Search marketing has been a big source of new business for Deluxe. Source: Deluxe.
Anyone who has a checking account is probably familiar with Deluxe Corp. (DLX +0.83%), the company that for decades specialized in printing the paper checks that hundreds of millions of Americans used as their primary payment method. Over time, though, the rise of electronic payment methods has caused a steady decline in Deluxe's core check-printing business, and that required the company to embark on an aggressive strategy to diversify its business into higher-growth areas. Coming into Thursday morning's second-quarter financial report, Deluxe shareholders were fairly optimistic about the company's ability to grow, and the company managed to exceed most of their expectations with an even stronger quarter. Let's take a closer look at Deluxe's latest results and why it believes things could look even better in the future.
Deluxe goes beyond checking
Deluxe's second-quarter results showed the extent to which the company has successfully executed its long-term strategy. Revenue came in at $435.9 million, up 7.5% from the year-ago quarter and topping the 5% growth rate that most investors were expecting from the company. Net income climbed 12% to $56.1 million, and that produced adjusted earnings of $1.13 per share, which easily exceeded the $1.07-per-share consensus forecast among those following the stock.
Yet where Deluxe's strategic plan really shows up is in its segment numbers. The Financial Services segment produced the most substantial sales growth, with revenue gaining 19%. Deluxe attributed the gains to growth in demand for marketing solutions and other services, and the acquisition of Wausau Financial Services last October also helped bolster the segment's performance. Pricing increases and cost reductions helped send segment operating income up 14%. By contrast, the Direct Checks segment, which has become the smallest of Deluxe's three major businesses, continued to see revenue fall, with a 5% drop in sales driven by the secular decline in check usage. Operating income for the segment rose 9%, though, as greater reorder activity helped offset volume declines.
The Small Business Services segment is where Deluxe has truly put its biggest effort, as it brings in about two-thirds of the company's revenue and represents about half of its operating income. Success in marketing solutions also helped in this part of Deluxe's business, and the company's online Safeguard distributor also contributed to a 5.5% rise in sales for the unit. Operating profit declined, but much of the cost was due to spending on marketing and other initiatives to generate greater revenue.
CEO Lee Schram was happy with Deluxe's performance. "We continue to execute our transformation strategy," Schram said, "and are pleased with the growth we see in our marketing solutions and other services product categories." The CEO further said that he's confident Deluxe's current strategy will foster further growth.
Deluxe looks forward with optimism
Deluxe's results were strong enough that the company boosted its guidance for the full 2015 year. Deluxe now expects revenue of $1.76 billion-$1.78 billion, which is at the upper end of its previous range, and adjusted earnings of $4.50-$4.60 per share are between a nickel and a dime better than previously forecast and exceed the consensus forecast among shareholders. For the third quarter, Deluxe expects to make $1.10-$1.15 per share on sales of $439 million-$447 million, which is roughly in line with what investors were already expecting.
One driver of Deluxe's improving financials has been a dramatic decrease in interest expense. The company paid less than half the amount of interest in the second quarter than it did in the year-ago quarter, and that singlehandedly helped overcome a drop in operating margins related to higher overhead costs to provide a net-margin boost.
Still, the most impressive part of Deluxe's transformation has been the extent to which it adopted new business lines. Checkwriting has clearly been in decline for years, and the challenge of admitting the loss of its core business and seeking more lucrative avenues for growth elsewhere is always difficult. Deluxe's success is particularly noteworthy in this light.
Deluxe shareholders were pleased with the results, sending the stock up by as much as 7% in the opening minutes of the morning session following the announcement. The company still has further to go before its transformation will be complete, but Deluxe has already succeeded where many companies in similar positions have failed, and its strategic vision is already paying dividends.
