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Edited Transcript of HAWK earnings conference call or presentation 26-Apr-17 9:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Blackhawk Network Holdings Inc Earnings Call

Pleasanton Apr 28, 2017 (Thomson StreetEvents) -- Edited Transcript of Blackhawk Network Holdings Inc earnings conference call or presentation Wednesday, April 26, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jerry N. Ulrich

Blackhawk Network Holdings, Inc. - CFO and Chief Administrative Officer

* L. Talbott Hoskins Roche

Blackhawk Network Holdings, Inc. - CEO, President and Director

* Patrick Cronin

Blackhawk Network Holdings, Inc. - VP of Finance and IR

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Conference Call Participants

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* Andrew Schmidt

* Ashish Sabadra

Deutsche Bank AG, Research Division - Research Analyst

* Bradley Allen Berning

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* David Chu

* Lara Arielle Fourman

Goldman Sachs Group Inc., Research Division - Research Analyst

* Oscar D. Turner

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Pu Chen

Jefferies LLC, Research Division - Equity Associate

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Presentation

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Operator [1]

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Welcome to Blackhawk Network's First Quarter 2017 Earnings Conference Call. (Operator Instructions) This call is being recorded. If you have any objections, please disconnect at this time.

I would now like to turn the call over to Mr. Patrick Cronin, Blackhawk's Vice President of Finance and Investor Relations. Please go ahead.

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Patrick Cronin, Blackhawk Network Holdings, Inc. - VP of Finance and IR [2]

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Okay, thank you, operator, and good afternoon, everyone. Earlier this afternoon, we published our first quarter 2017 earnings release along with a supplemental slide presentation, which contains additional details on Blackhawk's quarterly results, business highlights and financial guidance for fiscal '17. A copy of the presentation and earnings release can be accessed from our Investor Relations website at ir.blackhawknetwork.com.

Joining me this morning to discuss Blackhawk's first quarter results are Talbott Roche, our Chief Executive Officer and President; Jerry Ulrich, our Chief Financial and Administrative Officer; and Bill Tauscher, our Executive Chairman.

Before we begin, we should spend a minute on forward-looking statements. I'd like to remind everyone that management will make statements during this call that are forward-looking within the meaning of federal securities laws. Forward-looking statements contain information about future operating or financial performance. And forward-looking statements are based on our current expectations and assumptions and involve risks and uncertainties that could cause actual results or events to be materially different from those anticipated. Further, such forward-looking statements speak only as of the date of this presentation. We undertake no obligation to update or revise any such statements as a result of new information, future events or otherwise. For a list and description of those risks and uncertainties, please see the safe harbor statement on Slide 2 and the Risk Factors section in our filings with the SEC.

And with that, I will now turn the call over to Talbott.

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L. Talbott Hoskins Roche, Blackhawk Network Holdings, Inc. - CEO, President and Director [3]

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Thank you, Patrick, and good afternoon, everyone. Before we get into the detailed results of the quarter, I'd like to start with a few comments to remind everyone of our strategic focus in 2017 and our commitment to creating shareholder value. First, Blackhawk is focused on achieving its stated 2017 growth target of 22% adjusted operating revenues, 26% adjusted EBITDA and 16% adjusted net income, based on the midpoints of our guidance ranges. We remain well positioned to deliver on these growth targets across our segments. In U.S. retail, we expect return to growth post EMV in our physical retail channel, supported by continued growth from digital channel.

We are entering 2017 with an integrated sales effort in incentives, focused on the retention and upsell into our large enterprise accounts. And in international, we see continued growth from core retail business as well as growth from the newly acquired Grass Roots and the introduction of digital and incentive solutions more broadly across our international regions.

As we diversify our business from retail into digital and incentive channels, we are leveraging common global platforms and a shared content catalog. We expect to gain operating leverage as we scale. Finally, we remain focused on effective allocation of capital and delivering returns solidly of above our weighted average cost of capital.

Moving now to Slide 4 for our Q1 business highlights. Q1 U.S. retail results were down over last year as expected, but were ahead of forecast, and EMV impact was in line with expectations. We are seeing a return to growth in fiscal retail, as remaining restrictions are lifted and all the cards are returned to the fixtures throughout our stores. We continue to work with recently compliant change to eliminate restrictions in all stores and return to best practices, including marketing and the promotion of the popular open loop gift products. We're expanding distribution of our new 5% cash back products and introducing newly signed closed loop brands. Digital sales through the third-party sites as well as our own proprietary e-commerce sites continue to grow at healthy double digits, representing 10% of retail TDV in Q1 2017.

Our incentive segment performed consistent with expectations during the first quarter. We continued to focus on the retention and development of our largest accounts as well as the conversion of new consumer incentive accounts. We saw a strong start to our loyalty points program with Chase rewards. Incentives' volumes through digital channels, including loyalty and e-commerce, grew 55% in Q1. And in 2017, we shifted approximately $4 million of our incentives volume into the international and U.S. retail segment to reflect changes in management responsibilities. Also in Q1 2016, we executed a bank amendment that resulted in a gain of $4.3 million that did not repeat in Q1 '17. Excluding the impact of these items, adjusted operating revenue growth for incentives was 12%.

International performed in line with expectations in the first quarter, growing adjusted operating revenues 172%. Grass Roots integration with Blackhawk Europe is proceeding ahead of schedule. Excluding Grass Roots, organic adjusted operating revenue growth was in the mid-teens with good performance across all regions. We continue to expand the distribution of our original content through all the regions. Included in international segment results is approximately $15 million of adjusted operating revenue and a $500,000 loss at the adjusted EBITDA line, related to the Grass Roots' Meetings & Events business unit, which we intend to sell during the second half of 2017.

Moving now to Slide 5 and its update on EMV. Taking a moment just to comment on the state of fiscal retail and EMV, the impact on adjusted operating revenues and adjusted EBITDA was in line with guidance provided on our February 15, 2017, call. As a reminder, the remaining EMV impact at this point is related to 2 U.S. distribution partners who became compliant in mid-Q4 2016. We continue to work with these partners to eliminate all restrictions, return the high-value open loop cards to the wraps and run promotions that will drive increased consumer awareness and sales. Furthermore, we see strong performance of open loop overall, especially our newly launched 5% cash back product.

On Slide 6, we have Q1 financials versus guidance. This is a comparison of our Q1 actual results relative to the guidance provided on the February 15 call. As I mentioned earlier, higher-than-expected U.S. retail TDV was the primary reason we exceeded the guidance range across all key metrics in Q1. While Grass Roots' Meetings & Events business unit results were excluded from guidance, they are and will be included in actual results until we complete the sale of this unit. Also showed on Slide 6 is the estimated reduction in income taxes payable of $19 million, which was $3 million above our guidance range due to the higher-than-forecast stock-based compensation tax benefits.

The next 2 slides, Slides 7 and 8, review our Q1 year-over-year results. The first is a corporate-level view and the second contains segment-level detail. As expected, year-over-year results were negatively impacted by EMV and lower bank fees on open loop product. Also in 2016, seasonal Easter volumes fell into our Q1 fiscal calendar, whereas it fell into early Q2 this year. As mentioned earlier, the company executed a bank amendment in Q1 2016 in the incentives segment that resulted in a gain of $4 million that did not repeat in Q1 2017. Adjusted net income and adjusted EPS declined greater than EBITDA, primarily due to increased interest expense related to acquisitions.

Turning to Slide 8. For your reference, we included the segment results. Note that beginning this year, we are presenting the segment results with shared expenses, fully allocated to the 3 revenue-generating segments. We will provide a full 9-quarter historical trend of fully allocated segment P&Ls on the IR website in 2 weeks. Also, we are no longer providing TDV for the incentive in international segments, as an increasing proportion of revenues are derived from non-card related services that aren't tied to TDV as they are in our U.S. retail segment.

Moving on to Slide 9 and the expense ratios. The impact of the EMV and the acquisition of Grass Roots drove processing and services expenses and G&A expenses as a percentage of adjusted operating revenue higher in Q1 2017. We, of course, gained expense leverage in the fourth quarter, given the seasonality of the business, and we will also be realizing more synergies in Grass Roots and our other recent acquisitions as integrations continue.

For full year 2017, we are projecting these expenses as a percentage of adjusted operating revenue will decrease to 66.4% versus 67.8% in fiscal year '16, or 140 basis points of expense leverage.

On Slide 10, we show adjusted free cash flow reconciled through adjusted EBITDA. For the March 2017, trailing 12 months' free cash flow is essentially flat. The adjusted EBITDA decrease of $16 million and the increase in CapEx of $12 million during this current trailing 12-month period was offset by the changes in working capital. Also, there was a smaller increase in cash flow from settlement timing due to slower growth in transaction dollar volume.

Moving now to our 201.7 business outlook on Slide 11. Starting with U.S. retail. With virtually all of our U.S. accounts fully EMV compliant, open loop sales continue to rebound nicely, including the 5% cash back Visa product, which we expect to be selling in approximately 15,000 U.S. retail locations in the back half of 2017. We're also focusing on the addition of new, higher-margin original content throughout our network. And we are on schedule to launch 1,800 Target stores as well as target.com in the Q3 timeframe of this year.

Third-party digital volumes continue to grow behind the strength of amazon.com, staples.com and many others. Additionally, Blackhawk's proprietary e-commerce website, giftcards.com, continues to have a very high search ranking and is forecasted for growth at over 40%. For the U.S. retail segment, we are reaffirming our forecast full year 2017 adjusted operating revenue growth in the range of 8% to 19% with a midpoint of 13%. For 2017, this growth is virtually all organic.

In incentives, our focus is on deepening relationships with our existing enterprise accounts and signing significant new prospects currently in our pipeline or in negotiation. We expect organic growth from new consumer and loyalty programs. For instance, beyond the Chase loyalty program launched in Q1, we have 4 additional loyalty programs in our pipeline for launch later this year. And as mentioned earlier, Achievers continues to sign and launch new prospects and is currently ahead of its new business target for the year. For context, Achievers is tracking towards $140 million in gross billings in 2017. In addition, we completed a small consumer incentives acquisition in late Q1. And for 2017, our incentives segment forecast for adjusted operating revenue growth is from 12% to 25% with a midpoint estimate of 18%. Again, this is primarily organic growth in 2017.

In international, Grass Roots enhances our incentives presence in the U.K. and Australia. And we are moving ahead with our plan to divest the Grass Roots' Meetings & Events business, a lower-margin, services-oriented business. Grass Roots' integration will yield significantly enhanced contribution compared to preacquisition, launching our digital and incentives solutions, especially the Achievers' employee engagement platform, into all our international regions is a key focus for us this year.

Finally, we are seeing over 100% growth in newer, smaller markets like Brazil, South Korea and Indonesia. International adjusted operating growth for 2017 is forecasted in the range of 51% to 68%, with a midpoint estimate of 60%. Organic growth for the year is expected to be approximately 20%. We've not factored into these estimates any material FX impact.

Now let's move to Slide 12. I introduced this slide so we could discuss all our efforts around margin expansion. We stated in February that margin expansion is a primary focus for 2017 and going forward, and we are reaffirming our guidance for 2017 that reflects a 60 basis-point expansion in adjusted EBITDA margin. In order to achieve or exceed this target, we have a multifaceted program which covers all aspects of our business. We've talked extensively about a disciplined approach to acquisition integration. That includes key components such as the consolidation of the redundant technology into single global systems and the migration of third-party services onto Blackhawk's owned systems and services. In addition to the announced divestiture of the Meetings & Events business, we will continue to review other lower-margin business units for optimization. We also made it a priority to develop original content that provides higher-margin opportunities across our distribution network.

Finally, we are working cost reductions through productivity enhancements based on new technology and process redesign, along with focused procurement-based savings.

With that, I will now turn it over to Jerry to cover cash flow and our guidance.

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Jerry N. Ulrich, Blackhawk Network Holdings, Inc. - CFO and Chief Administrative Officer [4]

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Okay. Thanks, Talbott. As we indicated earlier, while Q1 came out ahead of our previously provided guidance, the difference is modest relative to the full year. So we are reaffirming our guidance for fiscal 2017 that we provided in February. We also indicated in February that year-over-year comparisons would still be EMV-affected, mostly for the first half of 2017, and also pointed out some nonrepeating items that occurred in 2016 that affect these comparisons.

So first, turning to Slide 13 and the Q2 GAAP guidance. Total operating revenues are forecast to grow 9% to 16%. This does reflect some further rebound from EMV, of course, but also higher growth in the incentives segment for Q2 as compared to Q1 and international growth, including the Grass Roots acquisition. On a GAAP basis, income and EPS include the amortization of intangible assets recorded in the purchase price allocations, other acquisition-related noncash items as well as noncash stock compensation expense.

On Slide 14, we've got our second quarter non-GAAP guidance. But as we described on the February call, we expect EMV will still have some impact on Q2. But overall, AOR growth rates are expected to improve to 17% at the midpoint from 4% in Q1, excluding the Meetings & Events revenue. EBITDA growth will be impacted by the lower U.S. retail volumes and lower program management fee rates on open loop products. In addition, recall that we indicated that for all of 2016, we had about $10 million in incremental bank program management fees related to migrating card portfolios of our acquired entities to our primary issuing bank. $4 million of that occurred in Q1, as we described earlier, and another $4 million occurred in Q2 of 2016, and the remaining $2 million for the year will occur across the second half of 2017.

We also completed the sale of our PayPower product, NetSpend, in the second quarter of 2016, which contributed about $1 million in EBITDA for that quarter with an additional $5 million of EBITDA spread across Q3 and Q4 for 2016. For the second quarter, factoring these items into the year-over-year comparison means that EBITDA is expected to grow 2% at the midpoint, still solid improvement from the 30% decline in Q1.

Adjusted net income declined primarily due to increased interest expense year-over-year. We have included Slides 15 and 16, which reflect the full year guidance and growth rates as we provided on February 15, 2 months ago, so no change from then.

And then finally turning to Slide 17, an update on cash flow and debt. Our free cash flow projection for the year remains in the range of $115 million to $135 million. We are increasing our CapEx forecast modestly to account for some incremental spin for Achievers for some new functionality as well as leasehold improvements that have no net cash outlay due to landlord allowances that cover them, but that are required to be included on a gross basis in the CapEx line and the cash flow statement.

This week, we completed an amendment to our credit facility to increase the debt-to-leverage ratio covenant for Q2 and Q3, which addresses the lower trailing 12-month adjusted EBITDA caused by EMV impacts. We also extended the period to draw the incremental term debt that we have under the facility out to January of 2018. As our debt leverage ratio declines later this year based on the improvements in EBITDA that we expect, we will continue to evaluate stock repurchases versus acquisition opportunities.

And again, as in prior quarters, there's reconciliations in the appendix of all of our GAAP to non-GAAP items.

And with that, I want to turn it back to the operator to open up the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll be taking our first issue from the line of David Chu from Bank of America.

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David Chu, [2]

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So can you just discuss what was in the cooperation agreement with JANA? I know cost efficiencies were an area of focus, but if you can just elaborate a little bit on what else.

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L. Talbott Hoskins Roche, Blackhawk Network Holdings, Inc. - CEO, President and Director [3]

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Sure, David, this is Talbott. Yes, we don't actually give a lot of detail about specific agreements, but it is posted, it's available. In mid-March, we filed a cooperation agreement with JANA, we welcomed 2 new members to our board, who we think are going to be very productive. We have had a series of cost-cutting efforts and/or, I would say, productivity work has been going on since we started doing integrations of our acquisitions. So it is a focus for 2017, it will remain a focus and we have a good program. I think I outlined some of the elements of it that we're going to be enacting and have already been enacting. We're also forming a cost committee that is a piece of our board and we'll have some participation by various board members on that, that will help us through this process.

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David Chu, [4]

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Okay. And you talked about open loop, but can you just provide some color on how closed loop performed, maybe, year-over-year?

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L. Talbott Hoskins Roche, Blackhawk Network Holdings, Inc. - CEO, President and Director [5]

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Yes. So we're continuing to see growth in closed loop in our U.S. retail and -- channel, and that includes physical and digital channels. I recall that in the year-to-date timeframe in the mid- to high single-digit growth rate. We have seen some of our larger accounts who have higher rates of growth, who are doing just excellent marketing and maintaining really good presence with consumers, and others who were coming back from EMV that hadn't been doing as much marketing prior or gearing up with more marketing activity, which has a nice halo effect. Even though some of that marketing has been focused on open loop, it has a nice halo effect on the entire category. So we're happy with the trends and expect to continue to see growth through the remainder of the year.

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David Chu, [6]

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Just lastly. So the kind of rebound in U.S. retail, would you attribute it primarily to marketing? Or is there anything else to call out?

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L. Talbott Hoskins Roche, Blackhawk Network Holdings, Inc. - CEO, President and Director [7]

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Oh, no. I would attribute it to multiple factors, and probably the most -- the important factor is just getting back to normal best practices. And what I mean by that is lifting those restrictions. So when checkers often limited the number of cards in an EMV environment and it took time to get them to stop doing that or they limited the form of tender. Also in some of our larger chains, 2 of our much -- our larger chains, 1 on the East Coast, 1 on the West Coast, they just became EMV compliant in Q4 -- mid-Q4 of '16. So they had to return all the higher denom open loop cards to the rack, and we had to make sure they were fully stocked. In some cases, those cards got lost so we had to send for replacement stock and they became fully in-stock -- in an in-stock condition in the case of one the larger accounts not until late February. So some of this is the blocky attack when you have retail, I've talked about on prior calls. I would say, the -- all of those best practices, making sure you're in an in-stock condition, your restrictions have been lifted. And yes, then getting back to the regular case of marketing, which they pulled back from a bit last year when they were not EMV compliant. But I wouldn't say it's a dramatic uptick of marketing, it's going back to the regular cadence of marketing that they did pre-EMV.

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Operator [8]

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Our next question comes from the line of the Oscar Turner from SunTrust.

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Oscar D. Turner, SunTrust Robinson Humphrey, Inc., Research Division - Associate [9]

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So you guys saw a continued rebound in open loop at 92% of levels in the quarter or 92% of 2015 levels in the quarter, which is above I think the 88% that you talked about in December. So what type of open loop rebounded, relative to 2015 levels, does your full year guidance assume?

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L. Talbott Hoskins Roche, Blackhawk Network Holdings, Inc. - CEO, President and Director [10]

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So I think we were really clear that on the last call, and we are sticking with it, that we're not forecasting a total recovery. Just what we did is we are happy with it bouncing back as far as it did in Q1 timeframe. We've actually said it gets to 94% in our full year guidance, so we're a little ahead of plan right now. But we wanted to just make sure that we saw good cadence and good productivity of sales. We're happy with the trends.

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Oscar D. Turner, SunTrust Robinson Humphrey, Inc., Research Division - Associate [11]

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And then another question on the cost-savings committee. I guess, with the forming of this -- the committee and the margin expansion initiatives that you guys laid out in the presentation, how should we think about possible margin upside over the next few years?

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L. Talbott Hoskins Roche, Blackhawk Network Holdings, Inc. - CEO, President and Director [12]

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Well, our goal is really to have ongoing margin expansion. We like to achieve 100 basis points of margin expansion every year. We have not formally baked that into our guidance yet as we're getting further down the path with integration work that needs to happen with Grass Roots, the consolidation of some of our systems. But we're feeling good about the efforts that are underway and we'll keep you posted.

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Operator [13]

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Our next question comes from the line of the Ramsey El-Assal from Jefferies.

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Pu Chen, Jefferies LLC, Research Division - Equity Associate [14]

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This is Christen Chen in for Ramsey. So firstly, I -- which will be if you could provide a little bit more color on kind of the slowdown in the incentives segment that you all called out in the press release. And does that have anything to do with kind of the you all not raising guidance or any conservatism there?

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L. Talbott Hoskins Roche, Blackhawk Network Holdings, Inc. - CEO, President and Director [15]

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So I think what we did call out is we did make some changes, some allocations out of the incentives segments. So we want to make sure we were clear about that. We had about $4 million of adjusted operating revenues that got pushed out into the international and U.S. segments because that's where that business was being managed, and it was more appropriate to account for it there. We were also lapping a onetime bank amendment as we moved -- last year, we acquired a company who had a card portfolio and we moved it on to our bank agreement, we got a little uptick, it was a synergy, it's really a positive synergy but we only get it once. And so that occurred last year so we're lapping that. So that creates a little headwind at the EBITDA line. I will tell you, we're feeling very good about incentives overall. We have had more success in terms of more deeply penetrating our enterprise accounts on the consumer side, we've actually signed some new enterprise accounts in the telecom category which as you know, or maybe I should say, make sure everybody does understand they're some of the biggest rebaters in the world. We're having success getting our utility customers to move away from using checks, which are less personal and less effective to higher margin prepaid cards and that's been a win for us. And then I mentioned also standing up these loyalty incentive programs later this year. So it is a chunkier -- and I should lastly say Achievers, the employee engagement fees. We really feel good about that because the pipeline they had has been targeting for new business. They were ahead of schedule in terms of signing that because it is a fast platform, you defer a fair amount of those revenues into next year. So I don't want to get people too excited about -- over the performance of the '17 time frame, but it sure makes us feel great about '18. And the success that, that solution is having an acceptance, it's having here in the U.S. market as well as our international regions. So we're really excited about global expansion with that as well. But what I want to say about the incentives business is, unlike the retail business, it is chunkier because it's promotion-driven, campaign-driven. So you can have ups and downs quarter-to-quarter and we've try to explain that and that does happen. That -- so that I hope gives you a little more color as you asked for on the incentives numbers.

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Pu Chen, Jefferies LLC, Research Division - Equity Associate [16]

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Yes, that's super helpful. And also, can you just provide an update on how the Target rollout is performing relative to your expectations? And then maybe along the same lines, how's Whole Foods performing relative to your expectation?

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L. Talbott Hoskins Roche, Blackhawk Network Holdings, Inc. - CEO, President and Director [17]

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Sure, sure, I'd love to, I love talking about our customers. Target is going great. We are very excited. We're very busy, however, printing a tremendous amount of card stock to prepare and fixture designs that are going to be going into stores this summer as well as getting prepared for the target.com launch. I think we mentioned this is a Q3, hopefully, early Q3 launch. And there are a lot of moving parts coming together but we feel great, not only about the logistics that needs to be handled to make a really successful launch happen, but the level of support that Target's bringing to this is really fantastic. I think they understand the value of this category, how to get behind it and use it as a way to drive traffic. And then, of course, we'll have the target.com launch as well, so that will also be additive this year. In terms of Whole Foods, they are just a really great retailer from -- in terms of the demographics that they reach. It's a great fit for gift. So with what I would call very basic, meaning not best practices execution at retail, they are achieving a steep ramp of growth. And I think that is because of the unusually good fit with a demographic that can spend a lot of money on gift cards. Their racks are, in our view, only basic and we have not succeeded yet on convincing them to move to best practices, but that work is still at hand and I think we're all pleased with the preliminary results. Their growth year-over-year is measured in the hundreds of percent, but I want to caution that, that's on a relatively small base. We're also happy with the market basket launch. We talked about them as a smaller retailer that launched last year, and they are also seeing hundreds of percents of increases. So kind of a normal quick ramp you see early in these programs when you install them and it takes time for consumers to find the rack.

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Pu Chen, Jefferies LLC, Research Division - Equity Associate [18]

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Sure, that's great. And so just quickly, I guess, how much of Target are you guys baking into the guidance expectations?

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L. Talbott Hoskins Roche, Blackhawk Network Holdings, Inc. - CEO, President and Director [19]

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As much as we think is prudent.

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Operator [20]

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Our next question comes from the line of Bryan Keane from Deutsche Bank.

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Ashish Sabadra, Deutsche Bank AG, Research Division - Research Analyst [21]

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This is Ashish Sabadra, calling on behalf of Bryan Keane. I -- just quickly, on the loyalty points program. Looks like you've had some good strong start to the chief's award. I was just wondering if you can talk about the prospect pipeline there. How many banks have been signed up? And what's the opportunity for a pipeline there?

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L. Talbott Hoskins Roche, Blackhawk Network Holdings, Inc. - CEO, President and Director [22]

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Yes. Yes. So this is, to us, an exciting new segment of the market. We have been focused on it for the last 2 years because banks don't move quickly. So getting to contract is a -- can be an -- a 12- to 18-month cycle. It seems to be abbreviating as we get some really great reference accounts in our boat. And so we have 4 other banks that we are in the process of launching and -- or will launch later this year as that's what's currently scheduled. And they are large banks but there are also some regionals listed as part of that. We have some very large national card -- a very large national card issuer. And then we have what I would call, some large regional banks as well. But it's a mix of mostly national issuers and a couple of regionals. We are also pursuing some other loyalty point programs, so we -- it doesn't need to be a bank or an FI to have a loyalty reward program. As you know, many airlines and players in the hospitality area have these types of point programs. So we see those as ripe opportunities as well to go in and offer a content from our global rewards catalog as gift cards in eGift in exchange for points.

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Ashish Sabadra, Deutsche Bank AG, Research Division - Research Analyst [23]

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That's great. Just quickly, the second quarter EBITDA guidance. That seems like it's below our in-the-street numbers. Now Jerry went through a couple of line items there in the sense there are a couple of headwinds or difficult comps. So as we think about, like the second half of the year, and some of these onetime items go away and you start getting the benefits from EMV as well as the Target starts to ramp up, should we think about a more normalized EBITDA growth in the back half?

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L. Talbott Hoskins Roche, Blackhawk Network Holdings, Inc. - CEO, President and Director [24]

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Yes. I think that's the right way to think about it. Look, I think Q2 is a little bit of an unfortunate lot of small numbers in that we are looking at a relatively small percent of the total EBITDA for the year, somewhere in the neighborhood of 10% or 12%. We are lapping some onetime events in that quarter. And so when you really look at it, we take $2 million to $3 million to normalize EBITDA relationship with AOR, and so when you think about the context of $238 million to $240 million that we're looking to secure this year it's really not that significant. And I do think that our growth trends, albeit, early in the year, we are a fourth quarter business still, give us great confidence that we can accomplish -- continue to accomplish what we set out to for the full year.

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Jerry N. Ulrich, Blackhawk Network Holdings, Inc. - CFO and Chief Administrative Officer [25]

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I'd add that fourth quarter last year, the EBITDA margin was 30% in a EMV-affected quarter. So you could expect something better than that. We'll be ramping, of course, with Target as Talbott talked about. And then the incremental synergy as we move through the year on the acquisitions from 2016.

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Ashish Sabadra, Deutsche Bank AG, Research Division - Research Analyst [26]

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That's helpful. And a quick housekeeping item. I'm not sure if you disclosed what the acquired revenue was or what the organic revenue growth was in the quarter, if that's -- if there is a way to get the acquisition revenues for the quarter?

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Jerry N. Ulrich, Blackhawk Network Holdings, Inc. - CFO and Chief Administrative Officer [27]

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We did not separate that out for the full business. We did talk about it individually for the full year context. So I think if you go back through, Talbott referred to the organic growth. U.S. retail this year is primarily organic growth as is incentives. International is the piece that has really the Grass Roots component that would be non-organic for most of the year.

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Ashish Sabadra, Deutsche Bank AG, Research Division - Research Analyst [28]

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That's helpful. And maybe one last final question. It's just use of capital, how do you think about M&A? If you can just talk about prospect pipeline for tuck-in acquisition. Or is there even an appetite for a bigger acquisition? That's it for me.

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L. Talbott Hoskins Roche, Blackhawk Network Holdings, Inc. - CEO, President and Director [29]

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Yes. I think from a capital-allocation standpoint, we're being very -- I think Jerry walked through our cash position right now and that kind of speaks for itself. I think we're also, though, looking at -- we're trying to be balanced in our view of how to allocate our capital. We're always -- we look at a lot of different acquisition opportunities, we're very focused on achieving the integration, effective integration, and the leverage with scale as I talked about right now. And we feel good about the acquisitions that we've already made. So there's a real focus in '17 on making sure that we get efficiencies out of that. So that -- I hope that answers your question. Not to say we don't have interest in acquisition, we're just, right now, very focused on the integration of the assets that we've made, and I'll leave it at that.

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Jerry N. Ulrich, Blackhawk Network Holdings, Inc. - CFO and Chief Administrative Officer [30]

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So I would just add, we laid out at the investment conference a pretty strict criteria about our acquisitions. So big or small, we aren't deviating from that. There's a pretty clear definition of what we look at, how we look at it, what hurdles they have to meet, et cetera. And Talbott's right for a number of reasons. Our focus for the next period of time is on our consolidation and integration. But given how long it takes for these things to come to pass and the fact that there is a robust opportunity list, we will continue to look and plan for the future, and of course, always measure that against other alternatives for our capital.

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Operator [31]

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Our next question comes from the line of James Schneider from Goldman Sachs.

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Lara Arielle Fourman, Goldman Sachs Group Inc., Research Division - Research Analyst [32]

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This is Lara Fourman, stepping in for Jim. My first question was just, in terms of the international business growth was triple digits this quarter, and it seems like it's mainly things that should benefit most of the year, like Grass Roots and B2B launches in original content. Why the decision not to raise the international revenue guidance of the year?

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Jerry N. Ulrich, Blackhawk Network Holdings, Inc. - CFO and Chief Administrative Officer [33]

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What you have with the first quarter is we've got the actuals of meeting and events in the quarter. As was covered in our presentation, we actually gave guidance without meeting and events because we aren't quite sure when -- what will happen with it and when. So that was a thing and because we just wanted to have a clearer picture of that ongoing business. But what we're required to do, of course, is report our actual results, which includes meeting and events. So in the quarter, you've got a number that includes meeting and events that has some -- because of its nature of its services business has some substantial AR, not so much from an EBITDA standpoint. And but when we look at our forecast or our guidance, much like we did for the whole year in our previous meetings with you, we didn't include it.

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Lara Arielle Fourman, Goldman Sachs Group Inc., Research Division - Research Analyst [34]

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Got it. And then my second question was just on client wins and losses. Besides Target, just what does the pipeline look like? And then also how many of your top 20 partners are up for renewal in 2017?

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L. Talbott Hoskins Roche, Blackhawk Network Holdings, Inc. - CEO, President and Director [35]

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Right. So we're always looking and signing new accounts. I think in the physical retail -- U.S. retail space, new substantial wins are fewer and further between just because it's a more mature market, but we are regularly signing new digital partners. And I -- as I mentioned also, these loyalty accounts, which frankly roll up into our incentives business. So I'll move back to retail. But I want to make the point that while we're focused on new physical wins, they tend to be fewer and further between the digital wins with more frequency. The renewals, we're constantly doing renewals. We have a very seasoned and significant renewal process. So we spend a lot of time with our existing partners, actively renewing them far in advance of their renewal dates or the expiry of their contracts, so we feel good about that. We have gotten out in front of a lot of our major partners and have them renewed for many years to come. But we're always paying attention to that. And it's a big focus for the sales team and it's a focus I'm involved, to nod at myself.

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Operator [36]

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Our next question comes from the line of Brad Berning from Craig-Hallum.

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Bradley Allen Berning, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [37]

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One follow-up on regards to non-EMV impacted markets. Maybe you could talk a little bit about same-store sales kind of growth. So help us understand kind of like the underlying trends that you're seeing, how were they in the fourth quarter versus this quarter ex EMV-impacted areas of the business?

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L. Talbott Hoskins Roche, Blackhawk Network Holdings, Inc. - CEO, President and Director [38]

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Yes, are you talking about within U.S. retail?

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Bradley Allen Berning, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [39]

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Yes, within U.S. retail, specifically. Yes.

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L. Talbott Hoskins Roche, Blackhawk Network Holdings, Inc. - CEO, President and Director [40]

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Yes. Well, we have really good -- we've seen good growth. It's been in that, I would call it mid to high single-digit growth. We do have one of our larger accounts performing at a low double-digit growth rate. And they are probably the most sophisticated in terms of their marketing and their use of their digital marketing capabilities to target high-value households that are higher buyers of prepaid products and gift cards. So we really like what we're doing there. So that -- but that gives you a sense of it. So that mid- to high single-digit growth.

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Jerry N. Ulrich, Blackhawk Network Holdings, Inc. - CFO and Chief Administrative Officer [41]

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Kind of like Talbott referred earlier, year-to-date. So not in Q1 because we had the Easter shift. But looking at year-to-date after we're clear of that shifting holiday, we're seeing those solid growth rates. Whereas in the fourth quarter, we talked about closed loop being relatively flat, partially affected by EMV, but not exactly determined. So I think we're happy with the trend line we're now seeing on the Closed Gift side, especially.

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Bradley Allen Berning, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [42]

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And then as a follow-up on that, the Easter shift as well as the leap year issue for this quarter, what do you estimate that the impacted drag on that? And how does that impact the following quarter on those shifts from a acceleration/deceleration standpoint?

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Jerry N. Ulrich, Blackhawk Network Holdings, Inc. - CFO and Chief Administrative Officer [43]

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I'd give about a 1% or so shift of TDV from, in this case, from Q1 to Q2.

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Bradley Allen Berning, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [44]

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Leap year by itself would be like a 1% differential, right? And so is the 1% just a leap year comment or you're talking about Easter shift?

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Jerry N. Ulrich, Blackhawk Network Holdings, Inc. - CFO and Chief Administrative Officer [45]

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I don't think the 1 day would really have an impact, because gifting, in particular, is oriented around holidays and special events and occasions, and unless you were born on a leap year day it would not enter into it.

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Bradley Allen Berning, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [46]

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That's a good point. Excellent, appreciate that. And then I'm just going to ask. I pretty much know what I'd get for an answer, but given the press speculation or regards to the competitive issue out there, just want to give you an open mic to say any responses that you want to give?

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L. Talbott Hoskins Roche, Blackhawk Network Holdings, Inc. - CEO, President and Director [47]

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No, I think that there has been -- let me say, there's been recognition in the industry and it's not lost on the parties themselves that there is some industrial logic to activities. But that's been out there, and speculation's been out there for a long, long time. And so I wouldn't read too much into it.

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Operator [48]

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The last question that we have time for today will be from the line Ashwin Shirvaikar from Citi.

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Andrew Schmidt, [49]

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This is Andrew, on for Ashwin. Question on the technology platform integration. I was hoping you could just help us understand the opportunity here. Is it more than just integrating acquisitions and also your just existing underlying systems? Is this a multiyear opportunity? And then, it'll be helpful if we could try to size the opportunity. I know it's early days, but any context around the opportunity here would be helpful.

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L. Talbott Hoskins Roche, Blackhawk Network Holdings, Inc. - CEO, President and Director [50]

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Yes. And I think there's multiple opportunities. So I'll give you an example. We have multiple things happening at once. So one example would be when we've done an acquisition, we've acquired somebody who's doing their processing on a third-party provider, and we have the opportunity then to migrate them on to our in-house processing platform as well as our in-house customer service at a much lower cost. We also will -- when we have instances of multiple platforms, I'll give you another example. eCommerce platform, we've made the decision to collapse them into 1 with the best features and functionality, retaining the multiple URLs so we can maintain the traffic, but we consolidate down to 1 platform, which gives us -- that requires fewer resources, technical resources in which to maintain and develop that platform. So those are the examples of what we mean, when we're moving to single global platform. Another example would be, we have a content catalog that we built up organically for retail that includes over 1,000 brands, and those are gift cards and eGift that are relevant to the retail channel. We have acquired separate catalogs, which we are now creating 1 global catalog so that the on-boarding happens once as opposed to having multiple times for content, that can be then accessed by any of our platforms via a rebate platform, a channel sales platform, a retailer. So you really get the efficiency of having 1 repository for that content and multiple points of entry to get it and access it. So the -- all of those are multiple-year efforts, they require we have a really great technology game. I think we've mentioned in prior calls that we've recruited in Sachin Dhawan and we've subsequently added other very talented folks who are helping us optimize the architecture of -- around these single global platforms to achieve optimum scale. So that's part of what's going to contribute to that margin expansion because it allows us to do the same business, a lot less technology expense.

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Jerry N. Ulrich, Blackhawk Network Holdings, Inc. - CFO and Chief Administrative Officer [51]

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And just to quantify, Andrew, the sales and -- or the technology departmental cost, or the operating cost ongoing, represent about 1/3 to 40% of our processing and services expenditures. So in the context of being able to gain efficiencies in that spend, that's kind of the proportion that you're looking at of the processing and services line on an ongoing basis.

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Andrew Schmidt, [52]

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Got it, that's really helpful context. And then we heard from a company that reported earlier today about weakness in physical brick-and-mortar channels, big-box retailers in and retailers like that. And I know you guys are in much more defensive channels, grocers and the like, but are you seeing anything to indicate weakness in foot traffic? Or it seems like your same-store sales are -- your underlying same-store sales are pretty strong so I wouldn't think so, but just wanted to ask.

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L. Talbott Hoskins Roche, Blackhawk Network Holdings, Inc. - CEO, President and Director [53]

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No, it's a really good question because we obviously pay a lot of attention to the retail trends. And I would agree with you that there's some specialty big-box, like in the toys and other areas that are under pressure from eCommerce and other discounters. Grocery is under pressure from deflation, which is -- makes it harder for them to raise their prices, but they aren't losing -- while there is some thought about we've got to maintain our traffic and there's consolidation in the industry that's happening, we aren't seeing this directly impact. Most of the retailers are healthy and the gift card sales are doing well. We have outliers, 1 or 2 that are in the news these days, maybe a Sears where we're watching things really carefully. But they aren't a large percent of sale because we have focused so much on that healthy, number 1 or 2 grocer in every market.

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Andrew Schmidt, [54]

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Got it, that's helpful. And then my last question is on Cardpool. You executed the agreement to take control of the kiosk last quarter. Should we expect to see Cardpool revenues start to ramp? I know it's not a big factor for the bottom line, but I'm just curious, just the revenue contribution for the year.

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L. Talbott Hoskins Roche, Blackhawk Network Holdings, Inc. - CEO, President and Director [55]

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Yes. It's a good question. And you are correct to say it is not going to be a huge contributor, but it is going to ramp. Part of what happened was last year, we got sold out on our negotiation with our -- the partner who was distracted with other things, made a decision to go ahead and purchase the kiosk so we could control our own destiny, which we've accomplished. That gives us a lot more freedom to place them where we want, to market around the service, to partner with our retailers who we have great relationships with to make sure they're placed in the highest-volume locations. All of that is good work that's being done right now. So we expect to ramp, but we are seeing a ramp. It is not a major contributor to the business, but it will continue to grow through the year. It's less than 1% of our EBITDA, as we've mentioned.

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Operator [56]

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Ladies and gentlemen, this now concludes our question-and-answer period for today. I'd like to turn the call back over to management for closing comments.

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Jerry N. Ulrich, Blackhawk Network Holdings, Inc. - CFO and Chief Administrative Officer [57]

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Okay, everyone, well, thanks for joining us. Enjoy the rest of your afternoon, and we'll be in touch soon.

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Operator [58]

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Ladies and gentlemen, thank you again for your participation in today's conference call. This now concludes the program, and you may now disconnect at this time. Everyone, have a great day.