Meta Data Limited
Q3 2014 Earnings Call Transcript

Published: 7 Nov 2014

[Operator:]

Good day, ladies and gentlemen, and welcome to the Quarter 3 2014 Higher One Holdings, Inc., Earnings Conference Call. My name is Mark, and I'll be your operator for today's call. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like hand the call over Kevin Leblanc, Investor Relations director. Please proceed.

[Kevin Leblanc:]

Thank you, Mark. Good morning, everyone, and welcome to the Higher One Third Quarter 2014 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 the call up for Q&A. There is a slide presentation that accompanies our discussion of the quarter and 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 risk 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 risk and uncertainties. There are a number of risk 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 the 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 risk associated with Higher One 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 future performance can be found in our current 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 nonrecurring or noncash 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 an 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, Kevin. And thanks to everyone for joining us today. With me on the call is our CFO, Chris Wolf, who will provide our financial update. We also have our Chief Operating Officer, Casey McGuane, to help answer questions after our prepared remarks. Now if you will please refer to the accompanying slide deck that is available on our Investor Relations website as I discuss the third quarter details and other topics. So turning to Slide 3. We had a sound quarter, and I have several highlights to share. Revenue was approximately 5% higher in the third quarter of 2014 compared to the third quarter of 2013. We saw significant organic growth in our Payments business, which continues to deliver increased transaction volume. Campus Labs, our data analytics business, also continued to perform well as a result of sales to new higher education institution clients over the past 12 months. As mentioned last quarter, we've been reinvigorating our product development efforts in this line of business. We ended the third quarter with adjusted earnings per share of $0.15, up from $0.14 in the prior year. So while account revenue is down 5%, our non-refund deposits continue to show impressive growth. Non-refund dollars deposited into the OneAccounts grew 16% over the prior year. These deposits, which now make up an excess of 12% of total dollars deposited, help diversify our deposit mix and result in more customers that are using our OneAccount for everyday purposes. In fact, customers that use ACH to make a non-refund deposit to their OneAccount, transact with the account about twice as much as the rest of the customer base. So we will continue to improve the methods by which customers can deposit money into their accounts. Now turning to Slide 4. Before I go into details on Refund Management, I'd like to give you more detail on the positive momentum in our Payments business. Our Payments business offers an outstanding service that benefit students, their parents and schools. For students and their parents, our services give them the ability to pay any type of charge or fee online anytime through a credit card, ACH, debit card or foreign currency. We also assist schools, so they can offer tuition payment plan services that help students and their families manage the growing cost of higher education. For schools, these services provide greater efficiency in processing payments by automating manual billing functions. Schools also can improve their cashiering operations, whether it's over-the-counter, in the back office or at campus events. Now we are pleased to say that our Payment transaction business now generates 30% of total revenue and just 2 years ago it represented only 16% of total revenue. Turning to Slide 5. I'd like to share some great developments in our Payment business. We reached a major milestone by completing the transition of Campus Solutions clients on to Higher One systems. Now we're combining the teams, which will strengthen performance by giving clients a common level of service and capabilities. We believe this will also lead to the expense synergies over the next 2 years. We are now in development of our new CASHNet enterprise system, which in the future, will combine the best of both Higher One and Campus Solutions products. This version will be best of breed and we believe can open up new growth opportunities for us in marketplace. And finally, we're adding even more flexibility and functionality to our payment suite, including a new user interface to make the user experience state-of-the-art. Looking at Campus Labs. As a reminder, Campus Labs provides institutions with the products and services needed to leverage data analytics to support student retention, resource allocation decisions and core processes such as accreditation. Our next phase with this business is to create more connectivity among our various product areas. This strategy will enable institutions to turn critical data into more powerful information and extend support to students and faculty. These enhanced data connections with supply tools, such as adaptive faculty development and teaching method trainings to aid and supporting student learning within the classroom. Through this new strategic direction with the Campus Labs business unit, we're reinvesting in the product, enhancing the distribution system and continuing to innovate to support the many challenges facing higher education institutions. Turning to Slide 6 on Refund Management. Let me start by addressing our regulatory circumstances. Last quarter, I updated you regarding the notifications from the staff of the Board of Governors of the Federal Reserve that they intended to recommend that the Board of Governors seek an administrative order against the company with respect to assertive violations of the Federal Trade Commission Act. While we have received many questions from investors as to when this matter will be resolved, we cannot give you a specific time frame or any additional details at this time. But we are working diligently to resolve this in a timely manner. Please turn to Slide 7, and moving on to the Department of Education. As you may be aware, the Department of Education did not publish proposed rules by November 1 with regard to Cash Management. We believe that the department continues to work on a proposed rule and if the one is published in the Federal Register by November 1, 2015, then we believe it will become effective July 1, 2016. We will continue to engage with the Department of Education and other regulators, consumer groups and students to help establish a new standard within the industry for clear, fact-based and neutral presentation of choices for students receiving their refund. We are not waiting for new rules. We are evolving and improving our refund selection process now that will give campuses options for the future. Turning to Slide 8. We recognized that these regulatory concerns continue to put downward pressure on our Refund Management business. Last quarter, I stated to be cautious on modeling new sales for the remainder of the year. Our sales team did a good job in the third quarter and we had new sales of -- on Refund Management product of 47,000 SSE. However, this is tempered by the fact that we lost Refund Management contracts, which had 36,000 SSE to bring a net sale gain of 11,000 SSE for the quarter. Although, I'm disappointed with each of these client losses, I am pleased to say that our retention rate continues to exceed 98%. And while we believe that the combined effect of the pending new rules from the Department of Education, the Federal Reserve note as I just discussed and the class action settlement we announced early this year, after which final approval is pending, while we believe all of these have made it more difficult to complete new sales, our relationship management teams have done a great job of maintaining existing relationships and they continue to sign renewal contracts for Refund Management. However, again, I would caution modeling significant refund gains in the near-term until there is additional clarity on these matters. Moving on to Slide 9. Our prized development team is also busy developing a whole new value proposition around the OneAccount and the debit card. One that, of course, has the core banking capability, but it also recognizes and continues to meet the needs of the unique set of customers. Our aim is to integrate features into our products that help students overcome known financial challenges that can prevent them completing their degree. We've just completed some very insightful quantitative research and students are excited about some of the ideas we're developing. We're planning to bring some of these new features to the market, to the 2015-2016 academic year. I also think that we have a unique opportunity to broaden the types of products and services we provide to students. We've recognized that after the initial experience with our OneAccount is excellent then it can serve as pathway to deeper engagement with Higher One. We are excited about this potential and are beginning to allocate resources to this vision. And now I will turn the call over to Chris Wolf for a further look at how the business has performed and the corresponding financials. Chris?

[Christopher W. Wolf:]

Thanks, Mark. At this point, I'll begin the discussion of our financial results for the quarter starting on Page 10 of the accompanying slide presentation. Please remember that all growth rates I mention will be year-over-year unless otherwise specified. Turning to Slide 10. Revenue for the third quarter was $59.8 million compared to $57.1 million during the third quarter last year, an increase of approximately 4.7%. I'll get into more detail on the drivers of our revenue changes on the upcoming slides. We had a gross profit margin of 52.9% in the third quarter of 2014 compared to 56.2% last year. The year-over-year change in gross profit margin this quarter was impacted by additional volume-related merchant expenses as a result of increased transaction count in volumes in the Payment business, combined with lower account revenue. We also experienced higher fraud-related cost to support OneAccount services. Offsetting those increases was a reduction of approximately $1.2 million in costs associated with the student banking options that were offered by Campus Solutions through June of 2014. Moving to Slide 11. Enrollment and disbursement trends are key drivers in our business so we'll start off with what we saw during the fall disbursement cycle on refunds. Enrollment date is released on a 1-year trailing basis so our client school enrollment is the best proxy we have when we are looking at enrollment trends. In summary, total unique recipients increased by 9%, which was aided by an 8% increase in launched SSE. But this increase was offset by the decrease in average refund size of approximately 2%, resulting in total dollars disbursed increasing by 6%. This increase in total dollars disbursed was offset by declines in adoption rate in our total school population, which resulted in total dollars disbursed in the OneAccounts being down 7%. The decrease in adoption rate is the function of reductions both at same schools as well as new clients that have a lower rate than our overall average. New schools typically have lower rates when our service is first implemented. Offsetting these changes is the 16% non-refund deposit increase, which led to a decrease in total deposits into the OneAccount by 4%. Turning to Slide 12. On a same-school basis, total unique recipients were down approximately 2%, and we saw average Financial Aid dollars down approximately 3% for total dollars disbursed being down 5%. We also showed an 8% decrease in year-over-year refund dollars going into the OneAccount. As a result, total dollars disbursed into OneAccount on a same-school basis were down approximately 12%. Turning to Slide 13, the waterfall slide. This waterfall slide illustrates the approximate impact of the different drivers that affected our account revenue. For this presentation, we try to isolate the impact of a number of changes that have happened over the course of the past 12 months. While we've shown them in separate columns, changes in one factor will often impact another factor. We have estimated the revenue impact based on these relationships that existed as of the third quarter of 2013. To be clear, this is an illustrative example to show directionally the moving parts of the account revenue and the impact that one factor can have on revenue. As shown in the second column, our account revenue increased by approximately $1.7 million based on net launches of new schools compared to last year. As you can see, this increase was offset by a combination of $1.5 million from lower enrollment and Financial Aid disbursements compared to last year, shown in column 3, as well as the decrease shown in column 4 of $2.3 million in overall account adoption year-over-year. Marc spoke about the increase in our non-refund deposits. This had an estimated $500,000 positive effect on revenue. Finally, column 6 shows the change that we've made to our fee schedule and other changes compared to last year. The overall effect of these miscellaneous changes led to a decrease of approximately $100,000 in account revenue year-over-year. Turning to Slide 14. As mentioned earlier, we continue to diversify our revenue streams. Payment Transaction revenue showed strength in the quarter, up approximately 25% over last year. The increase in Payment Transaction volume was primarily due to strong revenue growth in the Payments business, which was discussed earlier. Higher Ed. institution revenue grew 10% year-over-year, driven mainly by Campus Labs revenue and also from revenue associated with the CASHNet Suite. The 18% increase in Campus Labs revenue was due primarily to sales to new higher education institution clients over the past 12 months. Account revenue decreased approximately 5% from the prior year, which was due to lower amounts deposited into and spent from the OneAccounts, which resulted in decreased interchange and service fees. The overall movement of the account revenue was covered on the prior slide. Moving to Slide 15, looking at operating expenses. While we continue to make investments and compliance product development and other related areas, our operating expenses are down approximately 6% year-over-year. This is the result of prudent measures that we have implemented. Additionally, we incurred a $1 million bank partner transition charge last year. As a result, our general and administrative expenses were essentially flat for the quarter. The decrease in product development cost was driven by a couple of factors. First, there was a decrease in certain transition-related product development expenses associated with the Campus Solutions acquisition compared to the prior-year period. Although these transition-related product development cost decreased in the current period, we still have work to do and there could be some variability in the cost as we closed out the remaining transition-related services and activities through the end of this year and into 2015. In addition, there was an increase in 2014 of internal cost, which were capitalized rather than expensed. These costs are related to internal-use software development projects. Sales and marketing expense decreased during the quarter. This was primarily due to a decrease in personnel-related costs due to streamline of our sales force and lower discretionary marketing costs. Offsetting these decreased expenses was an increase in amortization expense of approximately $400,000. Turning to Slide 16. You'll see that adjusted EBITDA was $15 million compared to $14.3 million last year. This 4% increase was largely driven by the operating expense savings noted earlier. Moving to Slide 17. Our adjusted diluted EPS equaled $0.15 compared to $0.14 last year. In addition to the revenue expense items already mentioned, adjusted EPS was impacted by changes in other income and other loss. In the current quarter, we took a charge of approximately $300,000 when we sold our interest in the residential real estate project adjacent to our headquarters. Last year, we recorded other income of approximately $300,000 related to the divestiture of certain K-12 client contracts, not considered part of our core strategy that we required in connection with the Campus Solutions acquisition. Slide 18 shows that our free cash flow decreased to $10.7 million from the prior year period quarter of $18.1 million. This was largely due to a decrease in net cash provided by operating activities in the third quarter of 2014 compared to cash provided by operating activities in the third quarter of 2013. Our operating cash flows are sometimes impacted by the timing of normal working capital changes that vary from quarter-to-quarter. Capital expenditures were lower by $597,000 in the third quarter of 2014 compared to the same period in 2013. Turning to Slide 19. We ended the quarter with a cash balance of $32.4 million. In addition to the items affecting free cash flow that were mentioned on Slide 18, we also received cash of $3.6 million under disposal of the equity method investment in the real estate project that I mentioned earlier. We now have $94 million drawn on our line of credit. One of the financial covenants in the credit facility relates to a requirement to have a minimum of $50 million of trailing 12-month EBITDA, as defined in the credit agreement. As of September 30, 2014, our trailing 12-month EBITDA, as defined, was $53.7 million. Last quarter, I discussed the potential impact of the pending regulatory matters on a credit facility and liquidity sources. These regulatory matters have not been resolved and we are uncertain as of the timing of their resolution. Please note that we're on regular contact with our bank lending group. We're also exploring alternative financing options in the event that any potential restitution and/or civil money penalties are of such magnitude that our current banking group is unable to grant covenant release. Moving to the last slide, Slide 20. We have previously discussed our views on what impacted sales in the third quarter of 2014. The Refund Management SSE growth rate was 6% on a year-over-year basis, ended September 30, 2014. As previously discussed, a good portion of its growth has been driven by the conversion of Campus Solution refund clients. This quarter's numbers also include a decrease of 112,000 SSE, which reflect changes from the fall 2012 to the fall of 2013 enrollment figures, which were released on a provisional basis by IPEDS this quarter. Looking at the number of OneAccounts, you'll see that it decreased slightly year-over-year. This decrease is partially a result of closing nearly 100,000 accounts, which had minimally overdrawn balances in the second quarter of 2014. In addition, the reduction and account adoption at the same-schools discussed earlier also had impacted the number of accounts at those schools. However, on a sequential basis, the number of OneAccounts increased by 100,000 accounts. In summary, we had a solid quarter and continue to operate effectively, while we strive to continue to improve operational efficiency. Looking ahead, we still have uncertainties to the timing of decisions by the Department of Education in the matters relating to the Federal Reserve. Despite these challenges, we will continue to provide the highest-quality products, services and support to our customers. This concludes our prepared statements. And with that, we'll take your questions. Operator?

[Operator:]

[Operator Instructions] The first question comes from the line of David Scharf of JMP Securities.

[David M. Scharf:]

To start, this may have been asked before. But given that sort of the 2 broad businesses, the payments and processing versus the student banking or kind of arguably trending at different directions, can we get finally some, maybe, segment profitability or EBITDA figures just to help us understand ultimately the degree of contribution from the banking side versus the Payments and Campus Labs side to operating income?

[Christopher W. Wolf:]

Yes. David, this is Chris. Thanks for the question. The short answer is we're working on it and we fully intend to disclose that information. Part of the challenges that we've had, in all candor, is gathering some of the historical information that's required for segment disclosure in accounting purposes. And plus, I think, you do point out a -- a good point is there has been a tilt more towards those businesses and we, as a management group, are devoting more time to that and we are evolving in our management process there. But I do want to reiterate that we fully intend to do that. I would caution that I'm not sure it will be next quarter, but we fully intend to get it done as soon as possible.

[David M. Scharf:]

Got it. No, much appreciated it. And Chris, maybe you can tell me, just give me a sense for kind of the scale of the business. Within Payments, effectively, CASHNet, most are -- I mean, how much of that revenue is interchanged, is kind of passed through revenue, that's also in cost of sales from those convenience fees? Just trying to understand on a net revenue basis, how large that business is.

[Christopher W. Wolf:]

Unfortunately, David, I'm going to have to defer that question right now. I mean, we're just not in the position to break out the pieces at this point. It's a good question. But that's something I'll just have to take a pass at, at this time.

[David M. Scharf:]

Got it, okay. And I'll just move on to a couple of questions on the disbursement side. It's very helpful information on Slides 11 and 12 giving us a sense for adoption trends. When we look at the, I guess, the negative 12 on a same-school basis, the negative 4 for all looking at the dollars deposited into accounts. Wondering -- are the new -- first off, are the changes to the marketing that has been discussed both in the context of what the DOE may eventually do, and now that looks like that's going to be a good year plus down the road versus some proactive measures you've taken? Have you already implemented, in this fall enrollment season, most of the plan changes on the marketing front that have been discussed in the past calls?

[Marc Sheinbaum:]

Hi, David, it's Marc. Look, I think we've made a lot of changes to the refund process over the past several quarters. And they've been made and working with our bank partners, our clients, schools, regulators, compliance team, marketing team, and I think it's hard to kind of say most are done. I mean we'll continue to evolve the refund offering and that's is just a continual process as any product, you'll try to continue to improve that. And I think, the other thing we should all remember is, yes, we've made changes, but on top of that, we know that we've been highlighted in the news. I mean, it's been out there, all the regulatory and legal issues has been part of the news wire. So really is almost impossible to isolate what's causing what, in terms of adoption rates. And I think we're really spending most of our time thinking about in terms of adoption rates, really the value proposition of the product, right? So I mean, many companies go through changes and response rates and activation rates. I spent a lot of time in the [indiscernible], response rates have been going down for years there. And so all we can do is really work on the value of the product, right? What's the OneAccount and what's the bank account. And we've created a great product and continue to evolve what we already think is a great product. But we know it's competitive and consumers have choices, so we evolve that product and put value behind it -- additional value behind it all the time. We expect to get our fair share of customers choosing our product. So I think that's where we're focusing our attention. And as far as to answer your question, have we done most of the changes? It's really hard to say because there are no rules, right? So I think we're trying to get ahead of this as best we can.

[David M. Scharf:]

Got it. That's helpful. And as far as, I guess, contract expirations, it was helpful to note the net SSE traction this quarter. Given that it is a new environment, can you give us a sense maybe for -- of the installed base of SSEs, maybe something equivalent to a maturity schedule. Like, how many of those SSEs are in contracts up for renewal in 2015 and 2016? Just so we have a sense for the resigning schedule, if you will.

[Marc Sheinbaum:]

So we have over -- I'll take the first half and then Casey and Chris can add in. We have over $5 million SSEs as you know. In this past year, I believe that we signed contracts, pretty much over 80 contracts representing about $1.2 million of the SSE. Now we do have a bunch up for renewal next year. It's going to be almost another close to $1.9 million SSE up for renewal next year. And of those 80 contracts we signed this past year, that's a pretty good renewal rate, we're pretty pleased with that. Again, as I mentioned, we don't like losing anybody. And I've recognized the environment's -- the environment is challenging right now. Plus, as I said, we're pretty proud of the team that are out there, who are talking to clients all the time, we're bringing up the speed on not just where we're been but where we're going and what we doing. And so, if it's -- I think it will be a challenging environment for -- but I feel pretty good about our chances with it. And so hopefully, that -- but we don't really have like a -- you're looking for more of a tenure type of level of what happens year after year. But then it gives you good overview of at least the 24-month period.

[Operator:]

The next question comes from the line of Michael Grondahl of Piper Jaffray.

[Michael J. Grondahl:]

Could you talk a little bit about some of the customer experience improvements that you're making or plan to make to the OneAccount. Just sort of kind of how you have modified that over the last few quarters.

[Marc Sheinbaum:]

This is Marc again. I think the plan and most of the research, without divulging too much of our competitors to get hold off. Most of the research that we've done has been unique to, obviously, the student groups. And we've looked at all different segments of our student population of 2-year schools, 4-year schools, different age categories. I think -- one of the things that really popped at us, and we've talked about this before, is financial literacy is something that's really important to colleges and campuses as well as to students. And so yes, we have a very robust financial literacy program. But just giving a training class is one thing. But if we can kind of build those capabilities, those concepts into the product itself, so that students learn by actually using the product and we help them with tools that help them manage their limited financial resources. We knew that would resonate a lot with campuses, but it's actually resonating really well with students too. So I think those are the kind of things that we're really excited about putting into the program.

[Michael J. Grondahl:]

Okay. And then the Sallie Mae accounts that you brought over, what's sort of an update on that number, and how are we going to see those roll into the active OneAccounts?

[Christopher W. Wolf:]

Hey, Mike, it's Chris Wolf. Thanks for the question. As far as that goes, just kind of to the levels that where we were back there is, if you remember, we said there were about $1 million SSE that were coming across on their refund business and we have signed approximately 466,000 right now. So -- and if you recall, this was the first period where we really started to see activity with them, that we've basically shut that system down in June. So they're going to convert over to our system. Obviously, there are some transition issues as far as the way the program was run on Sallie Mae and we're brining those over from the former Campus Solution more into our mode. So I would say, right now, this is really the beginning of the full integration on the refund side. And like I said, we basically hit our goal, our goal was to get to that 50% number. We're at 466,000, so we're just a little short of 500,000. So we're on target. The adoption, as far as that goes, has, I can say, is -- that rate has been better than it was under Sallie Mae. And as I mentioned in my comments, usually in first year, we see lower activation or adoption rates, but we've been pleased so far with those.

[Michael J. Grondahl:]

Okay, okay. And then for the ATM fees, could you kind of give us what you're thinking there, potential workaround or alternatives you're coming up with?

[Marc Sheinbaum:]

Yes, this is Marc. I guess -- glad you brought that back up. I guess I should mention that too in terms of the value proposition. There was a discussion as you probably are aware as part of the neg reg part that Casey McGuane here was part of. And we are looking at alternatives and enhancements to ATM access. This is probably one of the rules that not being solidified with the fund education is really kind of slowing us down a little bit. And the fact is that the rules as they stand today on that ATMs have to be on onto your campus. And so, it doesn't give us a lot of optionality like the second. So we do think it's important to get some clarity around that rule and then we will be prepared for what the alternatives are, that we can do once we understand what that rule is. But that's a really important clarification that we need before we can make any movements on the ATMs.

[Michael J. Grondahl:]

Got it. That's a good point. Chris, could you maybe help us understand? In 2014, how much non-core expenses did you guys have, whether it was legal or regulatory related? And then secondly, could you kind of help us understand the synergies maybe over the next 2 years, just a range maybe, from putting the Campus Solutions on to the Higher One systems --

[Christopher W. Wolf:]

Sure. Let me try to go back on the question that you talked about as far as the non-core. There's probably some art in that definition in the sense that, there was a fair amount of legal fees and things like that. Sometimes, it's a little difficult to separate what's ongoing versus unusual in that sense. But what I would tell you, if you go back to when I first started in 2013, we have talked about making investments upwards the $7 million in these types of activities, being compliance legal, to bring us up to speed and plus to kind of react to some of the issues we face. And I can say that we've hit that and exceeded that number. So it was -- it's been a pretty substantial number, both in 2013 and 2014. As it relates to Campus Solutions, right now, I think we talked when we did the acquisition there that we were hoping that we would make the company EPS accretive at the end of this year, that's what we talked about when we did the acquisition. And I think you've seen where we talked about in previous quarters, where we were break even or slightly above in those numbers. So I think we've done a good job there. But to answer your question directly, I would say that we probably have expenses in the $4 million to $6 million range that are on the table, that we can work on. The key is how quickly we can do the integration and how much of that can go away. Because there are some costs that we -- will stay on there. But I would attribute to where we were, I think, when we talk to folks back when we had -- the loss in that company was greater $10 million. So I think we've done a good job as far as taking cost out. But as I've mentioned in my comments, we still have some integration to do. We have a little bit of development to do as we bring them other programs onto our platform. But I think if you're modeling like I said, that $4 million to $6 million range is the number that the cost that are still there.

[Michael J. Grondahl:]

Okay. And then, your free cash flow was very strong in the quarter at $10.7 million, and your cash balance has improved greatly over the last quarters, up to $32 million. Can you help us think about just next few quarters. I mean, is there any reason why for the next couple quarters those trends don't continue?

[Christopher W. Wolf:]

Yes. I'll finish that, Mike. Well, first of all, I do want to caveat, we don't give guidance. So I have always have to put that disclaimer in here to start. But I think if I'm doing my research and looking at the company and I'm looking at historical patterns, I think folks know what our fourth quarter has been historically, relative to the other quarters. I think when you will look at us from the seasonality standpoint, Q2 is our seasonally low quarter. So Q4, Q1 tend to trend positively, and I'm just speaking in the context of historically. So I think when you look at what we've done historically, that's a good starting point. The other thing I will add, we do have working capital fluctuations from quarter-to-quarter. As you can see, we actually negatively impacted this quarter. So that comes into play. But as you know, that's the normal vagaries quarter-to-quarter. And then the last point, I just want to mention, is capital expenditures are a part of that. Once again, we don't give guidance. But I think you've seen where we've been -- where we've settled in from a normalized standpoint. And the only caveat I would mention against that is that in my comments, I did mention that we would do some development spending. We're are doing in the Campus Solutions and in the CASHNet product suites there. So that's something you might going to factor in as well.

[Michael J. Grondahl:]

Okay. And then just lastly, the diluted share count, I think fell to 47.7, what pushed that down sequentially?

[Christopher W. Wolf:]

Yes, once again, Mike, this is Chris. It's really simple. It's really the stock price. It's really factored in there. Shares that are out of the money, if you will, are not counted into denominator for those who know the earnings per share diluted calculation. So that's why it's fixed shares, yes.

[Operator:]

The next question comes from the line of Michael Tarkan of Compass Point.

[Michael Tarkan:]

In terms of the new sales this quarter, did any of those come from Campus Solutions or were they completely new relationships? And then on the 80 contracts or so that you renewed this past year, were there any material changes in terms of the contract length, or any other significant changes in there?

[Marc Sheinbaum:]

Hi, Mike, it's Marc. Yes, the -- no, those new deals this quarter were all greenfield, they weren't Campus Solutions. And in terms of the -- Casey, I'm looking at the second part?

[Casey M. McGuane:]

In terms of the 80 contracts renewed this year, Mike, no. I mean, really about the same.

[Marc Sheinbaum:]

Term was about the same.

[Casey M. McGuane:]

Term's about the same.

[Michael Tarkan:]

And that those are roughly, just to remind me, just around 3-year contracts or so?

[Casey M. McGuane:]

On average, yes.

[Michael Tarkan:]

On average. I guess, shifting over to the departures this quarter, can you give us a sense for how many campuses moved over and maybe did they go to another provider, did they decide to this in-house, or any kind of additional color there?

[Marc Sheinbaum:]

Yes, Mike, it's Marc again. About half of the SSE we lost, it was 34,000, about half of that, they brought in-house. A number of SSE going to house and the other half went to competitive. So it's about half and half.

[Michael Tarkan:]

And in terms of how many actual schools or campuses, are you guys...

[Marc Sheinbaum:]

Without them, those are made of about 6 campuses in total for the third quarter.

[Michael Tarkan:]

Okay. And then on the expense side, just kind of getting back to this little bit. Do you have an ability to kind of take out some more meaningful cost ahead of what's probably some disruption on the account business going forward? I know the -- that changes won't take effect for another year-and-half, but are you contemplating any kind of -- any more in terms of like a more formal restructuring plan?

[Marc Sheinbaum:]

Again, Mike, the answer is we're looking at everything, and we have to anticipate and we are. I think, we're looking at all the new parts of the business about how we operate. And I think the most important thing is that we are -- we do have investments to make. And I think we do want to improve the OneAccount and the business, but as you are seeing the trends here, yes, the revenue's down. So we have to be really, really, really sharp about where we make those investments and what do we stop doing. I think that's just a prudent business practice that we are going through. We're going to now, and I think we'll be going through it for several quarters. Chris, do you want to add anything?

[Christopher W. Wolf:]

No, I think, that's fair. I mean, we have -- we are trying to manage cost. I think as we mentioned in the comments, we're just getting smarter and more prudent in our practices there and I'll echo Marc's point that we're looking at everything.

[Michael Tarkan:]

Understood. And then lastly, just regarding the Refund Management product development that I know you guys are looking into. Any sense as to maybe the timing of some announcements whether it's changes to the fees or a new kind of offering, any kind of color there?

[Marc Sheinbaum:]

Yes. And again, Mike, it's Marc. Anything that we do for the 2015, '16 academic year, it's going to have to be in the marketplace in no later than late spring. And we don't have impact on the 2015, '16 season. So we're looking at a bunch of things now and to privatizing some things and even testing some things. So I think late spring would be the late -- latest you can expect to hear something on that.

[Operator:]

The next question comes from the line of Oscar Turner [ph] of SunTrust [ph].

[Unknown Analyst:]

Just looking at your Payment transaction business. It looks like you guys have really been able to benefit from Campus Solutions. And I was just wondering, how do you think we should think about that -- the organic growth rate for that business going forward?

[Christopher W. Wolf:]

Yes, this is Chris. I'll try to take that question. I think as far as the first part, I agree, we have definitely gotten benefit from the addition of the Campus Solutions business, their product, their cash net equivalent, if you will. We have gotten benefit from that as it's added in over the year. One thing I would say though is we, on the on Higher One side, in our CASHNet, we've had nice organic growth over the past year as well. As we've mentioned previously, we added these as a payment mechanism and that has -- that receptivity has -- is driven revenue on that as well. So I would say those 2 things have annualized and so the growth rate there, because of those 2 things there, is at a slower pace. But I would add though is that we are still strong on organic sales and we are adding clients and so I think you have to temper that as well. So when you look at those 3 things, I'll leave it to you to decide what the numbers because I am a little hamstrung because I -- we don't give guidance per se. But we still feel pretty good about our pipeline on the CASHNet side.

[Unknown Analyst:]

Okay. And as far as that -- I don't mean to push too hard, but is that low single digits, is that...

[Christopher W. Wolf:]

Yes, you're pushing too hard. I hate to be [indiscernible]. But yeah, I mean, I'm a little bit hamstrung, like I said. But the one point and I would reiterate that you want to think about is that we did get growth from the Campus Solutions Suite as you picked -- as you mentioned early on in and that has annualized.

[Unknown Analyst:]

Okay, thanks. And just a follow up question on the adoption rate. It looks like, for the quarter, that's in the low 40% range. And is that a reasonable run rate that we can use to model going forward?

[Marc Sheinbaum:]

This is Marc again. I think, again, we don't give forward guidance about going forward. But all I could say is that we really can't anticipate what that number's going to be. Based on the fact that rules haven't been fortified with the Department of Education, and we don't know what additional changes will be coming. And as I said, we'll be making additional changes on our own too. So I really can't tell you that -- what the number should be in model at this stage.

[Operator:]

The next question comes from the line of David Scharf of JMP Securities.

[David M. Scharf:]

We clearly understand the lack of visibility in the absence of rules. But Marc, maybe just another angle to help us get a sense for potentially how to think about where SSE's in the account level? Looks like a year from now. Can you give us a sense for -- because I'm sure there's an internal CRM prospecting tool. Trying to get a sense for the schools that were sort of in the active calling list, or the schools that are kind of in wait-and-see mode a year ago. How many of those are kind of still in the prospecting list today? Meaning, how many of them that you were calling on that were kind of in that prospect list 12 months ago, has since either gone to a competitor, maybe pursued an in-house solution or if just kind of remained in sort of indefinite wait-and-see mode. Just so we have a sense for how the true pipeline really has evolved in this environment?

[Marc Sheinbaum:]

Yes. I think that it's fair to say, I don't have the CRM sales pipeline in front of me here to tell you exactly how do answer but do the math on in there. But I can tell you that our intelligence is that most of the people even spoke -- speaking to are just kind of in the wait-and-see mode right now. It's not like we're in a big influx. Now There were Campus Solutions clients. So if you looking at sales activity that might be going on with our competitors, we picked up half of the million SSE. The other half went some place. So I do know that, that some of them probably went to our competitors. So in terms of the greenfield out there, as a said, we continue to have robust conversations, and I think -- my sense is there's a lot of wait-and-see mode out there. And the good news about those conversations is because now, one thing -- one of things Chris mentioned in his remarks, we have integrated our sales teams between the payments and the refund team. So we have one voice out there now. So even though we may not be having that audience right now, we're still in front of these clients talking about payments. And our relationship people are still in front of them talking about payments. So we're going to be there and we're in front of them all the time. So I think that it's -- I'm confident that it will be active when it's -- it will be easy to get the activity going again once they're ready.

[Operator:]

And the next question comes from the line of Mike Grondahl of Piper Jaffray.

[Michael J. Grondahl:]

Just 2 follow up questions. One, as you see the, I guess, slightly lower adoption, are you responding to that with any marketing or kind of what effort are you putting into maybe change that? And then secondly, Marc, I just love your take on kind of where you see Higher One today and sort of your outlook for the business.

[Marc Sheinbaum:]

Yes. So the first one, I think is -- I'll go back to what I said earlier, is that our focus is on creating a great refund process for the schools and for the students, clear transparent, neutral choice. And in terms of we'd love them to pick the OneAccount based on the fact that I think it's a great value. And so we -- we'll -- I think we'll always be in a never-ending improvement process of the value proposition of the account, just like any other account bank product or card product has to do. So that's where our focus is, is on the value proposition. And look, in terms of where I see the business going, I think, as you can tell, obviously we're -- it's -- we're evolving in many different areas, we're very bullish on the payment space, it's what we highlighted today. We're very excited about the Campus Labs space and the work that we're doing on there and how that helps schools and help students. And on the refund space, it's a very, very important product for schools. We think that refund business is important. Schools appreciate the service you provide, helps them drive down cost and they like the fact that we offer the account to all their students. And that -- if there are bank customers out there, they can actually get an account. So I think that if -- I think right now, obviously, it's a moving target on the refund space, and it's hard to kind of pinpoint where it ends. But I do think that if we continue to provide value and work on things we're working on. We'll open up more schools and we'll get more accounts. And so I do think that there's a strong viability for that going forward. And then I think at same time, I think we're looking at other things. right? So are there other products we could be offering to students while they're in school and when they graduate, that enhances the value to Higher One. And we're also going to look at other products and services we offer to schools themselves. We have a great audience with the financial people at schools, the CFOs, the Bursar's, the Financial Aid office. What are the things can we be developing for them going down the road. So I think, our -- we believe if we create an excellent service and reputation with our customers, that's going to give us a great runway for additional things to add on. I appreciate all your time here today. I think I just wanted to wrap up and look, I think we -- I think you know Higher One's committed to helping colleges and universities to drive student success. As I said, I think our services, they do help schools, reduce their administrative cost, enabling them to reinvest their savings into academic programs and creating a better experience on campus. Higher One's also committed to helping students remove financial barriers to graduation. For years, we've assisting students in becoming financially capable with our financial literacy seminars, grants, partnerships throughout the nation, which helps students understand and limit and manage their financial obligations. And we look to help to set the industry-standard by offering products and services that students can rely upon everyday to become more successful in the classroom, on campus and in life. So again, thank you for participating today, we look forward to speaking with you on our next call.

[Operator:]

Thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Enjoy the rest of your day.