Pitney Bowes Inc. (PBI) Q3 2012 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Pitney Bowes Third Quarter 2012 Earnings Results Conference Call. [Operator Instructions] Today's call is also being recorded. If you have any objections, please disconnect your lines at this time. 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 the Safe Harbor overview.

Thank you. 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 2011 Form 10-K annual report and other reports filed with the SEC that are located on our website at www.pb.com and by clicking on 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. Also for non-GAAP measures used in the press release or discussed in this presentation, you can find reconciliations to the appropriate GAAP measures in the tables attached to our press release and also on our Investor Relations website. Additionally, this quarter we have provided slides to summarize most of the points we will discuss during this call. These slides can also be found on our Investor Relations website. Now our Chairman, President and Chief Executive Officer, Murray Martin, will start with an overview of the quarter. Murray?

Thanks, Charlie, and good afternoon, and thank you for joining us today. Before we start, I'd like to express our concern and best wishes for all of those who were impacted by Hurricane Sandy. I want to make a special note of appreciation to our employees who supported other employees, customers and our operations during this period of disruption. I'm happy to report that our employees in the impacted areas escaped injury and all of our facilities are now operational. In the third quarter, we continued to move forward on meeting our customers' needs by delivering innovative solutions and focusing on higher growth markets. Before we discuss the results for the quarter, let me share with you some thoughts on where Pitney Bowes stands today, where it's been, where it is headed. We believe we are going through a critical period in the history of our company and our industry. Many of you who know our story understand that a shift has been underway for some time. So let me review what we've done and intend to continue doing to meet that shift head on. We recognize that we needed to take a long-term view, specifically with investments towards higher growth opportunities to be more optimally positioned for the future. Over the last several years, we took actions to mitigate the impact of the global economy and evolving customer needs. And we focused on improving operations, increasing productivity and reducing cost and providing more opportunity for innovation. These actions allowed us to remain solidly profitable, generate strong cash flows and make strategic investments despite some revenue weakness. As many of you know, last year, we completed our 3-year Strategic Transformation program aimed at streamlining our business to further support growth. The initiative was broad-based and touched just about every part of the organization across the globe. We streamlined the organization, enhanced efficiencies and market responsiveness and improved overall operations. In short, we did what needed to be done for Pitney Bowes and our stakeholders. As a result, the company is better positioned while at the same time delivering the products and services our customers want and need. We saw the benefits of the restructuring in SG&A improvement, in our EBIT margins, in several of our business segments, and our overall ability to operate more efficiently and be more responsive to our customers. This program generated more than $300 million in net annualized savings, exceeding our targets. While the bulk of the work is complete, we continue to take cost out of the system and implement operational improvements across the business. In addition, by rethinking our cost structure and enhancing our market responsiveness, we've been able to make the investments necessary to support our long term growth strategy: To be the leading provider of solutions to help customers of all sizes manage their physical, digital and hybrid communications with their customers. Mail remains an important part of the business communications mix, and we are continuing to invest in enhancing its value to our customers. The economic downturn is lasting longer than many expected. The various factors and measures I've mentioned have led to an ongoing and unique equilibrium at Pitney Bowes. We will simultaneously balance managing our business in an uneven global business environment, with the need to invest and take action to drive longer-term growth. To that end, and building on the success of the Strategic Transformation program, we are initiating new actions to further improve long-term growth. We believe that there are opportunities to streamline and further reduce costs, as well as address margin mix trends and strategically invest in higher growth businesses. We're committed to taking these measures to improve operational flexibility. Mike will provide more detail in his remarks. Consistent with the shift to higher growth opportunities, today, in our earnings release, we also stated our decision to exit the portion of the International Mail Services business related to the shipment of traditional mail and catalogs. We expect the exit will be completed in the fourth quarter. We've taken a charge in the quarter to reflect an impairment of goodwill, intangible and long-lived assets. Mike will also discuss this in greater detail shortly. As for an additional investments, we have deep-rooted customer relationships and a unique understanding of the needs of the SMB and enterprise customers. It is this understanding that is driving our strategy for continued expansion of our ecommerce initiatives, cloud-based solutions, software and Volly. Customers are looking for solutions that will help them not only manage their physical, digital and hybrid communications, but to do so in a more cost-effective way. We're excited to announce that we're expanding our cross-border ecommerce capabilities and will continue to strategically invest in technologies that make it easier for our customers to interact with their customers. Consistent with our strategy to leverage opportunities in this higher growth market, we formed a new global ecommerce business group, this group will focus on growing our cross-border ecommerce solutions and parcel services to help retailers create a seamless, online purchasing and shipping experience for consumers. Our expanding relationship with eBay is a good example. We are partnering on their recently announced Global Shipping Program or GSP to help facilitate cross-border ecommerce and simplify the challenges associated with the historically complex cross-border sale of goods. As many of you know, eBay and Pitney Bowes have been collaborating on technology solutions and services since 2004 when we enabled our Internet postage platform to power the eBay shipping label printing service. Some 40% of sellers on eBay employ its label printing services. We are now providing technology and shipping services for the GSP, which eBay started testing during the quarter. Through the GSP program, Pitney Bowes now supports eBay customers' shipping needs from the U.S. to 18 countries. This is particularly exciting as we look ahead to Q4 and support the holiday shipping season with our cross-border ecommerce solution. We continue to make progress with our Volly secure digital mail service and have now signed 60 large third-party mail service providers who will offer our service to 6,500 companies and consumer brands. As we continue to work with billers and develop our software, we have decided to add and enhance our technology to provide additional capabilities that will improve the on-boarding process for billers. This will result in improving the scalability of the service and facilitating biller density. Partnering with several technology solutions that leverage the Volly platform will give us a faster path to the density necessary to move the market. Last week, for example, we, along with Broadridge Financial Services (sic) [Broadridge Financial Solutions], announced that Morgan Stanley Wealth Management and UBS Financial Services have each indicated their support for our Volly solution. However, we have determined that Volly's long-term value will be enhanced by deferring its availability to consumers until 2013. Turning now to our earnings in the quarter, as I mentioned at the outset, there's a shift underway at Pitney Bowes to fundamentally transform our business, with a diversified set of high-growth offerings and a reduced cost structure. Allowing us to respond to continued economic pressures while still investing for our future. Third quarter revenue benefited from growth in Production Mail, also in Mail Services, presort revenue grew as a result of increased Standard Mail volumes and continued penetration in all of the workshare discount categories. We also saw gradually improving trends in our North American mailing business as we experienced the best year-over-year comparison in 6 quarters for equipment sales. While encouraged by these signs and investments for the future, revenue and earnings results did not meet our expectations. The decline in revenue and earnings during the quarter reflects the increasing impact of the global economic weakness, especially in our Software and International Mailing and Management Services businesses. Adjusted EBIT margin was down year-over-year, impacted by lower revenues and the changing business mix. Finally, our free cash flow during the quarter was also lower than usual totaling $40 million. However, on a year-to-date basis, it was $551 million. On a GAAP basis, third quarter cash from operations was $69 million and $440 million year-to-date. Based on our year-to-date free cash flow, we are reaffirming our guidance range for the year of $750 million to $850 million. Cash flow this quarter was impacted by the timing of tax refunds and payments and the timing of working capital requirements. For instance, in both taxes and accounts receivable were significant sources of cash in the second quarter of 2012 and the third quarter of 2011. While this quarter, both items were uses of cash. Now I'll turn it over to Mike to review the results in greater detail with a breakdown by the segments. Mike?

Thank you, Murray. This afternoon we reported results for the third quarter of 2012. As Murray mentioned, many of the trends that we've been seeing throughout the year continued in the third quarter, specifically as it relates to the very uncertain and volatile global economic environment that continues to affect business spending patterns. Adjusted EPS was $0.47 for the third quarter of 2012 as compared with $0.69 per share for the same period in 2011. Last year's adjusted earnings per share included a $0.05 per share benefit from an insurance reimbursement and an $0.08 per share benefit from a tax settlement with the IRS. Excluding these 2 items, comparative adjusted EPS in the third quarter last year was $0.56. In general, adjusted results for this quarter and the prior year exclude the impact of restructuring cost, goodwill and asset impairment charges, asset sales and tax settlements that may have occurred in those periods that are not usual occurrences when considering normal ongoing operating results. A reconciliation schedule of GAAP to non-GAAP measures is included in the earnings press release and posted to the Investor Relations section of our website. GAAP earnings per diluted share were $0.38 versus $0.85 for the prior year. As outlined in today's press release, and as Murray mentioned, we announced our intention to exit the International Mail Services business and as a result, there are $28 million of pretax noncash goodwill, intangible and long-lived asset impairment charges affecting this quarter's GAAP results. The remainder of my discussion will focus on the comparative operations of our businesses for the periods discussed and therefore all income statement-related references or net results are on an adjusted basis. For the third quarter, company revenue totaled $1.2 billion, a decline of 6% on a reported basis. Excluding the impact of currency, revenue declined 5%. Adjusted earnings before interest and taxes or adjusted EBIT was $181 million this quarter and adjusted EBIT margin was 14.9%. Adjusted EBIT this quarter included an incremental investment of $3 million for Volly versus last year and approximately $3 million for infrastructure, distribution and related cost associated with our ecommerce growth initiatives. EBIT margin was also impacted by lower revenue in International Mailing and Software. Last year's EBIT margin benefited from an $18 million insurance reimbursement related to the Dallas facility fire. Adding back depreciation and amortization, EBITDA for the quarter was $241 million or $1.19 per share. SG&A for the quarter was $401 million, a decline of $27 million versus the prior year. As a percent of revenues, SG&A was 33%. SG&A continues to benefit from ongoing productivity initiatives and good credit experience, as well as lower benefit cost this quarter. Net interest expense in the quarter, including financing interest, was $45 million, a decline of $4 million relative to the prior year. The average interest rate was 4.7% for the quarter. The effective tax rate for the quarter was 27.4% versus an effective tax rate of 22.4% last year. The tax rate this quarter and last year benefited from the resolution of matters with tax authorities. On the balance sheet and cash flow, free cash flow during the quarter was $40 million and $551 million year-to-date. On a GAAP basis, we generated $69 million in cash from operations for the quarter and $440 million year-to-date. As Murray noted, cash flow was lower this quarter than usual. Comparisons of cash flow for this quarter versus the prior year were impacted by a large tax refund of almost $100 million and the timing of tax payments in the third quarter of last year. Comparisons to the second quarter of this year were also impacted by timing of tax payments, as well as the timing of working capital requirements. We continue to closely monitor cash flow results and focus on maintaining a strong balance sheet. We returned $75 million of cash to our shareholders in the form of dividends and had $13 million of restructuring payments related to our Strategic Transformation program. We are committed to a prudent use of cash. Our priorities for cash remain reinvestment in the business, consistent with our strategy to deliver innovative solutions and pursue higher growth markets, maintaining a fair return to our shareholders and managing our debt levels. We have $3.7 billion of debt on the balance sheet at the end of the quarter, which was $550 million less than the amount of debt at the end of last year. As Murray highlighted, we believe that building on the success of Strategic Transformation, there are further opportunities to reduce cost and streamline the business. Therefore, we anticipate taking actions that will include organizational and management consolidations. We expect these actions will result in a pretax restructuring charge in the fourth quarter in the range of $40 million to $60 million and are anticipated to generate annualized savings in the range of $45 million to $55 million. Now I'd like to discuss the third quarter results for each of our segments. This information can also be found in our earnings press release and the slides that we posted to our website in the Investor Relations section. North America Mailing revenue for the quarter was $448 million and EBIT was $169 million. During the quarter, the North American Mailing segment continued to increase year-over-year placements of Connect+ and pbWebConnect mailing systems and SendSuite Live shipping solutions. As a result, this quarter, we experienced the best year-over-year equipment sales performance in 6 quarters, although it was a decline of less than 4%. Overall revenue declined primarily because of lower recurring revenue streams. EBIT margin was impacted by fewer lease extensions on existing equipment. Because there were fewer lease extensions this quarter, there was a higher proportion of equipment sales, which will result in an improvement in customer retention and future recurring revenue streams. International Mailing revenue for the quarter was $154 million and EBIT was $11 million. Revenue declined versus the prior year due to fewer equipment upgrades and lower equipment sales, especially in the U.K. Revenue comparisons were also impacted by a postal rate change in France in the third quarter of last year, which generated $6 million of equipment sales related to postal rate updates or PROMs, and there is no similar rate change this year. EBIT margin declined year-over-year due to lower revenue, lack of PROM sales this quarter and the overall mix of business. Turning to the Enterprise Business Solutions group. Production Mail revenue for the quarter was $122 million and EBIT was $4 million. Production Mail revenue grew due to increased worldwide equipment sales during the quarter, in part because of the Drupa trade show held during the second quarter. EBIT improved when compared to the prior year, due to the growth of revenue and cost-reduction initiatives in the U.S. and Europe. The improvement in margin was partially offset by continued investment in our Volly service. Excluding the investment in Volly, EBIT margin would have been approximately 540 basis points higher. Software revenue for the quarter was $89 million and EBIT was $1 million. Software is where we experienced the greatest effects of the challenging global economic environment. Revenue comparisons with the prior year were also challenging given the high number of large licensing deals that we closed during the third quarter of 2011. Continued austerity measures by the public sector globally are also adversely impacting our business. EBIT margin declined versus the prior year principally because of lower licensing revenue, relatively higher R&D investment and marketing spend in the quarter. Management Services revenue for the quarter was $221 million and EBIT was $10 million. Management Services revenue and EBIT margin continue to be impacted by ongoing pricing pressures as a result of ongoing worldwide economic and competitive conditions and lower volumes. However, we continue to have positive net new written business, this coupled with our new strategic initiatives in print outsourcing are expected to drive revenue growth in the future. Mail Services revenue was $142 million and EBIT was $17 million. Increased Standard Mail volumes and continued penetration in the workshare discount categories continue to drive revenue growth for the presort operations. Overall, Mail Services revenue declined slightly this quarter as a result of lower mail and catalog volumes in the International Mail Services business. As Murray mentioned, we're focusing on the higher growth cross-border ecommerce opportunities and are exiting the slower growth International Mail Services. EBIT margin comparisons this quarter versus the prior year were impacted by the $18 million insurance reimbursement received in the third quarter last year. Also impacting margin was the company's continued investment in Software applications and the distribution network to facilitate the expansion of its ecommerce solutions. Marketing Services revenue was $40 million and EBIT was $9 million. EBIT margin benefited from reduced print production costs and ongoing productivity initiatives. That concludes my comments, and I'll turn the call over to Murray who will discuss guidance. Murray?

Thanks, Mike. We're operating in a very challenging and uncertain environment. While we expect effects of global economic uncertainty to persist, based on results to date and the expectations for the fourth quarter, we are reaffirming our previously announced 2012 guidance for revenue, adjusted earnings per share and free cash flow. Revenue is anticipated to be flat to minus 4%, adjusted earnings per share is expected to be in the range of $1.95 to $2.15 and free cash flow is expected to be in the range of $750 million to $850 million. As I outlined earlier, given our intentions to further streamline the business and reduce cost while shifting to higher growth opportunities, we will incur an expected restructuring charge in the fourth quarter of $40 million to $60 million. We are updating our GAAP EPS guidance to the range of $1.78 to $2.08 per diluted share. GAAP EPS reflects the goodwill and asset impairment charges of $0.09 per share related to our exit from our International Mail Services business, and the anticipated restructuring charge of $0.15 to $0.25 per share. GAAP EPS also includes the $0.11 per share of net tax benefits and $0.06 per share benefit from the sale of leveraged lease assets in Canada, both of which occurred in the first quarter of the year. Pitney Bowes is a global leader, and we believe that the steps we have taken and the actions we have underway will provide long-term benefit to our shareholders. Operator, we will now open it up to questions.

[Operator Instructions] We have a question from Kartik Mehta of Northcoast Research.

Maybe your thoughts on impact from all the postal rate changes that are -- seem to be occurring, and with all that as well if you could just talk about the impact to Pitney Bowes from the postal restructuring as well.

Sure. As we look at postal rate changes, as long as they're in a reasonable percentage, which the cap that is in place does force them to be -- it generally does not have a material effect in the near term. So it does, however, enhance the need for postal equipment as they look at how the rates are affected and easily implemented with our software-based systems. Of course, all of those rates are downloaded automatically. At the same time, as we look at postal restructuring, we see the post needing to look at how to provide easier access for customers in more locations, and that we would see as potentially beneficial to us, as well as how they would outsource more of their activities. They have a very aggressive workshare program, which we participate in, in our presort business, where we have 36 sites, and that also depending on how they reorganize could be beneficial. And then thirdly, as they look at creating more automation around mail, we do that automatically for our customers in our presort activity, and this eliminates their need to make the investments. So it actually enriches our presort opportunities.

And then, Murray, could you just talk about this ecommerce opportunity you have. Obviously, you must think it's a fairly large opportunity to create a business group around it, is there any way to provide metrics as to how big do you think the market is and maybe what Pitney's potential in that market is?

I think the market is quite significant. As you look at ecommerce traffic, and we'll look to provide more definitive information in that over the coming periods, but the ecommerce traffic is growing particularly in the cross-border area. It has been challenged with the uncertainty of what fully loaded delivered cost is for buyers. So there's a significant dropout when people realize that it is a cross-border sale. And that's really what this is focused at. It provides the consumer with an all-in price, including duties, taxes, et cetera. We will then manage that and inspect the goods before they leave the country to ensure that they comply with the appropriate duties and taxes. But the customer will see an all-in price and not have any surprises. This everyone believes will actually accelerate cross-border ecommerce. We are launching to 18 countries initially, and then we'll be looking to expand that. But as we move through the fourth quarter, we'll look to give you more information on what the market opportunity is for cross-border parcels.

And then just one last question, Mike, on the cost savings that you're going to realize, is that -- will you realize the entire amount in 2013 or is that more of a run rate that you believe you'll achieve in 2013?

Yes, I think that we'll achieve the majority of that in 2013. It is an annualized run rate, but we think that the timing of the actions are such that we'll see the majority of that in 2013.

We have a question from Ananda Baruah with Brean Capital. Ananda Baruah - Brean Murray, Carret & Co., LLC, Research Division: Few things, if I could, would you guys just mind -- you're reaffirming the guidance, sort of suggest to get to the -- by my math to get to the lower end of that, you need to do, I guess, at least 10% revenue growth sequentially. Can you give us the thinking behind what gives you confidence to be able to do that in the fourth quarter?

Yes, just to refresh in terms of the way that we provide our guidance it's on a constant-currency basis. So we are, I think, year-to-date at right about minus 4%. So we believe that the fourth quarter affords us some opportunities for improvement in our revenue growth rate. So the 10% sequential, I'm not sure I can relate to that in the way that you described it, but as Murray described, the ecommerce opportunity and some of the other comparisons in the businesses, we see opportunity for improvement in the fourth quarter. Ananda Baruah - Brean Murray, Carret & Co., LLC, Research Division: Mike, I guess the headwind from currency this year, is it 150 to 200 basis points, is that...

Yes, it's about 160 basis points in the third quarter and a similar amount on a year-to-date basis. Ananda Baruah - Brean Murray, Carret & Co., LLC, Research Division: Got it. Got it. That's helpful. So I guess you're sort of assuming fairly normal seasonality in Q4, it sounds like out of hardware business?

I mean obviously, the seasonality that you're referring to is -- we tend to have a higher level of equipment sales in the fourth quarter than in the first 3 quarters. That is the normal trend in the business. Obviously, whatever factors will play out in Production Mail and Software and the like in the business, those always tend to have some larger transaction impacts that aren't always easy to anticipate. Ananda Baruah - Brean Murray, Carret & Co., LLC, Research Division: Okay. And I guess on the restructuring, it sounds like -- so you're doing the exiting from International Mail Services, where -- the other restructuring that you alluded to that's going to make up the balance of the charge, can you just talk about where you're going to be focused on there? And do you anticipate having to do anything sort of after this round that you're talking about the $40 million to $60 million charge? Are there any other businesses under review? Can you just sort of, I guess, give us the full scope of what you guys are looking at doing?

So let me deal with the second part of your question first. We always review all of our businesses and will continue to review all of our businesses to see how they contribute and what their long-term contribution is to the strategic direction that we are going and whether they are a best fit within our portfolio or whether they would fit better elsewhere. So that is something that we do on a regular and ongoing basis, and we will continue to do that within all segments of the business. As to the restructuring charge itself, as you recall, we executed and completed a 3-year program. That was very broad based and affected pretty well every area around the world. And what we are doing here is targeting specifically the management and professional areas to ensure that they are aligned with the revision of the business model, with the changing mix of the business in growth, in enterprise and the margin mix that occurs as a result. So it's a very targeted approach in the areas that I mentioned, and therefore, it should execute fairly quickly and completely. Ananda Baruah - Brean Murray, Carret & Co., LLC, Research Division: Great. That's helpful, Murray. And just, I don't think this was disclosed yet, but what's the revenue impact from the exiting of the International Mail Services business? And then how much of the cost savings should we expect to be passed to the bottom line?

In terms of the Mail Services business, that's a roughly $140 million annualized revenue base today. In terms of the savings opportunity, as Murray outlined, the savings opportunity is really driven around a couple of things. One is obviously, to enhance the bottom line. We're also looking at how we better manage the changing mix of margins in the business and also reflecting the more challenging economic environment overall. So obviously, as we take the formal charge and have the specifics around it, we'll talk about that in more detail in the fourth quarter.

A question from Shannon Cross with Cross Research.

My first question is just with regard to working capital and cash flow this quarter. Mike, could you give some more specifics about sort of the uses of cash and if you expect on the working capital side at least, it could have been more timing rather that sort of a change, and if we should expect it to bounce back in fourth quarter?

Sure. Yes, I mean, relative to the second quarter, if you were to compare it to the second quarter, there's some definite timing differences, particularly within accounts payable and accrued liability. One example of it, a fairly sizable number is accrued interest. We pay most of our interest on a semiannual basis. So we accrue over 2 quarters and then pay. So that creates a meaningful timing difference between the second and third quarter. On an annualized basis, it obviously washes out. Similarly, things like payroll, where we accrue at the end of a period for the number of days outstanding to pay, there was a big difference between the second and third quarter as well. There were some AR timing, accounts receivable timing that you can get big payments in just before the end of the quarter, end of quarter, so that was relatively minor. But those are the biggest items and some minor employee liability accruals. But on an annualized basis, we expect these things to even out. And that's why we've reaffirmed our full year guidance of the $750 million to $850 million.

Okay, great. And I don't know, Mike and Murray, can you talk a bit about what you're hearing from customers? Clearly, on the Software side, you had some pressures in terms of not getting some big deals signed, but maybe if you could give us some idea of how things progressed during the quarter in your various segments and if you saw any signs of improvements or stability or decline, that would be helpful.

Sure, as we look at the Software in particular, the -- in Europe and in the U.S., there is a reasonable amount of public sector business and with the environment that's existed over the last quarter, the public sector business has been very slow and not really bringing itself to completion. I'd say, that was a significant item. The second significant item is the number of large transactions. The number of large transactions closed was down. So there is a delay. People are requiring more sign-offs in layers, which is increasing the time to get business signed. So I think that is the second item that we've seen in the quarter is delayed closing of those deals due to the signing of the business. Certainly, I don't think we saw any strengthening in the quarter from an economic point of view. And in fact, in most areas of the world, saw more volatility.

Okay, great. And just curious, did they get worse towards the end of the quarter or just sort of continuing volatility?

I think, fairly continuing volatility. Certainly, in all businesses, everything hinges on the end of the quarter, but it really wasn't anything different than we saw during the period. At the same time, from the positive side on the North American Mailing, which is lower ticket, we did see a reduction in the rate of decline that we had experienced in the past. It was about 1/2 of what it has been. So we are seeing some positive signs there. But I wouldn't call it aggressively positive that SMB is -- as a sector has turned up, but we've seen a high acceptance of our products and services and the ability to bring that in. And then as Mike mentioned, a lot of those are going in as new rather than lease extension, and that also is longer term and over the long term will supply long-term revenue. Shannon S. Cross - Weeden & Co., LP, Research Division: Okay, great. My last question is just with regard to the equipment that you sold. It sounds like, as you just said, that's a positive, but I'm curious as to what you're seeing in terms of mix shift down or are people sort of staying with the same kind of product? And also, what are sort of pricing environment out there, are you seeing any rational pricing or are people being fairly accepting of the fact that the market's not very strong, so no reason to price aggressively?

Two things in that regard. Firstly, the high-end items, Connect+, continues to move very well, and so we aren't seeing what we'd call any disproportionate downsizing. If anything, people in the upper-market area are staying with the product because they see more feature functionality and capabilities to deliver more value. So we really don't see too much there. At the same time, as we launched WebConnect, WebConnect supplies digital services as an adjunct to the product. And so again, it's providing a larger value proposition for the customers. So I think those 2 things in the mailing business have kept the size question as relatively stable and not created any real shift in that. Certainly, there is a question of confidence in the low end of the market. The NFIB report showed that the confidence has not improved in the market, and so we would like to see that because that would give us more breadth of that market space here in the U.S. So I think those are the ways we see the lower end. We expect it to continue. From your pricing question, there's always sensitivity and pricing in the market, but I wouldn't say we've seen anything that is significantly different than we have in the past periods.

We have Hale Holden with Barclays.

Just a couple of quick ones, for the slowdown in lease renewals, is that purely a function of higher sales or is it a function of sort of churn off of the system?

Yes, in terms of lease renewals, that is a conscious decision to market new equipment to customers where we've introduced new product to the marketplace in the form of Connect+ and pbWebConnect. And we believe that those customers will gain, as Murray mentioned, more value over time by having the additional feature functionality. So it's a trade-off of -- lease extensions can be higher margin because there's not a new piece of equipment, where a new equipment sale is a better revenue value over the long term for the company in terms of the recurring revenue streams.

So we should expect this margin impact kind of for the next 2 to 3 quarters against -- until you cycle grounded and the new equipment becomes sort of wider installed in the base?

Yes, as it sort of evens out as a percentage of the base, that would have an impact on the margin, correct.

For the fourth quarter restructuring charge, can you give us a sense of how much that will be actual cash out the door?

Yes, there will be -- I would say, the majority of that will be cash-based because it will be principally severance oriented.

Okay. And then for -- again, for the restructuring kind of plan or the cost-reduction plan, if I recall this correctly, the last time you went through the 3-year plan, you hired McKinsey to kind of come in and help you out with it. So the impression was, there wasn't really a lot of wood to chop after they were done. So it's sort of, how do you balance cutting into muscle or -- and are you doing this one on your own or have you hired someone to come help you with it?

Yes, actually, we had Booz & Company who helped us out in the original one. That was a very broad-based initiative across the whole business. What we're really doing here is an extension of what we would call continuous improvement in the business. Obviously, as the business evolves and new opportunities arise, and we see changes in some of the businesses, we continue to look for opportunities. And in many ways, as Murray mentioned, this initiative is around looking at the full extent of what we accomplished in Strategic Transformation and fine-tuning our management levels and spans of control and those types of things and looking at some of the professional levels where we feel we can get more accomplished with the investments we've made in infrastructure. So we are doing this on our own.

Chris Whitmore with Deutsche Bank.

I wanted to try to understand the equipment sales number a little bit better. If I exclude production sales from your equipment line, it looks like that number was down somewhere in the mid-teens on a year-on-year basis, is that a fair representation of what the meter placements did on a year-on-year basis?

No, Chris. I think Production Mail was up. There's a significant impact of currency in there due to the International side. So in the North America business, as I think I mentioned in my comments earlier, we're down a little under 4%. In international, excluding the currency impacts, we were down, I think about 6% to 7%. So those are the underlying changes in the core mailing business, in the equipment sales number. The DMT number or Production Mail numbers would have some currency effects in there as well.

Okay. That's very helpful. But nonetheless, we're looking at continued declines in that installed base. As we look into 2013, and I know it's early to talk about '13, but as we look into next year and given what we've seen in terms of placements, is it fair to assume that the recurring revenue streams are set to continue to decline in that mid-to-high single digit rate?

What we pointed to, I think, is that those rates of decline in the recurring revenue streams are starting to moderate. And our expectation is that, assuming we achieved our sales objectives that we would continue to see those moderate. In part because we've moved through a turn of the lease base, but also the effects of other products and services. I think you'd see that support services was flat on a constant-currency basis. It was actually positive in North American Mailing because of the placement of our shipping solutions. So we have some products and revenue opportunities to continue to address those recurring revenue streams. But there is an underlying change in the meter base that will continue to be something that we're going to work at over time.

Can you expand on that last comment in terms of the turn in the meter base? Do you mean you're seeing an increase amount of leases up for renewal or upgrade?

No, my last comment was about support services, which was professional services, was positive and that was in part because of placement of our shipping systems, which have a good bit of professional services associated with them.

So can you comment on the outlook for upgrades within that base and the timing of those contract renewals or runoffs?

We, obviously, will talk about '13 come the fourth quarter earnings announcement, but we don't see significant changes in the base as we go forward or the opportunity in the base as we go forward.

Okay. And my last question was more of a bigger picture strategy question, and this was touched on a little bit before. I'm trying to understand whether or not you're looking at more significant strategic action for Software or PBMS. I think most people would look at Software as a business as a hole that's consistently underperformed at pretty low profitability. What are you driving to change the performance of that business and is there a timeframe where you'd consider potentially selling some of these other businesses if you can't accelerate the growth and start to generate better returns in those businesses?

Chris, as I mentioned earlier, we do look at all of these all the time, and we look at them very closely, and we'll always look to make the right decisions on how we maximize the value of the business. The Software business, there are portions of it, a product called Spectrum, which is accelerating very well. It's a new product. So we look at the -- what are the new growth initiatives that are in the business and how will they perform over an extended time period. As we mentioned previously in the PBMS business, the print outsourcing is just beginning in that business and the expansion of our document processing services. But we look at those against the long term and the market and determine whether we think they are a best fit within our portfolio or whether they would be maximized best elsewhere. So we continuously do that and will continue to.

We have Steve Searl with Conning Asset Management.

With respect to the Volly product, can you elaborate on the comment in your press release that you've deferred its availability until 2013, you're adding additional, I think, software features into that, could you elaborate on that?

Sure. As we have said since the beginning that Volly is really a significant change in the way people work and will work going forward, and that means it will continuously evolve. And the first requirement for that product to be successful is to have sufficient documents available to ensure that there is a real user experience and people can begin to see the benefit. What we're doing is, we look at the product as saying -- we have, as I also mentioned, signed 60 large billers with 6,500 brands, but now you have to have a structure that infuses those easily. And as we look at the processes around how we do that, we're looking at how to make that easier, simpler and quicker to bring people on so that we can get the density. And we felt we need to get some of those changes in place to create that density capability. Because if we launch the product without documents, it's going to not have the reputation that it needs. And so we have always said that, we will launch it when we believe there's enough documents for positive usage experience. Now at the same time, I also mentioned some of the financial services companies that are coming on board. But again, we have to get the connectors in place to bring those documents in.

Okay. So at this point, you have not booked any revenues related to Volly?

No. And we had not forecasted even with a launch of anything meaningful in revenues this year or next year.

Okay. Changing subject to your cash balances, can you tell us how much of that was domestic versus offshore at 9/30?

Sure. At 9/30, I think we had about $460 million of cash on the balance sheet. About just under $150 million of that was outside the U.S. and the rest was in the U.S., some held as capital in our bank and other available to us.

Okay. And were there any commercial paper balances at the end of the quarter? And were you active in the market in the quarter?

We had 0 commercial paper balances at the end of the quarter. We do utilize commercial paper interim periods in the quarter.

Okay. And is it too early to make some initial comments on your plans for your June debt maturity next year?

We looked at that and have been taking steps to look at how we would manage that going forward. In fact in October, we did issue a $220 million of term notes to that with banks. Those are relatively short duration. They're consistent with our bank line term and at favorable rate. So we view that as partly available for payment of our bonds due in 2013.

Can you just refresh me, what is the term of your bank line?

It's through 2016, 3-plus years.

So these notes should mature in '16?

Yes, I think late '15 and '16.

Ananda Baruah of Brean Capital. Ananda Baruah - Brean Murray, Carret & Co., LLC, Research Division: Mike, I guess of the $350 million or so that's -- the $300 million that is actually inside U.S., do you know for sure how much of that you have access to?

Yes. There's about $150 million of it that we would say is being used either as capital for the bank or we have other commitments within our businesses for. So that would leave the balance available. Ananda Baruah - Brean Murray, Carret & Co., LLC, Research Division: Okay, got it. That's helpful. And then I guess, can we just -- I just want to quickly run back to your comments, the incremental investment comments on Volly, I think you said there was $3 million incrementally year-over-year, and I think you said for ecommerce you've invested $3 million, I guess, can you just give us what the year-to-date investments are for Volly in total and then maybe the year-to-date investments in ecommerce, and then what should we expect as run rate as we go into '13 for each of those because it sounds like ecommerce is kind of -- is growing, becoming...

Yes, I would say Volly is in line with the guidance that we gave at the beginning of the year. We had about $17 million of cost through the first 3 quarters and that's I think consistent with the run rate that we talked about in our guidance range. With respect to ecommerce, that spend in the third quarter was really a ramp-up of spend as we went to launch with the product or going to launch with the product and beginning to expand it. So while we did some investment early in the year, we increased that ramp, particularly around the distribution network in the third quarter. Obviously, we are looking to begin to generate revenue with ecommerce business, and that would help cover the cost as we go forward. Ananda Baruah - Brean Murray, Carret & Co., LLC, Research Division: Got it. I mean, do you think that can be a breakeven at some point in 2013 or is it still going to be a net investment?

Obviously, it depends upon the rate of adoption, but we anticipate that being a net contributor in '13.

There are no further questions.

Thank you for your participation. And I just like to conclude by saying, we continue to take actions to drive sustainable long-term growth for Pitney Bowes and our shareholders, and we're focused on positioning the company to succeed in the changing market landscape. Thank you and have a great day.

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