CyberSource Corporation Q3 2008 Earnings Call Transcript

CyberSource Corporation (CYBS)

Q3 2008 Earnings Call Transcript

October 23, 2008, 4:30 pm ET

Executives

Katrina Rymill – Director of IR

Bill McKiernan – Chairman and CEO

Steve Pellizzer – SVP of Finance and CFO

Analysts

Wayne Johnson – Raymond James

Franco Turrinelli – William Blair & Company

Colin Gillis – Canaccord Adams

David Scharf – JMP Securities

Glenn Greene – Oppenheimer & Co.

Gil Luria – Wedbush Morgan Securities

Robert Dodd – Morgan, Keegan & Company

Andrew Jeffrey – SunTrust Robinson Humphrey

Brett Huff – Stephens Inc.

Larry Berlin – First Analysis Corp.

Tom McCrohan – Janney Montgomery

Presentation

Operator

Good afternoon. My name is Michelle, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the CyberSource third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. (Operator instructions) I will now turn the call over to Katrina Rymill, Director of Investor Relations at CyberSource.

Katrina Rymill

Thank you, and welcome to CyberSource’s third quarter conference call. During this call, we will discuss our financial results for the third quarter of 2008. If you have not received a press release summarizing our third quarter results, it's available at www.cybersource.com. These prepared remarks will run for approximately 20 minutes, and then we will open up the call for Q&A.

Before we get started, I need to alert you to our Safe Harbor provision. During the course of this teleconference, we will make certain forward-looking statements regarding our business and results of operations. Statements made today that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act 1933 and Section 21E of the Securities Exchange Act 1934, including, without limitation, statements regarding the Company's expectations, objectives, anticipations, plans, hopes, beliefs, intentions, or strategies regarding the future. Such forward-looking statements include those relating to strength of the third quarter results and factors attributable to such results; strength of the business model and Authorize.Net acquisition; growth of eCommerce and the Company outpacing growth of the overall market; the Company being in the early stages of the acquiring business; acquiring services continuing to be a major driver for the Company; strength in customer sign-ups indicating health of the eCommerce market and the selling power of the Company’s value proposition; growth of the reseller and partner channel and factors attributable to such growth; merchant adoption of value-added services; strength of the European-based business; the Company’ offering acquiring services to European domiciled merchants by the end of 2008; delivery of high service levels; financial guidance including, without limitation, those regarding revenue, transaction volume, gross profit, operating expenses, net income, earnings per share, deferred tax assets, cash balance, and the Company’s ability to use R&D tax credit to reduce taxable income in California; the continuing health of eCommerce despite current economic trends; and the Company’s leadership position in the industry.

We wish to caution you that such statements are just beliefs or predictions, and that actual results might differ materially from those projected in any or all of these forward-looking statements. These statements are also subject to risks and uncertainties, including, but not limited to, the following – changes in customer requirements; potential financial risks relating to the Company's global acquiring business; changes in general economic conditions and eCommerce, in particular; changes in legal requirements and litigation arising from time to time; unforeseen technical difficulties relating to the Internet in general or our technology in particular; potential system failures including, without limitation, disruptions intentionally caused by third parties, and the intense competition in our industry, and the need for rapid technological change associated with such competition. Further, CyberSource's past financial business operations and stock performance are not necessarily indicative of CyberSource's future performance. Listeners are referred to the documents filed with CyberSource with the SEC, specifically Form 10-K filed on March 11, 2008, covering the one-year period ended December 31st, 2007, and our quarterly reports filed on Form 10-Q from time to time, all of which include these and other certain important risk factors.

And now, let me introduce Bill McKiernan, Chairman and CEO.

Bill McKiernan

Thanks, Katrina. Good afternoon and thank you all for joining us. It’s a pleasure to welcome to everyone to our third quarter 2008 earnings call. Our strong results this quarter reflect our successful expansion internationally, continued penetration of the small business market, and the ongoing growth of the eCommerce market.

In the third quarter, we generated record revenue of $57.7 million, a 117% over the same period last year and a 4% sequential increase over the second quarter. Our growth was driven primarily by our transaction processing and merchant acquiring offerings. And we saw strength across the board in both the enterprise and small business segments.

During the quarter, we processed a record 469 million billable transactions, a 63% increase over the same period last year. The dollar value of the transactions we processed in the quarter was approximately $27.5 billion, up 130% over the same quarter last year.

Net income on a GAAP basis was $207,000 and earnings per share on a GAAP basis was breakeven. Because these results include significant non-cash charges such as stock option compensation, amortization of intangibles, and reversals to the allowance to the deferred tax asset, we also provide certain non-GAAP financial metrics. Steve will provide a more detailed explanation of GAAP versus non-GAAP in a moment and we also reconcile certain GAAP and non-GAAP metrics in the press release.

This quarter, non-GAAP net income was $11.7 million, a 238% increase compared to $3.5 million a year ago. Non-GAAP EPS was $0.16, a 78% increase compared to $0.09 a year ago.

Our net operating margin in Q3 on a GAAP basis was approximately breakeven. Our net operating margin for the quarter on a non-GAAP basis was approximately 20%, up from 13% a year ago. This margin expansion highlights the strength of the CyberSource business, our attractive business model, and the accretive benefits of our acquisition of Authorize.Net.

While the overall economy is clearly struggling, the online channel represents one area of focus for many businesses. As total retail sales growth remain sluggish, online sales continue to grow at a much stronger pace with particular resilience internationally. Domestic eCommerce sales growth has seen some deceleration from the early years of eCommerce. But eCommerce still remains an area where merchants see great opportunity for growth compared to offline channels.

In a recent Forrester study, for the first time, Internet users said they would do a majority of their holiday shopping online. In a tightening economy, more shopping are looking to the Internet for better values, better selection, and relief from high gas prices. We believe eCommerce will continue to grow faster than traditional retail and we continue to target growth rates for CyberSource above the overall eCommerce market.

CyberSource has been growing at rates much faster than the market for years. This quarter, the transaction volumes on both the enterprise and small business platforms grew in excess of 20%, well above the market. We continue to increase market share based on our critical mass of channel partners and the strength of our value proposition.

CyberSource’s global acquiring business generates revenue of approximately $20.1 million in the quarter, a 2% increase from the second quarter, and up 68% over the same period last year. Global acquiring represents about 35% of our total revenue. The value of transactions where we acted as the merchant acquirer was approximately $630 million, or about 2% of the total transaction volume we processed in the quarter.

Although our acquiring revenue grew a healthy 68% year-over-year, this quarter the domestic slowdown in eCommerce has had some impact in our space primarily in terms of merchant acquiring revenue, which is domestically based and charged as a percentage of the items’ purchase price. However, it is clear to us that we are still in the very early days of our acquiring business since even within our installed base we are only underwriting about 2% of the volume we process.

This quarter, we signed approximately 1,100 new acquiring customers, which is the highest number of new acquiring adds in our history. I am very pleased with the progress we have made in this area. Our ability to continue to attract new customers and to cross-sell merchant acquiring are key measures of success of our acquisition of Authorize.Net. We now have approximately 4000 global acquiring customers and we expect merchant acquiring services to continue to be a major growth driver for the Company.

Another key metric that measures the health of the eCommerce market and the strength of our value proposition is the number of new customers we signed in the quarter. This quarter, we set another record in the number of new customers signed. We added approximately 27,000 new customers across a wide variety of industries in all market segments.

In the small business segment, we had a record number of new customer sign-ups. Traction was also good in the mid-market and enterprise segments. We now have approximately 245,000 active customers who rely on us for payment solutions. Large enterprise customers added this quarter include DeBeers; Merrill Corporation, which provided outsourced legal and communication solutions; Puritan's Pride, which is a leading online vitamin supplier; and Warner Brothers.

We also signed Facebook in the beginning of Q4. The signing of Facebook demonstrates our continued strength in signing companies with new Internet-based business models. Existing customers that added new services or renewed agreements during the quarter include Agilent Technologies, Gucci Group, J.C. Penney, and Pacific Sunwear of California.

We were also selected by a leading digital entertainment retailer to provide payment gateway and decision manager services. Like many high tech merchants, this merchant was experiencing significant chargeback problems from fraudulent orders. CyberSource’s Decision Manager helped to streamline the merchant’s online risk management processes by automatically analyzing incoming orders for fraud using merchant-specific business rules.

Our ecosystem of over 4000 resellers and partners is one of our most valuable assets and is a key growth driver for the Company. CyberSource continues to be the preferred provider of payment processing solutions by ISOs. We added over 400 new ISOs and affiliate partners this quarter and we are very pleased with the continued growth in the number of these important relationships.

Our ISO and Affiliate Reseller productivity remained strong during the quarter with a record number of gross merchant adds from the channel. eCommerce continues to provide ISOs with opportunities to grow and expand their businesses beyond the slower growing card present market. More ISOs appear to be focusing on the eCommerce market, which is good news for us given our dominant position in this channel.

Our small business team has been aggressively marketing and effectively cross-selling value-added services, improving the revenue per merchant that we’re generating from this segment. Customer penetration of these value-added services has been increasing. For example, adoption of the Automated Recurring Billing service jumped from 11% to 16% of the small business installed base since the beginning of this year; approximately 35,000 merchants are now using this service. Similarly, the Fraud Detection Suite is getting good traction, with an 11% adoption rate in the small business segment, up from 8% at the beginning of this year.

Adoption of our new offering, Customer Information Manager, has been growing rapidly as well since its launch last November, and now we have over 6600 merchants on this service.

In today’s challenging macroeconomic environment, we are seeing a trend toward outsourcing PCI compliance to trusted third parties such as CyberSource. PCI, or Payment Card Industry Data Security Standards, are standards set by the card associations to ensure the protection of sensitive cardholder data. Compliance with PCI continues to be expensive and complicated for merchants.

Our clients are leveraging two key services from us to limit the processing and storage of credit card data on their systems and to expedite their compliance with PCI. Our Secure

Storage service allows merchants to simplify the storage of credit card data. With this service, CyberSource takes on the expensive and daunting tasks of encryption, key management, and user access control on behalf of the merchant.

We also offer our Hosted Payment Acceptance service, which allows for customers to redirect payment activities to a CyberSource hosted platform. When used in combination, many merchants can eliminate credit card processing and storage from their environments completely thereby drastically simplifying the steps to become PCI-compliant.

This quarter, we announced a partnership with Trustwave, a leading provider of data security and PCI compliance management, to offer a complete set of payment security services for eCommerce merchants. Trustwave will offer its merchants our Secure Storage and Hosted Payment Acceptance solutions to reduce the difficulty of PCI compliance. And we will offer our merchants a comprehensive compliance program through Trustwave.

Our European-based continues to have strong momentum, generating a record 103 million transactions in the quarter, an increase of 87% over the same period last year, and up 17% from the second quarter. We processed 71 different currencies this quarter. Our European business represents 22% of total transaction volume, but only about 7% of our total revenue as merchant acquiring is not yet included in our European offering.

We have been working hard to finalize a partnership with our European bank sponsor to enable us to offer acquiring services to European domiciled merchants. We expect to finalize the agreement in the fourth quarter and we’ll take merchants live shortly thereafter.

Our Northern Ireland office is now operational and a core team of high-caliber staff has been hired to form the first product development team there. The opportunity to work at CyberSource on leading-edge high tech products has attracted a group of very talented experienced engineers. With the support of Invest Northern Ireland and the rest of the Belfast technical community, we have been able to ramp up quickly and are on target to hire approximately 40 people by the end of 2009. Our Invest Northern Ireland grant of about US$1.7 million has helped to cover the cost of our first year expenses there.

Finally, I am very pleased with the high level of system reliability and up time on both our small business and enterprise platforms. In 2008, we invested extensively in our small business platform, upgrading it to support high availability and to load balance it geographically. On our enterprise platform we have consistently maintained 99.99% reliability for the quarter. With our infrastructure investments we can better utilize multiple data center to optimize capacity and maximize system reliability by moving our merchant traffic dynamically between systems without dropping transactions.

Now, I will ask Steve Pellizzer to provide some additional details on the financials.

Steve Pellizzer

Thanks, Bill. As Bill mentioned, our third quarter revenue was $57.7 million, $1.7 million to $1.9 million higher than our guidance of $55.8 million to $56 million, and 117% increase over the same period last year.

During the quarter we processed a record 469 million billable transactions, a 63% increase over last year, and above our prior guidance for the third quarter of 450 million to 465 million. Please not that with regard to both our enterprise and our small business platform the transaction is counted if it is a billable event.

During the third quarter, we added approximately 27,000 new customers on a gross basis compared to 2000 new customers in the third quarter of last year. We added approximately 7600 on a net basis, up from 1400 in the third quarter of last year.

This quarter, several of our small business resellers continued their internal cleanup and requested the deactivation of merchants that have been inactive for sometime. We expect it to have minimal impact on our revenue as these accounts were virtually all non-transacting accounts. Absent this event, total net additions would have been approximately 12,000 customers.

Our gross profit on a GAAP basis was $29.6 million, higher than prior guidance of $28.3 million to $28.5 million. Operating expenses on a GAAP basis for the quarter were $29.8 million, slightly higher than previous guidance of $29.5 million to $29.7 million.

In late September, California legislators passed a bill in an effort to balance the state budget, which precludes companies from using historical net operating losses to offset taxable income for California state tax purposes. The bill is retroactive to January 1, 2008, and will continue in effect until December 31^st, 2009. The bill does allow companies to partially offset its state tax liability through the use of R&D tax credits, however. As a result, the Company recorded a slightly higher-than-expected non-GAAP tax provision.

The GAAP net income for the quarter was $207,000 and fully diluted earnings per share on a GAAP basis was breakeven, higher than prior guidance of a net loss of $400,000 to $600,000 and a loss of $0.01 per share.

Non-GAAP net income was $11.7 million, or $0.16 per share, higher than guidance of $10.1 million to $10.3 million, or $0.14 per share.

Our cash and short term investment balance was $60 million, which doesn’t include the $13.2 million payable to merchants at quarter-end.

Cash flow from operating activities was $15.8 million for the third quarter of 2008 compared to $5.2 million for the third quarter of 2007. The Company also generated approximately $1.6 million in cash from employee stock option exercises.

Capital spending for the third quarter was $5.2 million, slightly above our prior guidance of $4.5 million to $5 million. During the third quarter, we repurchased 197,625 shares of common stock at an average purchase price of $14.51 per share under the $10 million share repurchase that was approved by the Board of Directors in May of 2008. Subsequent to quarter end, the Company repurchased 507,300 shares of common stock at an average stock price of $14.06 per share.

Now, I will give you some detailed guidance with regard to our expected future performance. In light of SEC fair disclosure this forecast, which is made in good faith and is based on all the market information we have available today, will be the only numbers that the Company will comment on going forward or until updated by the Company. We also assume no duty to update these numbers at any time. Guidance does not take into account any further reduction in our valuation allowance against our deferred tax asset, which would result in a tax benefit during the period of the reduction. We will continue evaluating whether a further reduction is appropriate.

We expect revenue in the fourth quarter to be between $58.7 million and $59.2 million. We currently estimate billable transaction volumes in the fourth quarter to be between 505 million and 510 million. We expect gross profit to be between $30 million and $30.2 million during the fourth quarter.

We expect total operating expenses for the fourth quarter to be between $29.4 million and $29.6 million. Included in cost of sales and operating expenses is approximately $7.2 million of intangible asset amortization expense relating to our acquisition of Authorize.Net.

We currently expect net income in accordance with GAAP in the fourth quarter of $400,000 to $700,000 and earnings per share of $0.01 based on a weighted average share count of 72.5 million shares.

We expect non-GAAP net income for the fourth quarter to be between $11.4 million and $11.7 million and non-GAAP earnings per share to be $0.16 based on a weighted average share count of 72.5 million shares.

As a result of the California legislators’ decision in late September to disallow the use of NOL carry-forwards through December 31^st, 2009, we have commenced an R&D tax study to assess our ability to use R&D tax credits to reduce taxable income. We expect our non-GAAP tax provision to be approximately 3% to 4% of non-GAAP pre-tax income in the fourth quarter if we can support the use of R&D tax credits. The non-GAAP tax rate is also dependent on the result of a transfer price study that’s also currently underway.

Capital spending for the fourth quarter is expected to be between $1.2 million to $1.5 million.

While we remain cautious about the potential impact of the economic conditions on our business as a result of our strong performance in the third quarter, we are raising guidance for the full year 2008. For the full year 2008, we expect total revenue to be between $225.5 million and $226 million.

GAAP net income for the full year 2008 is expected to be between $1.1 million and $1.4 million. GAAP earnings per share is expected to be $0.02 per share based on a weighted average share count of 72.5 million shares.

Non-GAAP net income for the full year 2008 is expected to be between $45.9 million and $46.2 million. Non-GAAP earnings per share is expected to be between $0.63 and $0.64 based on a weighted average share count of 72.5 million shares.

We are forecasting a cash balance of between $60 million and $65 million as of the end of the year, which doesn’t take into account any nonrecurring items including cash that may be used for future repurchases of our common stock and fees payable to merchants.

And with that, I will now return the call back to Bill for his concluding remarks.

Bill McKiernan

Thanks, Steve. In summary, CyberSource has had a very strong quarter with consistent growth across almost every segment of our business including transaction volume, revenue, non-GAAP net income, EPS, and customer additions. Despite the market turmoil, the worldwide eCommerce market continues to grow at a relatively healthy rate. eCommerce remains a small yet growing percentage of overall retail sales. And the majority of merchants are looking at continued investment in and emphasis on their eCommerce initiatives. Obviously, these are uncertain times, but we remain guardedly optimistic going into the 2008 holiday season.

We continue to add more functionality and services to our offerings in areas such as value-added services, merchant acquiring, fraud prevention, global payment processing, and PCI compliance. By providing merchants with global payment solutions that simplify the complexity of online payment processing CyberSource has become the leader in end-to-end secure payment management for merchants of all sizes.

I want to express my thanks to the entire CyberSource team for their hard work, dedication, and their delivery of excellent results this past quarter. So, with that, operator, let’s open up the line for questions.

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from the line of Wayne Johnson with Raymond James.

Wayne Johnson – Raymond James

Good afternoon. Congratulations on terrific results in a very tough market, so that’s a great big smiley face on the earnings report.

Bill McKiernan

Thank you, Wayne.

Wayne Johnson – Raymond James

The pending pilot program with the pan-European bank, is that a – for credit card processing only or would other services be involved with that?

Bill McKiernan

No, we would expect that we’d be able to offer our fraud screening services as well and one of the things that we found is that by globalizing our fraud capabilities we really create some strong differentiation in the market for CyberSource payment solutions.

Wayne Johnson – Raymond James

Terrific. And so the rough estimated time of the signing would be in six weeks or so, middle of the quarter, or earlier – later?

Bill McKiernan

Yes, our goal, Wayne, is really to begin 2009 up and running and have that offering in place and our sales people trained to sell it–

Wayne Johnson – Raymond James

And will you make the announcement that that pilot program is in place once it’s signed? Would you be allowed to announce who it is and all that?

Bill McKiernan

I suspect that will be the case. I think as soon as the document gets signed – now we have got to pass one regulatory hurdle. We’ve got to get a sign-off from the taxation authorities over in Europe so that we are not subject to VAT, which we think is a formality, but as soon as we have that I think we’ll make the formal announcement.

Wayne Johnson – Raymond James

Well, terrific. And so for Facebook, which is a nice surprise, what are you guys providing for them and is that active – when is that active?

Bill McKiernan

Yes, so we signed that deal – Facebook has asked us not to disclose the details of the relationship, but we are really excited by the relationship, Wayne, because from experience we know that signing up some of these accounts that are small initially, but become very big Internet player over time really benefits us and benefits the customer as well because we can help the customer grow not only domestically but internationally. So, I am very optimistic about what the Facebook relationship means to both CyberSource and to Facebook over the long term.

Wayne Johnson – Raymond James

Right. Terrific. And I know you’ve told me when it was signed, when is it enabled – the contract enabled? Like are they a customer – are they processing today or is that going to be in – early next year or–?

Bill McKiernan

Again, Wayne, they’ve asked us not to disclose any of the details, but–

Wayne Johnson – Raymond James

Okay. I will move on, I will move on. How many inactive customers do you think are still included in the current customer base because this is – these purges come up from time-to-time and I am just kind of curious as to how we should – how we should think of the current customer base, how many of those are – would fall onto the same inactive customer category?

Bill McKiernan

Yes, and I think this is – it’s a little bit unusual and it think it’s a sign of the times more than anything else on the legacy CyberSource side anyway I mean we used to have one reseller that would do an annual cleanup and I think that was sort of more of the norm. Certainly the number of accounts that were terminated this quarter were obviously less than last quarter and the hope is that we are sort of waning down on that. The positive is these accounts are – they are processing any volumes, so it’s the monthly minimum is what we lose, which is inconsequential. But the hope is next quarter we’ll see a decline and I think with the holidays coming up it’s more unlikely that you’re going to see a lot of terminations going into the holiday season.

Wayne Johnson – Raymond James

Okay. And then one more quick follow-up, I will get back in the queue. The – let’s say that current market conditions continue throughout 2009, so economic conditions, business conditions for CyberSource that you see day in and day out. Just in very broad sketches, would it be unreasonable to assume that revenue growth is going to be 15%, 20% range? Any kind of guidance you guys could provide on that I think would be really helpful to investors.

Bill McKiernan

Yes, I mean we are in the process right now of working on our 2009 plan. So, I don’t want to make any broad statements sort of at this point in time, because we’ll obviously be giving guidance in January. I mean I think if you look historically, CyberSource has grown at a faster pace than the market, and so a barometer to look at is just what’s happening in the overall market. I think we started to be impacted by some of the slowdown in the latter part of Q3, which is the basis for the guidance I’ve given for the fourth quarter, and I think we are going to continue to kind map what’s happening in the macro environment from that perspective.

Wayne Johnson – Raymond James

Right. Terrific. Thanks so much.

Bill McKiernan

Alright, thanks Wayne.

Operator

Your next question comes from the line of Franco Turrinelli with William Blair and Company.

Franco Turrinelli – William Blair & Company

Good afternoon guys.

Bill McKiernan

Hey, Franco.

Steve Pellizzer

Hey, Franco.

Franco Turrinelli – William Blair & Company

Smiley face, that’s news. Maybe you should change the graphics on the press release. Hey, can I just kind of get one out of the room right here. I mean obviously yesterday we heard from Amazon. I mean they reported a fairly severe deterioration during the quarter and their very cautious outlook looking out into the fourth quarter. I think Steve that you had commented that you did see some impact as the quarter progressed, but it sounds as though you are feeling a little bit, I would say, less worried about the future than some of the other reports that we’ve heard.

Steve Pellizzer

I have a fair characterization. We did see the growth rate in transaction volume slow in the latter part of Q3. The way that we build our models and then I provide guidance is really based on looking at the run rates coming out of the quarter before and also looking at the seasonality year-over-year. And we went about the same methodology, which played out to the guidance that I’ve provided. These are certainly unusual times – certainly times to be cautious and to be conservative. My hope is that we are sitting here in January with an optimistic report with regard to the first quarter.

Franco Turrinelli – William Blair & Company

Okay. Bill, do you think there is any insights to be gained – I think you commented that the – maybe a little bit more of a slowdown in the acquiring services, I am assuming that the acquiring services are more predominantly offered to smaller and more retail focused customers whereas your overall gateway services are probably larger and maybe a more diversified set of clients. Is that correct or is there some other insight to be gained from the different trends in those two categories?

Bill McKiernan

No, Frank, I think that’s right on. The fact is we’ve got about 4000 acquiring customers and 245,000 overall customers, so there is little more concentration among those acquiring accounts. In conjunction with our board meeting this week and also this call, Steve headed up an effort to analyze the transaction volume levels that we saw in October, so through the first couple of weeks of October, to try to figure out if there are any worrying trends that we would see going into Q4. And based upon that analysis I think what we felt is that the guidance that Steve gave is well supported particularly on the small business platform. That’s a very diverse group of merchants and probably not as dependent on any big holiday season spike as perhaps the enterprise side. In the enterprise side we feel good about where we are in mid-October, but the enterprise group tends to have more of a seasonal spike. As of today, we feel pretty good about where we are relative to guidance, but in this environment, again, it’s – these are uncertain times.

Franco Turrinelli – William Blair & Company

Although, Bill, I mean if I remember correctly most of your non-retail customers – I am thinking government, education, not-for-profits, business-to-business services, they are all gateway customers, right?

Bill McKiernan

For the most part, that’s right.

Franco Turrinelli – William Blair & Company

Okay. Okay, let me jump back into line, I will let other people ask some questions. Thank you.

Bill McKiernan

Thanks, Franco.

Operator

Your next question comes from the line of Colin Gillis with Canaccord.

Colin Gillis – Canaccord Adams

Hi, everybody.

Bill McKiernan

Hi, Colin.

Steve Pellizzer

Hey, Colin.

Colin Gillis – Canaccord Adams

Can you just talk a little bit about October? Did the growth rates and transaction volumes, did they stabilize in the last few weeks?

Bill McKiernan

Well, again, we – when we did our planning for the fourth quarter we looked at sort of the run rates coming out of Q3 and adjusted our internal plans accordingly and based on the adjustments that were made we are tracking to that. We are not seeing a further deceleration, at least haven’t to-date, in the volumes that we are seeing.

Colin Gillis – Canaccord Adams

Okay, great. And can you just update us on the timetable to have agreements with sponsor banks for acquiring in Europe and Asia? I mean, what is the right number of total banks to be working with?

Bill McKiernan

Well, right now we are focused on the one in Europe and Asia is a little bit more out there, that’s sort of a late ’09 kind of effort. But we really want to get the first one done, as I mentioned earlier, in time so that once we start 2009 we’ll be up and running and hit the ground really pretty hard in January.

Colin Gillis – Canaccord Adams

But, as we look out into ’09 we can probably expect agreements with maybe a handful of banks?

Bill McKiernan

Yes, I think we’ve got some discussions going on now of a very preliminary nature, but our goal, as we’ve talked about on these calls, is that we want to be able to offer our customers a global solution and so that means being able to offer acquiring solutions in any significant country where they want to do business.

Colin Gillis – Canaccord Adams

Okay, great quarter.

Bill McKiernan

Thanks, Colin.

Operator

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

David Scharf – JMP Securities

Good afternoon. A couple of things. First, are you able to provide a – kind of year-over-year transaction growth just for the legacy CyberSource, if we – or, I am sorry, on Q4, as far as the guidance, is there a way to give us what kind of transaction growth is implied if we pull out those two months of ANET out of last year? I mean, I am coming up with kind of mid-teens, does that sound correct?

Bill McKiernan

That sounds a little low. We did not disclose the CyberSource versus ANET transaction volumes, and haven’t since we’ve done the deal because we really look at it as one business. I would say, if you look historically I mean CyberSource volumes have been growing in the sort of 40% range year-over-year. Obviously, that’s not including Authorize.Net.

David Scharf – JMP Securities

Right. And obviously it’s a backward way of kind of trying to get a sense for how much the transaction growth may have moderated towards the end of Q3, heading into this quarter, but probably south of 20% sounds about right?

Bill McKiernan

Yes, I mean I think that’s fair.

David Scharf – JMP Securities

Okay. Just in terms of the competitive environment, thinking back to last downturn kind of earlier part of this decade at least in kind of the brick-and-mortar merchant processing world there seemed to be a awful lot of accelerated fee compression, lot of it came from larger national merchants and big regional ones. Are your competitors behaving any differently in the last couple of months as the environment gets more challenging? You notice anything either on pricing initiatives or any other competitive factors?

Bill McKiernan

I have not, David, although having said that I mean this is a very competitive industry. I will say that in the traditional brick-and-mortar world, the offerings tend to be more commoditized there, and so the only lever that the vendors have to play with is essentially price. And so that’s the one they play with. Whereas, in the eCommerce world, we sell very much based on the overall value proposition and the value you can add to a customer’s business. And so we try to focus more on how we can help customers manage through this environment, which means we can help them tap into fast-growing markets outside the U.S. We can help them manage their fraud risk. We can help them grow their businesses into areas that historically they may not have been focused on. So, when we differentiate our offerings, those are the things we focus on versus just making it a pricing discussion.

David Scharf – JMP Securities

Okay. Good, good. Just two more quick questions. One, regarding the NOLs, if you are unable to use those R&D credits, is there a revised pro forma tax rate we ought to be thinking about through the end of ’09?

Steve Pellizzer

Yes, I mean I haven’t given any guidance on ’09, I was clearly talking about Q4 because these studies that we are doing are going to drive some of the conclusions with regard to 2009 and frankly they are going to impact Q4 as well. I mean I think it’s fair to say that if we don’t get the positive answers we want obviously the non-GAAP tax rate is going to be higher, could be in – I hate to speculate, but potentially in the 5% to 10% range. But I am optimistic that we’ll come to a good conclusion there.

David Scharf – JMP Securities

Okay. No, no, that’s helpful. I mean just looking for an order of magnitude. And lastly, I don’t want to try to pin you on any ’09 outlook, I know you are not giving any guidance, just big picture, looking at this year, every quarter sequentially, and this includes your Q4 guidance – we have four quarters in a row of client growth, four quarters in a row of sequential transaction growth, four quarters in a row of revenue growth, and yet you earn $0.16 every quarter. Is there anything unique about the cost structure this year in term of investment spending that we’ve kind of going to lap [ph] so that when I look in 2009 there is a case to be made that you are going positive earnings growth, that you are going to be earning more than $0.16 a share every quarter?

Bill McKiernan

There is no question that we’ve been investing in the business in 2008, you can see that just from looking at the headcount. WE are just under 500 in total employees at the beginning of the year, and we are now sitting at just above 600. so we’ve – we significantly invested in the business from a headcount perspective. I don’t think – and again we’re just now in the process of building out our 2009 plan, so I don’t want to be too premature, but I am not expecting to add that sort of headcount volume in 2009. So that’s one point. And ob headcount is the biggest expense that we have given that we are a service business.

David Scharf – JMP Securities

And in the context of a 25% increase in headcount, a lot of those decisions were made earlier in the calendar year when it was as much different environment. Any likelihood that you’d actually see some cut-backs or that those plans may have been too aggressive given what’s going on globally now in terms of the macro outlook?

Bill McKiernan

I don’t think so. I mean we’ll see what happens and how the economy plays out. When I look at the fourth quarter I mean we certainly scaled back some of the hiring plans that we had, but I don’t think we are – I certainly don’t think we are looking at a reduction in force at this point.

David Scharf – JMP Securities

Got you. Okay, thanks a lot guys.

Operator

Your next question comes from the line of Glenn Greene with Oppenheimer.

Glenn Greene – Oppenheimer & Co.

Good afternoon guys.

Bill McKiernan

Hi, Glenn.

Glenn Greene – Oppenheimer & Co.

First question, I am just trying to reconcile some of your comments with sort of the cautionary tone – not cautionary but some weakness towards the end of the quarter, with the fact that your transaction counts actually sort of blew away expectations. So does that suggest that July and August were extremely strong and September slowed? I am just trying to reconcile and then I also got a couple of follow-ups.

Bill McKiernan

Do you think July and August were strong months and I don’t want to make too much of the slowdown that we saw in September. I mean there was a weather decline when you compare it to the months prior, and that’s the basis for some of our conservatism going into the fourth quarter.

Glenn Greene – Oppenheimer & Co.

And that really – sorry, next question, so you’ve got – your guidance for 4Q suggests sequential transaction growth of – at the low end “8%” and normal sort of sequential. Your seasonal pattern for the fourth quarter is much stronger than that. So I don’t know if it’s just sort of cautious conservatism on your part or how much is cautious conservatism and how much is – what you are sort of seeing in the environment and the slowdown towards the end of September that you are sort of factoring here for sort of norm going with us?

Steve Pellizzer

Yes, and again, the approach that we took with regard to formulating our guidance as well as our internal plan is no different than in the past and we’ve got a model on the revenue side that’s proven to be fairly accurate. Granted, it’s being tested in a unique environment in Q4. But the factors that we are taking into both in determining our internal plan and guidance is again looking at sort of the run rate coming out of Q3 as well as looking at historically what we’ve seen in terms of seasonality and sort of putting those two factors together to determine the internal plan. Again, I would like to think that what we saw in September given the headlines and what not was going on that in January

we’ll be sitting here having a positive discussion, but again these are unique times that we are looking at.

Glenn Greene – Oppenheimer & Co.

Understood. And then just as it relates the pockets of weakness that you saw, is there any way you can sort of contrast it between enterprise versus small business and any specific verticals across your customer base that you saw a notable softness?

Steve Pellizzer

I mean the small business segment remains very strong and again a lot of that is driven off of the monthly fees. Where we saw more of it is on the enterprise side, and Bill talked a little bit about the acquiring side of the business, we saw some decline in the average sales price of the transaction, and those were sort of the drivers from an assumption perspective into the Q4 model.

Glenn Greene – Oppenheimer & Co.

Okay. And nothing across verticals that stood out?

Steve Pellizzer

No, I don’t think there was anything unique from a vertical perspective to speak of.

Glenn Greene – Oppenheimer & Co.

Okay. Thank you.

Operator

Your next question comes from the line of Gil Luria with Wedbush.

Gil Luria – Wedbush Morgan Securities

– question. A follow-up actually on the last guidance. So, in the merchant acquiring business it sounds like one of the differences there is that you are – because you charge a percentage of the ticket then a lower ticket is – translates to less revenue. So if we’ve been assuming $100 a ticket in the past how much of difference should we be thinking about going forward, especially the fourth quarter?

Steve Pellizzer

Yes, I would say it’s fractional, maybe 5% or something to that effect in the way of a decline is what we’ve seen in September.

Gil Luria – Wedbush Morgan Securities

And then the second part of that is that I think you stated that you underwrite these transactions and in the past the liability that you’ve had from doing that have been, I believe, negligible. Do you see any changes to that? Have you already seen any changes to that? You foresee any changes in the near future?

Steve Pellizzer

We haven’t seen anything to-date. Again, we have got a team that looks both at the underwriting of prospective merchants and then we’ve also got a team that focuses on risk management. So they are looking at our portfolio, the customer is looking at the volumes that they process, looking at anything unusual, a spike in volume or a decline in volume. And we have ways of sort of mitigating our risk by holding funds until we get answers to questions if we do see unusual activity. So there is things that we do to mitigate risk to us, but we haven’t seen anything unusual in terms of trends or an increase in bankruptcies or anything like that.

Gil Luria – Wedbush Morgan Securities

Right. And the last question is can you give us an update on the share buyback? How much do you still have authorized? Are you – and since you did most of the buying at $14, $10 million mean you are going to buy that more?

Steve Pellizzer

So, our Board had approved a $10 million plan back in May and so we basically utilized that entire $10 million through today. We have not – the Board has not approved an additional repurchase plan as of this time, but they have that opportunity in the future depending on what happens with the share price.

Gil Luria – Wedbush Morgan Securities

When do you have the next opportunity to suggest that to the Board?

Bill McKiernan

As soon as the window opens, which is three days after today.

Gil Luria – Wedbush Morgan Securities

Sound good. Thank you so much.

Operator

Your next question comes from the line of Robert Dodd with Morgan, Keegan.

Robert Dodd – Morgan, Keegan & Company

Hi guys. A couple of quick housekeeping ones and I want to dig into Europe a little bit more. When you – we look at the guidance for transaction growth in Q4 and the revenue guidance and again at the low end you are looking at transactions up about 8% sequentially, revenue up 2%. Is there – I mean obviously there is various mix things going on. Is that all there is to it in terms of more transactions against the monthly minimums, the acquiring business always there? Has there been any deltas in the pricing that you’ve offered to large or small accounts recently?

Steve Pellizzer

No, it’s not a pricing thing. It’s something we typically see in the fourth quarter where we do a see a reduction in sort of the average transaction price. So that’s sort of what’s being modeled.

Robert Dodd – Morgan, Keegan & Company

Got it. One thing, just coming back to kind of the share issue and the share count I mean you said you bought back half a million shares since the end of the quarter yet you are guiding – you guidance embeds the share count going up in Q4. I realize there is options, et cetera, et cetera, plus obviously the stock price is down. So I mean can you – is there anything you are factoring in there or is that just you guys being conservative again?

Steve Pellizzer

Yes, it’s the same share count that we used in the prior quarter from a guidance perspective and yes, there is an opportunity for the share count increase based on stock option exercises, but rather than trying to guess 100,000 higher or lower, I just decided to stick with kind of the number we had used in the past for the sake of consistency.

Robert Dodd – Morgan, Keegan & Company

Okay, got it. And then if I can move on to Europe, two issues, I mean first on the transaction growth I mean we saw a very substantial acceleration, Q3 versus Q2 in terms of sequential growth. I mean were there any large new customers that came on line? Can you give us a little bit more color on that, particularly sine a lot of that’s in the U.K. and the U.K. as we know has got issues right now.

Bill McKiernan

Yes, I think it’s the overall strength of the business over there, Robert. We have some outstanding customer relationships and the team in the U.K. has done a great job just in managing those relationships and adding to them. I don’t think there is any one or two individual accounts that significantly contributed to that number that are new.

Robert Dodd – Morgan, Keegan & Company

Okay, got it. And then just on to the acquiring opportunity over there, obviously substantial market opportunity for you guys. The question is what’s the distribution scheme going to be for you? Is it primarily you are targeting, initially at least, your existing large acquiring customers? And obviously you are probably not going to be able to get referral partnerships in the same way from banks, for example that you do in the gateway market. You don’t have the same kind of market brand name, I would guess, today in continental Europe that you do in the U.S. So I mean what’s the – your strategy in terms of finding customers in continental Europe?

Bill McKiernan

Right, so, Robert, it’s very similar to the strategy that we’ve employed in the U.S., which is we leverage the same sales force, but we just give them one more thing to sell and when our sales people go out in 2009, they will be pitching the entire the value proposition including acquiring to customers and we also think there may be an opportunity to sell some of those accounts that are existing accounts, merchant acquiring as well.

Robert Dodd – Morgan, Keegan & Company

Okay. Thank you.

Operator

Your next question comes from the line of Andrew Jeffrey with SunTrust.

Andrew Jeffrey – SunTrust Robinson Humphrey

Hey guys.

Bill McKiernan

Hey, Andrew.

Andrew Jeffrey – SunTrust Robinson Humphrey

Nice trend in gross margin. Can you talk a little bit about how much of that is mix, little less acquiring revenue this quarter and how much of that is your ability just to scale the processing platform in light of the robust transaction growth you’ve seen and also just directionally if the mix stays kind of constant, it’s sort of the same question, should we anticipate the gross margin to continue rising, all things being equal?

Steve Pellizzer

Yes, I mean the margin I mean I think we’ll [ph] have 1% so it’s wasn’t a huge increase. I think we saw a fairly steady mix quarter-over-quarter, so I think that obviously there is a lot of variables that play into the cost of sales line, including headcount because we’ve actually been making investment there in customer service reps albeit they are at a low value per head. I mean there is obviously a lot of things that are playing in there and just one of those is scale. I mean I think there is a benefit that we are seeing there just from increased volume on the existing platform.

Andrew Jeffrey – SunTrust Robinson Humphrey

If Europe is successful – European acquiring is successful, will that be – would we be starting gross margin expectations from a different level as you look to ’09 or is that probably a ’10 and beyond kind of event given that you are starting from a pretty low base.

Steve Pellizzer

Yes, I mean I think it has – the profile I think is going to be similar to that of our domestic acquiring margins, but I think it’s going to be very similar to how we introduce domestic acquiring. So, if you go back to 2004, there was a slight impact over a long period of time resulting from that increasing base of revenue and I think that’s what we’ll see as well.

Andrew Jeffrey – SunTrust Robinson Humphrey

Okay. And then you’d mentioned some inactive customer purging. Anything else just generally though in terms of overall small business health that’s one of potential upshots of what we are seeing on the – from the constrained credit environment. Any sense that cash cycles are stretching out or – your balance sheet looks pretty clean, but is there anything you are seeing that suggest that your smaller customers are under any kind of financial stress?

Steve Pellizzer

No, again, we have a pretty vigorous process with regard to terminating accounts if in fact they are delinquent from a billing perspective. But I mean I think it’s quite the contrary, I mean we’ve seen a lot of strength at that low end, the small business market segment. We have seen great numbers. And you see those in our Q3 statistics, but even expectations into Q4 are very high with regard to the small business segment of the market.

Bill McKiernan

Yes, Andrew, I would add to that. Our DSOs for the quarter are about 25 days. That’s pretty consistent with the last few quarters. And also if history is any guide, the last time we had a pretty significant economic downturn back in the sort of ’01-’02 timeframe, the small business sign-ups at Authorize.Net actually went up. And one explanation for that is to the extent unemployment picks up more people look to set up websites as a way to supplement or replace lost income. So in some ways that small business segment can be counter-cyclical for us.

Andrew Jeffrey – SunTrust Robinson Humphrey

Okay. So, in that regard, it’s not necessarily a read through in general to the health of small business, it’s actually a mix shift of sort that you might expect.

Bill McKiernan

Yes, and if you look at what happened this quarter, we had a record number of sign-ups and we may see more churn over time but we also may see new business formation accelerating.

Andrew Jeffrey – SunTrust Robinson Humphrey

Great. Thank you.

Operator

Your next question comes from the line of Brett Huff with Stephens Inc.

Brett Huff – Stephens Inc.

Good afternoon. Congratulations on a nice quarter.

Bill McKiernan

Brett.

Brett Huff – Stephens Inc.

Hello.

Bill McKiernan

Is that Brett?

Brett Huff – Stephens Inc.

Congrats on a nice quarter.

Bill McKiernan

Thank you.

Brett Huff – Stephens Inc.

Two quick questions, one of my questions have been answered. Number one, wanted to understand a little bit more about the attachment rates. I think you guys have talked about in the past of – when your sales folks are out selling the gateway or other services, did you see that attachment rate move around at all vis-à-vis the little bit of a slowdown in the acquiring business or is that mostly a size of transaction kind of thing?

Steve Pellizzer

Yes, I don’t think there has been any kind of slowdown in the attachment. I think it’s more driven by the average ticket as well as may be a slight slowdown in just volumes processed.

Brett Huff – Stephens Inc.

Okay. And then my only other question was can you explain to me what kind of impact – given you guys have 22% or 25% of transactions that originate outside the United States – and I think that’s the right stat, what kind of impact from a currency point of view do you anticipate, so if I am living in Germany and buying something in the U.S. I’m – I think I am less inclined to do so now given that the currency changes occurred. Do you see any implications there or anything in 3Q that changed or so far in 4Q?

Steve Pellizzer

Yes, I mean we don’t take any FX exposure if that’s what you are asking. The only FX exposure that we take is just from the fact that we’ve got an office in the U.K. that’s denominated in British pounds, but we are not taking FX exposure on individual transactions.

Brett Huff – Stephens Inc.

But have you seen those kinds of transactions taper at all given that may be the attractiveness of that transaction isn’t as keen as it was before?

Bill McKiernan

Yes, but, Brett, some of our merchants are actually pricing in local currencies anyway, so they are already ahead of that curve, actually.

Brett Huff – Stephens Inc.

Okay. That’s all I needed. Thanks for your time.

Operator

Your next question comes from the line of Larry Berlin with First Analysis.

Larry Berlin – First Analysis Corp.

Good afternoon guys. How are you doing.

Bill McKiernan

Good, Larry.

Larry Berlin – First Analysis Corp.

Good. Hey, just a couple of quick questions. One, is there any type of magnitude you can give us in terms of revenue for the Automated Recurring Billing and the Fraud over the course of this year or is that just not possible?

Bill McKiernan

I don’t have it handy, Larry, but the metrics that I shared I think indicate that these are becoming increasingly popular. And again, the value in these services is often that they act as differentiators in the market for CyberSource, so we are able to bring more value-added services to the customer.

Steve Pellizzer

I think (inaudible) it’s fair to say the revenue is like under $1 million for each of those lines–

Larry Berlin – First Analysis Corp.

Okay. (inaudible) and then you are placing too much substantial some for the questioner but I just want to double check, have you seen any changes at all in churn amongst the small businesses or it’s just too early to tell?

Steve Pellizzer

No, I don’t think there is anything unusual other than what we’ve talked about with regard to some of the clean-ups that some of our resellers have done, but those – that’s representing churn from prior periods that they are just getting caught up on.

Larry Berlin – First Analysis Corp.

Okay great, thanks guys.

Steve Pellizzer

Thank you.

Operator

Your next question comes from the line of Tom McCrohan with Janney Montgomery.

Tom McCrohan – Janney Montgomery

Hi Steve.

Steve Pellizzer

Hello.

Tom McCrohan – Janney Montgomery

Hello. Can you provide an update on the ANET integration. Can we assume that these activities are completely finished and if there is any additional cost synergies that you’re potentially working on above and beyond what has been previously disclosed?

Bill McKiernan

Well, Tom, for the most part the cost synergies have been realized. We are looking at consolidating platforms over time, but that’s a two to three year effort, I would say, and frankly the cost synergies associated with those consolidations they are probably not of a huge magnitude. It’s more operational efficiency that we derive from consolidation.

Tom McCrohan – Janney Montgomery

And switching gears, have you seen any impact, positive or negative, from the dissolution of Chase Paymentech and First Data that you can talk about?

Bill McKiernan

I don’t think so. I think Paymentech continues to be a great partner of ours in the market and we work with them very closely. They are certainly a dominant player in the eCommerce space and we try to stay in close touch with them to make sure that to the extent we have mutual customers that they are well served even through the dissolutions of the FDC-Paymentech alliance.

Tom McCrohan – Janney Montgomery

And can you – Bill, I know I have asked this before and I apologize asking you again, can you remind us the difference between the Salem platform, the online platform Paymentech has and what you can do like why Paymentech would continue to rely upon CyberSource?

Bill McKiernan

Sure. We have connections into the Salem platform. We provide gateway services to our customers into Salem. And I think customers chose the CyberSource gateway for a whole variety of reasons, one is the ease of integration of our gateway into their existing legacy systems. We’ve spent a lot of time building plug-in integrations into all these different eCommerce platforms, so we make it very easy for customers to install the API and plug in to Salem. And then we offer all these other value-added services like fraud screening, which merchants can get through Paymentech. In addition to that, we really take what we think is a much more global view of payment processing and try to support many more payment types than anyone else. So if you want to sell things in the German market or the French market or the Brazilian market or the Chinese market, we’ve got connections that are built out to support those unique payment types.

Tom McCrohan – Janney Montgomery

So, is the Salem platform considered a front-end platform or a back-end platform?

Bill McKiernan

No, it’s both.

Tom McCrohan – Janney Montgomery

It’s both. Got it. And just lastly another separate topic on the European merchant acquiring initiative. Is there any guidance that you can give us regarding what we can expect as far as penetration rate from the volume that you are processing today should we expect the same 2% of volume is kind of the goal there in Europe or should be above or below that over time?

Steve Pellizzer

Well, I mean it’s going to be a similar rollout to what we have done in the U.S., so starting out we are at a base of zero, so, our hope is that we are going to grow it as quickly as we have here in the U.S. and then you are going to see an acceleration in our U.S. volume processed.

Tom McCrohan – Janney Montgomery

Okay. Are there any incremental investments needed to bring on board and start doing underwriting and chargeback processing for Europe? Are you adding a processing center in Northern Ireland to handle that or is that all going to – all that activity going to be leveraged on what you already have here in the United States.

Steve Pellizzer

Well, certainly underwriting in the risk management side, we are going to leverage our existing resource here at least initially. There may be a time when they have got enough volume in the U.K. that it necessitates local staffing there but certainly out of the gate the plan is to leverage the team we have.

Tom McCrohan – Janney Montgomery

Great. Thanks for taking my questions.

Steve Pellizzer

Thank you.

Operator

Your next question comes from the line of Franco Turrinelli with William Blair and Company.

Franco Turrinelli – William Blair & Company

Hi, Steve and Bill, I’ve got few housekeeping questions, if I may. Steve, where were the – there is a normal recurring charge, where was that recognized, was that SG&A?

Steve Pellizzer

Yes, it was in the G&A line.

Franco Turrinelli – William Blair & Company

Okay thanks. In the earlier comments, you said something about the – I am looking for the processed volume in acquiring and you said something about 2%, and I wasn’t sure if that was 2% of volume or 2% merchants is acquiring processing volume.

Bill McKiernan

Yes, it’s 2% of volume. So, about 630 million or so.

Franco Turrinelli – William Blair & Company

Thanks. Steve, does – have you explicitly taken into account – I mean I guess it’s not a lot of your revenue still out of U.K. what 7% you said but does your guidance factor in the – what’s happened to forex rates over the last couple of weeks.

Steve Pellizzer

Yes, it does. I mean we obviously get hurt on the top line, but then we get help on the expense line, but it does take that into account.

Franco Turrinelli – William Blair & Company

Right, but I mean in terms of some of the questions earlier, looking at the sequential growth in the fourth quarter revenue guidance I mean there is an impact from foreign exchange included in that?

Steve Pellizzer

Absolutely.

Franco Turrinelli – William Blair & Company

Great. Is – this whole tax situation in California, if you need to do – I mean is there risk that you need to kind of move R&D back to California and that would somehow make the Irish development less attractive to you?

Steve Pellizzer

No, no, it’s more looking historically at R&D efforts as opposed to looking prospectively.

Franco Turrinelli – William Blair & Company

Okay, great, thank you. That’s helpful. Hey, thanks so much for the increased disclosure on the value-added services. Bill, do you have a sense what is a realistic target for penetration of those value-added services? I mean I know we’ve talked about this before some of the new orders, a thousand shoes is probably fraudulent, so not everyone needs that. I mean do you have any sense of where those numbers could go?

Bill McKiernan

Yes, I think it’s situational in that if you look at sort of on the small business platform we’ve got the PCI compliance related services like Customer Information Manager and then there is Automated Recurring Billing, and then the fraud offerings, and depending upon the nature of the merchant’s business they may or may not have a need for all of those. So, for example, not all merchants are that susceptible to fraud. It more depends on what it is they are selling. So, if you are not selling something that’s easily resold off then you don’t have that much of a fraud problem. And if you don’t have a product that lens itself to a recurring business model, you may not have a need for that either. Now, on the PCI side, every merchant has to be compliant with PCI. So, we believe that probably has a higher penetration potential than the other services. But having said all that, again, the benefit to us in offering these value-added services is our ability to differentiate our offering relative to anyone else in the market place by offering this rich eCommerce solution.

Franco Turrinelli – William Blair & Company

Okay thanks. And one final thing. I was really impressed with the number of new ISOs and Affiliate Resellers that you were able to sign, especially given some of the skepticism that had been originally expressed regarding your ability to manage that particular channel issue. What I don’t have a sense of, and I don’t know if you’ve given us this number in the past, is about how many ISOs and about how many resellers do you actually have in total?

Bill McKiernan

So, it’s over 4000 now and, Franco, that’s an excellent point. That metric is so important to the long term health of the business and we have invested heavily this year with the help of the heritage Authorize.Net people to really make sure that we are satisfying the requirements from our channel partners in terms of their support needs and technology needs and product needs. And I think that is paying off. I think our relationships with the channel are as good as they’ve ever been. I think we’ve demonstrated a real commitment to meet their requirements. And we are also seeing in the industry, as I mentioned in the remarks, much more focus on eCommerce among a broad spectrum of ISOs and affiliates. So, all of that is helping us as we sign more and more affiliates and increase our dominance of that very important channel.

Franco Turrinelli – William Blair & Company

I mean, Bill, and again I don’t know that you’ve given these numbers in the past, but it looks like perhaps actually acceleration in the rate at which you are adding ISOs and Affiliate Resellers, certainly an accelerations prior to the rate that Authorize.Net had been adding them at.

Bill McKiernan

Definitely true in the affiliate area. On the ISO, we’ve always had a very strong ISO channel and frankly I don’t think there are that many new ISOs being created, not as many as there are affiliates being created. Affiliates tend to be ISPs, web developers, domain registration companies, and things like that, and so we are seeing an increase in the population of those kinds of businesses. And we are signing up a lot more of them and we’ve got some focused efforts underway to try to get more affiliates into the CyberSource population. And that’s been working great for us.

Franco Turrinelli – William Blair & Company

So, should I assume that those 60 ISOs are largely competitor take-aways form other providers?

Bill McKiernan

Not necessarily. I’d say some could be competitor take-aways and some could be just new ISO formation.

Franco Turrinelli – William Blair & Company

Okay. One final question, if I may. I mean obviously we feel that in a lot of questions there have been basically concerns about the health of the banking industry, merger some of the large banks and stuff. Can you remind us among those 4000 Affiliate Resellers, the role of banks in that group and whether or not you have exposure to any individual banks that is significant?

Bill McKiernan

No, I don’t think we do, Franco. I think if anything the crisis that the banks are working through right now make them more likely to work with partners like CyberSource to provide key aspects of the eCommerce value chain. So, in many ways it’s helping to solidify the relationships that we have with these banking partners.

Franco Turrinelli – William Blair & Company

Okay. Thank you, Bill. That’s very helpful.

Operator

And that concludes our Q&A portion. Mr. McKiernan, do you have any closing remarks?

Bill McKiernan

No, thank you very much, operator, and thanks, everyone, for joining us.

Operator

And this does conclude today’s conference call. You may now disconnect.

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