DLX - Fundamentals, Financials, History, and Analysis
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Business Overview

Deluxe Corporation (DLX) is a leading provider of trusted payments and data solutions, serving millions of small businesses, thousands of financial institutions, and hundreds of the world's largest consumer brands. With a rich history spanning over a century, Deluxe has evolved from its humble beginnings as a check printing company into a diversified financial technology powerhouse.

Deluxe Corporation was founded in 1915 as the Merchants Service Company, a small check printing business in St. Paul, Minnesota. Initially focusing on printing checks for local businesses, the company quickly expanded its offerings to include other business supplies such as forms and envelopes. In the 1920s, the company rebranded as Deluxe Check Printers, Incorporated, and began expanding its national presence by opening production facilities across the United States. During this period, Deluxe also started providing checks and other financial supplies to banks, establishing a key customer segment that would become increasingly important for the company's growth.

Despite facing significant challenges during the Great Depression, Deluxe managed to persevere. The post-war economic boom of the 1950s and 1960s saw the company continue its expansion, diversifying beyond its core check printing business into other business services and supplies. This diversification strategy continued in the 1980s and 1990s, with Deluxe making several strategic acquisitions to enhance its capabilities and customer reach. These acquisitions included companies specializing in data-driven marketing, treasury management, and payment processing, helping to transform Deluxe from a check printing specialist into a broader business services and payments provider.

The 2000s brought new challenges for Deluxe as the use of paper checks began to decline rapidly. In response, the company further diversified its product and service offerings, investing heavily in digital and technology-enabled solutions. This strategic shift has allowed Deluxe to maintain its position as a leading provider of business services and payments solutions to small businesses, financial institutions, and major corporations.

Today, Deluxe operates four core business segments: Merchant Services, B2B Payments, Data Solutions, and Print. The Merchant Services segment provides electronic credit and debit card authorization, as well as payment 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, receivables management, and payables automation. The Data Solutions segment delivers data-driven marketing solutions, account switching tools, and business incorporation services. Finally, the Print segment provides personalized checks, business forms, and promotional products.

Deluxe's diverse portfolio of products and services has allowed the company to navigate evolving market dynamics and customer needs. The company's strategic focus on innovation and technology-driven solutions has been a key driver of its success, positioning Deluxe as a trusted partner for businesses of all sizes.

Financial Performance and Ratios

Over the past three years, Deluxe has demonstrated resilience and adaptability in its financial performance. In 2022, the company reported total revenue of $2.24 billion and net income of $65.39 million, with a gross profit margin of 54.0% and an operating profit margin of 9.5%. The company's current ratio stood at 0.93, indicating a solid liquidity position, while the debt-to-equity ratio of 2.87 suggests a moderately leveraged capital structure.

In the latest fiscal year, 2023, Deluxe reported total revenue of $2.19 billion and net income of $26.12 million, with a gross profit margin of 53.2% and an operating profit margin of 9.4%. The company's operating cash flow was $198.37 million, and free cash flow was $97.62 million. The current ratio improved to 0.93, and the debt-to-equity ratio decreased slightly to 2.76, reflecting ongoing efforts to optimize its balance sheet.

Quarterly Financial Highlights

For the third quarter of 2024, Deluxe reported total revenue of $528.4 million, a 1.7% decrease from the prior-year period. However, the company's comparable adjusted revenue, which excludes the impact of divestitures, declined by a more modest 0.7% year-over-year to $527 million. This performance was driven by continued growth in the Merchant Services and Data Solutions segments, partially offset by challenges in the legacy check and business forms business within the Print segment.

Despite the revenue headwinds, Deluxe demonstrated strong operational execution, with comparable adjusted EBITDA increasing by 6.9% to $104.5 million. This translated to a comparable adjusted EBITDA margin of 19.8%, an improvement of 140 basis points compared to the third quarter of 2023. The company's focus on cost management and process optimization initiatives, collectively known as the "North Star" program, has been a key driver of this margin expansion.

Additionally, Deluxe generated $46.7 million in free cash flow during the third quarter, contributing to a $30.2 million year-over-year improvement in free cash flow for the first nine months of 2024. This solid cash flow generation has enabled the company to reduce its net debt position by $45 million sequentially, further strengthening its balance sheet.

The company's net income for the third quarter of 2024 was $8.97 million, while operating cash flow stood at $67.88 million. Free cash flow for the quarter reached $116.50 million, showing significant improvement compared to the prior year quarter. These improvements were driven by pricing actions, cost optimization initiatives, and gains from business divestitures, partially offset by the ongoing secular decline in check and forms volumes.

Segmental Performance

Deluxe's Merchant Services segment continued to deliver strong results, with revenue increasing by 6.3% year-over-year to $93.5 million in the third quarter. This growth was driven by sustained momentum in customer wins, both in the bank partner and integrated software vendor channels, as well as favorable volume trends, particularly in the government sector. Adjusted EBITDA for the Merchant Services segment grew by 2.3% to $17.8 million, with a margin of 19.0%. For the first nine months of 2024, the segment's revenue increased by 7.4%, while adjusted EBITDA grew by 9.9%, maintaining an adjusted EBITDA margin in the low 20% range.

The B2B Payments segment saw a sequential improvement in its performance, with revenue increasing by 0.7% year-over-year to $75.1 million. This was driven by the onboarding of new remittance processing customers and a moderation in the decline of legacy hardware and software sales. Adjusted EBITDA for the B2B Payments segment was $15.3 million, with a margin of 20.4%. However, for the first nine months of 2024, the segment's revenue decreased by 5.0%, and adjusted EBITDA declined by 4.9%, with adjusted EBITDA margins in the low to mid-20% range.

In the Data Solutions segment, revenue declined by 4.5% year-over-year to $61.1 million, as the business lapped a challenging prior-year comparison driven by strong deposit-seeking campaign activity among core financial institution clients. However, the segment's adjusted EBITDA grew by 14.4% to $17.5 million, with the margin expanding to an impressive 28.6%. For the first nine months of 2024, the segment's revenue increased by 6.2%, while adjusted EBITDA grew by 23.6%, with adjusted EBITDA margins in the low to mid-20% range.

The Print segment continued to navigate the secular decline in check and business forms volumes, with revenue decreasing by 2.3% year-over-year to $297.3 million. Despite these headwinds, the segment's adjusted EBITDA margin improved by 60 basis points to 32.8%, driven by ongoing efforts to optimize the company's supply chain and leverage its print-on-demand capabilities. For the first nine months of 2024, the segment's revenue decreased by 3.5%, and adjusted EBITDA declined by 5.3%, maintaining adjusted EBITDA margins in the low 30% range.

Liquidity and Capital Structure

As of the third quarter of 2024, Deluxe maintained a solid liquidity position with $41.31 million in cash and $283.33 million available on its credit line. The company has a $500 million revolving credit facility, of which $209 million was drawn as of Q3 2024. Additionally, Deluxe entered into an $80 million accounts receivable financing facility in March 2024, with $66 million drawn.

The company's debt-to-equity ratio stood at 2.584, reflecting a moderately leveraged capital structure. The current ratio was 0.918, while the quick ratio was 0.825, indicating the company's ability to meet its short-term obligations.

Guidance and Outlook

For the full year 2024, Deluxe has provided guidance for total revenue in the range of $2.12 billion to $2.14 billion, reflecting a decline of 1% to flat on a comparable adjusted basis. The company expects adjusted EBITDA to be between $405 million and $415 million, representing a comparable adjusted growth of 4% to 6%. Deluxe also anticipates delivering adjusted earnings per share in the range of $3.20 to $3.35, which would translate to a comparable adjusted growth of 6% to 11%.

The company's guidance assumes an interest expense of $120 million, an adjusted tax rate of 26%, depreciation and amortization of $165 million (with acquisition amortization of approximately $75 million), an average outstanding share count of 45 million shares, and capital expenditures of approximately $100 million. Additionally, Deluxe expects to generate free cash flow between $90 million and $100 million for the full year 2024.

The company's outlook is underpinned by its continued execution of the "North Star" program, which is expected to drive further operational efficiencies and margin expansion across the business. Deluxe remains focused on strengthening its competitive position, diversifying its revenue streams, and delivering sustainable long-term value for its shareholders.

Recent Business Exits

In June 2023, Deluxe completed the sale of its North American web hosting and logo design businesses. The company is also in the process of exiting its U.S. and Canadian payroll and human resources services business. These exited businesses generated annual revenue of approximately $55 million in 2023. These strategic moves align with Deluxe's focus on core growth areas and operational optimization.

Risks and Challenges

While Deluxe has demonstrated resilience in the face of industry disruptions, the company faces several risks and challenges that warrant consideration:

1. Secular decline in check and business forms volumes: Deluxe's legacy Print segment, which includes check and business forms, continues to face ongoing headwinds from the shift towards digital payments and paperless processes. The company's ability to offset these declines through growth in its other segments will be crucial.

2. Competitive landscape: Deluxe operates in highly competitive markets, with both traditional and emerging players vying for market share. The company's ability to differentiate its offerings, maintain its technological edge, and deliver superior customer service will be critical to its continued success.

3. Macroeconomic conditions: As a provider of financial services and products, Deluxe's performance is susceptible to broader economic trends, including changes in consumer spending, small business sentiment, and interest rates. Adverse macroeconomic conditions could impact the company's revenue and profitability.

4. Regulatory environment: Deluxe's operations are subject to various regulatory frameworks, particularly in the financial services industry. Changes in regulations or increased compliance requirements could increase the company's costs and impact its ability to serve its customers effectively.

Despite these challenges, Deluxe's diversified business model, focus on innovation, and strong execution track record position the company well to navigate the evolving market landscape and capitalize on emerging opportunities.

Conclusion

Deluxe Corporation's rich history, innovative spirit, and diversified product portfolio have been instrumental in its transformation from a check printing company to a leading Trusted Payments and Data solutions provider. The company's focus on driving operational excellence, expanding its high-growth segments, and optimizing its capital structure has enabled it to deliver solid financial performance and position itself for long-term success.

As Deluxe continues to navigate the dynamic payments and financial technology landscape, its ability to anticipate and adapt to industry trends, coupled with its commitment to delivering exceptional value to its customers, will be crucial in driving sustainable growth and shareholder returns.

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