When writing a check was the most common way to pay bills, Deluxe Corp. (NYSE:DLX) had a key presence in millions of people's everyday lives, as it provided the paper checks that they used to manage their finances.
Now that electronic payment systems have started replacing check writing, Deluxe has had to adapt, and coming into Thursday morning's third-quarter financial report, Deluxe shareholders believed that the company was on the right track to diversify away from its check-focused business segments to gain a more sustainable business model. Deluxe's results didn't give investors everything they had hoped to see, but the company is still demonstrating its resiliency in making the most of its new opportunities.
Let's look more closely at how Deluxe did last quarter and what's ahead for the company in the future.
Deluxe puts in a mixed performance
Deluxe's third-quarter results showed that the company is still growing, but that growth wasn't as fast in all areas as some wanted. Revenue grew 6.4% to $439.8 million, falling just short of the $442 million in sales that investors were expecting to see. Net income climbed at a more impressive 28% clip to $56.9 million, 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 after accounting for restructuring and other one-time costs, adjusted earnings of $1.16 per share were $0.03 higher than the consensus forecast among investors.
As we've seen in recent quarters, though, it takes a closer look at Deluxe's individual segments to see just how far the company has come in its transformation. The Small Business Services division saw revenue rise by nearly 4%, and operating income gains of 21% were particularly impressive, as Deluxe managed to boost operating margins by more than 2.5 percentage points and take full advantage of the growth opportunities in areas like website development and hosting, search engine marketing and optimization, and logo design along with customized forms and checks. Price increases helped offset adverse foreign-exchange impacts for the division. The Financial Services segment also contributed to Deluxe's overall growth, with revenue and operating income climbing rising 20% and 22% respectively in light of the purchase of Wausau Financial Services in October 2014.
Meanwhile, Deluxe's well-known check segment once again reflected the secular decline in check writing that financial institutions across the industry have seen in recent years. Revenue fell 7%, and despite nice gains in margins, operating income from the check-printing business declined 4% from the year-ago quarter.
Deluxe CEO Lee Schram once again showed his pleasure at the company's growth. "We delivered a strong third quarter," Schram said, "growing revenue over 6% and delivering double-digit growth in earnings per share." Schram strongly believes that Deluxe can extend its streak of rising sales, cash flow, and earnings-per-share growth in 2016.
What to expect from Deluxe
In particular, Schram pointed to the acquisition of Datamyx announced in the week prior to the earnings report as potentially helping to boost growth going forward. In his words, the provider of integrated information, technology, and analytics "will further strengthen the marketing solutions and other services offerings in our Financial Services segment."
However, the guidance that Deluxe gave wasn't quite as strong as most investors had hoped to see. For the fourth quarter, Deluxe expects adjusted earnings of $1.18 to $1.24 per share, which extends below the current consensus forecast for the quarter. Revenue of $456 million to $466 million would similarly be at the low end of expectations. Deluxe largely narrowed previous full-year 2015 guidance, with revenue expected between $1.765 billion and $1.775 billion, producing adjusted earnings of $4.51 to $4.57 per share.
The company's 2016 guidance should give long-term shareholders some hope for accelerating performance going forward. Deluxe expects revenue to grow 4% to 6% in 2016, and growth in earnings per share of 5% to 8% could end up exceeding the roughly 6% growth rate that investors currently want to see.
Still, Deluxe isn't the only company that has had to reinvent itself. Pitney Bowes (NYSE:PBI) has seen its former specialty of mailing services see a similar decline to Deluxe's check-printing business, and it too has focused on trying to deliver business services to enterprise customers. Pitney Bowes has had a tougher road to recovery than Deluxe, but its experience shows that Deluxe could face competition from companies like Pitney Bowes that are trying to reinvent themselves with a broader enterprise focus.
Deluxe shareholders initially responded negatively to the results, with the stock falling more than 2% in the first half-hour of the morning session following the announcement. Even though it has done an outstanding job of moving beyond a deteriorating check-printing business, Deluxe still has work to do to sustain the growth that investors want to see going forward.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Deluxe. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.