Meta Data Limited
Q1 2016 Earnings Call Transcript

Published: 5 May 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the Higher One Holdings Incorporated first quarter 2016 earnings conference call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Mr. Patrick Pearson, Investor Relations Director. Sir, you may begin.

[Patrick Pearson:]

Thank you, Chanel. Good morning, everyone, and welcome the Higher One first quarter 2016 earnings call. Giving prepared remarks on the call today will be our Chief Executive Officer, Marc Sheinbaum, and our Chief Financial Officer, Chris Wolf. Marc will provide a summary of the quarterly performance and Chris will provide more detail on the financials before opening up the call for Q&A. There's a slide presentation that accompanies our discussion of the quarter. It’s available on our investor relations Web site at www.ir.higherone.com. This call contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Management’s projections and expectations are subject to a number of risks and uncertainties that could cause actual performance to differ materially from that predicted or implied. Forward-looking statements may be identified by the use of words such as expect, anticipate, believe, estimate, potential, should or similar words intended to identify information that is not historical in nature. Forward-looking statements are based on the current beliefs and expectations of Higher One management and are subject to known and unknown risks and uncertainties. There are a number of risks and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statements. These statements speak only as of the date they are made and the company does not intend to update or otherwise revise the forward-looking information to reflect actual results of operations, changes in financial condition, changes in estimates, expectations or assumptions, changes in general economic or industry conditions, or other circumstances arising and/or existing since the preparation of this presentation or to reflect the occurrence of any unanticipated events. The forward-looking statements in this presentation do not include the potential impact of any acquisitions or divestitures that may be announced and/or completed after the date hereof. For further information regarding risks associated with our business, please refer to our filings with the Securities and Exchange Commission including our annual reports on Form 10-K for the most recent fiscal year-end, quarterly reports on Form 10-Q, and current reports on Form 8-K. Information about factors that could affect future performance can be found in our recent SEC filings available on our Web site. We will also provide certain metrics on a non-GAAP basis including adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted EPS, and free cash flow. We believe that these non-GAAP measures, which exclude amortization of intangibles, stock-based compensation, and certain non-recurring or non-cash impacts to our results provide useful information regarding normalized trends relating to the company's financial condition and results of operation. Reconciliations of these non-GAAP measures to their closest comparable GAAP measure included in the appendix to the presentation that accompanies this call as well as in our recent SEC filings. With that, I’ll now turn the call over to our CEO, Marc Sheinbaum. Marc?

[Marc Sheinbaum:]

Thanks, Pat. Good morning, everyone. Thanks for joining us today. On the call with me this morning is our CFO, Chris Wolf, who will provide our financial update for the quarter. Following our prepared remarks, Chris and I will gladly take your questions. Please refer to the accompanying slide deck that is available on our investor relations Web site as I discuss the first quarter details beginning on slide three. Consolidated revenue for the quarter was $55.6 million, a 9.7% decrease from the prior year period. We ended the first quarter with a non-GAAP adjusted earnings per share from continuing operations of $0.13 compared to $0.18 in the prior year period. Turning to slide four, our Payments business experienced another solid quarter with revenue increasing approximately 5% from prior-year period to $23.4 million. Similar to past quarters, growth in the Payments business this quarter was the result of increased payment transaction revenue, which was up 5.1% on a year-over-year basis, driven by a 14% increase in revenue through our SmartPay platform. On slide five, you’ll see that we continued to sign and implement new business, which is fundamental to future revenue growth of Payments. This quarter, we signed nine new CASHNet clients and sold additional modules to over 40 existing payment clients, all of which we project will deliver over $370,000 in annual subscription revenue. Turning to strategic matters on slide six. On April 4, our shareholders voted to authorize the sale of our Disbursements business, the Customers Bank. Obtaining shareholder approval was a key step towards the closing of this transaction. We’re working on the final steps of the closing process. When we announced this deal in December, we were projecting a second-quarter closing and we remain on track to meet that timeline. I’d like to thank my team for working so diligently over the last four months in order to ensure a smooth transition for our employees, schools and their students. We’re also continuing to work with our advisors at Raymond James on our review of strategic alternatives for the remaining business. With that, I'll hand it over to Chris to begin our discussion of the financials, starting on slide seven.

[Christopher Wolf:]

Great. Thanks, Mark. At this point, I'll turn our discussion to our financial results for the quarter, starting on slide seven of the accompanying presentation. Please remember that all growth rates I mention will be year-over-year, unless otherwise specified. Turning to slide seven, gross revenue for the first quarter was $55.6 million compared to $61.5 million during the first quarter last year, a decrease of approximately 9.7%. I’ll get into more detail on the drivers of our revenue changes momentarily. We had a gross profit margin of 53.3% in the first quarter of 2016 compared to 54.9% last year. The year-over-year change in gross profit margin this quarter was primarily due to lower gross margins in the Disbursements business, which I’ll discuss in the upcoming slides. Turning to slide eight. Payments revenue was up approximately 5% in the quarter to $23.4 million. The increase in Payments revenue was mainly due to the year-over-year increase in the dollar volume processed through our SmartPay payment module. The increase in payment transaction volume was due to an increase in volume at existing clients and, to a lesser extent, clients who implemented during the year. Our Payments line of business accounted for approximately 42.1% of our total revenues this quarter. Disbursements gross revenue decreased approximately 18% from the prior year to $32.1 million, primarily from a decrease in account revenue. This decrease was due to fewer dollars being deposited into and spent from OneAccounts. During the quarter, the total amount of financial aid disbursed through our Refund Management services was down approximately 9% and the amount disbursed into OneAccounts was down approximately 19%. Moving to gross margin, let’s turn to slide nine. As a reminder, consolidated gross margin percentage this quarter was 53.3%. Gross profit margin for Payments this quarter was 51.6% compared to 50.6% in the prior-year period. Our cost of sales in Payments was $11.3 million in the first quarter compared to $11 million in the prior-year period. Similar to trends seen in recent periods, the largest driver of cost increase was additional volume-related merchant expenses as a result of increased transaction account and volumes in the SmartPay payment processing business. Gross margin for Disbursements was $17.5 million this quarter compared to $22.5 million in the prior year. The decrease was driven primarily by lower account revenue and associated volume-related expenses, which included decreases in fraud and operational losses. Gross profit margin was 54.5% compared to 57.3% in the prior-year. Turning to slide ten, operating expenses for the quarter were $22.3 million, an increase of approximately $100,000 from the prior-year period. Our first quarter 2016 operating expenses include approximately $420,000 of professional fees associated with the sale of the Disbursements and OneAccounts business. Excluding the impact of these transaction-related costs, operating expenses would have decreased approximately $340,000. General and administrative costs were $17.3 million in the quarter, a decrease of approximately $200,000 from the prior-year period. That decrease is the result of reduced personnel costs and professional fees. Product development costs were $1.8 million this quarter, which equates to 3.2% of gross revenue. Our product development costs are up year-over-year as we continue to invest in our CASHNet platform. Sales and marketing expense decreased 14.7% during the quarter to 5% of gross revenue. Decrease in sales and marketing expense was due to reductions in both personnel costs and discretionary marketing spend. Turning to slide 11, consolidated adjusted EBITDA from continuing operations was $14.9 million compared to $18.1 million last year. This decline was largely driven by the decrease in account revenue covered earlier, partially offset by decreases in certain operating expenses. Looking at adjusted EBITDA for our two lines of business, Payments generated adjusted EBITDA of $6.7 million, an increase of 11.5% over the prior-year period, while adjusted EBITDA margin was 28.8% in the current period, up slightly from 27.1% last year. Adjusted EBITDA for disbursements was down 32.2% to $8.2 million in the quarter, driven by many of the factors I discussed earlier in my remarks related to this line of business. Turning to slide 12, our non-GAAP adjusted diluted EPS from continuing operations equaled $0.13 compared to $0.18 last year. In addition to items previously discussed, year-over-year adjusted EPS was favorably impacted by lower interest expense and income taxes. Moving to slide 13, we ended the quarter with a cash balance of approximately $35 million. We generated approximately $9 million of operating cash flows during the quarter, down from $16.2 million in the prior year. This decrease was the result of lower earnings in our disbursements line of business, which I covered earlier, as well as less favorable changes in working capital in 2016 compared to 2015. Capital expenditures were $885,000 during the first quarter of 2016, a decrease of approximately $1.1 million compared to the same period in 2015. The amount outstanding on the credit facility remained at $29 million at the end of the quarter. Turning to final slide, slide 14, as Mark mentioned, we expect to transfer our Disbursement business in the second quarter. Total cash consideration is $37 million, of which $17 million will be received at close. The remaining $20 million will be placed in escrow and we will receive those funds in two installments of $10 million on each of the two anniversary dates of the closing. In addition to the $37 million, we will also receive $5 million for certain transition-related services that we will be providing to Customers Bank through June 30, 2017. And with that, we’ve concluded our prepared statements. We’ll now take your questions. Operator?

[Operator:]

Thank you. [Operator Instructions] And our first question comes from the line of Andrew Jeffrey of SunTrust. Your line is now open. Please go ahead.

[Andrew Jeffrey:]

Hey, guys. Good morning.

[Marc Sheinbaum:]

Good morning.

[Andrew Jeffrey:]

Couple of questions. I guess when you look at your payment suite and the fact that you’ve signed nine new customers in the first quarter. Can you talk a little bit about market share and how you kind of stack up against your primary competitor? Has there been more movement than usual, gaining share, losing share, how are you thinking about that?

[Marc Sheinbaum:]

Hi, it’s Marc. Thanks for the question. Not only think about it in terms of market share, but I think we feel very, very good and very strong about our position. I think the fact that we continue to sign new clients in this space is a very positive signal. And I think our team is out. They’re talking to a lot of schools and there’s a lot of receptivity to the value proposition that we. So I think we’re feeling very good about where we are and the success that we’ve had. I think it shows with the signings, not just with new clients, but I think deepening our relationships. During every quarter, we’re talking about adding new modules. You saw how many we added this quarter, so we’re feeling pretty good about our progress.

[Andrew Jeffrey:]

Okay. So you’d characterize this as kind of an average new deal signing quarter or better than average?

[Marc Sheinbaum:]

It’s hard to, like, characterize it as average or better than average. I think we’re where we want to be, where we expected to be this quarter. I think that’s probably a better way to phrase it.

[Andrew Jeffrey:]

And with regard to the volume growth in the SmartPay product, can you give us a sense, Chris, perhaps of what the magnitude of growth is, what yields are, and maybe the rate of net revenue growth?

[Christopher Wolf:]

Thanks for the question. I think we mentioned in Marc’s comments, SmartPay was up about 14% year-over-year, so I think most of that really was driven by what, I’d call, organic or mostly clients that were already in place that we just saw more volume going through the pipes, if you will. So we’re just getting more usage there. As Marc mentioned, we signed new clients. We have a pretty healthy backlog. And, obviously, we’ll add there. So I think as far as where SmartPay is, I think that's going very well and we like the trends where it’s going there. I don't know, I'm sorry, I forget the other part of your question. If you want to repeat that, Andrew, I’d be happy to answer that.

[Andrew Jeffrey:]

Just wondering what net revenue growth may have been in SmartPay. It’s pretty consistent with that. I think that if you really – we give that gross margin and we got a little bump on – we did get a little margin improvement, but it's pretty consistent, net margins. We do account for growth. That’s the proper accounting for it. But I think others might consider net margin as really – or net revenue as really after our cost of sales because merchant expense is the bulk of what is in there. So as you can see, we did a little bit better on margin relative to revenue growth. But they’re pretty consistent.

[Andrew Jeffrey:]

Okay, great. Thank you.

[Operator:]

Thank you. And I’m showing no further questions at this time. I would now like to turn the call over to Mr. Marc Sheinbaum for closing remarks.

[Marc Sheinbaum:]

Thanks, operator. So, again, appreciate everybody’s time this morning. Thanks for joining us. Obviously, we’ll continue to share our progress on future earnings calls. So thanks again.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone, have a great day.