Meta Data Limited
Q3 2015 Earnings Call Transcript

Published: 27 Oct 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Higher One -- Q3 2015 Higher One Holdings Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will be conducting a question-and-answer session and instructions will follow during that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Patrick Pearson, Director of Corporate Development, Investor Relations. Sir, please go ahead.

[Patrick Pearson:]

Thank you, Brian. Good morning everyone, and welcome to the Higher One Third Quarter 2015 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 our quarterly performance and Chris will provide more detail on the financials before opening up the call for Q&A. There is a slide presentation that accompanies our discussion of the quarter that is available on our Investor Relations website 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 events 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 conditions, 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 contemplated after the date hereof. For further information regarding the risks associated with our business, please refer to our filings with the Securities and Exchange Commission, including our annual report 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 the factors that could affect the future performance can be found in our recent SEC filings available on our website. 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 operations. Reconciliations of these non-GAAP measures to their closest comparable GAAP measure are included in the appendix to the presentation that accompanies this call as well as in our recent SEC filings. With that, I will now turn the call over to our CEO, Marc Sheinbaum. Marc?

[Marc Sheinbaum:]

Thanks Pat, and thanks to everyone for joining us today. With me on the call is our CFO, Chris Wolf, who will provide our financial update, as well as our Chief Operating Officer, Casey McGuane who will be available to answer questions after our prepared remarks. Please refer to the company slide deck that is available on our investor relations website as I discuss the third quarter details beginning on Slide 3. I’d like to open up the call today by discussing the announcement we made last week regarding the sale of our Campus Labs data analytics business. On October 14, we signed a definitive agreement to sell the Campus Labs business to an affiliate of Equity Partners for a purchase of $91 million subject to certain closing adjustments, including adjustments for working capital. We expect this deal to officially close by the end of November 2015. We acquired Campus Labs back in 2012 to broaden our relationships on campus as well as bringing our existing financial products and services to Campus Labs’ client base. While we’ve helped Campus Labs grow over the last three years, Higher One’s experience lies in providing solutions to the business office of colleges and universities and their students. We are pleased with this transaction as it has offered us the opportunity to unlock significant value from this asset and that will provide us with financial flexibility. Please note that the Campus Labs results are included in our financials for the third quarter which Chris will cover in more detail in his remarks. Turning to Slide 4. Gross revenue was $56.1 million in the third quarter of 2015 compared to $59.8 million in the third quarter of 2014. This quarter we increased our allowance for potential customer restitution from $8.75 million to $30.6 million related to the Federal Reserve and FDIC matters. As a result, net revenue was affected by $21.9 million this quarter and there is a reasonable possibility that the liability related to these matters will increase in future periods. And we still believe that total exposure related to these matters to be $70 million. We ended the third quarter with a non-GAAP adjusted earnings-per-share of $0.09 compared to $0.15 in the prior year period. Revenue was down in the quarter reflecting increases in both the payments and data analytics line of business offset by continued decline in the disbursements business, including the OneAccount. Now let’s look at the results in our payments business beginning on Slide 5. I am pleased to report that payments revenue was up 4% this quarter compared to the third quarter 2014 driven primarily by a 5% increase in payment transaction revenue. That increase in payment transaction revenue was largely attributable to increases at existing clients and to a lesser extent, clients who implemented during the past year. Consistent with our expectations and comments on previous calls, the growth rate of our payments business is paring back from the levels seen in previous periods but still remains positive. We attribute to this slowdown to certain tailwinds having annualized in 2014 as well as the impact of the Campus Solutions migration project. On Slide 6, you will see that we continue to sign and implement new business which is fundamental to future revenue growth for payments. This quarter we signed four new CASHNet clients and sold additional modules to over 25 existing payment clients all of which we project will deliver over $400,000 in annual subscription revenue. Turning to Slide 7. Disbursements revenue was down 15% on a year-over-year basis, driven primarily by a decrease in account revenue over that same period. Similar to trend seen in previous quarters, the decrease in account revenue was a result of decreases in financial aid refunds being disbursed into the OneAccount. Chris will cover the fall financial aid refund volume trends in more detail. Offsetting some of that decline, we did see a continued increase in non-refund dollars being deposited into the OneAccount this quarter which was 5% higher than in the third quarter 2014. The type of deposit which represents a growing share of total deposits is a key indicator of customer engagement with the OneAccount. On the sales and renewals front, we signed one new client representing just over 1800 Signed School Enrollment which we refer to it as SSE and renewed more than 70 current clients representing over 580,000 SSE. However we did lose two clients representing over 11,000 SSE this quarter. This brings our year-to-date renewals to just under 2 million SSE. Given the environment for this business, we are very pleased with our retention trends this year. Turning to Slide 8. While we worked through many of the macro trends affecting disbursements business that I mentioned earlier, we are working hard to make the OneAccount a more attractive offering to students. This fall we launch several new OneAccount features that are designed to help students manage their accounts more effectively. Money Meter is an online budgeting and cash flow management tool that lets students easily track and categorize their spending and create budgets for any purpose. SnapShot is an enhancement of our mobile app that lets students see the balance they have available for spending after taking into account future bill payment obligations and savings goals. And to encourage students to use these new features, we have introduced Passport, a program that provides positive reinforcement for making smart money management decisions like paying bills and creating budgets, as well as for academic achievements such as good grades and graduating. The program has received enthusiastic student feedback as well as accolades from financial literacy experts. Turning to Slide 9. We await the release of the final regulation relating to cash management and campus debit cards by the Department of Education. As we’ve discussed with you, Higher One has taken an active role since the beginning of the process and our hope has been that this program would respond to our concerns and that of more than 175 colleges and universities, students and trade associations who took issue with the rule [ph] as it was proposed. As a reminder, if the Department finalizes and publishes new regulations by November 2, 2015, these regulations should go into effect on July 1, 2016. As we’ve communicated through this process, Higher One has been hard at work making improvements and testing different options related to the refund selection process and the OneAccount suite of banking products in anticipation of new regulations. We are looking forward to seeing the final regulation. This concludes my prepared remarks. I will turn it over to Chris to discuss the financials beginning on Slide 10. Chris?

[Chris Wolf:]

Thanks, Marc. I am going to open with a discussion on the sale of the Campus Labs business on Slide 10 and then I’ll turn the discussion to the third quarter results. As you saw in our press release last week, we signed an agreement to sell substantially all the assets and liabilities of our Campus Labs business. The transaction is subject to regulatory approvals and is expected to close by the end of November 2015. The total cash purchase price of the Campus Labs transaction is approximately $91 million. This purchase price is subject to certain closing adjustments, including adjustments for working capital. The working capital adjustments will be determined at the time of closing but may reduce the purchase price by $5 million to $7 million. Overall we expect to receive proceeds net of expenses and taxes between $55 million and $60 million. As a condition of amendment to our credit facility to allow for the sale of the Campus Labs assets, we will be required to repay $30 million of the outstanding amount on the credit facility when the sale of Campus Labs is complete. I will discuss the amendment to our credit facility later in my remarks. At this point, I will turn our discussion to our financial results for the quarter, starting on Slide 11 of the accompanying slide presentation. Please remember that all growth rates I mention will be year-over-year unless otherwise specified. Turning to Slide 11. Gross revenue for the third quarter was $56.4 million compared to $59.8 million during the third quarter last year, a decrease of approximately 5.7%. Net revenue was impacted by a $21.9 million allowance for customer restitution recorded in the quarter. This brings our total allowance for customer restitution to $30.6 million. However we remain uncertain about the timing and ultimate amount of these matters. For comparison purposes during the remainder of my presentation, I will refer to gross revenue. I will get into more detail on the drivers of our revenue changes on the upcoming slides. We had a gross profit margin, excluding the impact of the allowance for customer restitution of 50.6% in the third quarter of 2015 compared to 52.9% last year. The year-over-year change in gross profit margin this quarter was primarily due to lower gross margin percentage in the disbursements line of business, including the OneAccount. Turning to Slide 12. Payments revenue was up 3.9% in the quarter to $23.8 million. The increase in payments revenue was due to higher payment transaction revenue, primarily due to an increase in the dollar volume of transactions processed through the SmartPay payment module compared to the prior year. The increase in payment transaction volumes was primarily due to increases in volume at existing clients and to a lesser extent clients who implemented during the year. Our payments line of business accounted for approximately 42.2% of our total revenues this quarter. Data analytics revenue which comprised 7.8% of total revenue this quarter grew 18.9% year-over-year to $4.4 million. This growth was driven by the sales of Campus Labs products to both new and existing clients over the past 12 months. Disbursements gross revenue decreased 15.1% from the prior year to $28.2 million primarily from a 15.3% decrease in account revenue. This decrease was due to fewer OneAccounts and lower amounts deposited into and spent from OneAccounts which resulted in decreased interchange and service fees. Turning to Slide 13. Let’s examine the trends that drove the decreases in deposits and spending from the OneAccount. Enrollment and disbursement trends were key drivers in our business and we will start off with what we saw during the fall disbursement cycle on refunds. Enrollment data is released on a one-year trailing basis, so our client school disbursement data is the best proxy we have when looking at enrollment trends. We have included client disbursement data through mid-October for this evaluation which includes most of the fall cycle. We will begin with all schools in our network and then on Slide 14 we will review same school data. In summary, total unique recipients decreased by 6%. Additionally we saw a decrease in average refund size of approximately 3% resulting in total dollars disbursed decreasing by 9%. This decrease of total dollars disbursed combined with declines in the selection rates by our total school population resulted in total dollars disbursed into the OneAccount being down 18%. The decrease in overall selection rate of the OneAccount is the function of reductions both at same schools as well as new schools which typically have a lower selection rate than the overall average. Non-refund dollars deposited into the OneAccount were up 5% for the quarter which when combined with the decrease in dollars disbursed to OneAccounts discussed above led the total deposits into the OneAccount being down 17%. Turning to Slide 14. On a same school basis, total unique recipients were down approximately 7% and we saw average financial aid dollars down approximately 1% resulting in total dollars disbursed being down 8%. We also saw a 10% decrease in refund dollars going into the OneAccount. As a result, total dollars disbursed into the OneAccount on a same school basis were down approximately 18%. Now we will look at changes in our refund management SSE and ending OneAccounts for the period beginning on Slide 15. The refund management SSE count is down 2% on a year-over-year basis ended September 30, 2015. Approximately 98,000 of this decrease is a result of our annual enrollment adjustment which reflects changes from the fall 2013 to the fall 2014 enrollment figures which were released on a provisional basis by IPEDS this quarter. There was an additional net decrease of 10,000 SSE as two client losses exceeded the one sale we booked during the quarter. Looking at the number of OneAccounts, you'll see that it decreased 7% year-over-year. This decrease is primarily the result of a reduction in the selection rates of the OneAccount at same schools discussed earlier and in line with decrease in the number of people who have received disbursements this fall compared to last fall. Moving to gross margin, let’s turn to Slide 16. As a reminder, consolidated gross margin percentage this quarter was 50.6%. Gross profit margin for payments this quarter increased to 49.1% from 48.8% in the comparable prior year period. Our cost of sales and payments was approximately $12.1 million in the third quarter compared to $11.7 million for the three months ended September 30, 2014. The largest driver of the cost increase was additional volume related merchant expenses as a result of increased transaction count and volume SmartPay payment processing business. Gross profit margin in our data analytics line of business was 88.6% this quarter, down from 89.2% in the comparable prior year period. Lastly on this slide, gross margin for disbursements, excluding the impact of the allowance for customer restitution was $13 million this quarter compared to $17.1 million in the prior year. The decrease was driven primarily by lower account revenue. Gross profit margin was 46.1% compared to 51.6% in the prior year. Our cost of revenue decreased during the quarter due in part to the lower transaction volumes. However certain areas including our customer service costs did not decrease accordingly. We do expect to begin to see the annual cost savings of $4 million from the customer care outsourcing as early as next year. In addition, there are some fixed costs included in this line of business which are not impacted to this transaction volume change. Turning to Slide 17. Looking at operating expenses, we continue to make investments in compliance and product development. During the current quarter, general and administrative costs increased to $18.1 million. This increase is attributable primarily to two factors. First, depreciation and amortization increased $700,000 including amortization related to internal use software. And secondly, personnel costs increased by $300,000 including $200,000 of stock-based compensation expense. The 31.2% increase in product development cost which equates to 3.6% of gross revenue was primarily due to higher personnel costs most of which is related to product development for the data analytics line of business. Sales and marketing expense decreased 8.3% during the quarter to 7.4% of gross revenue. The decrease in sales and marketing expense was due primarily to a non-recurring amortization charge of approximately $300,000 recorded during the three months ended September 30, 2014. Turning to Slide 18. You will see that adjusted EBITDA was $11.2 million compared to $15 million last year. This decrease was largely driven by the decrease in account revenue and increases in G&A expenses noted earlier. Now let’s look closer at adjusted EBITDA margins of the three lines of business beginning on Slide 19. Adjusted EBITDA for payments was $6.6 million, an increase of 3.9% over the prior year period while adjusted EBITDA margin is 27.6% in the current period even with last year. Our data analytics line saw adjusted EBITDA increase by 4.4% this quarter to $1.6 million with margins decreasing to 35.8% from 40.7% in the third quarter of 2014. This decrease in adjusted EBITDA margin is attributed to the increase in product development costs that I covered earlier. Adjusted EBITDA for disbursements was down 57% to $3.1 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 20. Our adjusted diluted EPS equaled $0.09 compared to $0.15 last year. Adjusted EPS was impacted largely by changes in revenue and operating expense items already mentioned, including depreciation and amortization expense related to capitalized software placed in service since last year. Moving to Slide 21. Our free cash flow was $11 million in the third quarter of 2015 compared to the prior year quarter which had free cash flows of $10.7 million. This increase on a year-over-year basis is the result of larger cash flows from operating activities offset by increased spending on capital expenditures. Our operating cash flows increased largely due to favorable working capital changes which tend to vary quarter to quarter. Capital expenditures were up by approximately $300,000 in the current quarter compared to the same period in 2014. Moving to the last slide, Slide 22. We ended the quarter with a cash balance of $27.8 million which is up $11 million from the beginning of the quarter. The increase is the result of the free cash flow discussed earlier. The amount outstanding on the credit facility remains at $59 million at the end of the quarter. Subsequent to quarter end, on October 23 we amended the credit facility to allow for the Campus Labs sale. In connection with this amendment and upon closing of the Campus Labs transaction, we will be required to pay down the credit facility by $30 million. Additionally, the following terms were also modified. The revolving credit facility was reduced to $75 million, $35 million of which can only be drawn for the resolution of the regulatory matters discussed earlier. Our leverage ratio requirement is changed to 2 times beginning December 31, 2015 and our trailing 12 month EBITDA requirement is reduced to $25 million beginning December 31, 2015. And with that, we've concluded our prepared statements. We’ll now take your questions. Operator?

[Operator:]

[Operator Instructions] Our first question comes from the line of Mike Grondahl with Piper Jaffray.

[Mike Grondahl:]

Thanks guys. Could you talk a little bit about some of the OneAccount options and features that you’re testing and sort of how you think those will play out?

[Marc Sheinbaum:]

Yes, Mike, this is Marc. I think we talked about some of the new features that we've actually put into the new account, the OneAccount in terms of some of the marketing pieces we have in there. Some of the testing, I really can’t go into detail of that. I think a lot of the features that we’ve seen in NPRM are some of the things we’ve done for the analysis on, and we’ve done some market testing on but again, until we are getting a general sense of just what might work or what doesn’t, so I think again, we will be in better position to share that with you during the follow on calls.

[Mike Grondahl:]

And could you highlight maybe the two or three things that you think you’re most concerned about under the potential new rules?

[Marc Sheinbaum:]

Sure. Mike, again, I think we’ve been pretty public about that and in fact, as we commented on the rules that were proposed back in late May, we described our biggest concerns were the inability to get sufficient data to authenticate and verify the identity of the students because it could lead to fraud. We talked about the 30-day waiver of fees every time that there's a disbursement into the students account which can happen multiple times throughout the year, so that definitely has a big impact on economics. The third is the requirement for the choice page of the student to have a default – the default and the most prominent option to be the display being the ACH to the existing account. And obviously the concern with that one is that, with all the fee restrictions being asked on the account, if anyone could figure out how to make the economics work on that, not sure why the department would then say the default option should be the student existing account which might be with the bank that has nothing to do with the student disbursement business and wouldn't have any of the restrictions that department is asking from our accounts. So it doesn’t really make a lot of sense. Lot of our schools are very concerned about the requirement of paper check as being an option for everybody and then the final thing that we commented on, was the potential federalization of the program by the Department of Education.

[Mike Grondahl:]

Do you think it will pretty much be business as usual until July 1, 2016? And as a follow-up to that, do you have a range of how much you’ve got to spend to kind of modestly retool your operations or get ready for the new rules?

[Marc Sheinbaum:]

Yes, the last one I will tell you that, again, it’s hard to kind of get a range of pieces on that until we see what the final rules are, and in terms of the – I am sorry, go back to your first question again – I was focusing on the second one.

[Mike Grondahl:]

Will it be sort of business as usual the December, March or June quarter?

[Marc Sheinbaum:]

Again our understanding is that the rules will be in effect effective July 1, 2016. So any decisions we make prior to that will have to decide that at the time but right now we have no plan to make any changes before the requirement.

[Operator:]

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

[Oscar Turner:]

So just looking – I mean I know you guys talked about OneAccount and saw the disbursement dollars were down, looks like high double digits on a same school basis. Can you just provide color on how you think you can try to stem those declines in the future?

[Marc Sheinbaum:]

Yes, again, Oscar, I think – this is Marc again – I think it’s all going to come down to the final regulation. So I think it’s going to really come down to what are the requirements and what are the restrictions in terms of the choice page, the account features, all those pieces, I think that’s going to really drive what the future trends would look like here.

[Oscar Turner:]

And then I know last -- maybe the first quarter you talked about the customer care partnership and just wondering if you could talk about the progress there and what’s the timeline on implementing that initiative?

[Marc Sheinbaum:]

So again, I will turn it to Casey on that, I think we made terrific progress on that. Casey, do you want to give some more color on that?

[Casey McGuane:]

Sure. Well, as you mentioned, earlier this year we did announce a partnership to outsource the banking and disbursement customer care services by the end of this year. As Marc shared, we remain on track there. We should be fully transitioned in Q4 and the core competency of this partner is really focusing on customer care services for financial services. They began handling some of our volume in July and they are now handling a 100% of our inbound volume and overall we’re really pleased with this decision. So we are on track to complete the transition in the fourth quarter and we expect to see a financial benefit of approximately $4 million in 2016.

[Oscar Turner:]

And just last question, I was wondering if you could provide the percent of OneAccount revenue that was interchanged this quarter?

[Chris Wolf:]

Oscar, this is Chris. I will stick with the standard party line, that we are between 40% and 50% and that range holds true.

[Operator:]

Thank you. Our next question comes from the line of Gary Prestopino with Barrington Research.

[Gary Prestopino:]

In terms of the – if you look at the revenue buckets, your data analytics which you sold, right, that was $4.4 million approximately. On the income statement, is that booked into higher education revenue? And then what's left activity wise that you do in higher education revenue when this data analytics is gone?

[Chris Wolf:]

Yes, basically it is booked into higher education. Gary, it is right now -- when you look on the face of the income statement as opposed to the product line P&Ls what will be left in higher education will be the subscription, for one disbursed and for CASHNet, right, and that’s what will be left in there. But when we look at our product line P&Ls, those amounts are shown in disbursements and products. So I just wanted to distinguish those two for you. End of Q&A

[Operator:]

Thank you. I am showing no further questions at this time. I would now like to turn the call back to Marc Sheinbaum for final remarks.

[Marc Sheinbaum:]

Okay, thank you. So I want to again thank everybody for joining us today. We appreciate the questions and engagements in the call today. And look forward to speaking with you again soon as we learn more about the department rules. Thank you.

[Operator:]

Ladies and gentlemen this does conclude today's program. You may all disconnect. Everybody have a wonderful day.