Blackhawk Announces First Quarter 2018 Financial Results

PLEASANTON, Calif., May 01, 2018 (GLOBE NEWSWIRE) -- Blackhawk Network Holdings, Inc. (NASDAQ:HAWK) today announced financial results for the first quarter ended March 24, 2018.

Merger Agreement ? On January 15, 2018, Silver Lake and P2 Capital Partners agreed to acquire Blackhawk in an all-cash transaction for a total consideration of approximately $3.5 billion, which includes Blackhawk's debt. Under the terms of the merger agreement, Blackhawk stockholders will receive $45.25 per share in cash upon closing of the transaction.  Blackhawk currently expects the transaction, which is subject to stockholder and regulatory approvals, and other customary closing conditions, to close mid-2018. For further information on the transaction and related merger agreement, please refer to Blackhawk's Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission (the "SEC") on January 16, 2018, and Blackhawk's definitive proxy statement on Schedule 14A filed with the SEC on March 2, 2018 (the "Proxy Statement").

Non-GAAP Measures (see Table 2)

GAAP and Non-GAAP results in the tables above include Cardpool for both Q1 2018 and Q1 2017 and include Grass Roots Meetings and Events results for Q1 2017.  In December 2017, the Grass Roots Meetings and Events business was sold for a total consideration of $45.2 million.  Cardpool remains an asset held for sale which the Company intends to divest in 2018.

Cardpool Results

For Q1 2018, Cardpool contributed $14.7 million of operating revenues, $1.8 million of pre-tax loss and a $1.8 million adjusted EBITDA loss. For Q1 2017, Cardpool contributed $20.0 million of operating revenues, $1.6 million of pre-tax loss and a $1.3 million adjusted EBITDA loss.

Grass Roots Meetings & Events Results

For Q1 2017, Grass Roots Meetings & Events contributed $15.1 million of operating revenues, $0.6 million of pre-tax loss and $0.5 million of adjusted EBITDA loss.

GAAP financial results for the first quarter of 2018 compared to the first quarter of 2017

• Operating revenues totaled $429.2 million, an increase of 11% from $386.4 million for the quarter ended March 25, 2017.  This increase was due to a 17% increase in operating revenues from the U.S. Retail segment driven by the addition of Target as a distribution partner, the acquisition of CashStar and growth in original content; a 3% increase in operating revenues from the international segment driven by growth across all regions, partially offset by the lost revenue related to the sale of Grass Roots Meetings and Events; and an 8% increase in operating revenues from the incentives and rewards segment primarily due to growth in Achievers and the loyalty business.
• Net loss totaled $15.8 million compared to net loss of $17.5 million for the quarter ended March 25, 2017.  The net loss was driven primarily by an increase in partner distribution expense related to transaction dollar volume generated by distribution partners with higher commission share and higher transition and acquisition costs, partially offset by processing and services expense savings.
• Net loss per diluted share was $0.28 compared to a net loss per diluted share of $0.31 for the quarter ended March 25, 2017.  Diluted shares outstanding increased 1.0% to 56.5 million.

Non-GAAP financial results for the first quarter of 2018 compared to the first quarter of 2017 (see Table 2 for Reconciliation of Non-GAAP Measures)

• Adjusted operating revenues totaled $193.6 million, a 1% decrease from $195.9 million for the quarter ended March 25, 2017.  The decline was driven by higher partner distribution expense related to transaction dollar volume generated by distribution partners with higher commission share, lost revenue related to the sale of Grass Roots Meetings and Events and lower Cardpool revenue.  These declines were partially offset by a $7.1 million one-time benefit due to a contractual amendment related to an open loop product, the addition of CashStar, growth in original content, as well as growth in Achievers and the loyalty business.
• Adjusted EBITDA totaled $22.3 million, an increase of 71% from $13.1 million for the quarter ended March 25, 2017. The increase was primarily driven by a $7.1 million one-time benefit due to a contractual amendment related to an open loop product.
• Adjusted net income totaled $1.7 million, compared to an adjusted net loss of $2.8 million for the quarter ended March 25, 2017.
• Adjusted diluted EPS was $0.03, compared to an adjusted diluted loss per share of $0.05 for the quarter ended March 25, 2017.

Conference Call

As a result of the proposed merger, the Company will not host an earnings conference call, provide earnings guidance or publish supplemental earnings presentation slides.

About Blackhawk Network

Blackhawk Network Holdings, Inc. (NASDAQ:HAWK) is a global financial technology company and a leader in connecting brands and people through branded value solutions. Blackhawk platforms and solutions enable the management of stored value products, promotions and incentive programs in retail, ecommerce, financial services and mobile wallets. Blackhawk's Hawk Commerce division offers technology solutions to businesses and direct to consumers. The Hawk Incentives division offers enterprise, SMB and reseller partners an array of platforms and branded value products to incent and reward consumers, employees and sales channels. Headquartered in Pleasanton, Calif., Blackhawk operates in the United States and 26 other countries. For more information, please visit blackhawknetwork.com, hawkcommerce.com, hawkincentives.com or our product websites giftcards.com, giftcardmall.com, cardpool.com, giftcardlab.com, omnicard.com and CashStar.com.

Non-GAAP Financial Measures

Blackhawk regards the non-GAAP financial measures provided in this press release as useful measures of the operational and financial performance of its business. Adjusted EBITDA, Adjusted net income and Adjusted diluted earnings per share measures are prepared and presented to eliminate the effect of items from EBITDA, Net income and Diluted earnings per share that the Company does not consider indicative of its core operating performance within the period presented. Adjusted operating revenues are prepared and presented to offset the distribution commissions paid and other compensation to distribution partners and business clients. Adjusted EBITDA margin represents Adjusted EBITDA as a percentage of Adjusted operating revenues. Adjusted operating revenues, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted net income and Adjusted diluted earnings per share may not be comparable to similarly titled measures of other organizations because other organizations may not calculate these measures in the same manner as Blackhawk. Investors are encouraged to evaluate our adjustments and the reasons we consider them appropriate.

The Company believes Adjusted operating revenues, EBITDA, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted net income, Adjusted diluted earnings per share and Reduction in income taxes payable are useful to evaluate the Company's operating performance for the following reasons:

• Adjusting operating revenues for distribution commissions paid and other compensation to retail distribution partners and business clients is useful to understanding the Company's operating margin;
• Adjusting operating revenues for marketing revenue and other pass-through revenues, which has offsetting expense, is useful for understanding the Company's operating margin;
• EBITDA and Adjusted EBITDA are widely used by investors and securities analysts to measure a company's operating performance without regard to items that can vary substantially from company to company and from period to period depending upon their financing, accounting and tax methods, the book value of their assets, their capital structures and the method by which their assets were acquired;
• Adjusted EBITDA margin provides a measure of operating efficiency based on Adjusted operating revenues and without regard to items that can vary substantially from company to company and from period to period depending upon their financing, accounting and tax methods, the book value of their assets, their capital structures and the method by which their assets were acquired;
• in a business combination, a company records an adjustment to reduce the carrying values of deferred revenue and deferred expenses to their fair values and reduces the company's revenues and expenses from what it would have recorded otherwise, and as such the Company does not believe is indicative of its core operating performance;
• non-recurring expenses related to Blackhawk's pending merger with Silver Lake is not reflective of our core operating performance;
• intangible asset amortization expenses can vary substantially from company to company and from period to period depending upon the applicable financing and accounting methods, the fair value and average expected life of the acquired intangible assets, the capital structure and the method by which the intangible assets were acquired and, as such, the Company does not believe that these adjustments are reflective of its core operating performance;
• non-cash fair value adjustments to contingent business acquisition liability do not directly reflect how the Company is performing at any particular time and the related expense adjustment amounts are not key measures of the Company's core operating performance;
• reduction in income taxes payable from the step-up in tax basis of our assets resulting from the Section 336(e) election due to our Spin-Off and the Safeway Merger and reduction in income taxes payable from amortization of goodwill and other intangibles or utilization of net operating loss carryforwards from business acquisitions represent significant tax savings that are useful for understanding the Company's overall operating results; and
• reduction in income taxes payable resulting from the tax deductibility of stock-based compensation is useful for understanding the Company's overall operating results. The Company generally realizes these tax deductions when restricted stock vest, an option is exercised, and, in the case of warrants, after the warrant is exercised but amortized over remaining service period, and such timing differs from the GAAP treatment of expense recognition

Additional Information and Where to Find It

In connection with the proposed merger, the Company filed the Proxy Statement on March 2, 2018. The Proxy Statement and a form of proxy were mailed to the Company's stockholders on or about March 2, 2018. The Company also plans to file other relevant materials with the SEC regarding the proposed merger. This communication is not a substitute for the Proxy Statement or any other document that the Company may file with the SEC or send to its stockholders in connection with the proposed merger. Investors and security holders will be able to obtain the documents (when available) free of charge at the SEC's website, http://www.sec.gov, and the Company's website, www.blackhawknetwork.com. In addition, the documents (when available) may be obtained free of charge by directing a request to Patrick Cronin by email at [email protected] or by calling (925) 226-9939.

Cautionary Statements Regarding Forward-Looking Statements

This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are indicated by words or phrases such as "guidance," "believes," "expects," "intends," "forecasts," "can," "could," "may," "anticipates," "estimates," "plans,"  "projects," "seeks," "should," "targets," "will," "would," "outlook," "continuing," "ongoing," and similar words or phrases and the negative of such words and phrases. Forward-looking statements are based on our current plans and expectations and involve risks and uncertainties which are, in many instances, beyond our control, and which could cause actual results to differ materially from those included in or contemplated or implied by the forward-looking statements. Such risks and uncertainties include the following: the occurrence of any event, change or other circumstance that could give rise to the termination of the merger agreement; the failure to obtain certain required regulatory approvals to the completion of the transaction or the failure to satisfy any of the other conditions to the completion of the transaction; the effect of the announcement of the transaction on our ability to retain and hire key personnel and maintain relationships with our partners, clients, customers, providers, advertisers, and others with whom we do business, or on our operating results and businesses generally; risks associated with the disruption of management's attention from ongoing business operations due to the transaction; our ability to meet expectations regarding the timing and completion of the merger; our ability to grow adjusted operating revenues and adjusted net income as anticipated; our ability to grow at historic rates or at all; the consequences should we lose one or more of our top distribution partners, fail to maintain or renew existing relationships with our distribution partners on the same or similar economic terms or fail to attract new distribution partners to our network or if the financial performance of our distribution partners' businesses decline; our reliance on our content providers; the demand for their products and our exclusivity arrangements with them; our reliance on relationships with card issuing banks; the consequences to our future growth if our distribution partners fail to actively and effectively promote our products and services; changes in consumer behavior away from our distribution partners or our products resulting from limits or controls implemented by our distribution partners during their transition to EMV compliance; our ability to successfully integrate our acquisitions; our ability to generate adequate taxable income to enable us to fully utilize the tax benefits referred to in this release; changes in applicable tax law that preclude us from fully utilizing the tax benefits referred to in this release; the requirement that we comply with applicable laws and regulations, including increasingly stringent anti-money laundering rules and regulations; and other risks and uncertainties described in our reports and filings with the SEC. These risks, as well as other risks associated with the proposed merger, are more fully discussed in Item 1A under the heading Risk Factors in our Annual Report on Form 10-K for the year ended December 30, 2017, our Quarterly Report on Form 10-Q for the fiscal quarter ended on March 24, 2018 which is expected to be filed on or prior to May 3, 2018 and other subsequent periodic reports we file with the SEC.  We undertake no obligation to update forward-looking statements to reflect developments or information obtained after the date hereof and disclaim any obligation to do so other than as may be required by law. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.