ST. PAUL, Minn., April 25 -- Deluxe Corporation reported first quarter diluted earnings per share (EPS) of $0.48 on net income of $25 million. EPS for the first quarter of 2005 was $0.78 on net income of $39 million. The revenue growth in Small Business Services (SBS) was offset by declines in Financial Services and Direct Checks, our personal check businesses, resulting in lower net income and EPS.
"First quarter performance met our expectations," said Ron Eilers, CEO of Deluxe Corporation. "The revenue increase in SBS confirms that our growth strategy is taking hold, particularly the initiatives to broaden and deepen our relationships with financial institutions and small businesses. In our Financial Services business, a number of recent contract renewals and new business wins, for example US Bank, support what we said last quarter about increasing our share in this channel. In fact, customer orders shipped in the first quarter were higher than each of the two previous quarters."
First Quarter Performance
Revenue was $411 million compared to $437 million during the first quarter 2005. Revenue in Small Business Services increased by $11 million, or 4.9 percent, driven by both higher revenue per order and a higher number of orders. This increase was offset by lower revenue per order and lower order volume in our personal check businesses.
Gross margin was 62.0 percent of revenue, compared to 65.2 percent in 2005. Lower prices and lower order volume in personal checks, along with higher manufacturing costs in SBS, contributed to the decline.
Selling, general, and administrative (SG&A) expense was flat in the first quarter. Investments to execute the SBS growth strategy were offset by lower amortization expense and synergies resulting from the NEBS integration.
Operating income was $52 million, down from $77 million last year. Operating income included a gain of $5 million from a facility sale during the first quarter of 2006. Operating margin was 12.7 percent of revenue compared to 17.6 percent in the prior year.
Net income decreased $14 million and diluted EPS decreased $0.30 from 2005 due to the lower operating income.
Cash provided by operating activities increased $41 million compared to last year due to the timing of medical and severance benefit payments and lower performance-based employee compensation payments related to 2005's operating performance. Contract acquisition payments were also lower than the previous year.
First Quarter Performance by Business Segment
Small Business Services' revenue increased to $236 million from $225 million in 2005 as a result of early successes implementing the growth strategy that was previously communicated. The number of customer orders and first-time buyers increased, as did revenue per order. Operating income decreased to $12 million from $25 million in 2005, due primarily to planned costs related to executing the growth strategy, a $7 million increase in the allocation of corporate shared services costs, and higher manufacturing costs.
Financial Services' revenue was $117 million compared to $145 million in 2005, primarily the result of both lower revenue per order and lower order volume. As a result, operating income decreased to $20 million from $32 million in 2005. Comparing first quarter 2006 with fourth quarter 2005, order volume was up 5.2 percent.
Direct Checks' revenue was $58 million compared to $67 million in 2005 due to lower order volume from the decline in check usage and lower response rates. Operating income was $20 million, flat compared to 2005 as a result of allocating a larger percentage of corporate shared services costs to SBS and reducing advertising and call center costs. Comparing first quarter 2006 with fourth quarter of 2005, order volume was up 1.8% due to an increase in new customers.
The Company stated that it expects 2006 second quarter diluted EPS to range from $0.52 to $0.56 and full-year EPS to be between $2.70 and $2.80. Deluxe also reiterated that it expects operating cash flows to come in between $240 and $260 million for the year.
"We're starting to see the benefits of our strategy that's focused on serving small business customers and financial institutions," said Eilers. "Our Small Business Services growth initiatives are gaining momentum and will further benefit us as we move into the second half of the year. In addition, as we bring on the financial institution clients we've recently won and realize their full impact, we will continue to gain share in our financial services channel."
Eilers added, "We're excited about our prospects for the rest of the year and the future as we transform our business and grow our presence in the small business arena. I'm confident that Deluxe's new CEO, Lee Schram, has just the right combination of experience, business acumen, and character to lead Deluxe into an exciting future."
WhatTheyThink is the global printing industry's leading independent media organization with both print and digital offerings, including WhatTheyThink.com, PrintingNews.com and WhatTheyThink magazine versioned with a Printing News and Wide-Format & Signage edition. Our mission is to provide cogent news and analysis about trends, technologies, operations, and events in all the markets that comprise today’s printing and sign industries including commercial, in-plant, mailing, finishing, sign, display, textile, industrial, finishing, labels, packaging, marketing technology, software and workflow.