Deluxe Corp. (NYSE: DLX) has faced the monumental task of transforming itself from being the leader of a dying industry to a provider of a much wider range of business services for its client base. So far, Deluxe has done a good job of staying the course with its reorganization efforts, and the result has been higher revenue and profits. Coming into Thursday's fourth-quarter financial report, Deluxe shareholders were looking for continued slow but steady gains in the company's top and bottom lines, and the report largely met those expectations. Let's look more closely at how Deluxe did and what it sees ahead for 2017.
Deluxe finishes 2016 with solid momentum
Deluxe's fourth-quarter results showed the steady progress that the business services provider has seen recently. Sales were up 3.6% to $480.2 million, which almost exactly matched the consensus forecast among those following the stock. Net income was down 9% to $54.2 million, but after making allowances for extraordinary items, adjusted earnings of $1.35 per share were up 7% from year-ago levels and exactly matched what most investors were expecting to see.
Taking a closer look at the numbers, the disparity between Deluxe's traditional check business and its more recent strategic focus areas remained apparent. The small business services segment enjoyed revenue growth of almost 5%, and the financial services unit grew at a 4% rate. However, the direct checks business kept losing ground, seeing sales fall 8% from year-ago levels.
The profitability perspective was similar for each of the segments. Small business services showed the greatest gains in operating income with a 7% rise, and financial services operating income was flat compared to the prior-year period. The direct checks segment, however, saw operating profit fall by more than 11%.
Where Deluxe is getting business is also changing. Previous price increases have helped the business services unit, as well as increased demand for marketing solutions. For financial services, the acquisitions of Data Support Systems and FISC Solutions helped boost the top line. Yet the secular decline in check usage continued to weigh on the direct checks business, and to a minor extent the financial services division.
Deluxe CEO Lee Schram expressed his enthusiasm about the company's results. "We had another successful year of growth, in both our digital marketing services capabilities and financial results," Schram said. The CEO also pointed to rising sales and operating cash flow as signs of success in the company's transformation.
What's ahead for Deluxe?
Deluxe expects more of the same in 2017. In Schram's words, "We believe the strategic investments we made during the year in web services, data-driven marketing solutions, and treasury management solutions put us well on track toward our goal of growing marketing solutions and other services to 40% of our revenue in 2018." The CEO also believes that Deluxe can diversify its customer base to grow further.
Yet Deluxe's guidance fell a bit short of what some investors had hoped to see. The company expects that it will bring in $469 million to $477 million in revenue during the first quarter of 2017, producing adjusted earnings of $1.12 to $1.17 per share. Both figures were slightly less than investors had hoped to see. For the full 2017 year, revenue of $1.935 billion to $1.975 billion could produce adjusted earnings of $5.10 to $5.30 per share, and those figures are more in line with the prior expectations that those following the stock had already set.
Deluxe shareholders weren't entirely happy about that guidance, sending the stock down 2% in morning trading following the announcement. However, the extent to which Deluxe has already avoided what could have been cataclysmic problems related to the steady decline of its check-writing business speaks to its success, and conditions look promising for further fundamental growth in 2017 and beyond.
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