% last year. And in the last quarter, it was up 1.3%. So we're starting to see the follow-on benefits from that transition and the need for people to accelerate the quality of what they're delivering in mail. So that's sort of from the global hardware side. On the software side, the continuing expansion we have in data analytics and location intelligence is providing us with some very positive and unique offerings to customers that are very exciting for them. So they're adopting those. And then we have our multi-year contracts, which have been a negative for a couple of years, but now that stream revenue is coming in. And we're continuing to see the acceleration of those multi-year contracts. And then finally, as I had mentioned, we introduced the Portrait -- new Portrait Analytics software. The combination of the Portrait tools with our existing tools provided a much richer relationship in our customers. So we're seeing that as a continuing positive trend as we offer a much broader range of services to our customers. Ananda Baruah - Brean Murray, Carret & Co., LLC: And then just last one for me, I guess. Just regarding the potential impact, I guess -- well, the impact, the situation in Dallas, and you mentioned that the, I guess, the potential impact in totality is $0.07 to $0.09, and it's not baked into your guidance. So as we move through the -- kind of just through the year, what kind of visibility would you guys have, I guess, into how progress is coming along? And what will you be willing to share with us, I guess, just so we can minimize any opportunity or risk of getting surprised towards the end of the year on what's going on there?

Sure. we feel very confident about that range in terms of the impact, because it's really based on what we know we can qualify the mail at in our prior facility and the process we need to make to get the mail to qualify at that level again. And it's really having the new facility up and running. We're quite confident that we have insurance coverage that will keep us whole on this. We really have a question of the timing of when we can recognize those insurance proceeds versus the impact in the business, but we are well on our way to having the new facility in place. We'll be up and running in the second quarter, and it takes several months to kind of iron out the process and to get it to full productivity. But we expect that certainly in the fourth quarter, we'll be -- we should be running at prior levels of productivity. And if anything, with a new facility and all, the opportunity to do even better. So we think this is -- it's quite measurable in terms of the impact on the business. And if everything works out well, we would recognize the proceeds in the year, but if not, we think we'll be, at the end of the day, kept whole in terms of this event. Ananda Baruah - Brean Murray, Carret & Co., LLC: I mean, is there any likelihood that we kind of get into the fourth quarter and then you sort of realize that, like, the whole thing's not going to be settled, I guess, and you just kind of end up getting caught short at the end?

I think there's 2 separate issues here. One is our view on having our facility up and running. That is in full flight in terms of a project to get it up and running. And it's something we, as you know, have a network of nearly 40 locations, have a lot of competency in putting new facilities together and getting them running effectively. The question on the insurance, I think, is much more one of timing, of accounting recognition as opposed to the validity of the claims. Part of the recognition of that is we've already received $15 million from insurance companies in advance.

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

I had 2 -- I don't know if it's going to be possible for you to break this out, but to what extent are your mail volumes associated with kind of local advertising? And the reason I'm asking is, seeing a lot of the media companies come out with lower local advertising, and there seems to be an increasing sort of secular shift there. So I was wondering if it was having an impact on your clients' buying decisions at all or not. Then I have a follow-up.

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

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

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

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

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

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

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

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

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

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

Okay. My last question's on gross margin. You're in the midst of a pretty significant restructuring program, yet gross margin was down by about 2 full percentage points year-on-year. It was below my expectation. I'm just trying to understand some of the gross margin pressures you're seeing in the business a bit better.

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

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

We tend not to look at it in the aggregate that way as much as we look at it on a unit-by-unit basis. And as you saw, we had improving EBIT margins in 4 of the 7 businesses. Those are, in part, driven by improving gross margin. So I would say if you look at prior year, full year as a guideline, we should be looking for equal or improving.

Your next question comes from the line of Shannon Cross from Cross Research. Shannon Cross - Weeden & Co., LP: My first question, on Management Services, you talked about a pipeline that's improving. Can you give just some more clarity into sort of how you're thinking about the contracts that you might be signing? I remember, a few years ago, when you got aggressive in that business, and clearly, it dampened margin. So how should we sort of think about your balancing revenue growth within Management Services against margin potential?

Sure. In terms of looking at Management Services, I think a good view into that would be an announcement we made just yesterday about a partnership with EMC, and utilizing their Captiva software for new solutions. Those are technology-based solutions that we believe have a greater margin potential than traditional labor-based services. So while our pipeline still includes some of our traditional products and services, we're looking at more technology-based services that tend to be more off-site than on-site. And so it's going to be a mix of those types of things, the traditional products, along with some of the new technologies and new partnerships that allow us a different margin profile in that business as we go forward. And that really applies around the whole CCM or Customer Communications Management strategy that we've laid out. Shannon Cross - Weeden & Co., LP: Okay, great. And then on the cash side of things, given that you did a significant -- you generated a lot of cash in the first quarter, and I realize some it's not necessarily nonrecurring or maybe will reverse itself. But I'm curious as to sort of what you think are the dampening impacts as we go through the year. Clearly, I would assume equipment sales, which will then theoretically use some cash, or finance receivables will be in there. Is there anything else we should really focus on in terms of pressure on cash? And I guess you also talked about CapEx. But I mean, anything specific or incremental to those 2 that we should think about, because it seems like your cash flow's on a really solid track this year.

Yes, I don't see anything that's of a high order of magnitude that would be dampening. I mentioned a couple of the uses that we would expect over the course of the year. CapEx increases year-over-year would be modest. Our total CapEx last year was only about $125 million to $130 million. We estimate that could be $125 million to $175 million this year. So a little increase. Part of that will be around new systems and solutions that we're launching across the business. Some of it is around Mail Services facility fit-out, but don't see anything changing dramatically from what we saw in 2010 other than the things that you cited. Shannon Cross - Weeden & Co., LP: Okay. And then on the Connect+ side of things, can you talk about sort of where you think you are in terms of penetration of that? I know -- I think you pulled it out across your domestic sales force. Sounds like you're moving it through other regions. But I'm curious because it seems like it's getting good traction, so how should we think about Connect+? And is this something that can sort of provide some underlying support for the next year or so? And then is other technologies within that, that you plan on deploying down market, or I'm not sure if there's a way to go up market with them, but how should we think about it?

As you look at Connect+, it continues, as you said, to gain market traction in the markets we've launched it in. And in particular, we're seeing the shift towards more and more color on the device. So the early launch in the U.S. had low color penetration. It's now in the -- it was in the 10%, 20% range. It's now in the 50%, 60% range. So we expect to see that continue to ramp, which is both good for equipment sales, and then it is also good for long-term supply revenue. So we expect that shift to continue. And then, as we've mentioned, we've launched it in Canada, U.K. and Australia. We will be launching it in a number of other significant markets, particularly France and Germany, a little later this year as it's approved there. That will continue its positive global impact. At the same time, it is a web-based platform, and so we'll be able to continue to go back to that customer base, and expand the capabilities that are available on it with new software options that we have out there. Shannon Cross - Weeden & Co., LP: Okay. And then from a competitive standpoint, how are you sort of seeing the competitive landscape market share? Any color you can give us on pricing, just how is your sort of, I guess, you kind of have like that large competitor out there. How are things going vis-à-vis them?

As we look at the margins within each segment, we are seeing margin staying constant. So we're not really finding any effect in the marketplace from price, I think, is what you're indirectly asking. So I think that price is holding. And if anything, with the Connect+, we're able to move that price positively because of the incremental functionality, particularly around color, which no one else in the market has. So we expect to continue to gain traction as a result of that. And then back to your earlier question about the capabilities inside of Connect+ and its leveragability, we are already beginning the leverage of that with the pbSmart products at the low end in the SMB space. So we're taking capabilities from there and opening it into other market segments. And we will continue to do that with web-based offerings that will enhance our existing customer implementations, either directly through the device or as implemental software around their existing devices. Shannon Cross - Weeden & Co., LP: Okay. And then my final question. Given some of the concerns on the economy, or I'm not quite sure what's going on right there in the world right now, but you guys tend to have somewhat of a look. I'm curious about linearity during the quarter. Do things get better or worse? Any comments you want to make on sort of how April's looking there. Are we feeling more comfortable as you went through the quarter in terms of the level of business activity?

I think as you put it, until everybody knows for sure, it's pretty hard to make predictions. But we have seen the Enterprise side of the business continue to remain strong in written business. It does vary globally as different markets, particularly in Europe, with the credit items that occur, it does have some varying effect. But in general, the Enterprise segment has continued to show positive signs. The SMB area is much slower. We aren't seeing the same type of positive reaction in the SMB space as far as opening up from a spending point of view. So that remains something that we have basically put into our plan, that it will remain sort of where it is. On the positive side, though, we do see markets like Asia as being very strong. And it is not that big a component of our business, but it is very positive and very helpful as we see the market growth and the expansion there. I'd just like to go back to Chris's question that I left unanswered. On the installed base of meters, this is all meters globally. In the U.S., in last year, the meter population declined 7%. And as you look at it at this current quarter, it was down in the 6% range. So we're starting to see a decline in the U.S. Globally, it is positive in a number of countries, and generally less than 6%. So the U.S. is about just over half of the global market of installed base. So it would say the decline is moderating around the world, and it would be somewhere down in the under 6%. If I was to pull a guess, it would be in the 3% to 4% range. And then the other component of that is the majority of that reduction has been in the very low end of the meter line, which is the lowest revenue side of the product line. Now that's why, as you noticed, we introduced SmartPostage [pbSmartPostage]. SmartPostage goes directly into that low end both below our existing meters and up to the meter, and then adds a shipping component. So it is a complementary product we'll be adding to our existing meter customers and expanding. So we see that as an offset in the low end. Certainly, at the high end, the Connect+ product is gaining in placements in that space. So we're seeing the high end as more stable, and the low end, as we've had the economic issues around the world for Small Business, has been a negative. We see that decline slowing. And then the SmartPostage, our cloud-based offering, will actually begin to address that as we go through this year.

Your next question comes from the line of LLoyd Zeitman from Bernstein [AllianceBernstein] .

I'm surprised no one's asked about Volly yet. So I guess I will.

Sure. Volly continues to be an exciting product. And as we said back at the beginning of the year, we launched it so we could go out and begin building the relationship and connectors, which -- with high-volume mailers, and that we would not take into to the market until we had put those connectors in place. So we're well along the path of partnerships with our installed customer base. We're continuing to develop those relationships and build the tools with them to create the ability to place the mail into Volly. We are still expecting to go to the consumer market sometime late in the third quarter. We will launch it earlier as an internal trial with PB employees, and then look to go to market in the third quarter. At the same time, we did bring in a president of that business, who comes from the digital marketplace, and he is also continuing to look at the offering as we are planning to launch it, and making any appropriate adjustments that would enhance it from a digital acceptance. So the traffic and volume around it, and people wanting to participate continues to grow from both a mailer and consumer side. But we do need to build the connectors for the mail producers before it will have value to consumers. So we are still on the track we had planned. We still see it as an exciting product, and we'll look to see how we begin the adoption curve late in the year.

Your next question comes from the line of Ananda Baruah from Brean Murray. Ananda Baruah - Brean Murray, Carret & Co., LLC: I guess, along those lines, could you guys just give us a sense. I mean, you've sort of announced Volly, which is consumer phasing, and you've done stuff on the business side like SmartPostage and some of these other things. And I guess could you give us a sense, and maybe kind of if you could put a wrapper, if that's possible, around what the totality of the sort of new solution strategy is going to be going forward? What's the best way for us to think about sort of how you're trying to shift things, sort of between where you are today and where you think you'll be when you reach critical mass with some of these U.S. solutions?

Sure. What we announced late last year is our commitment to the Customer Communication Management space, and all of our new products and services are tailored around that. Our products, historically, have been involved in connecting our customers to their customers. We are taking that connection and expanding it with our Software tools, new Hardware tools and our cloud-based tools, to enhance that communication in both physical and digital form. So you'll see all of our offerings coming out based around Customer Communication Management, helping our customers more effectively communicate with their customers to enhance and build their relationships in both physical and digital form, and the ability to have that in multiple digital forms. So we're saying this is a broad-based communication tool. We're leveraging our expertise and capability across it. And as we go forward, we'll see much more -- you look at Connect+. It starts with the ability to put promotions on the outside of the envelope. SmartPostage does the same. You have Smart Connections [pbSmart Connections], which brings Digital Communications in. You have Volly, which starts connecting physical and digital together and creating those communications. You have all of our software tools, which enhance those communications. And then, the addition of the analytics because you can do all those things and wonder whether it's succeeding or not, and that's where the whole data analytics comes in, which ties it back to, again, how do I communicate to my customers. So I think about it as every one of our customers is looking to retain their customer base, expand their offerings to their customer base, and find new customers. And that's what the mail has traditionally done, and that's what we're doing as we expand into a hybrid world of both physical and digital. Ananda Baruah - Brean Murray, Carret & Co., LLC: And Murray, have you guys, I guess, thought through, or would you be willing to share with us the extent that you've thought through, sort of, I guess, whether it's 2 years or kind of 2 to 5 years, or whatever the right time frame is, like what mail, kind of mail volumes needs to be at, whether it's like slightly positive or slightly negative? And what equipment sales needs to be at for you guys to generate, I guess, the services revenue growth sort off of all the new services that you're going to be offering to make the business model work?

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

Ananda, the other thing I would just note is that BCG [Boston Consulting Group] had done a review of expectation of mail volumes 10 years out. And what we've seen in terms of mail volumes settling out are numbers that are actually right in the range of their long-term predictions, and so which is a very modest decline overall, over time, but with positives in standard and some declines in first class. So I think the numbers in the last quarter are actually even a little better than the average is. So we looked at that as a guide, and then obviously, we'll modify along the way as we learn about any other changes in the overall marketplace. Ananda Baruah - Brean Murray, Carret & Co., LLC: So if the BCG study turns out to be more or less accurate, I guess that sounds like the implication is, the inference is that, that would be good enough to allow your business model to work.

That's correct.

[Operator Instructions] And at this time, there are no further questions.

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

Ladies and gentlemen, this conference will be available for replay after 10 a.m. Eastern Time today through May 13. You may access the AT&T TeleConference replay system at any time by dialing area code (320) 365-3844, and entering the access code 198073. That does conclude your conference for today. Thank you for your participation, and for using AT&T Executive TeleConference. You may now disconnect.