Meta Data Limited
Q2 2013 Earnings Call Transcript

Published: 8 Aug 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the Quarter 2 2013 Higher One Holdings, Inc. Earnings Conference Call. My name is Laura, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. And I'd like to turn the call over to Mr. Kevin LeBlanc, Investor Relations Director. Please proceed, sir.

[Kevin Leblanc:]

Thank you, Laura. Good morning, everyone, and thank you for joining us on Higher One's Second Quarter 2013 Earnings Call. Giving prepared remarks on the call today will be our Chief Executive Officer, Mark Volchek; and our Chief Financial Officer, Chris Wolf. Mark 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 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 words -- 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 contained are based on the current beliefs and expectations of Higher One and is 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 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 risks associated with Higher One -- with the Higher One business, please refer to our filings with the Securities and Exchange Commission including 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 the factors that could affect future performance can be found on our recent SEC filings available on our website at www.ir.higherone.com. 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 the appendix of 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, Mark Volchek. Mark?

[Mark Volchek:]

Thank you, Kevin, and thank you, everyone, for joining us today. With me on the call is Chris Wolf who will provide our financial update. We also have our President, Miles Lasater and our Chief Operating Officer, Casey McGuane, who will be available to answer questions after our prepared remarks. We have several topics to cover on today's call, so let's jump right in. At a board meeting held last week, our board voted to expand and added Sam Braunstein as a director. She has a long history as a senior consumer marketing executive and is a successful entrepreneur. I would like to publicly welcome Sam to our board and know that she will provide great insight and be a welcome addition. In addition to expanding our board, since the beginning of the year, we have added several positions to our senior management team including a new CFO, Chief Marketing Officer, Chief Compliance Officer and a Vice President of Product Management. We believe that these new hires are valuable in positioning the company for future growth and striving for the highest compliance standards in the industry. Please refer to the accompanying slide deck that is available on our Investor Relations website as I discuss the quarter and other topics. Turning to Slide 3. Total revenue came in above results for the second quarter last year. Account revenue declined due to changes we made to our fee structure over the past several quarters. Adjusted EPS was $0.04 per share. We believe that the acquisition of the Campus Solutions business from Sallie Mae will be dilutive to our earnings this year and accretive to our 2014 earnings. Operating expenses were up during the quarter, which is mainly the result of added employee costs from the new senior management positions I mentioned and over 100 individuals that joined our team with the Campus Labs and Campus Solutions acquisitions. In addition to providing details on the recent acquisition of Campus Solutions from Sallie Mae, I will also cover updates on sales and our competitive position, product development and the regulatory compliance environment. Turning to Slide 4. There are many factors that make the acquisition of Campus Solutions a great fit for us. This acquisition gives us the opportunity to significantly grow our refund and payment client base, further diversify revenue and provide future opportunities to work with Sallie Mae on other products and initiatives. For many years, both Higher One and Sallie Mae have shared a clear focus on serving colleges and universities and our Business Office Solutions strive to bring more cost savings and efficiencies to higher education. Let's take a look at Campus Solutions' 3 main products. Tuition Payment Plans or TPP is a full-service payment plan that allows students to pay tuition fees over time rather than in one lump sum. NetPay is Campus Solutions' billing and payment solution. TPP and NetPay address the same needs on campus as our CASHNet Suite of Payment Products. Campus Solutions Refunds is a refund processing service often linked to prepaid cards and checking accounts. Sallie Mae's selected Higher One's proposal to acquire the Campus Solutions division in part due to our track record of client satisfaction and market-leading products. I'm excited that many members of the Campus Solutions team have joined us. These talented individuals will be instrumental in making both the transition and the future a success. Now turning to Slide 5. The integration of Campus Solutions is progressing. And as the first priority, we are focused on integrating the sales teams. With the addition of 8 sales professionals from Campus Solutions, we now have 38 total people on our outside sales team. We have trained the entire combined sales force on the Higher One products and the integration of the client-facing aspects of Campus Solutions is progressing according to plan and we feel good about the results so far. We feel that there are 3 main components to making this deal a significant contributor to our future revenue and earnings. First, we must leverage the knowledge and expertise of the Campus Solutions employees and the best elements contained in the Campus Solutions software to continue to enhance our OneDisburse and CASHNet suite of services. This, along with our pipeline of product enhancements, will help ensure we remain a leader in each market we serve. Second is to generate more revenue out of the combined products and combined client base. We will migrate the existing Campus Solutions Refund processing clients to OneDisburse. We also anticipate a large cross-selling opportunity over time to CASHNet and Campus Labs. The third component is to take advantage of the cost synergies of migrating everyone off the legacy Campus Solutions technology. The team now more deeply understands the intricacies of this complex technology challenge. The purchase price of the Campus Solutions acquisition was approximately $47 million and was funded with our existing credit line. In 2012, Campus Solutions reported revenue of approximately $24 million. We expect the transaction to be dilutive in 2013 and accretive for 2014. The key to making the transaction accretive will be to migrate the existing Campus Solutions' Refund processing clients to OneDisburse. So to summarize, we plan to generate more revenue while also take advantage of the cost synergies of migrating clients to one technology platform. Turning to Slide 6. As I mentioned previously, we have completed the integration of the Campus Solutions sales team within our existing Higher One sales team, would sell OneDisburse, CASHNet and Campus Labs. We fit Campus Solutions' sales personnel into position within each product family, speeding our hiring process and providing depth within the team by adding more professional with extensive higher education experience. Two weeks ago, we had the entire combined sales force together here in New Haven for extensive product training. The team continues to meet with and educate former Campus Solutions clients about Higher One and our products. We have begun signing Refund clients to migrate from the Campus Solutions legacy product to OneDisburse, 6 in the last 6 weeks. We believe we will have continued conversions to OneDisburse over the next several quarters, as clients learn about OneDisburse. Ultimately, we are contractually obligated to phase out the Campus Solutions legacy refund disbursement product in the second quarter of next year. We're investing in infrastructure and software that enable continuous improvements in our payments business. Campus Solutions payment clients will have the opportunity to migrate to Higher One technology platforms in a phased conversion process. This process is scheduled to take approximately 18 months. We have a team within the sales group focused on training and scheduling the migration of Campus Solutions clients to this new infrastructure. Turning to Slide 7, I'd now like to talk about our sales and our competitive position. We remain the industry leader in providing high-quality, cost-saving tools for colleges and universities to serve their students better. Our outside sales team continues to meet with college administrators and business officers to address the pressing needs of reducing operating expenses while enhancing student service. There are ongoing questions in higher education right now regarding regulation, convenience and choice for students. Talking through these issues is an important part of our sales process. Some of our sales cycles are extended, while we work closely with institutions to vet and address each campus' unique goals and perspective. The total pipeline for OneDisburse remains large but the conversion to close deals is slower than I would like. Sales for CASHNet continue to be strong. We now have a bigger presence in the payments line business since acquiring Campus Solutions and we should benefit from greater scale going forward. And Campus Labs sales are up from last year. We increased the size of our Campus Labs sales force, adding representation to the West Coast and Southwest. From a competitive perspective, we are stronger with the addition of Campus Solutions in all areas of our business. We have more clients, more sales and support personnel and have grown our customer base significantly. This positions us for more cross-selling opportunities and provides our clients with ease and convenience in working closely with a partner that knows their campus well. Having a trusted partner who is actively investing in addressing your long-term needs is a valuable relationship in any business. This kind of relationship is especially important to leaders in higher education now, as new challenging questions have arisen in the national dialogue concerning expectations for college education today. Turning to Slide 8. Let me move on to our product development roadmap. We are renewing our focus on product development and innovation and are investing in future growth opportunities. It's too early to give details but we are excited about further integrating our products to create new and compelling value propositions for our customers. We also continue to incorporate emerging technology to meet the ever-changing needs of an increasingly more mobile and collaborative student population. For example, last week, we announced the acquisition of a unique social payments solution from PayDivvy. The software provides a more effective way for college students to manage the payment of bills with roommates or other groups and to make person-to-person payments. In addition, we're working on other mobile solutions to enhance our services we provide to students. Two of our clients were awarded grants by the Bill and Melinda Gates Foundation on a multiyear initiative focused around accelerating market development for integrated planning and advising services technology applications. These systems, which include tools within the Campus Labs product line, are designed to leverage technology to improve student academic decision-making. It will also help to identify students who may not be retained and to support institutional strategies to help students stay on track to degree attainment. The issue of supporting student success continues to be paramount in higher education. Turning to Slide 9. In July, we signed an agreement to add Customers Bank as one of our bank partners. The initial term of this deal is 5 years and will automatically renew for additional 3-year terms. We're actively working on implementation. We have also signed a 2-month extension with Cole Taylor Bank to keep a portion of deposits with them until October 31 if we're unable to complete the transfer of all accounts to our other bank partners in August. And now, I'd like to turn to the regulatory environment. We've been tracking the negotiated rulemaking, or neg reg, first announced by the Department of Education in April 2012. The topics of initial notice included leveraging electronic disbursements despite financial-aid fraud and considering students' choices in how to receive their refund in view of the costs associated with the various options. The negotiated rulemaking committee currently underway is focused on other topics, not the ones I just mentioned. Those may be addressed at a future time. As we are in a regulated consumer business, a focus on compliance and regulation remains key for Higher One. We operate in an evolving and complex compliance environment, and our investments in our compliance program and staff are moving us in the right direction. Over the past few years, we have made a number of changes to our products and processes to make our offerings even more consumer-friendly. We are strengthening our compliance with additional hires and investing in automated systems and will continue to add resources. Our outreach to communicate what we do for schools and how we help students manage their finances reduce fraud and improve graduation rates, and educational effectiveness is ongoing. When people understand the services we offer, the value we provide is clear. We save money for schools and offer choice to students including low-cost, high-value financial services. If you look at the problems that regulators and legislators are trying to solve, fighting financial-aid fraud, improving graduation rates, lowering administrative expenses for schools and others, our products and services help do just that. In summary, while 2012 and 2013 have been challenging from a financial perspective, with the acquisition of Campus Solutions from Sallie Mae, we are continuing to build on our strong foundation for future growth. While work remains, we're making progress in further developing our consumer products and brand, diversifying our business and mitigating risk going forward. And we will continue to make investments that will create value over the long run. I am confident that we're doing the right things for the business and I remain optimistic about the future. And with that, I'll hand the call over to Chris Wolf for a deeper look at the financials. Chris?

[Christopher W. Wolf:]

Great. 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, I'll begin our discussion on revenue. Total revenue for the second quarter was $40 million compared to $38.9 million last year, an increase of approximately 2.9%. Current quarter amounts included $1.5 million of revenue from the recently acquired Campus Solutions and $2.5 million from Campus Labs. Excluding this revenue, organic revenue declined by approximately 7.5%. I'll discuss the driver of revenue changes in more detail on the upcoming slides. Gross margin percentage for the current quarter was 55.3% compared to 56% last year. In absolute dollars, gross margin increased over last year due to the addition of our new businesses. Gross margin percentage was negatively affected by the mix of revenue, with lower account revenue and higher amounts of lower margin payment transaction revenue and higher education institution revenue. The increase in our cost of revenue was primarily related to additional transactions processed through our SmartPay service and the Campus Solutions payment processing service. We did experience a significant decrease in our provision for operational losses. In the past few quarters, we have made efforts to reduce third-party fraud to protect our customers, and we are now seeing a reduction in our fraud losses. This was offset by other costs including customer service costs and expenses associated with both our acquisitions, including amortization expense of acquired intangibles and personnel-related costs. Part of these costs were related to transition service agreements with both Sallie Mae and Sallie Mae Bank, where they provided certain services to us for periods ranging from approximately 7 to 19 months. Turning to Slide 11. Let's further analyze second quarter revenue. As you can see from the slide, we continue to diversify our business with higher contributions from payment transaction and higher education institution revenue. However, account revenue decreased by approximately 14%. Interchange revenue was up, as dollars flowing into the OneAccounts went up 7%, but this was offset by a significant decrease in service fee revenue. Service fee revenue decreased primarily as a result of changes we made to our fee schedule and practices. As we've previously discussed, we modified our fee structure for the OneAccount. The implementation of this fee structure has not yielded the amount of revenue we expected when we initiated the changes over the past few quarters. As we are able to gather data on account usage and behavior by account holders over a longer period of time, we will be in a better position to estimate revenue from this fee structure. Let's review the variety of fee schedule updates which took place over the past year that continues to impact our account revenue. Specifically, changes that went into effect in Q1 are

[Operator:]

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

[David M. Scharf:]

Mark, I'm wondering if you can provide a little color, I guess, on the sales cycle and decisioning among universities. I mean, above and beyond, obviously, the static nature, what I'm really wondering is has it changed much in the last 6 months? I mean, obviously, it seems like there's been stalled decision-making for well over a year. It seems like DOE regulatory overhang is partially responsible. But I'm just wondering, the decision to suspend guidance, among other things, have you noticed a further deterioration or a level of uncertainty among major decision-makers?

[Mark Volchek:]

Sure, this is Mark. And thanks for the question. Why don't I address sort of the sales part of the question and then turn the question about guidance over to Chris. So talking about sales, for Q2, our gross sales, the new sales made, the closed sales, were better than the last few quarters before that, so we're actually pretty excited about the Q2 OneDisburse sales number. And while there's more activity going on, and I think that's something that we had mentioned in the last call, and I think we continue to see activity pick up, the rate of closing is still slower than I would like but it has picked up, given the Q2 number. So there certainly are uncertainties in the industry and given that the current neg reg, as we mentioned in the prepared remarks, is not addressing the topics around the cash management, those may be addressed at a future negotiated rulemaking session. That has effects on slowing things down but also speeding some deals up. So I think it's really a balanced approach there. Sales are always difficult to predict in the short term. But that said, we look forward to working on the OneDisburse pipeline, reaccelerating that in future quarters. The cross-selling opportunity with our existing product and now with the Campus Solutions client base is really exciting. And as we mentioned, CASHNet and Campus Labs sales continue to be robust and continue to move forward. So I think overall, OneDisburse sales have accelerated in Q2 over prior quarters and there is more activity. So certainly, we're not seeing a degradation or slowdown beyond what we had talked about in prior quarters. With that, Chris, if you want to touch on the guidance question.

[Christopher W. Wolf:]

Sure, thanks, Mark. David, this is Chris. And one point I do want to emphasize, I think we talked about last quarter as well, is that our focus on the sales side is on Campus Solutions and converting the refund business. So that is a big part of where our focus is. But touching on the guidance. I do want to reemphasize, I think we have mentioned all along that the fall semester is a big time for us and that we -- depending on what enrollment and financial aid was going to be, it was going to be a big driver of the year. And I think we've been pretty candid about that. The challenge that we've had over the past couple of quarters is that we have seen lighter-than-expected fee revenue. And it has gotten to a point where that amount, that delta, has gotten a little too wide for us. So that's really what is the driver there as well and what's driving that. So as I mentioned there, as what happens in the fall, what we see in both enrollment and refund will drive what happens through the rest of the year. And depending on what happens there, we could update at the end of the next quarter.

[David M. Scharf:]

Got it, that's helpful. Chris, staying on the topic of fees. In the past, I know the company has given a rough breakdown of the composition of OneAccount revenue, and historically, we've been told it's been roughly about 1/3 interchange, 1/3 ATM-related fees, and 1/3 sort of a basket of other. Given all the changes that have been made recently, can you provide us a little more context of how those things are shaking out? Just how much of the OneAccount revenue we should think of in terms of being interchange and ATM-driven?

[Christopher W. Wolf:]

This is Chris. I'll take that, David. I think it's best at this point, since the situation is fluid and evolving, I think we'd be really doing you a disservice to say what the amounts are, because there is a shift. I think you can see when you look at the macro numbers that account revenue is becoming a lesser piece of the pie. So I would rather withhold at this point. And as we mentioned, as we get a better feel as the fee and changes are in place, I think we'll be in a better position to say what's the ongoing makeup of the fee revenue would be.

[Mark Volchek:]

I think -- this is Mark. The only thing I would add to that is I think in Chris' prepared remarks, he did talk about interchange continuing to perform in a more robust fashion, whereas the decline in account revenue is really driven by service fees overall. And so that mix, just purely looking at the those 2 points, certainly implies that interchange has become a larger portion than it was previously. So I think that's, at this point, what we can provide.

[David M. Scharf:]

Okay. And sort of a housekeeping item. It looked like bookings or signed SSEs on the disbursement side were 100,000 in the quarter. It looks like the sequential increase in SSEs was less than that. Were there any de-conversions during the quarter?

[Casey McGuane:]

David, this is Casey. Thanks for the question. As you know, we work really hard to ensure a high level of satisfaction among clients. And through Q1, we were successful with completing 10 consecutive quarters of 100% renewal on OneDisburse. However, in Q2, we had 2 OneDisburse clients de-convert, and that was about 11,000 SSE. However, overall, renewal rates remain strong.

[David M. Scharf:]

Got it. And the de-conversions, just purely for anecdotal purposes, did they decide to go back in house? Did they license an in-house solution? Did they go to another outsource platform?

[Casey McGuane:]

Great. I can handle it, Mark, sure. Yes, of the 2, one brought the solution in-house. And another merged with another campus who we were not serving at the time, and they adopted that service, which was a competitor's service.

[Operator:]

Your next question comes from the line of Georgios Mihalos from Credit Suisse.

[Ryan Davis:]

This is Ryan Davis, filling in for George. I have a few questions. Let's begin on the new fees. Could you kind of aggregate or maybe de-bundle the new fees and/or the reduced fees or eliminate fees? And how that affects the revenue? Can you start with that?

[Christopher W. Wolf:]

This is Chris. Maybe what I would want to emphasize, maybe in the interest of time, in the script, we did point out all the fee changes and I'll just briefly touch on those...

[Ryan Davis:]

Right, but is there one that affects more than the other? And I mean going forward, should we expect these to be gone or can they come back with some loosening of the regulatory environment?

[Christopher W. Wolf:]

What I would say there is that, maybe more as we try to emphasize on the point, as we change the fee structure, some of the account behavior has changed. And that's what we're trying to wade through. Some of these changes have already taken place since the beginning of the year. And as we go through the year, we are seeing how people react to the changes. And really, what we're trying to convey is that we just don't have enough data to know how the fees are going to behave over time. So to answer your question, we do think that as we get more data through the year, that we could see more revenue in some of these fee changes, and that's the message we're trying to convey. As far as some of the fees coming back, look, we make changes to fees for various reasons and, ultimately, we're trying to do what's best for consumers. So I don't think it's fair to say we're going to bring some of these fees back. And Miles, I don't know if you want to add anything to that.

[Miles Lasater:]

Yes, I'd love to add a little bit. This is Miles. Strategically, we're focused on driving value for individual customers so that they use the account more. And we're seeing strong, robust growth in the first half of this year, we saw great growth last year in terms of the nonfinancial aid deposits, which we see as a key behavior that signals people are using the account more often for other purposes. And as we continue to add features, improve customer experience, continually listen to feedback and evolve in the investments we're making from a product perspective, I think that provides more opportunities for us to see an increase in that type of deposit behavior which is, strategically, ultimately, a better place for us to be.

[Ryan Davis:]

Okay, fair enough. And could you remind us, I don't think you guys broke it up, but the CASHNet SSE growth for the quarter, you said it was robust, I believe. Could you kind of quantify that?

[Christopher W. Wolf:]

Yes, this is Chris. I'll go ahead, and Mark can add some color. I think what we've done is now we really just break out the OneAccount SSE because we think that's the most relevant figure and we aggregate all the other items into 1 SSE there. That's a change, I think, we made a few quarters ago because we really think that the OneAccount SSE is the most relevant one and the one in aggregate because we have so many different products now.

[Mark Volchek:]

Yes. What I would add to that is just the way revenue is generated to the CASHNet product, really it's related to what modules the school buy, how much service we provide on campus. So it's less driven necessarily by an SSE figure but really is a little bit more of a traditional software model where you could see growth in higher education revenue. And then we have modules like SmartPay and payment plans that create other types of revenue. So in that, we really look at CASHNet and Campus Labs that's generating revenue through subscriptions, through other forms. But then we give the total SSE number because we believe that really highlights the opportunity of cross-selling. And so with all these different modules and different businesses, we believe it was more important to highlight the OneDisburse SSE and total number rather than breaking out these modules that aren't really related to the SSE numbers.

[Ryan Davis:]

Okay. And one final question, on the Campus Solutions acquisition, and pardon if you've already answered this. But could you quantify maybe the effect of the cost synergies expected? And is there -- what kind of revenue synergies, if any?

[Christopher W. Wolf:]

Yes, this is Chris. I'll answer that question. I'll start on the revenue side first. I think as we've mentioned on the last conference call, the key -- it is both revenue and expense here that are key to the success here. But the conversion of the refund accounts to our OneDisburse and OneAccount is the key to success. So it's a revenue-driven model in that regard. Shifting to expenses, I don't know if folks have seen our 8-K that we put out on the business there, but the business had operated -- had operating loss in 2012, had been profitable before 2010. And there were a number of costs, I think the operating loss for the year or the net loss was over $10 million for the year, last year, in 2012. But we've been able to isolate, just by looking at that approximately $10 million in costs that we can get at right away from things that include corporate shared services, restructuring costs that were put into the business, they have professional fees that they incurred in the last year and severance cost and things of that nature. So we think there's a pretty robust cost structure that we can go at in the near term, that we can get at, that will make the deal accretive, in combination with the revenue growth in 2014. One point I do want to emphasize to everyone, and Mark alluded to this in his comments, and I did as well, is that we are spending in transition there, we are doing some IT development and as part of that migration, we are incurring cost in 2013. We'll really start to see the benefits of this in 2014.

[Operator:]

Your next question comes from the line of Chris Shutler from William Blair.

[Christopher Shutler:]

So on Campus Solutions, it sounds like you've had 6 signs over the last 6 weeks, I think, is what you said, Mark. Given that you completed the acquisition in early May and kind of the time line in the second quarter of next year, that seems like a fairly low number relative to the 1 million total SSEs. So just how should we think about the timing of schools converting over to Higher One and just that number actually showing up in the SSE count?

[Mark Volchek:]

Sure, thanks for the question, Chris. We're actually pretty happy with the start. As you know, in higher education, things -- schools spend time to look at things and consider things carefully. And so we actually feel like that, that's moving pretty quickly. But you are correct, there is a big effort to convert the clients from the Campus Solutions business to OneDisburse. We have focused on some of the larger ones first but have also gotten some smaller ones to sign up for that conversion. It's really a migration, as we mentioned, we are phasing out the legacy refund solution by next year second quarter, and so there's a lot of work to do to convert those. In addition, we have an effort to migrate the clients from the payments solutions to Higher One technology platforms as well, which will help in the cost synergies side. So it's really a pretty big, complex effort that we're really, first off, focusing on the sales and client side, and those integrations are progressing kind of along plan. And I think from a sales side, I actually think things did move faster than we originally expected.

[Christopher Shutler:]

Okay. I mean, if you take the roughly 1 million SSEs in the Campus Solutions business, how many schools does that equate to?

[Mark Volchek:]

I'm not sure we've given an exact number there, but I think if you use an average of 10,000, which is what we've used in the past, that gives you an approximate number in the ballpark of how many schools it would be.

[Christopher Shutler:]

Okay, that's fair. And then on the neg reg process, just a clarification question there. When you say it's not currently -- that credit balance disbursement is not currently being looked at, does that mean that in the fall, the committee meetings from September to November, that credit balance disbursement is just not on the docket and you expect it to be discussed at a later time? I just want to make sure that's what you're saying.

[Mark Volchek:]

That's correct. What we said is the current negotiated rulemaking committee that's being assembled is not going to be touching on the cash management rules or updating those. So that was reserved for potential future negotiated rulemaking. And at this point, we don't have a specific timing for when that could happen. And I think the department is evaluating priorities and going through how to speak with those. As you know, generally, the negotiated rulemaking session is every year on different topics. And so we're, at this point, waiting to see if it's in the next round. But at this point, it's not being addressed in the current rulemaking session.

[Christopher Shutler:]

Okay. And then a couple of quick questions on the fee schedule. So, I guess, first, I'm just wondering why the changes to the fee schedule resulted in revenue that was below your expectations. It seems like maybe the -- I don't know if you're assuming that adoption rates would go up as a result of some of the changes, but maybe you could just clarify the delta in expectations versus what actually happened.

[Miles Lasater:]

Yes, sure, this is Miles. I've been pleased with customer feedback being strong and usage has grown. We've seen some positive movements on adoption. So some good trends there. The fee schedule changes in forecasting do require us to make certain assumptions about the behavior in the accounts that people will have and how they interact with us. And those assumptions were something that we built into our model and we're still learning about how actually people perform, and that behavior feeds into our ability to update our forecast. And we'll be working on that.

[Christopher Shutler:]

Okay. And then the other one on fee schedule is, I'm just curious to get your thoughts on the $0.50 PIN debit fee. I mean I understand why you charge it, but it's an outlier fee that's been called out by certain legislators and regulators. Just curious to get your thoughts on that fee right now as it stands.

[Miles Lasater:]

Sure, this is Miles again. I think you're referring to, on 1 of our 3 accounts, there's a $0.50 PIN debit fee. You can use your card for free when you swipe and sign, and you have the MasterCard zero liability that we provide for the swipe and sign transactions, as well as other rewards provided. So we want to make sure that folks can use their card for purchases without incurring fees, and we provide that. The 2 newer accounts that we've rolled out, Premier and Edge, do not have a PIN fee, and I think that reflects our thinking on the feedback that we've gotten and how we want to evolve the accounts to provide the best value for customers. So I think that's been positive. And frankly, I haven't heard too much about this topic in this quarter.

[Christopher Shutler:]

Okay. I know there is legislation out in California that specifically calls it out. So I was just -- that's why I asked.

[Operator:]

The next question comes from the line of Mike Grondahl from Piper.

[Michael J. Grondahl:]

I think you guys commented in the prepared remarks that x the 2 acquisitions, core revenue was down 7.5%. Does that get worse before it gets better with this August fee change?

[Christopher W. Wolf:]

Yes, this is Chris. First of all, let me caution. We have withdrawn guidance. And so I want to be careful about that, getting caught up into saying that. What we have said in previous quarters is that, and to echo what Miles said, is that we're still learning the behavioral changes as we've made these fee changes and we're still trying to understand the effects of this. And that's part of the reason that we step back and have decided to suspend guidance, at least temporarily, until we get a better feel of how the behavior is going to affect -- how it affects the changes in the fee schedule. So I really have to diplomatically say it's a work-in-progress. And that's what we're trying to get our arms around.

[Miles Lasater:]

I think I would add, this is Miles, from that perspective, in terms of the core transactional behavior in the accounts that customers are doing, the fact that folks are depositing more money into the accounts means that usage behavior overall is positive for us. So we're not trying to reflect some strange or unusual pattern in how people fundamentally use the accounts. But when you provide a new fee structure, it does influence around the edges of behavior and we want to make sure we understand that better. Mark, did you want to add more?

[Mark Volchek:]

Yes, sure, this is Mark. I was just going to also add just some chronological sort of timing of certain changes that are impacting us and when those will get anniversary-ed. So the drop in organic revenue is really caused by a combination of less enrollment, less financial aid from last fall, which will be anniversary-ed in Q3, and then the fee changes that we talked about, that will be primarily made effective Q1. So as we go into the fall, the enrollment sort of year-over-year is up for change, potentially positive, potentially negative. And I think that is sort of an unknown. But we will anniversary the big drop from last year's sort of Q3-over-Q3 as we go into this fall. And so, that provides an opportunity for improvement but it could also decline further. So that's really uncertain going into this fall. The fee changes will take until Q1 to anniversary, the ones that we talked about.

[Michael J. Grondahl:]

Okay. And I know you're not providing guidance but I assume you are aware of some of the dialogue and some of the early reads on this upcoming fall season. I mean, it looks like enrollment could be weak, if not fairly weak, even compared to last year. Is that something that went into your thought about guidance?

[Mark Volchek:]

This is Mark, and I'll sort of pick the question. I think it's around fall enrollment and financial aid, expected volumes. And I think that really remains uncertain. We certainly have seen some of the press reports, which actually are mixed, there are some reports that talk about certain segments being up, other reports on certain segments being down. And I think it's really difficult to piece that together to get a full picture, especially us talking to clients directly. College and universities, in some cases, don't know enrollment themselves until the semester actually starts, especially in the community college segment, many students enroll the first day of class or even after the first day of class, and so that can really be a big swing. I think there was uncertainty this summer, as we all know, around financial aid and student loan rates, and so with that resolved, so there's really a lot of uncertainty. And at this point, we have seen 2 years of decline and there's some folks out there who are expecting continued decline. But others believe that, particularly in the community college space, we will actually see a rebound as their budgets have improved, or their state funding has improved. So we're seeing a lot of different anecdotal evidence in both directions. And so I think at this point, it's really too early to predict where the fall enrollment will come out. So we see that just as uncertain as it was earlier in the year.

[Michael J. Grondahl:]

Okay. And just last question. Can you repeat what the revenues and expenses were for Campus Solutions?

[Christopher W. Wolf:]

Sure, this is Chris here. Let me get it here. So for the period from May 8 through June 30, our revenue was $1.5 million and expenses were $3.4 million for a net of $600,000, which equated to $0.01 per loss on adjusted EPS.

[Operator:]

Your next question comes from the line of Richard Cheever from SunTrust.

[Richard Cheever:]

First off, I just wanted to clarify something that you had on the prepared remarks, to make sure I got this right. So it's just the refund solution from Campus Solutions that is end-of-life as of 2Q '14. You gave an 18-month time frame for something. Can you remind me what that was?

[Miles Lasater:]

Sure, this is Miles. We acquired Campus Solutions with a product lineup that has a lot of overlaps with our existing products. And so for the refund solutions, there is a contractual obligation with Sallie Mae to phase those out Q2 of next year, as you alluded to. We have longer and we've announced to clients that we will be supporting the payments and Tuition Payment Plan applications through 2014, and we've told clients our goal is to convert all those clients in 2014 to the CASHNet platform. So those are the 2 time frames. Hopefully, that's clear.

[Richard Cheever:]

Okay, good. And then having said that, I think you also alluded to sort of underestimating the complexities of some of the integration issues. Can you help balance that statement with the goal of achieving the cost synergies that you hope to achieve?

[Miles Lasater:]

This is Miles. I can continue on that. If anyone else wants to add anything, please do. We commented on better understanding the complexities here, we knew this was going to be a complex and large project when we did the deal. I don't think there's been huge surprises. We have important transition services agreements with the seller, and we want to make sure to continue working with them to keep things running smoothly there. There are a number of moving pieces, and we have scheduled that. So we're doing our best. We don't mean to say that there's been a big surprise there. Anyone else?

[Richard Cheever:]

I guess one other way that we'd like to look at that is maybe the timing of when those cost synergies might actually start falling through.

[Christopher W. Wolf:]

Yes, this is Chris. I think when we talk about the cost synergies, as far as I mentioned in my earlier comments, there are plenty of things outside of the IT and the transition that Miles was talking about that I think we can start seeing right away in the sense that, I mentioned like as far as the corporate overhead and things like that, we can start taking those costs out sooner than some of these development costs. Because as I did mention, there will be some duplicative development costs in the IT side. So it depends on what aspects of the cost that you're talking about. But we can start seeing those in 2013 but what I must caution you about is, as I mentioned earlier, they did have a sizable operating loss. And so to get to the -- to get from dilutive to accretive is going to take us into 2014. And once again, I do want to emphasize it's really selling OneDisburse and OneAccount and driving revenue, which will drive the other side of that equation.

[Operator:]

Your final question comes from the line of David Scharf from JMP Securities.

[David M. Scharf:]

Just had one follow-up on the account metrics. I believe you mentioned that the denominator, if you will, or the number of OneAccounts reported has probably ticked up given the elimination of the inactivity fee, that ultimately, there's less incentive to have to kind of close the account down if you're not being charged for inactivity. Can you give us some sense now of what percentage of those OneAccounts you would deem to be inactive and how that compares to a year ago? It gives us a much better sense of how to think about what the real revenue-producing base of that total OneAccount number is.

[Mark Volchek:]

Sure, this is Mark. We really haven't given that breakdown and we currently give the OneAccount number as a number of accounts that have a balance in them. As we've discussed in the past, we've considered different metrics and other metrics are more volatile. So we are continuing to evaluate how best to report that. But at this point, we still believe that the OneAccount metric we give is the best metric. But we'll continue to look at that and consider other things in the future. I think the key for us is that still the vast majority of accounts are held by students who are getting refunds. That's for the vast majority of our business, but the non-refund business is growing, which will change kind of the nature of some of our statistics and some of the account behaviors as we can grow that non-refund deposit and get students to use it for more and use it more often and make more transactions and maybe keep it post-graduation. We're still working on that goal and we're making some progress there but there's still a lot more work to be done around that retention and growing the usage behaviors.

[Operator:]

I would now like to turn the call over to Kevin LeBlanc for closing remarks.

[Kevin Leblanc:]

Thank you, Laura. I would like to thank everyone for joining us on the call this morning. We sincerely appreciate your interest in the company. We look forward to updating you on our next quarterly earnings call. Hope you have a great day.

[Operator:]

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.