HAWK

Blackhawk Network Holdings, Inc. (HAWK)

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Blackhawk Network Holdings, Inc. (HAWK)

Q3 2013 Earnings Conference Call

October 10, 2013 10:00 AM ET

Executives

Patrick Cronin - Vice President, Finance and Investor Relations

Bill Tauscher - Chairman and Chief Executive Officer

Talbott Roche - President

Jerry Ulrich - Chief Financial Officer & Chief Administrative Officer

Analysts

Sara Gubins - Bank of America

Bryan Keane - Deutsche Bank

Ramsey El-Assal - Jefferies

Tim Willi - Wells Fargo

David Chiaverini - BMO Capital Markets

Ashwin Shirvaikar - Citi

Presentation

Operator

Good day, ladies and gentlemen and welcome to the Q3 2013 Blackhawk Network Inc. Earnings Conference Call. My name is Jasmine and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. If you have any objections please disconnect at this time.

I would now like to turn the conference over to your host for today, Mr. Patrick Cronin, Blackhawk’s VP of Finance and Investor Relations. Please proceed.

Patrick Cronin

Alright, thank you operator and good morning everyone. Quick correction there actually Blackhawk for those of you heard black rock, Blackhawk Network’s earnings call. And with me today to discuss Blackhawk’s third quarter 2013 earnings results is Bill Tauscher, our Chairman and CEO; 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 operating or financial performance, and 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 and 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

Well, thank you Patrick and good morning everybody. I would like to begin by highlighting a few items from our third quarter earnings release and then commenting on our progress on our fiscal 2013 goals. For the third quarter, revenues totaled $206 million, which was an increase of 25% over the third quarter from last year. The increase was the result of three factors.

First, load value increased 18% for the quarter. Second, we had a 58% increase in program, interchange, marketing and other fees. Now, this was primarily the result of increased marketing revenues from both U.S. and international card partners promoting their gift card programs as well as additional backend fees from open-loop gift products. Just as a reminder, the majority of marketing revenues are pass-through that offset the sales and marketing expense line. In fact, marketing expense for the third quarter, net of marketing revenues, declined 300K year-over-year. The third factor in our revenue growth was a 53% increase in product revenues with half the increase coming from Cardpool and the remainder from our telecom handset and card printing businesses.

Turning to load value, third quarter loan value growth was a significant improvement over Q2 driven by continued strong growth in open-loop gift card sales and a rebound in closed-loop gift card sales in the U.S. International load value continued to grow at just over double the U.S. growth rate. As a reminder, we did exit the prepaid telecom wholesale business just after the end of the third quarter last year. Excluding the impact from this exit, load value sales actually grew 22% in the third quarter.

Adjusted operating revenues, which are total revenues net of commissions and fees paid to our distribution partners, grew 34% for the quarter to $101 million. On a GAAP basis, net income for the third quarter declined year-over-year from $3.1 million to $2.4 million due primarily to the inclusion in 2012 results of a $2.6 million after-tax non-cash credit adjustment to the liability for the contingent portion of the Cardpool acquisition purchase price. In the third quarter this year, the contingent liability adjustment resulted in a $200,000 after-tax, non-cash credit or $2.4 million less than last year. Excluding this impact and the impact of other non-cash charges that Jerry will review later on the call, adjusted net income was $4 million for the quarter, up from $1.7 million in the third quarter of 2012.

GAAP diluted earnings per share was $0.04 in the third quarter of 2013 compared to $0.06 for the third quarter of 2012. Year-to-date GAAP diluted earnings per share was $0.12 as compared to $0.23 for the third quarter of 2012 year-to-date. Excluding the impact of non-cash items, however, adjusted diluted earnings per share increased by $0.05 from $0.03 in the third quarter of 2012 to $0.08 for the third quarter of 2013. For the third quarter, year-to-date adjusted diluted earnings per share was $0.28 compared to $0.25 in 2012.

We continue to make really good progress on our growth initiatives. I would like to quickly highlight accomplishments in our international regions, and then I will turn it over to Talbott, who will provide an update on progress in the U.S. Many of you saw the announcement on the sale of Safeway’s Canada division to Sobeys. Blackhawk is also the gift card provider for Sobeys and we are coordinating to ensure a smooth transition to Sobeys operations. This also provides us with an opportunity to integrate certain Safeway best practices into Sobeys overall. Last quarter, we announced Home Depot as a new U.S. distribution partner and now we have signed Home Depot in Canada. We expect to have 180 stores launched by the end of October.

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