Yahoo Finance Deluxe Corporation (NYSE:DLX) Q1 2024 Earnings Call Transcript
Deluxe Corporation (NYSE:DLX) Q1 2024 Earnings Call Transcript May 1, 2024
Deluxe Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Brian Anderson: [Call Starts Abruptly] Before we begin and as seen on the current slide, I'd like to remind everyone that comments made today regarding management's intentions, projections, financial estimates, and expectations of the Company's future strategy or performance are forward-looking in nature as defined in the Private Securities Litigation Reform Act of 1995. Additional information about factors that may cause our actual results to differ from projections is set forth in the press release we furnished this afternoon, in our Form 10-K for the year ended December 31, 2023, and in other company SEC filings. On the call today, we will discuss non-GAAP financial measures, including comparable adjusted revenue, adjusted and comparable adjusted EBITDA and EBITDA margin, adjusted and comparable adjusted EPS and free cash flow.
In our press release, today's presentation and our filings with the SEC, you'll find additional disclosures regarding the non-GAAP measures, including reconciliation of these measures to the most comparable measures under U.S. GAAP. Within the materials, we are also providing reconciliations of GAAP EPS to comparable adjusted EPS, which may assist with your modeling. Finally, as an important additional note, this evening's presentation reflects results aligned to our updated segment reporting structure, as outlined in our filings concurrent with our December Investor Day presentation and today's 8-K filing, which provides unaudited recast business segment revenue and adjusted EBITDA information for both 2022 and 2023, including quarterly details for 2023.
Updated operating segment figures are reported excluding any results from exited businesses for the respective periods, which results from such activities reported separately within the filed materials and detailed further within our segment information and reconciliation of GAAP to non-GAAP measure slides in the appendix of today's presentation materials. Chip will add some detail regarding these updates during his comments this evening. And with that, I'll turn it over to Barry.
Barry McCarthy: Thanks, Brian, and good evening, everyone. Two things before I get started. First, today, I'll be discussing comparable adjusted results for the quarter, which we believe best reflect our ongoing business performance. Later, Chip will discuss our reported consolidated and comparable adjusted figures to give even more perspective. Second, as Brian just mentioned, this is the first time we're reporting on our new segments. We'll also be happy to have follow-up conversations that answer questions that you may have on these updates. We think this new segmentation provides better insight into the Company and our future. Our strategy is clear; invest on relationships, trust and brand built in our Print business to grow the Payments and Data businesses.
Very simply, Payments and Data are our growth drivers, and Print is our cash generator, helping drive Payments and Data's success. On this chart, you can see Print was 57% of revenue, with Payments and Data combined delivering 43% for the quarter. With Q1 combined Payments and Data revenue of $226 million, growing 8.1% with margins of 22%, this is an attractive portfolio of businesses that we think is often overlooked. Our new operating segments should help highlight these businesses. Over the longer term, we expect the combined Payments and Data businesses to reach revenue parity with Print and expect to provide updates annually. Overall, I'm very pleased to report our strong start to 2024. In the first quarter, we delivered growth across every key metric: revenue, adjusted EBITDA, EPS, and margin.
Our adjusted EBITDA expanded at a significantly faster rate than revenue, demonstrating the operating leverage we have now purposely built into the Company. We were also particularly pleased with the significant year-over-year improvement in cash flow. As a result of the strong performance, we're raising our 2024 cash flow guidance and affirming all other full year operating metrics. You will recall accelerated cash flow and profit growth are the key tenets of our overall strategy and North Star program, both of which we outlined during our December Investor Day. We believe the Q1 performance demonstrates our progress. As a reminder, our North Star goal is to unlock $80 million of incremental comparable adjusted EBITDA and $100 million of incremental free cash flow by 2026.
As of the end of Q1, we're making progress on all 12 North Star work streams shown here. Initiatives comprising roughly 2/3 of our targeted $130 million of overall EBITDA improvements are now moving to the execution stage. Recall that the $130 million is aligned to our net $80 million incremental earnings target after factoring for expected secular declines through 2026. Benefit realization will phase in during the remainder of this year and throughout 2025. We expect to see in-year benefits accelerate and remain well positioned to achieve our goals. Now before reviewing our first quarter highlights, I'd like to provide a few comments on the macro economy and key business drivers. First, as we discuss on each of these calls, Deluxe actively monitors trends surrounding overall domestic consumer sentiment, including discretionary spending.
We review economic information from many providers, including the Federal Reserve, card associations and more. Looking at this information alongside our own available data, while it appears consumers still feel inflation pressure, some of the unfavorable spending dynamics between less and more discretionary categories present a year ago appeared to have stabilized a bit. You see this reflected in our Merchant Services performance. Second, our business continues to benefit from our overall One Deluxe go-to-market approach as our growth during the first quarter included new customer wins across each of our reporting segments. Third, trust continues to be a key driver for the Company, and as we have noted, is one of our core values. We were honored to be recognized for the third consecutive year as one of America's Most Trustworthy Companies by Newsweek.
This ongoing recognition is testament to the quality both of our products and services and the commitment of all Deluxers delivering every day for customers. Now to provide some additional details about our first quarter performance. For the quarter, net of business exits, revenue was $529 million, up 1.2% or just over $6 million year-over-year. The combined growth in our Payments and Data businesses more than offset the single-digit secular declines in Print, consistent with our strategy. Importantly, the Company is now in its fourth consecutive year of delivering organic revenue growth, demonstrating that our shift towards a Payments and Data company is working. Total adjusted EBITDA dollars increased 7% from the first quarter of 2023 to $97 million, continuing to reflect robust operating leverage across our portfolio, as noted in my opening comments.
Adjusted EBITDA margins finished the quarter at 18.3%, reflecting an expansion of a full 100 basis points versus the prior year. We remain particularly pleased with the results, helping to demonstrate our progress around continued optimization of our operating expense base and expansion of adjusted EBITDA levels outlined within our North Star execution plans. Moving on to some segment highlights, beginning with Merchant Services. For the quarter, Merchant segment revenue grew 8.3% while adjusted EBITDA dollars grew 16.3% and margins expanded 150 basis points from 2023 on strong processing volumes. We're pleased with the strong performance of this business as we approach the third anniversary of the acquisition on June 1. Since the combination, revenue, profit, operating leverage, and margin have all materially accelerated, further demonstrating the power of our One Deluxe model.
We will continue to leverage our strong bank partner relationships, increasing penetration with integrated software vendors, or ISVs, and direct selling resources. Additionally, we continue to invest responsibly in our differentiated service capabilities, technology and feature enhancements. Moving now to results within the B2B payment segment. While we saw year-over-year declines of 7.7% for B2B, the overall results were largely in line with our internal expectations for the first quarter. As we have shared on previous calls, we're transitioning to a software-as-a-service or a SaaS model, reducing our dependency on one-time non-recurring revenue like software licenses and check imaging devices. This move to SaaS will also reduce our dependence on core transaction processing revenue over time.
This means we are deliberately reducing focus on selling one-time non-recurring products. As we anticipated and as indicated in our first quarter results, the short-term impact has been less revenue but improved margins. During the first quarter, B2B margins expanded 120 basis points, resulting in modest EBITDA impacts despite the drop in revenue. Additionally, we remain encouraged by our growing pipeline, demonstrating strong demand for our newest products. While we shift our focus to SaaS, we will continue to focus on efficiencies across lockbox, leveraging recent site consolidations and other operating improvements. We have continued to win new deals in the lockbox business, helping to offset secular volume pressure and fund the transition to SaaS products.
We have several high-quality deals currently in the implementation phase, and despite some customer delays, we expect these deals to go live later this year. To be clear, we do expect to see revenue, profit, and margin grow simultaneously as the shift towards SaaS unfolds over the next several quarters. We also expect to announce a new leader for this segment in the coming weeks. Moving now to Data Solutions, which delivered particularly strong first quarter results. The core Data Driven Marketing, or DDM business, had a solid quarter, driving segment revenue growth of 34.5% and adjusted EBITDA growth of 46% during the period. These results reflect continued strong demand for customer acquisition marketing activities across our expansive base of core SI partners.
Additionally, Data continues to broaden its portfolio of clients, extending to other attractive non-financial service verticals, including telecom, utility, and smart home technology providers. As we've discussed previously, quarter-to-quarter lumpiness results from the campaign-oriented nature of the DDM business, with customers often shifting planned marketing expense between quarters. Accordingly, we would not expect the levels of growth reported during the first quarter to recur over the balance of the year. Shifting finally to our Print segment. Consistent with our expectations and prior guidance, the Print business experienced a revenue decline of just over 3% to $303 million while adjusted EBITDA margins held at 30%, in line with our outlook and typical first quarter seasonality.
Within the segment, legacy Check revenues remained roughly flat during the quarter at just over $178 million. Total revenue declines were consistent with our expectations for the first quarter, which typically lag sequentially from Q4 holiday-related seasonal strength. Overall, we continue to manage the Print portfolio to maximize cash flow through operating efficiencies, pricing actions and responsible investments. To summarize, our overall first quarter results speak to our transformation and North Star progress. This ongoing performance improvement provides us with a great foundation to deliver our 2024 revenue growth and EBITDA expansion goals. While work remains, our consistent and sustained pace of progress create even greater confidence in our bright future as a Payments and Data company.
Finally, before passing us to Chip, I want to acknowledge and thank all fellow Deluxers who work hard every day to deliver these results for our customers and investors. With that, I'll turn it over to Chip.
Chip Zint: Thank you, Barry, and good evening, everyone. As Barry noted in his opening, we were very pleased with our first quarter progress, particularly our better-than-anticipated cash flow generation and our strong comparable adjusted EBITDA growth during the period. As Brian pointed out upfront, our updated segment reporting reflects the removal of all business exit impacts to both ongoing and re-casted historical operating segment financials. This will allow for a clean view of our segment performance over time, net of any impacts from divested lines of business. The combined impact of the business exits can be seen separately within the historical results of today's 8-K filing as well as within the enterprise-level non-GAAP reconciliations found within the appendix of today's materials and in our past filings.
Importantly, 2024 operating segment results will continue to be reported excluding any impacts from residual payroll business results that may be realized as customer migrations take place over the course of the year. This is consistent with the conversion agreements we executed during the second half of 2023 as we made the decision to exit these businesses. As a result, our total enterprise 2024 results will now incorporate a comparable adjusted revenue figure in addition to comparable adjusted EBITDA and EPS to remove any payroll business impacts incurred from both the current and prior year results. Now with that out of the way, I'll begin today with a bit of additional color around the consolidated highlights for the period before moving on to the segment results, our balance sheet and cash flow progress and updated 2024 guidance.
For the quarter, on a reported basis, we posted total revenue of $535 million, down 1.9%, driven by the impact of our prior year exits but increasing 1.2% year-over-year on a comparable adjusted basis. We reported GAAP net income of $10.8 million or $0.24 per share for the period, improving from $2.8 million or $0.06 per share in the first quarter of 2023. This increase was driven by improved operating results, particularly lower SG&A expense, as well as gains relating to the business exits during the period. Comparable adjusted EBITDA was $96.9 million, up $6.3 million or 7% versus the first quarter of last year. Comparable adjusted EBITDA margins were 18.3%, improving 100 basis points versus the first quarter of 2023. Q1 comparable adjusted EPS came in at $0.72, improving from $0.69 in 2023, primarily driven by the improved operating income results previously noted.
Now turning to our operating segment details, beginning with the Merchant Services business. The Merchant business grew first quarter revenue by 8.3% year-over-year to $96.5 million, reflecting strong Q1 performance, as Barry noted. Segment adjusted EBITDA finished at $21.4 million, improving $3 million or 16.3% versus the prior year, with margins expanding 150 basis points to 22.2% of revenue, mainly resulting from the strong top line growth and our ongoing profit enhancement initiatives. In addition to the highlights Barry covered, the Merchant business also benefited from robust seasonal volumes within the government vertical during the quarter and remains well positioned to continue momentum towards our mid- to high single-digit revenue growth and low 20% adjusted EBITDA long-term outlook.
Turning to B2B payments. As a reminder, our B2B segment includes our treasury management offerings, featuring both our R360 software and lockbox remittance offerings on the AR side in addition to our eCheck and DPX AP disbursement solutions. Results from RDC and other scanner hardware and our fraud and security suite of offerings are also included within this segment. For the first quarter, B2B segment revenues finished at $69.4 million, down from $75.2 million during 2023, consistent with our expectation for Q1 performance. While overall remittance volumes remained fairly stable on a sequential basis during the quarter, the balance of the business was unable to fully offset some non-recurring hardware sales from 2023 and other one-time items, resulting in an overall 7.7% decline year-over-year.
Despite the revenue headwinds within the segment, adjusted EBITDA margins continued to improve, consistent with the focus on operational efficiencies to which we have alluded on our prior two quarterly earnings calls. Margins improved by 120 basis points to 19.2% during the quarter, with adjusted EBITDA dollars declining 1.5% from 2023 to finish at $13.3 million. Despite the expected soft start to the year, we anticipate flat to low single-digit full year revenue growth as we transition to recurring revenues, as Barry discussed. Overall EBITDA margins are expected to improve to the low to mid-20% range over time. Moving on to Data Solutions. This segment rebounded very strongly on both a year-over-year and sequential basis, delivering strong results for the first quarter.
Data revenues finished at $59.7 million for the quarter, reflecting a sequential increase of more than $15.5 million from its seasonally lowest fourth quarter, achieving overall growth of 34.5% versus Q1 of 2023. As we noted a quarter ago, the Data Driven Marketing business saw several customers accelerate campaigns into the fourth quarter of 2022, pulling planned data spend from the prior year first quarter comparable results. As Barry referenced, the quarter-to-quarter volatility of campaign timing within this business can make sequential growth rates difficult to predict with great precision. We continue to suggest averaging the two to three most recent quarters' actual results for both revenue and EBITDA dollars as a good barometer for ongoing segment-level financial performance over the balance of the year.
We remain very encouraged by the recent performance of this segment and believe our mid- to high single-digit longer-term growth guidance remains appropriate from a full year perspective. Data's adjusted EBITDA margins for the quarter improved 200 basis points to 25%, again reflecting campaign timing impacts within the Q1 compare as referenced previously. Adjusted EBITDA for the quarter was $14.9 million, up 46.1% from the prior year period. We continue to have strong confidence in the long-term low to mid-20% adjusted EBITDA rate guidance for this segment. Turning now to our Print businesses. Print segment first quarter revenue was $303.4 million, declining 3.4% on a year-over-year basis. This decline was in line with our secular unit decline expectations across this business with legacy Promotional Solutions revenue driving nearly all the full segment decline as we continue to prioritize stronger margin printed forms and other business essentials.
Adjusted EBITDA margins declined 30 basis points year-over-year to 30%, continuing to reflect our operating expense discipline and efficiency across cost of goods sold inputs in particular. Consistent with our long-term outlook, for the balance of 2024, we continue to expect to see low- to mid-single-digit revenue declines across the Print segment with adjusted EBITDA margins remaining in the low 30s. Turning now to our balance sheet and cash flow. We ended the first quarter with a net debt level of $1.54 billion, modestly up from our 2023 year-end level while remaining materially lower than the $1.66 billion mark at the end of Q1 of the prior year, consistent with our ongoing commitment to debt reduction as a top capital allocation priority for the enterprise.
Our net debt to adjusted EBITDA ratio was 3.7x at the end of the quarter, also increasing minimally from the 3.6x reported at year-end. As we've noted, our long-term strategic target remains approximately 3x leverage, and the first quarter typically reflects our seasonally lowest cash flow result, which tends to drive slight increases to our reporting leverage ratio relative to the balance of the year. Free cash flow, defined as cash provided by operating activities less capital expenditures, finished at $6.2 million for the quarter, improving by $38 million from the negative results reported during the first quarter of 2023, driven by continued strong working capital efficiency in addition to reduced year-over-year CapEx spend, lower cash incentive payments and improved operating results.
This was a continuation of the stronger-than-anticipated operating cash flow results we have reported since the second quarter of last year, noting that we guided to an expected negative first quarter free cash flow result on our prior earnings call. We continue to expect the first quarter to reflect our seasonally lowest cash flow results, inclusive of payments for annual license and maintenance expenditures, employee compensation payments, and other items. As a result of this first quarter performance and our updated forecast, we are raising our full year free cash flow guidance range, as Barry alluded within his opening remarks. We remain very pleased with our overall operating cash flow generation during recent quarters and our ability to continue our delevering path consistent with our clear capital allocation priorities.
As an additional note regarding our overall capital structure, I wanted to take a moment to provide a bit of additional color as to the status of our present debt maturities, summarized on the current slide. As we announced during the first quarter, in mid-March, we entered into an accounts receivable securitization facility with a capacity of up to $80 million. Through the first quarter, we have drawn approximately $65 million on the facility, directing these funds towards prepayments against the balance of our 2024 required quarterly term loan amortization. This AR facility provides us two primary benefits relative to our prior capital structure. First, the 36-month agreement terminates in the first quarter of 2027, and as such, acts to shift out as much as $80 million of maturities to the column labeled 2027 plus on the current slide.
Secondly, the base rate plus 140 basis points of interest on the new facility provide rate advantage borrowing against the balance of our 2026 variable rate debt. As shown here, our current revolving credit and term loan facilities carried June of 2026 maturities, while our 8% bonds mature in 2029. We remain very comfortable with our present levels of available liquidity and look forward to providing additional updates on any capital structure developments going forward. Before turning to guidance, consistent with past quarters, our Board approved a regular quarterly dividend of $0.30 per share on all outstanding shares. The dividend will be payable on June 3, 2024, to all shareholders of record as of market closing on May 20, 2024. I'm pleased to update our 2024 guidance, reaffirming our estimates from our December Investor Day and raising our free cash flow range this evening.
As Barry noted previously, we continue to make strong progress in line with our original expectations across all key North Star initiatives. Forecasted realization of the implemented work stream impacts noted in Barry's comments are fully reflected within our existing 2024 guidance ranges. Our updated guidance figures are as follows, keeping in mind all figures are approximate and reflect the impact of business exits over the past 12 months: revenue of $2.14 billion to $2.18 billion, reflecting flat to 2% comparable adjusted growth versus 2023. Adjusted EBITDA of $400 million to $420 million, reflecting between 2% and 7% comparable adjusted growth; adjusted EPS of $3.10 to $3.40, reflecting 3% to 13% comparable adjusted growth, and free cash flow of $80 million to $100 million, increased from our prior guidance range of $60 million to $80 million.
Finally, in order to assist with your modeling, our guidance assumes the following: interest expense of $120 million to $125 million; an adjusted tax rate of 26%; depreciation and amortization of $150 million, of which acquisition amortization is approximately $55 million; an average outstanding share count of 44.5 million shares and capital expenditures of approximately $100 million. This guidance is subject to, among other things, prevailing macroeconomic conditions, including interest rates, labor supply issues, inflation, and the impact of other divestitures. To summarize, we are very pleased with the first quarter 2024 performance and resulting increased cash flow forecast. We look forward to continuing the growth and operating leverage momentum throughout the balance of the year while remaining focused on executing against our broad North Star initiatives and continuing our organic revenue growth, EBITDA expansion, and deleveraging journey.
Operator, we are now ready to take questions.
See also
12 Most Hated Countries in Europe and
25 Cities with Tallest Buildings in the World.
To continue reading the Q&A session, please click here.
