Deluxe Reports 2Q 2013 Financial Results

Deluxe Corporation announced its financial results for the second quarter ended June 30, 2013.

Revenue of $381.4 million was at the high end of the range in the prior outlook and adjusted diluted EPS exceeded the high end of the range in the prior outlook driven by strong operating performance in Small Business Services and Financial Services and lower medical and performance-based compensation costs.

Revenue for the quarter was $381.4 million compared to $371.0 million during the second quarter of 2012. Revenue increased 2.8% compared to 2012, driven by 8.0% growth in Small Business Services. Marketing solutions and other services revenue increased 21.1% compared to 2012 and represented 20.6% of consolidated revenue, up from 17.5% in the second quarter of 2012.

Gross margin was 65.0% of revenue, compared to 65.6% in the second quarter of 2012. Unfavorable product mix and increased delivery rates and material costs in 2013 were partly offset by favorable impacts from price increases and the Company’s continued cost reduction initiatives.

Operating income in 2013 was $82.5 million compared to $73.6 million in the second quarter of 2012. Operating income was 21.6% of revenue compared to 19.8% in the prior year driven primarily by higher revenue per order, continued cost reductions and lower performance-based compensation, partly offset by product mix and increased delivery rates and material costs.

“We delivered another very strong quarter while continuing to advance our transformation,” said Lee Schram, CEO of Deluxe. “Revenue in the second quarter was at the upper end of our outlook, adjusted EPS exceeded our outlook and operating cash flow was strong, all driven by favorable performance particularly in both Small Business Services and Financial Services. Marketing solutions and other services revenue grew 21% over last year and will further benefit from the acquisition of VerticalResponse. Our strong first half of the year positions us well to grow revenue in 2013 for a fourth consecutive year.”

During June 2013, the company acquired VerticalResponse, Inc., a provider of self-service marketing solutions for small businesses, including email marketing, social media, online event marketing, postcard marketing and on-line surveys, in a net $27 million cash transaction. The company employs approximately 110 people and will continue to be based in San Francisco, CA. The acquisition is expected to generate approximately $12 million in revenue during the remainder of 2013 and be approximately six cents dilutive to EPS in 2013 after absorbing acquisition-related amortization expense.

Commenting on the recent VerticalResponse acquisition, Mr. Schram noted, “VerticalResponse accelerates our web-based growth efforts with small businesses, adding valuable online promotional and internet marketing services capabilities. This is a great opportunity for us to strengthen our offerings to small businesses and add a seasoned management team.”

Small Business Services’s revenue was $251.8 million versus $233.1 million in 2012. Revenue was 8.0% higher in the quarter driven by growth in marketing solutions and other services revenue, including the impact of acquisitions, accessories and other product revenue and in checks. The Safeguard distributor, on-line, major accounts, and dealer channels each reported strong growth in the quarter. Revenue growth includes a benefit from price increases. Operating income in 2013 increased to $46.2 million from $38.2 million in 2012.

Financial Services’ revenue was $83.1 million compared to $85.7 million in 2012. The impact of check usage declines offset the benefits of price increases and growth in non-check revenue. Operating income in 2013 increased to $21.6 million from $20.0 million in 2012.

Direct Checks’ revenue was $46.5 million compared to $52.2 million in 2012, primarily driven by lower order volume resulting from the continued decline in check usage, partially off-set by higher revenue per order. Operating income in 2013 decreased to $14.7 million from $15.4 million in 2012.