ST. PAUL, Minn., July 31 -- Deluxe Corporation reported second quarter diluted earnings per share (EPS) of $0.63 on net income of $32.6 million. EPS for the second quarter of 2007 was $0.69 on net income of $36.0 million. The quarter's results reflect more than expected economic softness in the Small Business Services segment, partly offset by lower performance-based compensation and continued progress with its cost reduction initiatives.

The Company also stated that yesterday it closed its previously announced acquisition of Hostopia.com (TSX: H). In accordance with the rules of the Toronto Stock Exchange, the effective date of the merger required to complete this transaction will be August 6, 2008.

"We are disappointed with our revenue performance in the quarter and certainly are not immune to the challenging economic conditions," said Lee Schram, CEO of Deluxe. "Despite these conditions, we remain optimistic about the continued transformation of Deluxe. The Hostopia acquisition will not only provide our customers with high quality web services offerings, but will also provide us with a web-enabled platform to launch our growing suite of business services offerings. In addition, we launched ShopDeluxe at the end of the quarter which is our new state-of-the-art e-commerce shopping site."

Second Quarter Performance

Revenue for the quarter was $367.7 million compared to $399.9 million during the second quarter of 2007. Small Business Services revenue was $18.6 million lower than the previous year driven primarily by economic softness. Financial Services revenue was down $7.9 million from the previous year due primarily to anticipated lower revenue per order while Direct Checks revenue decreased $5.7 million due to lower order volume.

Gross margin was 62.0 percent of revenue compared to 64.3 percent in 2007. Reductions in manufacturing costs from production efficiencies were more than offset by the lower revenue per order in Financial Services, an unfavorable shift in product mix and higher delivery-related costs mostly from fuel surcharges.

Selling, general and administrative (SG&A) expense decreased $23.0 million in the quarter. The decrease was driven by lower performance-based compensation, benefits from cost reduction initiatives and lower amortization of acquired intangible assets. As a percent of revenue, SG&A decreased to 45.3 percent from 47.4 percent in 2007.

Operating income was $61.3 million, compared to $67.5 million in the second quarter of 2007. Operating income was 16.7 percent of revenue compared to 16.9 percent in the prior year. The decrease in operating margin was driven primarily by the revenue decline, an unfavorable shift in product mix and higher delivery-related costs.

Net income decreased $3.4 million and diluted EPS decreased $0.06, driven by the lower operating income partially offset by lower interest expense due to a lower debt level.

Second Quarter Performance by Business Segment

Small Business Services revenue was $211.5 million versus $230.1 million in 2007. The decline was due to soft economic conditions and lower check volumes in Canada due to sales generated in 2007 by a government mandate requiring a new check format. Operating income decreased to $29.1 million from $30.0 million in 2007.

Financial Services revenue was $110.0 million compared to $117.9 million in 2007. Revenue per order was down in line with the Company's expectation. Second quarter order volume was down only 1.3% compared to last year. Operating income decreased to $18.8 million from $23.2 million in 2007.

Direct Checks revenue was $46.2 million compared to $51.9 million in 2007. Second quarter order volume was down due to the continued decline in check usage and advertising response rates. Operating income was $13.4 million compared to $14.3 million in 2007.

Year-to-Date Operating Cash Flow Performance

Cash provided by operating activities for the first six months of 2008 totaled $66.8 million, a decrease of $37.9 million compared to last year. The expected decrease in 2008 primarily relates to lower earnings and higher payments in the first quarter for 2007-related incentive compensation, partially offset by lower income tax payments and benefits from working capital initiatives.

Business Outlook

The Company stated that for the third quarter of 2008, revenue is expected to be between $367 million and $374 million, and diluted EPS is expected to be between $0.56 and $0.60. For the full year, revenue is expected to be between $1.515 billion and $1.535 billion, and diluted EPS is expected to be between $2.52 and $2.62. The Company also stated that it expects operating cash flow to be between $195 million and $205 million in 2008 and capital expenditures to be approximately $30 million.

"The importance of our transformational efforts have become increasingly clear as we see the impact the economy is having on our core small business checks and forms products," Schram stated. "Last week we completed another small strategic acquisition of a business social networking company called PartnerUp. Our recent acquisitions, including PartnerUp, Hostopia, Logo Mojo and the Johnson Group, begin to shift our portfolio from traditionally mature, print related markets in decline to business services markets that are growing. We believe that building out our offerings in these new spaces while investing in organic growth opportunities and remaining focused on our cost reduction initiatives will lead to sustainable top and bottom line growth for Deluxe in the medium term."

The Company also stated that its full year outlook includes a contribution from Hostopia and PartnerUp of approximately $15 million of revenue, $2 million of EBITDA and a diluted loss per share of $0.08 due primarily to estimated amortization associated with purchase accounting and interest expense. In addition, a previously planned price increase in Financial Services will go into effect early in the fourth quarter. Finally, the Company is undertaking a deeper review of its small business cost structure in light of recent business trends. Additional charges and the corresponding savings which may occur once the review is completed are not yet reflected in the current outlook or the Company's $225 million cost reduction target.