HAWK

Blackhawk Network Holdings, Inc. (HAWK)

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Blackhawk Network Holdings Inc (HAWK)

Q2 2013 Earnings Conference Call

July 18, 2013 10:00 am ET

Executives

Patrick Cronin – VP of Finance and Investor Relations

Bill Tauscher – Chairman, Chief Executive Officer

Talbott Roche – President

Jerry Ulrich – Chief Financial & Administrative Officer

Analysts

Julio Quinteros – Goldman Sachs Sara Gubins – Bank of America

Mike Grondahl – Piper Jaffray

Ashish Sabadra – Deutsche Bank

Wayne Johnson – Raymond James

David Chiaverini – BMO Capital Markets

Ramsey El-Assal – Jefferies

Gil Luria – Wedbush Securities

Presentation

Operator

Welcome to Blackhawk Network’s Second Quarter Earnings Conference Call. For those on the audio only dial-in, your lines have been placed on listen-only until the question-and-answer session. This call is being recorded. If you have any objections please disconnect at this time.

I would now like to turn the call over to Mr. Patrick Cronin, Blackhawk’s VP of Finance and Investor Relations. Please go ahead.

Patrick Cronin

All right. Well, thank you operator and good morning everyone. With me today to discuss Blackhawk’s second quarter 2013 earnings results is, Bill Tauscher, our Chairman and Chief Executive Officer, Talbott Roche, our President and Jerry Ulrich, our Chief Financial & Administrative Officer.

Before I turn the call over to Bill, I’d like to remind you that management will make statements during this call that include forward-looking statements within the meaning of Federal Securities Laws. Forward-looking statements contain information about future and operating or financial performance. Forward-looking statements are based on our current expectations and assumptions that involve risks and uncertainties that could cause actual results or events to be materially different from those anticipated.

However, we undertake no obligation to update or revise any such statements, as a result of new information, future events, or otherwise. For a list of description of those risks and uncertainties, please see our filings with the SEC.

And with that, I’d like to turn the call over to Bill Tauscher.

Bill Tauscher

Thank you, Patrick, and good morning everybody. Let me begin by highlighting a few key items from our earnings release and commenting on our progress toward our fiscal 2013 goals. For the second quarter, revenues totaled $226 million, an increase of 19% over the second quarter last year. The increase was the result of four key factors. First, load value increase 11% for the quarter, which I’ll comment on further in a moment. Second, we had a 20-basis point increase in commissions and fees as a percentage of load value. This was the result of favorable product and geographic mix of sales.

Third, we had higher fee income on our program-managed Visa gift products in the U.S. due to volumes, and in Australia related to the timing of other fees under our issuing bank contract. And fourth, we grew product sales which includes the Cardpool gift card exchange, telephone handset sales, and card printing services by 37% year-over-year in the second quarter.

Our load value growth was 11% for the quarter, a decline from recent quarters. Several factors that we believe were somewhat unique to the quarter contributed to this. Load value for the closed-loop gift card business started slowly this quarter, paralleling Department of Commerce data indicating slow sales at grocery during the early part of the second quarter and announcements by a number of retailers that weather impacted their results during the same timeframe.

In addition, one of our top distribution partners reduced promotional activity for a very low margin program as compared to last year, which adversely impacted growth by approximately 3 percentage points, but had a minimal impact on our revenues and operating margins.

And finally, our exit of the wholesale distribution segment of our prepaid telecom business in late 2012 had a negative 3 percentage point impact on load value growth. Excluding these last two factors, our overall load value growth would’ve been 17% for the quarter. Now, we have seen a rebound in load value growth over the most recent eight weeks, which includes the last four weeks of the second quarter and the first four weeks of the third fiscal quarter, which ended this past Saturday. That rebound is 19% unadjusted or 22% including the exit of the wholesale telecom business.

Now adjusted operating revenues, which is total revenue, net of the commissions and fees paid to our distribution partners grew by 21% for the quarter to $108 million. Distribution partner commissions as a percentage of the commissions and fees for the quarter ended June 15, 2013 increased 2.5 percentage points as compared to the quarter ended June 16, 2012.

Of the total, 1 percentage point increase resulted from the amendment in January 2013 of our distribution partner agreements with Safeway U.S. and Canada that eliminated the previous differential in commissions shared with Safeway as compared to other distribution partners. The remaining increase was due to change in the mix of sales from U.S. distribution partners and between the U.S. and international regions.

On a GAAP basis, net income for the second quarter declined year-over-year from $5.9 million to $3.5 million, reflecting an increase in the non-cash mark-to-market charge for accelerating the expense of partner equity instruments at the time of the IPO. This had a $3.8 million after-tax negative impact.

Excluding the after-tax impact of non-cash charges and credits, as outlined in the earnings release, our adjusted net income grew 18% to $8.6 million for the quarter. This, of course, includes the impact of the increased commission rate paid to Safeway, which Jerry will comment on further later on the call. GAAP earnings per share was $0.07 for both the second quarter and year-to-date periods.

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