Q2 2017 Earnings Report July 19, 2017, 2:00 PM Pacific 1
Forward Looking Statements This presentation 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: 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 existing relationship with our distribution partners 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 money-laundering rules and regulations; and other risks and uncertainties described in our reports and filings with the Securities and Exchange Commission (the SEC ), including the risks and uncertainties set forth in Item 1A under the heading Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2016, our Quarterly Report on Form 10-Q for the fiscal quarter ended on June 17, 2017 which is expected to be filed prior to or on July 27, 2017 and other subsequent periodic reports we file with the Securities and Exchange Commission. 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. 2017 Blackhawk Network - See Appendix for Reconciliation of GAAP to non-gaap Adjusted Measures 2
2017 Focus Strong growth from all segments U.S. Retail Incentives International Generate operating leverage Optimize return on capital 2017 Blackhawk Network - See Appendix for Reconciliation of GAAP to non-gaap Adjusted Measures 3
Q2 17 Highlights U.S. Retail: AOR 4% Q2 17 vs Q2 16 (+10% excluding Cardpool) Physical retail volume at forecast. EMV impact slightly less than forecast as retailers continue to return to best practices. Digital ahead of expectations with >40% YOY growth. Cardpool AOR declined by $11M due to continued kiosk transition. Target as DP fully prepped for launch of closed loop and telecom at the beginning of Q3. Incentives: AOR +25% Q2 17 vs Q2 16 Consumer and corporate channel sales in-line with expectations; Achievers continuing to perform with significant new account signings; ramp in loyalty programs also drove growth. International: AOR +181% Q2 17 vs Q2 16 (+90% excluding M&E) Driven largely by Grass Roots; up 19% YOY excluding Grass Roots 2017 Blackhawk Network - See Appendix for Reconciliation of GAAP to non-gaap Adjusted Measures 4
Q2 17 Non-GAAP Financial Results Actual vs Guidance ($ in millions except per share data) Q2 17 Actual Q2 17 excl M&E Guidance* Adjusted Operating Revenues (AOR) $235 $215 $207 to $223 Adjusted EBITDA $30 $29 $25 to $28 Adjusted Net Income $7 $6 $1 to $3 Adjusted Diluted EPS $0.12 $0.11 $0.02 to $0.05 Reduction in income taxes payable $13 $13 $12 Reduction in income taxes payable per share (diluted) $0.22 $0.22 $0.21 * Guidance provided on April 27, 2017 Grass Roots Meeting and Events business ( M&E ) is asset held for sale and was excluded from guidance. M&E AOR and Adjusted EBITDA for Q2 17 results were $20M and $0.9M, respectively. 2017 Blackhawk Network - See Appendix for Reconciliation of GAAP to non-gaap Adjusted Measures 5
Non-GAAP Financial Results Year-over-Year (excluding M&E) ($ in millions except per share data) Q2 17 excl M&E Q2 16 % Change Adjusted Operating Revenues (AOR) $215 $184 17% Adjusted EBITDA $29 $26 10% Adjusted Net Income $6 $7-15% Adjusted Diluted EPS $0.11 $0.13-15% Reduction in income taxes payable $13 $14 Reduction in income taxes payable per share (diluted) $0.22 $0.24 Growth in AOR driven largely by Grass Roots and incentives Growth in Adjusted EBITDA excluding Cardpool was 20% and was impacted by Target launch costs of approximately $1M Adjusted Net Income decline primarily due to increased interest expense related to acquisitions Share count 57.9M, up 0.9% 2017 Blackhawk Network - See Appendix for Reconciliation of GAAP to non-gaap Adjusted Measures 6
Non-GAAP Financial Results by Segment (excluding M&E) ($ in millions) US Retail TDV Q2 17 $2,264 TDV Q2 16 $2,089 % Increase (Decrease) 8% Incentives International Excl M&E Total Excl M&E AOR Q2 17 $98 $74 $43 $215 AOR Q2 16 $103 $59 $22 $184 % Increase (Decrease) -4% 25% 90% 17% Adjusted EBITDA Q2 17 $15 $10 $4 $29 Adjusted EBITDA Q2 16 $18 $9 -$1 $26 % Increase (Decrease) -16% 4% n/a 10% Excluding Cardpool, Target launch costs and Q2 16 Paypower sale benefit, US Retail AOR and EBITDA growth would be 10% Incentives EBITDA growth compressed due to 2016 issuing bank migrations International AOR excludes $20M for Grass Roots M&E (held for sale); excluding all Grass Roots, International AOR organic growth of 19%; EBITDA excludes $0.9M from Grass Roots M&E 2017 Blackhawk Network - See Appendix for Reconciliation of GAAP to non-gaap Adjusted Measures 7
Expense Ratios Q2 17 vs Q2 16 Q2 17 Q2 16 Change FY17 Est* FY16 Actual Processing & services % of AOR* 45.0% 41.1% 3.9% 39.6% 39.3% Sales & marketing, net % of AOR* 20.0% 20.0% - 18.9% 19.1% General & administrative % of AOR* 9.4% 10.1% -0.6% 9.1% 9.4% Total as % of AOR* 74.4% 71.2% 3.3% 67.6% 67.8% Processing and services expense ratios increased year-over-year in Q2 due to Cardpool decline and the addition of Grass Roots Will gain leverage for the full year based on US Retail growth in 2H 17 and sale of Grass Roots M&E (assumed by 4Q 17) Excluding M&E, FY17 estimated expense leverage is 130 bps * Notes: Expenses exclude stock compensation Sales and marketing is net of marketing and other pass-through revenues See reconciliation of GAAP revenues to AOR in Appendix FY17 est. column based on mid-point of guidance range 2017 Blackhawk Network - See Appendix for Reconciliation of GAAP to non-gaap Adjusted Measures 8
Adjusted Free Cash Flow ($ in millions) LTM Q2 17 LTM Q2 16 Adjusted EBITDA $184 $192 Less: CapEx (62) (47) Less: Cash Interest Expense (13) (13) Add (Subtract): Cash Taxes Refunded (Paid) (4) 3 Less: Noncash PPA Adjustment (11) (15) Add (Subtract): Changes in W/C 16 (40) Add: Settlement Timing Benefit 16 21 Adjusted Free Cash Flow $125 $101 2017 Blackhawk Network - See Appendix for Reconciliation of GAAP to non-gaap Adjusted Measures 9
2017 Business Outlook U.S. Retail AOR +7% to +11% FY 2017 Growth Range revised lower for Cardpool shortfall estimated at $40 million for full year; Target launched beginning of Q3 17; focusing on higher margin original content Incentives AOR +17% to +27% FY 2017 Growth Range revised upward due to higher revenues on loyalty programs; Achievers, consumer and corporate incentives programs on track International AOR excluding M&E +51% to +68% FY 2017 Growth Grass Roots integration proceeding on plan and expected to drive enhanced contribution versus pre-acquisition; expect to add Achievers customers in all regions during 2017 2017 Blackhawk Network - See Appendix for Reconciliation of GAAP to non-gaap Adjusted Measures 10
Key Initiatives for Margin Expansion Acquisition integration - Technology platform consolidation - Continue migration off third party processing services Review / exit lower margin business units Expand distribution and sales of higher margin content Cost reduction from process/systems improvements and procurement initiatives 2017 Blackhawk Network - See Appendix for Reconciliation of GAAP to non-gaap Adjusted Measures 11
FY2017 GAAP Financial Guidance ($ in millions except EPS) 2017 Guidance 2016 % Change Operating Revenues $2,148 to $2,312 $1,900 13% to 22% Net Income $22 to $26 $5 337% to 416% Diluted EPS $0.35 to $0.44 $0.08 333% to 444% Year-over-year GAAP results reflect EMV rebound and growth in Incentives and International Net Income and EPS reflect acquisition related expenses, including amortization of intangibles and interest 2017 Blackhawk Network - See Appendix for Reconciliation of GAAP to non-gaap Adjusted Measures 12
FY 2017 Non-GAAP Financial Guidance ($ in millions except EPS) 2017 Guidance 2016 % Change Adjusted Operating Revenues $1,028 to $1,141 $889 16% to 28% Adjusted EBITDA $225 to $250 $189 19% to 32% Adjusted Net Income $91 to $100 $82 11% to 22% Adjusted Diluted EPS $1.56 to $1.70 $1.43 9% to 19% Adjusted EBITDA Margin* 21.9% 21.3% +60bps Adjusted Free Cash Flow $115 to $135 $109 6% to 24% Reduction in income taxes payable $58 $58 - Reduction in income taxes payable per share (diluted) $0.98 $1.02-3% * Calculated based on the mid-point of guidance of Adjusted EBITDA and AOR 2017 Blackhawk Network - See Appendix for Reconciliation of GAAP to non-gaap Adjusted Measures 13
Q3 17 GAAP Financial Guidance ($ in millions except EPS) Q3 17 Guidance Q3 16 % Change Operating Revenues $413 to $434 $362 14% to 20% Net Loss ($12) to ($8) ($5) -137% to -58% Diluted Loss Per Share ($0.20) to ($0.16) ($0.09) -118% to -75% Increase in GAAP net loss vs growth in GAAP revenues: Increased amortization of intangibles ($2.5M) Increased interest expense ($1.5M) Non-repeating gain on sale of investment in Visa Europe ($1.9M) Estimated effective tax rate (benefit on pre-tax loss) 30% for Q3 17 vs 62% for Q3 16 2017 Blackhawk Network - See Appendix for Reconciliation of GAAP to non-gaap Adjusted Measures 14
Q3 17 Non-GAAP Financial Guidance ($ in millions except EPS) Q3 17 Guidance Q3 16 % Change Adjusted Operating Revenues $204 to $225 $169 21% to 33% Adjusted EBITDA $28 to $32 $27 4% to 19% Adjusted Net Income (Loss) $4 to $7 $8-50% to -13% Adjusted Diluted EPS $0.07 to $0.11 $0.14-50% to -21% Reduction in income taxes payable $11 $13 Reduction in income taxes payable per share (diluted) $0.19 $0.24 Q3 16 included $1M gain on sale of PayPower business Lower program management fee rates on Open Loop -$2M Q3 17 AOR growth forecast by Segment (midpoint): US Retail +12% (+18% excluding Cardpool); Incentives +27%; International +83% (+25% excluding Grass Roots) Higher interest expense YOY based on financing completed mid-2016; flat to Q2 17 Diluted shares forecast for Q3 17: 58.2M vs 57.0M for Q3 16 2017 Blackhawk Network - See Appendix for Reconciliation of GAAP to non-gaap Adjusted Measures 15
2017 Cash Flow and Debt Update 2017 free cash flow projection no change: $115 million to $135 million Capex estimate remains $55 million for core business platforms plus $4 million for leasehold improvements that are reimbursed by landlord but treated as Capex for accounting and cash flow statement Debt leverage cap 4.25X Pro forma Adjusted EBITDA for Q2 17 and Q3 17, reverting to 4.0X for 4Q 17 & thereafter Total debt at end of Q2 17 $695M, pro forma leverage ratio 3.6X Stock repurchases during Q2 - none 2017 Blackhawk Network - See Appendix for Reconciliation of GAAP to non-gaap Adjusted Measures 16
Appendix Reconciliation of GAAP to Non-GAAP Measures Certain amounts are rounded and may not add to total amounts.
Management s Use of Non-GAAP Financial Measures The Company believes Adjusted operating revenues, EBITDA, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted net income, Adjusted diluted earnings per share, Reduction in income taxes payable and Adjusted free cash flow are useful to evaluate the Company's operating and financial performance for the following reasons: Adjusting operating revenues for compensation to retail distribution partners and pass through marketing revenues is useful to 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 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 2017 Blackhawk Network - See Appendix for Reconciliation of GAAP to non-gaap Adjusted Measures 18
Management s Use of Non-GAAP Financial Measures (cont d) Non-cash equity grants made to employees and distribution partners at a certain price and point in time do not necessarily reflect how the Company's business is performing at any particular time and the related expenses 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 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 Adjusted free cash flow - Free cash flow provides information regarding the cash that the Company generates without the fluctuations resulting from the timing of cash inflows and outflows from these settlement activities, which is useful to understanding the Company's business and its ability to fund capital expenditures and repay amounts borrowed under its term loan. The Company also may use Free cash flow for, among other things, making investment decisions and managing its capital structure 2017 Blackhawk Network - See Appendix for Reconciliation of GAAP to non-gaap Adjusted Measures 19
GAAP Revenues to AOR Reconciliation ($ in millions) Q2 17 Q2 16 % Change Total operating revenues $463 $391 18% Partner distribution expense (202) (191) 5% Marketing and other pass-through revenues (28) (21) 34% Revenue adjustment from purchase accounting 2 4-66% Adjusted operating revenues $235 $184 28% 2017 Blackhawk Network - See Appendix for Reconciliation of GAAP to non-gaap Adjusted Measures 20
GAAP Net Income to Adjusted EBITDA Reconciliation ($ in millions) Q2 17 Q2 16 % Change Net Income (loss) $(6) $(11) 45% Interest and other (income) expense, net (1) - n/a Interest expense 7 4 71% Tax expense (benefit) (5) (7) 37% Depreciation and amortization 28 28 1% EBITDA 24 13 82% Employee stock-based compensation 8 9-6% Revenue adjustment from purchase accounting, net 1 4-67% Other (gains) / losses,net - (1) n/a Change in fair value contingent consideration (4) 1 n/a Adjusted EBITDA $30 $26 13% 2017 Blackhawk Network - See Appendix for Reconciliation of GAAP to non-gaap Adjusted Measures 21
GAAP Pre-tax Income to Adjusted Net Income Reconciliation ($ in millions) Q2 17 Q2 16 % Change Income (loss) before income tax expense $(11) $(19) 42% Employee stock-based compensation 8 9-6% Revenue adjustment from purchase accounting, net 1 4-67% Change in fair value of contingent consideration (4) 1 n/a Other (gains)/losses, net - (1) n/a Amortization of intangibles 15 16-9% Adjusted income before income tax expense 10 11-9% Income tax expense (benefit) (5) (7) 37% Tax expense on adjustments 8 11-30% Adjusted tax expense (benefit) 3 4-16% Adjusted net income $ 7 $ 7-5% 2017 Blackhawk Network - See Appendix for Reconciliation of GAAP to non-gaap Adjusted Measures 22
GAAP EPS to Adjusted Diluted EPS Reconciliation Q2 17 Q2 16 % Change Diluted earnings (loss) per share $(0.11) $(0.20) -45% Employee stock-based compensation 0.08 0.09-11% Revenue adjustment from purchase accounting, net 0.01 0.05-80% Other (gains)/losses, net - (0.01) n/a Change in fair value of contingent consideration (0.04) 0.01 n/a Amortization of intangibles 0.18 0.19-5% Adjusted diluted EPS $0.12 $0.13-8% 2017 Blackhawk Network - See Appendix for Reconciliation of GAAP to non-gaap Adjusted Measures 23
FY17 Guidance Range Reconciliation of GAAP Revenues to Non-GAAP AOR ($ in millions) Low High Operating revenues $ 2,148 $ 2,312 Partner distribution expense (1,052) (1,095) Marketing and other pass-through revenues (72) (80) Revenue adjustment from purchase accounting 4 4 Adjusted operating revenues $ 1,028 $ 1,141 2017 Blackhawk Network - See Appendix for Reconciliation of GAAP to non-gaap Adjusted Measures 24
FY17 Guidance Range Reconciliation of GAAP Net Income to Non-GAAP Adjusted EBITDA ($ in millions) Low High Net income $ 22 $ 26 Interest and other (income) expense, net 32 41 Income tax expense 13 17 Depreciation and amortization 116 121 EBITDA 183 205 Employee stock-based compensation 38 41 Other adjustments 4 4 Adjusted EBITDA $ 225 $ 250 2017 Blackhawk Network - See Appendix for Reconciliation of GAAP to non-gaap Adjusted Measures 25
FY17 Guidance Range Reconciliation of GAAP Net Income to Non-GAAP ANI ($ in millions) Low High Income before income tax expense $ 33 $ 43 Employee stock-based compensation 38 41 Amortization of intangibles 62 64 Other 4 4 Adjusted income before income tax expense 137 152 Income tax expense 13 17 Tax expense on adjustments 33 35 Adjusted tax expense (benefit) 46 52 Adjusted net income $ 91 $ 100 2017 Blackhawk Network - See Appendix for Reconciliation of GAAP to non-gaap Adjusted Measures 26
FY17 Guidance Range Reconciliation of GAAP EPS to Non-GAAP Adjusted EPS Low High Diluted earnings per share $ 0.35 $ 0.44 Employee stock-based compensation 0.46 0.50 Amortization of intangibles 0.71 0.72 Other 0.04 0.04 Adjusted diluted earnings per share $ 1.56 $ 1.70 2017 Blackhawk Network - See Appendix for Reconciliation of GAAP to non-gaap Adjusted Measures 27
FY17 Guidance Range Reconciliation of Adjusted Free Cash Flow ($ in millions) Low High Adjusted EBITDA $ 225 $ 250 Less: Expenditures for property, equipment and technology (53) (58) Less: Interest paid (19) (24) Less: Cash taxes (paid) and refunded (10) (12) Other (28) (21) Adjusted free cash flow $ 115 $ 135 2017 Blackhawk Network - See Appendix for Reconciliation of GAAP to non-gaap Adjusted Measures 28
Q3 17 Guidance Range Reconciliation of GAAP Revenues to Non-GAAP AOR ($ in millions) Operating revenues range $413 - $434 Partner distribution expense (197) Marketing and other pass-through revenues (13) Revenue adjustment from purchase accounting 1 Adjusted operating revenues range $204 - $225 2017 Blackhawk Network - See Appendix for Reconciliation of GAAP to non-gaap Adjusted Measures 29
Q3 17 Guidance Range Reconciliation of GAAP Net Income to Non-GAAP Adjusted EBITDA ($ in millions) Net income (loss) range ($12) ($8) Interest and other (income) expense, net 7 Income tax expense (4) Depreciation and amortization 27 EBITDA range $18 - $22 Employee stock-based compensation 9 Other adjustments 1 Adjusted EBITDA range $ 28 - $32 2017 Blackhawk Network - See Appendix for Reconciliation of GAAP to non-gaap Adjusted Measures 30
Q3 17 Guidance Range Reconciliation of GAAP Net Loss to Non-GAAP Adjusted Net Income ($ in millions) Loss before income tax expense range ($16) - ($13) Employee stock-based compensation 9 Amortization of intangibles 14 Other 1 Adjusted loss before income tax expense range $8 - $11 Income tax expense (benefit) (4) Tax expense on adjustments 8 Adjusted tax expense (benefit) 4 Adjusted net income range $4 - $7 2017 Blackhawk Network - See Appendix for Reconciliation of GAAP to non-gaap Adjusted Measures 31
Q3 17 Guidance Range Reconciliation of GAAP Loss Per Share to Non-GAAP Adjusted Loss Per Share Diluted loss per share range ($0.20) - ($0.16) Employee stock-based compensation 0.11 Amortization of intangibles 0.15 Other 0.01 Adjusted diluted loss per share range $0.07 - $0.11 2017 Blackhawk Network - See Appendix for Reconciliation of GAAP to non-gaap Adjusted Measures 32
Q & A