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Higher One Holdings (NYSE:ONE)

Q4 2012 Earnings Call

February 12, 2013 5:00 pm ET

Executives

Ken Goff

Mark Volchek - Co-Founder, Chief Executive Officer and Director

Miles Lasater - Co-Founder, Chairman, President and Chief Operations Officer

Analysts

Christopher Shutler - William Blair & Company L.L.C., Research Division

Kevane A. Wong - JMP Securities LLC, Research Division

Gary F. Prestopino - Barrington Research Associates, Inc., Research Division

Adam J. Letson - Piper Jaffray Companies, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2012 Higher One Holdings Earnings Conference Call. My name is Marcel, and I will be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today, Mr. Ken Goff, Director of Investor Relations. Please proceed, sir.

Ken Goff

Thank you. Good afternoon, everyone, and thank you for joining us today for Higher One's Q4 2012 Earnings Call. I hope you're all having a great Mardi Gras. With us today are our Chief Executive Officer, Mark Volchek; and our Chief Operating Officer, Miles Lasater.

Miles and Mark will provide a summary and some color about our performance in the quarter before opening the call up for Q&A. There is a slide presentation that accompanies Mark's discussion of the quarter that is available on our Investor Relations website at www.ir.higherone.com.

Before we begin, I'd like to remind everyone that this call will include forward-looking statements as defined by the Securities and Exchange Commission. 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. These statements speak only as of the date they are made, and the company does not intend to update or otherwise revise the forward-looking information to reflect actual results of operations, changes in financial condition, changes in estimates, expectations or assumptions, changes in general economic or industry conditions or other circumstances arising and/or existing since the preparation of this presentation or to reflect the occurrence of any unanticipated events. The forward-looking statements made on this call do not include the potential impact of any acquisitions or divestitures that may be announced and/or completed after the date hereof. Information about the factors that could affect future performance can be found in our recent SEC filings available on our website at 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. Reconciliation of these non-GAAP measures to their closest comparable GAAP measure are included in the appendix of this presentation -- 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

Thanks, Ken, and thank you, everyone, for joining us today for our fourth quarter 2012 earnings call. At our core, Higher One held with 3 key goals: to lower the cost of education by improving administrative efficiencies and reducing fraud and waste; to provide financial literacy at low-cost financial services to college students; and to improve graduation rates through better data collection and analysis. We believe that these are important goals for the broader education and financial services market that everybody can get behind. Our technology and services helped lower the cost and enhance the quality of higher education in the U.S. And we believe that our structural cost advantage and unique understanding of the higher education market puts us in a position to profitably offer low-cost, high-value financial services and other products to the student population.

Last year, we made meaningful progress in positioning Higher One for future growth. We continued to develop our consumer brand. We increased and enhanced our product offerings, and we diversified the new lines of business. While the macro environment has put pressure on our financial results in the near term, we are making investments on the business that will put us in a strong position over time.

More specifically, in 2012, we maintained 100% OneDisburse client retention, expanded the OneDisburse client base by 11% and grew revenue by 9%. We now serve campuses with enrollment totaling 10.9 million students. 2012 was a challenging year with numerous headwinds, including being the second consecutive school year of lower enrollment, tough new cycles about the industry and regulatory uncertainty. The fact that we managed to achieve so much is a testament of the strength of our business, our employees and client relationships.

And with that, I'd like to hand the call over to Miles.

Miles Lasater

Thanks, Mark. There are several things I'd like to cover before handing the call back over to Mark, who will then go through the financials and guidance in more detail. I plan to discuss our strategy around consumer products and what we're seeing with adoption, our progress with sales, an update on our government relations initiatives and the regulatory environment and our multi-bank partner strategy.

Looking at where we stand with our consumer products, it's safe to say that we have made more improvements to our offering in 2012 than we had in any prior year. Our improved offering now includes multiple checking account options, which gives students the ability to choose which account makes the most sense for their usage patterns. We have changed our branding, marketing and promotional strategy to focus on communicating to customers that our checking account is for more than just refunds and can be used as a primary bank account.

Given these new products, new branding initiatives and our drive to set the industry standard for regulatory compliance, we made a number of changes to the account selection process. While adoption rates were affected both by macro factors and some of the changes we made, it was important to employ these changes in time for the fall semester.

As we said last quarter, we believe that the changes we made establish a new baseline for adoption. Going forward, we will continue to improve our messaging, products and process with the goals of increasing account adoption and deepening our engagement with customers while maintaining a strong compliance program. I am confident that we are having a positive impact, and we are already seeing positive adoption evidence in January 2013.

I'd now like to take some time to discuss sales. To start, I'm happy to report that we had a great year for sales for the CASHNet Suite of Payment Products. Growth in the number of students enrolled at school signed up for CASHNet has accelerated every quarter of 2012 and ended the year growing 20%. We also continued to have success upselling additional modules to existing clients. We continue to expand the client base of Campus Labs, our recently acquired suite of data analytics products. We have made strides in integrating the sales teams, and I believe there is a rich cross-sell potential with other parts of the business. Over time, Campus Labs will benefit from the relationships our salespeople have with senior administrators in higher ed institutions. And OneDisburse and CASHNet will benefit from the relationships Campus Labs has with hundreds of schools serving almost 5 million students. In addition, the combination of the 3 suites of service under the Higher One umbrella puts Higher One in a unique position to continue to help schools increase efficiencies and improve the student experience.

Last November, we announced our first feature to combine data from OneDisburse with the data analytic capabilities of our Campus Labs suite. The feature is called Campus Labs Insight and enables higher education administrators to gain unprecedented insight into institutional effectiveness and student success. We will continue to look for ways to integrate our products to enable institutions to overcome new challenges. The increased effectiveness will provide campuses with the incentive to implement additional Higher One services.

Looking now at OneDisburse sales. They did come in below the expectations we have set at the beginning of the year. We increased sign school enrollment -- or the number of students enrolled at signed clients by just under 500,000, which amounts to 11% growth for the year. Decision makers in higher education tend to be attuned to policy discussions, and as such, we believe that sales were impacted by the press cycle, as well as some political and regulatory uncertainty. Larger schools appear to be more sensitive to these issues than smaller schools.

While we signed almost as many campuses over the course of 2012 as we did in 2011, the average size of schools signed in 2012 was lower than the prior year. I believe that there were some larger contracts that were on the table in 2012 that may have gotten pushed out. I'd stress that our win rate continues to be strong, and we don't see competition gaining much traction. This is further evidenced by our 9 straight quarters of 100% client retention. We are optimistic that we should be able to mitigate the impacts from these issues in 2013. The political rhetoric has been toned down following the election, and we managed to maintain 100% client retention through a difficult press cycle. Sales tend to be referral based, and considering how happy our existing clients are with our services, I believe it bodes well for reaccelerating sales going forward.

I'd say that the regulatory environment remains challenging. So I think we've made excellent progress in working with regulators and legislators to mitigate risks. We have expanded our product offering and made changes to certain processes as we work to set the industry standard for regulatory compliance. We have hired a new Chief Compliance Officer who will enhance internal oversight, and we had expanded our outreach to policy makers to communicate what we do to save money for schools, to help students manage their finances, to reduce fraud and to improve graduation rates and educational effectiveness.

Higher education and consumer finance are 2 sectors that often have regulatory and legislative oversight, and we look forward to working with policymakers in the future. When people understand the services we provide and compare us to other options, the value we provide is clear. We save money for schools, and we offer choice to students including low-cost, high-value financial services. In fact, if you look at the problem that regulators and legislators are trying to solve, fighting financial aid fraud, lowering administrative expenses for schools, improving graduation rates and others, our products and services help do just that.

As we head into 2013, we have expanded the services we offer, enhanced their value and improved our ability to communicate that to regulators and legislators. One thing we recently announced that I'm particularly excited about is our new financial aid fraud detection and prevention product, OneDisburse Alert!, which identifies potentially suspiciousness disbursements. Alert! utilizes proprietary comparative analysis techniques and a proprietary database to identify suspicious records within a file. These findings are then compiled and provided to the institution through a comprehensive reporting process.

Schools will be able to use the information provided by this product to be more focused in their efforts to combat fraud. For example, the system is designed to flag students who have already enrolled, accepted financial aid and then dropped out of another institution. Another red flag is a given student trying to enroll in multiple institutions or students that are enrolled at other institutions under a different alias. This product represents a great way for us to leverage our technological capabilities and relationships with schools to help prevent fraud. Fraud prevention is a major initiative of the Department of Education, and we are happy to be able to make them -- to help them achieve these goals. This is a strong argument for capturing more data electronically rather than using antiquated paper-based systems. I hope that this can evolve into a full suite of products to help institutions identify, fight and prevent financial aid fraud.

At this point, I'd like to touch on where we stand with our bank partner relationships. I'm quite pleased with the progress we made over the course of 2012. We entered the year only set out to partner with one bank for customer deposits, which wasn't ideal from a risk management perspective. We are now equipped to handle multiple bank partners. Operationally, bringing on a new bank partner is now something that we can accomplish in a matter of weeks.

With that said, there may be exchange to one of our partnerships. While we've enjoyed working with Cole Taylor Bank over this past year, we have made a mutual agreement with Cole Taylor to transfer the deposits they hold on our behalf to other partner banks. We understand that circumstances can change for banks. This is a key reason for our multi-bank partner strategy. We are set up operationally to have various movable parts and to be able to add, remove or switch depository bank partners with no material impacts to our customers. We're extremely encouraged by the feedback we've gotten from our other bank partners who say that our partnership is going well from their perspective.

In short, 2012 presented a number of challenges, and I'm pleased with how well we've addressed them. While some of our metrics came in below where we thought they would at the beginning of the year, we have made great progress in developing our consumer products and brand, diversifying our business and mitigating risk going forward. We will continue to make investments that will create value over the long run.

And with that, I'll hand the call back over to Mark for a deeper look at our financials. Mark?

Mark Volchek

Thanks, Miles. At this point, I'll jump right into the discussion of the financial results for the quarter, starting on Page 3 of the company's slide presentation. Please remember that all growth rates I'll mention will be year-over-year unless otherwise specified.

Now to touch on some of the highlights in the quarter. We enjoyed our ninth consecutive quarter of perfect OneDisburse client retention. Revenue was up 7% from Q4, coming in within our revised guidance range. We continued our rollout of new consumer products and branding initiatives, and we made progress with our integration of Campus Labs, releasing a new product that allows school administrators to better view all of the data that's available to them, including OneDisburse data.

Turning to Slide 5. You'll see that our efforts to diversify our business have helped to offset the headwinds we're facing with account revenue. Payment transaction revenue was up 12%. Growth was impacted by provisions that were included in Proposition 30, which was recently passed in California. Part of Prop 30 reverses recent increases in tuition at certain public colleges in California. Many students receive the credit to tuition payments at the end of the fourth quarter, causing the amounts they paid out of pocket

to be significantly lower than normal. Though some students might receive additional rebates in the spring of 2013, this should be viewed as a onetime impact, and I expect this revenue component to return to more normalized growth levels.

We also saw strong growth in higher ed institution revenue, driven mainly by our inclusion of revenue from the recently acquired Campus Labs product suite. The Campus Labs suite contributed around $1.9 million in GAAP revenue to higher ed institution revenue in the quarter.

In the fourth quarter, we signed a new deal with MasterCard. One of the impacts of the new deal was that our revenue stream that made up a large portion of other revenue will now be included as a component of account revenue going forward. We're very happy with the new deal and believe that it will contribute to our bottom line as we grow the business.

Turning to Slide 6. Gross margin was down approximately 3 percentage points when you exclude the impact from the customer credit project in Q4 2011. This was driven by lower revenue, investment in customer service and mix shift as our lower margin revenue streams continue to grow faster than ones with higher margins.

On Slide 7, I'll go into a bit more detail about our operating expenses. G&A expense as a percent of revenue was up 3.8 percentage points. The absolute dollars spend was pretty much in line with Q3 as we saw higher levels of depreciation and amortization, had higher employee-related expenses and continued to invest in enhancing compliance. Product development was also considerably higher as a percent of revenue as we included a full quarter of Campus Labs. A good number of the core employees focused on Campus Labs work in R&D around new product features, which is reflected in our product development expense line. With sales and marketing, we saw an increase in costs related to the direct deposit promotion we were running. The promotion has driven more accounts getting direct deposit, which is the behavior we're looking to incent. However, direct deposit initiatives do not have an immediate payback in the quarter.

On the next slide, you'll see that adjusted EBITDA margin was down by more than 9 points. This was driven by decline in gross margin and the increase in operating expenses as a percent of revenue.

On the next slide, you'll see that adjusted diluted EPS was down 16%. There was an increase in interest expense as we have drawn $80 million in our line of credit to help fund the acquisition of Campus Labs and support our share repurchase program. Also, taxes were lower in the fourth quarter of 2011 due to certain nonrecurring items negatively impacting year-over-year growth in EPS this past quarter. Offsetting these negative impacts on EPS, our share buyback program decreased the diluted share count by about 10%. Free cash flow grew nicely in the quarter. Excluding spending on the building renovation project, CapEx made up around 7% of revenue in 2012. We had said that we expected to be in the 5% to 10% of revenue range as we invest in IT infrastructure that can control cost and help us grow revenue. The return to lower CapEx levels following the completion of the building renovation project has provided a boost to our free cash flow generation. For 2013, we expect CapEx to be in the range of 6% to 8% of revenue.

Turning to Slide 11. Miles discussed his views on what impacted sales in 2012 and a look going forward. There's one point that I'd like to stress again. One or more of our services is now available at schools with enrollment totaling 10.9 million students. This is over half of the entire higher education student population of the U.S. It's difficult to overstate how exciting this is as it represents significant cross-sell and upsell opportunities throughout our product suite. It gives us huge population for which we can provide services, particularly as we continue to develop our consumer brand.

Getting a college degree remains the best way to increase one's earnings potential. People in college today drive the economy tomorrow, and the ability to form trusted relationships with over half of the college population to help improve financial literacy, increase graduation rates and offer low-cost, high-value products and services provides an exceptionally strong foundation for us to continue to grow in the future.

On the next slide, you'll see that the number of OneAccounts was essentially flat over the course of the year. This is partially due to a change in the way we close low balance, inactive accounts. This change caused the onetime stepdown in the number of accounts in the second quarter of 2012. This will impact year-over-year growth rates until we anniversary the change in Q2 of this year. I'd note here that we did see stabilization, in fact, slight growth in revenue per account. This metric has been under pressure for a couple of years now due to regulatory impacts to fees, as well as macro factors that impacted the number of accounts receiving a financial aid disbursement. The changes we've made on how we close out low balance accounts have helped to reduce the number of open accounts on our books that don't have any activity. And some of the changes we've made to our consumer products and branding have focused on generating high-value accounts. While the changes we're making to the business could cost volatility in this metric in the near term, I'm optimistic that we can continue to deepen our customer relationships going forward by offering more high-value services to more engaged consumer base.

Turning to Slide 13. You can see that we used our line of credit to fund share repurchases throughout the quarter. We utilized an additional $50 million of debt in Q4, bringing the total withdrawn on our credit line to $80 million. We purchased approximately 7.6 million shares in the quarter at an average price of around $10.27 per share. And we completed the $100 million share repurchase authorization in January 2013.

Before giving guidance on Slide 14, I'd like to talk about some of the investments we are planning for 2013. We plan to have incremental discretionary OpEx investments totaling between $5 million and $7 million in 2013. We have said that 2012 was an investment year in which we built the strong foundation for growth. We improved our technology infrastructure, our compliance capabilities, our product suite and our branding and marketing.

In 2013, we plan to build upon this foundation, putting the company in a strong position for future growth. The majority of these investments will be focused on growth initiatives. These include more product development spend, better lifecycle management and building out more predictive analytics capabilities. We will also continue to improve how we serve, educate and communicate with consumers. These investments should help us deepen customer engagement and improve retention. Some of these initiatives started in 2012, and we're encouraged by the initial success we've seen in certain metrics, such as growth in nonrefund deposits. We expect these investments to enhance future growth and produce a strong return over time. The remainder of these investments will focus on strengthening the business in a variety of ways. This includes investments in government and media relations, enhancing our compliance program, improving our fraud reduction and loss prevention capabilities and strengthening our bank operations and procedures. We have hired and will continue to hire outstanding people to further these goals internally, and we'll also continue to spend on outreach to Washington D.C. and around the country, educating them about the benefits we provide to higher education.

Let me be clear. We do not expect these investments to drive meaningful new revenue in 2013, but they will impact EPS this year. That said, I'm confident that the investments we're making now are best for the long-term growth of the business. I'm extremely excited at the opportunities in front of us, and as a large shareholder myself, I'm focused on what will create the most value for the company over time.

With that said, we expect that 2013 revenue to be in the range of $210 million to $220 million, and we expect 2013 non-GAAP diluted EPS to be in the range of $0.62 to $0.70. This takes into account the discretionary OpEx investments I just spoke of.

In summary, I'm optimistic that 2013 will be a good year for Higher One. Some headwinds remain, but I'm confident we're making the right investments on our business to position us for long-term growth. Our 100% OneDisburse client retention is a testament to the value of the services we provide to schools and students. We continue to evolve and improve the services we offer to both schools and students, and I'm pleased with the progress we've made in integrating the Campus Labs acquisition today. I'm as confident as ever about our ability to create long-term value for shareholders.

And with that, Miles and I will be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Chris Shutler with William Blair.

Christopher Shutler - William Blair & Company L.L.C., Research Division

You said that you're happy, Mark, with the growth that you're seeing in the nonrefund deposits. Maybe just a little bit more color there and then what type of adoption rates you're seeing for Premier.

Mark Volchek

Sure. Why don't I let Miles take the Premier question first, and I'll come back to the first part of your question.

Miles Lasater

Sure. So we've seen those initiatives being linked, and I'm glad you asked that question because we think that it's certainly a high point for 2012. The OneAccount Premier account has been further enhanced in January of this year, adding all point which is 38,000 plus or so, free ATMs, lowering the monthly fee and other enhancements that we're excited about, which we believe will drive further adoption. And so there is a strong overlap between the OneAccount Premier adoption and the nonrefund dollar deposit volume growth that we saw in 2012. And we want to continue to invest in growing those nonrefund deposits as they provide good revenue diversification, deposit diversification overall. Was there anything you wanted to add to that, Mark?

Mark Volchek

Yes. I mean, I think we've seen a continued strong growth in the nonrefund deposits that are really important. We have not provided the exact numbers. There are metrics, but I think that's something that we'll continue to track and evaluate how to provide you more color on that in the future.

Christopher Shutler - William Blair & Company L.L.C., Research Division

Okay. And then I recently saw that you guys received a letter from a representative who was asking about the ATM access that you guys provide. So I just wanted to get your take here on the call about what changes, if any, you see yourself considering as we get through '13 on the ATM front, particularly for maybe some online students that don't have access to an ATM on campus.

Miles Lasater

Yes. We're constantly evaluating the value proposition and taking feedback from all parties to improve that and continually strive to do that. We have an ATM fleet across the country that is in the top 25 in terms of size. We continue to invest in that and expect that to grow. The growth in our ATM is included in the CapEx, 6% to 8% in 2013 that we talked about. We added an ATM -- over the last 2 years, we've added an ATM on average every 2 or 3 days. So I think we're continuing to invest in that area. As I mentioned, we also added Allpoint to OneAccount Premier. So for those customers that want to have access to even more ATMs, that's very positive. And I think part of your question was about receiving inquiry from one representative from California. And we certainly will continue an open dialogue with him and his staff about making sure that students have choice value and easy access to cash, which we believe they do.

Christopher Shutler - William Blair & Company L.L.C., Research Division

Okay. But right now, you're not considering adding a surcharge fee network to the regular account?

Mark Volchek

We'll certainly take into account all feedback that we receive from consumers, from others and evaluate it. The Allpoint addition to OneAccount Premier is something that's fresh for us, and it's something that we just did in the last month. So as we evaluate the adoption of that and usage of it, its impact on consumers and the value proposition, whether those ATMs really are in locations that people find convenient to use, how often they use them, et cetera, all these factors will feed into future product design for sure.

Christopher Shutler - William Blair & Company L.L.C., Research Division

Okay, great. And then just a couple more quick ones, if I may. First, the -- Mark, what's the interest rate that you guys are paying on your debt?

Mark Volchek

Sure. The current interest rate in the credit line is about 2%.

Christopher Shutler - William Blair & Company L.L.C., Research Division

About 2%, okay. And then any update on the CFO search?

Mark Volchek

We continue to work really hard on it. And it's certainly a really high priority for me, and we'll provide you an update as soon as we have one.

Operator

Your next question comes from the line of Kevane Wong with JMP Securities.

Kevane A. Wong - JMP Securities LLC, Research Division

A few things I'll try to run through quick. First, Cole Taylor Bank, obviously, you touched on that termination. They weren't -- it didn't look like they'll be with you particularly long. Can you give any particular color on what sort of caused the break? Is there any sort of ramifications for other bank relationships that you have? Just any sort of color you can give us around that and [indiscernible].

Miles Lasater

This is Miles. Our multi-bank strategy is built around having multiple banks, built around being able to change banks when necessary. While we certainly hope for longer-term relationships, and that's what we seek, and we feel that we've had a good partnership with Cole Taylor, we do understand that circumstances change for banks. And so we're looking either to add more partners or the current partners that we have, have interesting capacity to handle the deposits without Cole Taylor. So we feel that the program design is really working as intended.

Kevane A. Wong - JMP Securities LLC, Research Division

Was it a -- so we can infer that as a mutual thing versus some sort of they should have made some move or -- I mean, which is the way we should sort of view it?

Miles Lasater

Yes, you're correct. It was a mutual decision that we made. I think we filed an 8-K with some information on that. We've signed a transition agreement with them, so we can have [indiscernible] transition that won't have much impact on customers. And we're very focused on that to make sure that, that is a smooth process for sure. And we wish them the best of luck. We're going to be working together certainly over the next coming months and have been happy with the relationship today.

Kevane A. Wong - JMP Securities LLC, Research Division

Got you. And 2 other topics, if I can. One was just looking at the SSE adds. You had 53,000, it looks like, for the quarter, which is a low number. You had also indicated something about the comparison being difficult until you overlapped the higher shedding of accounts that was done in the second quarter. I would have thought that would have been more onetime than something that would have carried forward. Am I mistaken? Or was there something else that impacted sort of that low number in the fourth quarter?

Miles Lasater

So I think -- the 2 parts of your question, let me take the second part first about the number of accounts. So I think the year-over-year comparison is certainly impacted by the changes made in the summer where there was a onetime stepdown. And so that certainly continues to impact the year-over-year comparison. So there were no new changes made since the summer to fourth quarter. But when you look at the fourth quarter of 2011, that was pre-changed, and therefore, the OneAccount number would have been higher.

Kevane A. Wong - JMP Securities LLC, Research Division

So did that change -- just to qualify, so that change that you did in terms of purges, that carries forward into further -- into ongoing quarters, and that's why the year-over-year comparison continues to be difficult until second quarter of '13, is that correct?

Mark Volchek

Sure, yes. It closes out low balance, inactive accounts faster than it did before, and so those accounts get closed out a few months sooner.

Kevane A. Wong - JMP Securities LLC, Research Division

Got you. And looking at this quarter, specifically on its own, it's lower than both the second quarter and the third quarter. Is there a particular -- and you talked about perhaps having some large possible accounts sort of being held up given sort of the environment. Is there anything you can give us in terms of a backlog or things that are sort of -- any kind of numbers that may have been held up in terms of SSE adds for the quarter?

Mark Volchek

So turning to sales in general, it's always difficult to qualify exactly which deals would have closed or would not have closed. I've personally been involved in a number of large deals that ended up not closing in 2012 and are still open. As we've talked about, it's difficult to predict our sales in the short term, and we're really focused on the long term, making sure we have a high win rate, making sure we have a large pipeline for a successful year and then work to convert those ongoing. So I don't have any specific numbers to share other than I feel that we're in a good position going into 2013. We've expanded our sales resources. I think the cross-selling opportunity is tremendous. If we think about total SSE served by Higher One the beginning of the year versus the end of the year, it went from, call it, close to 6 million SSE to almost 11 million. That's almost doubling the number of students that we work with, and that creates huge cross-selling opportunities for all our products. And that's really what we're focused on going into 2013.

Kevane A. Wong - JMP Securities LLC, Research Division

And if I can have just one last one, and I'll circle back in the queue. So looking at the sales cycle, time for sales, things like that, can you give us some sort of feel on how that went this quarter versus the prior quarter versus what you're seeing so far in 2013?

Mark Volchek

So looking at the sales cycle and really, if we measure from sort of when they started the internal purchasing process to the deal closing, I do think in 2012, we saw that sales cycle extend and become longer, especially for the larger deals where schools are really spending extra time doing diligence, making sure they're making the best decision ultimately. We believe we come out on top, but that diligence does take longer, and we think that, that sales cycle, given the headwinds in 2012, has extended, particularly for longer schools. Going into 2013, we'll see how it develops and certainly are working to shorten that back to where it was before.

Kevane A. Wong - JMP Securities LLC, Research Division

Any improvement? Or has it been sort of stable within the last quarter or so in terms of that overall length of cycle?

Mark Volchek

I think we've seen it stable sort of over the Q3 and Q4. Certainly too early to tell or talk about for 2013.

Operator

Your next question comes from the line of Gary Prestopino with Barrington Research.

Gary F. Prestopino - Barrington Research Associates, Inc., Research Division

Can you maybe -- in terms of -- with cross-selling, I mean, it's very evident you've expanded your universe fairly dramatically here. Any insight into how early efforts of that are going for you? Or is it just too early to tell since you only have Campus Labs that long?

Mark Volchek

Sure. This is Mark, and I'll take that question. And it's really an exciting question that I'm happy to answer. I've personally been involved in a lot of the discussions around sales in our sales meeting where we recently had all 3 teams together. And what I've observed is that we're already seeing salespeople work together, go in on deals together, share leads. I think it's too early to have some of the analytics of the data to say how things are going. But seeing how things are progressing and seeing folks working together, and I think we've already -- I've already seen deals or prospects where we've had meetings that we formerly had a hard time getting where one salesperson was able to get the other team member in. And so that's really exciting to see. And I think ultimately, schools are looking for value where they can have multiple services and products from one provider where things work together more seamlessly, they have one person, they can ultimately call, one company responsible. And so I think that really bodes well for the future. But given that it's 6 months, it's really too early to have metrics on that.

Gary F. Prestopino - Barrington Research Associates, Inc., Research Division

No, that's all right. That's what I was getting at. Are you getting these meetings for OneDisburse SSE that you would have had a heck of a time trying to get prior to the Campus Labs?

Mark Volchek

Yes, I think that's really all different ways. I think we're getting OneDisburse meetings, introductions from the Campus Labs folks and vice versa. Certainly, one of the things we really wanted to do is bring the Campus Labs product to senior decision makers at schools, and that's something that our OneDisburse sales folks have been able to do. And the CASHNet team has also been extremely busy, and we had a great year for CASHNet sales. And I think there, we're really seeing great synergies between OneDisburse and CASHNet and now the Campus Labs in the mix. I think those intros are really going all -- so all 3 products that -- and should help sales in all 3 categories for 2013.

Gary F. Prestopino - Barrington Research Associates, Inc., Research Division

And the last question real quickly is the Premier card is the only card that offers Allpoint access at this point?

Mark Volchek

That's correct. OneAccount Premier is where we've rolled out Allpoint, and we'll evaluate the success there for future products.

Operator

[Operator Instructions] Your next question comes from the line of Adam Letson with Piper Jaffrey.

Adam J. Letson - Piper Jaffray Companies, Research Division

First, I also got cut off for a second, so I apologize if any of these have been asked. But can you quantify by chance the benefit that the revenue per account received from the MasterCard contract being renegotiated?

Mark Volchek

And for confidentiality reasons with MasterCard, we really can't disclose the detail of that agreement, other than I can say that from an accounting standpoint, we did reclassify a large portion of other revenue into account revenue. So you can imply some of that shift. And then I think the real benefit from the Master deal and what we're still excited about is really that going forward, as we grow the business, we're going to see real incremental benefits to the bottom line. So I think when you look at 2012, it was certainly a slight improvement, the new deal over the old deal. But going forward, it is really where we're going to start building up and seeing more benefit going forward. And both on the Fiserv and MasterCard deals, our strategy was to really optimize the relationship over the next 5 years rather than the short term. And that's why I think as you look at our '12 results or as we talked about 2013 guidance, those impacts aren't as strong. If they will be, in the outer years of that 5-year contract.

Adam J. Letson - Piper Jaffray Companies, Research Division

Got you. And then with guidance assuming flat enrollment and flat disbursements, what's the level of confidence in that being able to stabilize? And what sort of visibility do you have into that, especially given some comments that the first half will likely still be down?

Mark Volchek

Sure. So that's a great question. And it's something we're certainly watching very closely. As you know, the spring semester is fairly closely tied to kind of the fall semester. So we're expecting spring 2013 to kind of follow in the footsteps of the fall. But then as we look through sort of the back half of 2013, that's an important checkpoint as we look at enrollments and volumes in the fall. In terms of visibility, we certainly don't have any proprietary data to predict the future in terms of enrollments other than what we gather from the public markets, from our clients. We certainly get a lot of feedback and learn their expectations. And to kind of summarize that, I think there's 2 things that we look at. One is sort of the long-term projections for enrollments provided by the government, and various reports are that enrollment will grow slightly over sort of the next 5 to 10 years. If I sort of look at that on a more granular basis, what we're hearing from schools is that conceptually, more students want to go to college. They need to go to college to get better jobs. And what happened over the last year or 2 is there's been structural reasons that students couldn't go to school, either because there wasn't a funding available to them, they didn't figure out the change in funding environment quickly enough or schools had budget constraints and couldn't provide space for enough students that wanted to go to school. So I personally believe that there's more students that want to go to school that can't go to school currently, and I do think that the government and the colleges and universities will figure out ways for folks to go to school. I think everyone in Washington D.C. and around the country believes that education is important and that's something we need to fund. And I think the questions are more around how to fund higher education, how to support students going to school rather than should we. And so I think those backdrops give me confidence that over the next 5 or 10 years, we'll certainly see growth in higher education. That's more difficult to sort of use that to predict the exact point for this fall, but I feel pretty good about using the flat assumption. Certainly, we could see some noise around that number, positive or negative, and that's something we'll be watching closely but won't really have data on -- or at least preliminary data until we report our Q3 earnings in November.

Operator

And your next question comes from the line of Chris Shutler with William Blair.

Christopher Shutler - William Blair & Company L.L.C., Research Division

Just a couple of quick follow-ups. First, in the quarter, the M&A expense, what exactly was that, Mark? I mean, it looked like a pretty big number relative to the size of Campus Labs.

Mark Volchek

Sure. So in that line, so the M&A expense line, that's primarily an adjustment to the contingent consideration that ran through there. It's actually a credit. I think that's what you're referring to, the credit that runs through the M&A line?

Christopher Shutler - William Blair & Company L.L.C., Research Division

Yes.

Mark Volchek

Yes. So the credit is really an adjustment to the contingent consideration. As you know, at the time of the deal, we estimate what we think the earn-out will be, and then we have to review that quarterly to see if that's still accurate. Certainly, at the first checkpoint, there wasn't really a lot of data to use. Now that we've gotten through Q4, we've been able to refine our models. And I don't think it's uncommon for folks to adjust these given that from an accounting standpoint, it's a pretty short measurement period of only essentially 5.5 quarters. We'll see some volatility around that number even though we've really -- with the recurring revenue model at Campus Labs, the closer we get to the end of 2013, the more accurate that number gets. And so I think that's really a refinement on the model. I think stepping back and thinking about integration in Campus Labs, we're still confident and on track that Campus Labs will grow 30-plus percent. I think the original earn-out implied a higher growth rate. But even the current adjustment still implies a very healthy growth rate, and we're very happy with the integration and the progress we've made on Campus Labs.

Christopher Shutler - William Blair & Company L.L.C., Research Division

Okay, great. And then just the last one for me is just out of curiosity with the whole neg reg process kind of hanging out there at some point down the line. Have you guys heard or seen any signs that the federal government may or has any intention, I guess, longer term of making any broader or sweeping changes to the whole credit balance disbursement process, whether it's centralizing in some fashion or something like they did to the FFEL program a couple of years ago?

Miles Lasater

As far as the Department of Education negotiated rule making, they did publish, as you referred, in April an open rule-making process related to fighting financial aid fraud, electronic disbursement of financial aid. So that does not indicate any movement or structural changes you're indicating. That negotiated rule-making process has not moved yet to the next step. They don't probably comment, but they have not asked for nominations on the committee at this point. So that would be the next step. I think if you're talking about what have we heard in other conversations that we've had, I'm hearing more of the policy talk from research groups or student advocacy groups. I'm hearing more about concepts that increase the number of transactions. There's a few pilots that Department of Education has, I believe, allowed or endorsed or have been involved with in some way, which some people referred to as aid like a paycheck where you would receive your refund not as a lump sum but as multiple transactions. That's the type of thing that is small early, if that's what you're asking for. But I think that would be something we could help with. We, I believe, have helped at least one client with that. More transactions, I think, would mean that there would be more need for our services.

Operator

And your next question comes from the line of Kevane Wong with JMP Securities.

Kevane A. Wong - JMP Securities LLC, Research Division

A few follow-ups, too. First, looking at the refund size, average disbursement size. Can you give some color there? Obviously, 3Q dropped a lot. Have you seen any other particular changes there, any signs that it might improve, any chatter from schools as far as what they're seeing or expecting?

Mark Volchek

Yes. So I think there's really not a lot of incremental data since Q3. I think when we gave the data on the Q3 call, that already included some October data. So that really was for most of the fall disbursement cycle. As we sort of think about spring 2013, generally, that follows pretty closely to the fall. But we're still in the middle of the cycle, so we don't really have conclusive data to talk about for the spring other than generally, the spring would follow the trends from the fall as we think about that.

Kevane A. Wong - JMP Securities LLC, Research Division

Okay. Maybe the other way looking at just cost to students, again it might be the same thing, but any sort of indications in terms of cost changing, going up, things such as that?

Mark Volchek

Yes, I think in terms of looking forward, I think 2 things to mention. I do think the legislation in California Prop 30 will help to lower tuition, some retroactively, some going forward. I do think a lot of schools are struggling with as they think about fall 2013 tuition, how to keep that flat, and are looking for ways to be more efficient, to eliminate waste and fraud. I think the goal for many schools is to keep tuition increases as small as possible. And certainly, that would help students to have more funds available for their living expenses and books and other stuff. So I think that's really key and certainly on the mind for a lot of schools. I'm not sure there's really a direction at this point on where that will come out. In the end, it will be a mix. Some states and schools would be successful at keeping tuition low, others will be less. And so I think that's the mix of what we'll be looking for when we get to the fall.

Kevane A. Wong - JMP Securities LLC, Research Division

Got you. Two other quick questions. One, just sort of looking at the annualized -- average annualized revenue for OneAccount. It was actually up year-over-year. It was the first time in the first quarter in years. Obviously, it might be because of that re-class of the revenues into that bucket. Wondering if you saw more particular activity in those accounts. Any sort of color there that you can give in terms of number of fees, activity of fees, amounts of deposits that you're getting from accounts?

Miles Lasater

Sure, happy to help with that. I think the re-class is not a really important factor there. We have seen positive growth in 2012 for the nonrefund deposit volume, and I think that has helped drive some usage. You are correct that there are some noise around the denominator there. So there's both effects going on.

Kevane A. Wong - JMP Securities LLC, Research Division

Okay. And just as far as looking forward, I mean, is that a sort of a ratio that you would expect to be showing some improvement going forward because of the new accounts and just people taking up an activity? What's sort of your outlook or your view on how that's going to progress going forward following seasonality?

Miles Lasater

Well certainly, our goal is to deepen our relationships with clients. When you look backwards, we have done very well on account adoption, and I think we have more opportunity in usage and customer lifetime. And so part of what we're continuing to work on this year is that full lifecycle management in terms of investing in both tools and infrastructure and data analytics capabilities to understand that better, to be able to act on that better, to be able to drive that deeper relationship with those customers.

Kevane A. Wong - JMP Securities LLC, Research Division

Got you. Okay, fair enough. And then lastly, just looking at that incremental $5 million to $7 million in expenses for 2013, I guess 2 things around it. One, is there any kind of expense that you can give us in terms of how that will roll out through the year? And then secondly, looking at 2014, I mean, is there something that we would continue to see spending in 2014? Or should they actually drop off, helping our margin as we look out another year?

Mark Volchek

Before I jump into sort of the details of the distribution and going forward, I think it's important to point out that we thought long and hard about these investments. And it's a number of different projects that invest in technology, tools, people, process, a lot of different points. And we feel this is the time, as we're seeing these headwinds, to really invest in future growth. And so some of these will get rolled out throughout Q1, Q2 and build up throughout the year. And most of these are recurring expenses. I think the -- this is sort of a step-up to make these investments, and we believe those will support future revenue growth and reaccelerate the growth in certain areas and provide a foundation to enhance compliance, to enhance a lot of our operations, procedures, processes in different points. So I think as you look at those investments, we believe this is the time to really provide that foundation, build in 2012 and then invest in 2014 and beyond. And we do believe that if we're successful, reaccelerate when we're successful, reaccelerate in revenue growth, that we'll then see less incremental, new spending needed to support that.

Operator

There are no further questions at this time. I will now turn the call back over to Mr. Volchek.

Mark Volchek

Thank you. And before signing off, I like to say thank you to Ken Goff, our Director of Investor Relations, whose last day at Higher One will be this coming Friday. After joining the company to help its IPO process, Ken has worked diligently to help us build a strong investor relations operation. I'm pleased to say that we have hired a new Head of Investor Relations who will be starting in the next couple of weeks, which should allow for a smooth transition. I'd like to wish Ken well and all the best in his future endeavors and thank him again for all the contributions he's made to Higher One's success. Thank you, Ken.

Ken Goff

Thanks, Mark. It’s been a pleasure and an honor being part of the team. Higher One is an exciting and unique company made up of absolutely incredible people, and I've truly enjoyed my time here. It's also been a great experience to work with the investors and analysts who follow the company, so thank you to everybody on the line now. I'm confident there will be a smooth transition with Investor Relations, and I'm excited to follow all the great things Higher One is sure to accomplish in the future. So thank you, everybody, for listening in on today's Q4 2012 call. As Mark said, I will be onboard through Friday, so if you have any questions, please don't hesitate to reach out. Have a good night.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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