Deluxe Corporation (NYSE:DLX) is a leading provider of technology-enabled solutions that help businesses pay and get paid, accelerate growth, and operate more efficiently. The company's diverse portfolio of products and services includes merchant services, marketing services and data analytics, treasury management solutions, and promotional products, as well as customized checks and business forms. With a strong focus on innovation and customer trust, Deluxe has transformed itself into a payments and data-driven company, while maintaining its legacy print business as a reliable cash generator.

Business Overview

Deluxe operates four reportable segments: Merchant Services, B2B Payments, Data Solutions, and Print. The Merchant Services segment provides electronic credit and debit card authorization and payment systems and processing services primarily to small and medium-sized retail and service businesses. The B2B Payments segment offers treasury management solutions, including remittance and lockbox processing, remote deposit capture, receivables management, payment processing, and paperless treasury management, as well as fraud and security services. The Data Solutions segment provides data-driven marketing solutions, including digital engagement, financial institution profitability reporting, account switching tools, and business incorporation services. The Print segment offers printed personal and business checks, printed business forms, business accessories, and promotional products.

Financials

In the first quarter of 2024, Deluxe reported revenue of $534.9 million, a 1.9% decrease compared to the same period in 2023. This decline was primarily driven by the impact of business exits, which resulted in a $17 million decrease in revenue. Excluding the impact of these exits, the company's revenue increased 1.2% year-over-year, demonstrating the strength of its core business operations.

The company's net income for the first quarter of 2024 was $10.8 million, a significant improvement from the $2.8 million reported in the first quarter of 2023. This increase was driven by improved operating results, including lower selling, general, and administrative (SG&A) expenses, as well as gains related to the company's business exits.

Deluxe's adjusted EBITDA, a key metric that excludes the impact of non-cash items and one-time events, was $100.5 million in the first quarter of 2024, flat compared to the same period in 2023. Adjusted EBITDA margin expanded by 40 basis points to 18.8%, reflecting the company's focus on operational efficiency and cost optimization.

Segment Performance

Merchant Services: This segment delivered strong performance in the first quarter, with revenue growing 8.3% year-over-year to $96.5 million. Adjusted EBITDA for the segment increased 16.3% to $21.4 million, with margins expanding 150 basis points to 22.2%. The company attributes this growth to customer wins across its market channels, including bank partner relationships and integrated software vendors.

B2B Payments: Revenue in this segment declined 7.7% to $69.4 million, primarily due to reduced lockbox processing volumes and the transition from one-time, non-recurring revenue to a recurring revenue model. However, adjusted EBITDA margins improved by 120 basis points to 19.2%, as the company focused on operational efficiencies and the consolidation of lockbox processing operations.

Data Solutions: This segment rebounded strongly, with revenue increasing 34.6% to $59.7 million and adjusted EBITDA growing 45.0% to $14.9 million. The company attributes this performance to continued strong demand for customer acquisition marketing activities across its financial institution partners and a broader portfolio of clients.

Print: Revenue in the Print segment declined 3.4% to $303.3 million, in line with the company's expectations for secular declines in checks, business forms, and some business accessories. Adjusted EBITDA margins remained strong at 30.0%, reflecting the company's focus on operational efficiency and responsible investments in this cash-generating business.

Liquidity

As of March 31, 2024, Deluxe had $23.5 million in cash and cash equivalents and $252.2 million available for borrowing under its revolving credit facility, providing ample liquidity to support its operations and strategic initiatives. The company's net debt position was $1.54 billion, with a net debt to adjusted EBITDA ratio of 3.7x.

During the first quarter of 2024, Deluxe generated $26.6 million in net cash from operating activities and $6.1 million in free cash flow, a significant improvement from the negative free cash flow of $32.2 million reported in the same period of 2023. This strong cash flow performance allowed the company to continue its deleveraging efforts, with the net debt to adjusted EBITDA ratio improving from 3.8x at the end of 2023.

Outlook

For the full year 2024, Deluxe expects revenue to be between $2.14 billion and $2.18 billion, excluding the impact of the payroll and human resources services business that the company is currently exiting. This represents flat to 2% comparable adjusted growth compared to 2023. The company also expects adjusted EBITDA to be in the range of $400 million to $420 million, reflecting 2% to 7% comparable adjusted growth.

Deluxe's strategic focus is centered on its "North Star" program, which aims to drive shareholder value by expanding EBITDA growth, increasing cash flow, paying down debt, and improving the company's leverage ratio. The company has made significant progress on this initiative, with approximately two-thirds of the targeted $130 million in EBITDA improvements now in the execution stage. Deluxe expects to realize the full benefits of these initiatives by 2026, which should further strengthen the company's financial position and enable it to capitalize on growth opportunities in its Payments and Data businesses.

Risks and Challenges

Deluxe operates in a competitive and rapidly evolving industry, which exposes the company to risks such as technological changes, regulatory changes, and shifts in customer preferences. Additionally, the company's reliance on a limited number of large customers in its Merchant Services and B2B Payments segments could pose a risk if these customers were to reduce or terminate their business with Deluxe.

Conclusion

The company's transformation into a payments and data-driven business, coupled with its strong focus on operational efficiency and cash flow generation, positions Deluxe well to navigate these challenges and continue delivering consistent growth and shareholder value. The company's diversified portfolio of products and services, combined with its trusted brand and customer relationships, provide a solid foundation for future success.

Overall, Deluxe's first quarter 2024 results demonstrate the company's ability to execute on its strategic priorities and deliver consistent financial performance. With a clear focus on growth in its Payments and Data segments, while optimizing its legacy Print business, Deluxe appears well-positioned to capitalize on the evolving needs of its customers and drive long-term shareholder value.