CyberSource Corporation Q4 2008 Earnings Call Transcript

CyberSource Corporation (CYBS)

Q4 2008 Earnings Call Transcript

January 29, 2009 4:30 pm ET

Executives

Katrina Rymill – Director, IR

Bill McKiernan – Chairman & CEO

Steve Pellizzer – SVP, Finance & CFO

Analysts

Franco Turrinelli – William Blair

Wayne Johnson – Raymond James

David Scharf – JMP Securities

John Maietta – Needham & Company

Gary Prestopino – Barrington Research

Brett Huff – Stephens, Inc.

Gil Luria – Wedbush

Glenn Greene – Oppenheimer

Andrew Jeffrey – SunTrust

Tom McCrohan – Janney Montgomery

Presentation

Operator

Good afternoon. My name is Jason, and I'll be your conference operator today. At this time, I would like to welcome everyone to the CyberSource Fourth Quarter 2008 Earnings Conference Call. (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 Fourth Quarter Conference Call. During this call, we will discuss our financial results for the fourth quarter of 2008. If you have not received the press release summarizing our fourth 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 provisions. 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 measure of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 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 fourth quarter results, and the company's value proposition, consumer and merchant behavior trends, on-line eCommerce being more cost effective than traditional sales channels, small businesses being created by individuals looking to supplement income or replace lost income, the company's performance being evidence of trends in consumer and merchant behavior, number of new customer sign ups as a measure of the health of the eCommerce market and the company's value proposition, potential growth of emerging categories of the company's customer base, increasing importance of the reseller channel and the company's ability to continue attracting new resellers and partners, the company's roadmap and expansion plans internationally, the success of the Authorize.Net acquisition, 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 credits to reduce taxable income in California, the company's momentum going into 2009, and flight-to-quality in difficult economic environments.

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 the forward-looking statements. There is no assurance that any forward-looking statements will be realized. Achievement of future results subject to risks, uncertainties, and potential inaccurate assumptions.

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, disruptions or illiquidity in the national banking, credit, and financial systems, and the impact of those risks on CyberSource's business, changes in Generally Accepted Accounting Standards, 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. CyberSource undertakes no obligation to publicly update forward-looking statements whether as a result of new information, future events, or otherwise.

Listeners are referred to the documents filed by CyberSource with the SEC, specifically Form 10-K filed on March 11, 2008, covering the one-year period ended December 31, 2007, and our quarterly reports filed on Form 10-Q from time-to-time, all of which include these and certain other important risk factors.

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

Bill McKiernan

Well, thank you, Katrina. Good afternoon and thank you all for joining us. It's a pleasure to welcome you all to our fourth quarter 2008 earnings call. Although 2008 was a challenging year for the global economy, it was an exceptional year for CyberSource. Our business has performed extremely well in spite of this challenging economic environment, which I believe clearly demonstrates the value of our value proposition to customers.

And our results, when compared to reported growth rate statistics demonstrate that we continue to gain market share. In times like these, we are very fortunate to be in a market that benefits from some very strong secular growth trends. Those trends relate to both consumer behavior as well as merchant behavior.

On the consumer side, consumers are more focused on finding good values, which are more often found online. The good deals to be found online, when combined with the convenience of online shopping, make it very compelling for consumers.

On the merchant side, many published reports indicate that we are still in the very early days of merchant adoption of the Internet as a meaningful sales channel. In this environment, it makes sense that merchants are looking to more aggressively cut costs, maximize revenue, and expand their reach, which are all benefits provided by the online channel.

Merchants understand that it's more cost effective to display inventory online than in stores. Merchants understand it's cheaper and faster to localize Web sites for countries like India, China, Brazil, and Mexico than to open physical stores.

Furthermore, in these challenging economic times, where we see and hear reports almost daily, about layoffs and businesses shutting down, I believe that many small online businesses are created by people who are looking to supplement income or replace lost income or by merchants who are shutting down brick and mortar stores to move everything to the Internet.

The evidence of these trends is not only in anecdotes, but also in the very strong financial and operating metrics we achieved this quarter. Record revenue, record transactions, record new merchant set ups, et cetera.

In the fourth quarter, we generated record revenue of 62.3 million, a 37% increase over the same period last year. Now, please note that Q4 2007 included only two months of Authorize.Net results. The acquisition closed on November 1, 2007. However, even after accounting for the stub period in 2007, the 2008 results were very strong. Q4 2008 revenue also showed an 8% sequential increase over the third quarter. Our growth was driven primarily by our transaction processing and merchant acquiring services and the addition of about 100,000 new customers throughout the year.

During the quarter, we processed a record 547 billion billable transactions, a 31% increase over the same period last year. The dollar value of the transactions we processed in the quarter was approximately 28 billion, up 33% over the same quarter last year. Net income on a GAAP basis was 10 million and earnings per share on a GAAP basis was $0.14.

Because these results include significant non-cash charges, such as the reversal of our valuation allowance against our deferred tax asset, stock option compensation, and amortization of intangibles, 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, our non-GAAP net income was 13.6 million, a 47% increase compared to 9.2 million a year ago. Non-GAAP EPS was $0.19, a 27% increase compared to $0.15 a year ago. Our net operating margin in Q4 2008 on a GAAP basis was 16% and our net operating margin on a non-GAAP basis was 22%, up 200 basis points from a year ago.

CyberSource's global acquiring business generated revenue of approximately 21.7 million in the quarter, a 37% increase over the same period last year and an 8% increase sequentially. Global acquiring represents about 35% of our total revenue.

The value of transactions where we acted as a merchant acquirer was approximately $720 million or about 3% of the total transaction volume we processed in the quarter.

This quarter we signed approximately 1,000 new acquiring customers and we now have approximately 4,700 global acquiring customers.

Another key metric used by us to measure the health of the e-Commerce market and the strength of our value proposition is the number of new customer sign ups. This quarter we set another record in the number of new customers signed. We added approximately 27,700 new customers across a wide variety of industries. We now have approximately 253,000 active customers who rely on us for payment solutions.

Large enterprise customers added this quarter include Avis Car Rental, Beatport, an online music site, the Democratic National Committee, Facebook, Fandago, the Obama Transition Project, and Sony BMG Music Entertainment.

Existing customers that added new services or renewed agreements during the quarter include Educational Testing Service, NCO Financial Systems, which provide outsourced business process solutions, and ScanSource, a distributor of specialty technology products such as RFID and barcode scanning solutions.

Another strength in our business is the diversity of our install base. The diversity is not only in the types of businesses we serve, but also in the geographies we serve. To give you a sense of the diversity of our install base, we recently looked at our top 200 customers to determine what verticals they serve.

In the fourth quarter, 65% of our top 200 customers were in verticals other than retail. Now, this is not intended to be an all encompassing scientific study of our install base, but it does demonstrate at least among our top 200 accounts, how important non-retail verticals are to CyberSource.

Other vertical markets such as travel, technology, services, media, telecom, colleges, universities, charities, and other emerging categories are all very important verticals for us.

There are some relatively new online categories at least from a payment standpoint, such as social networking, political campaigns, and other non-profits that are emerging categories for us. These are categories that historically have done little or no payment acceptance online. And so, the growth in these verticals can be dramatic.

Examples of this are two accounts we won last quarter. The Democratic National Committee and the Obama Transition Project. These accounts are using us for gateway services, fraud management, and merchant acquiring. We originally won the Obama Transition Project. Based on our strong bundled product suite, platform stability, and customer support, we were able to expand that win to the DNC.

Going forward, a sizeable percentage of online contributions to and purchases from Democratic Party will flow through CyberSource. These important wins highlight how new online categories are emerging and helping grow the e-Commerce space. Now, when a candidate runs for office whether it's for a local city council, a judgeship, a senate seat, whatever, the first thing they do is set up a Web site to communicate their positions and raise money. While traditionally donations were made by check, these donations have moved online as Web sites are upgraded to accept payment. Now, politicians, universities, churches, and other non-profits leverage the Internet to raise an increasingly significant share of their contributions.

Our reseller and partner channels have become an increasingly important and integral part of our sales strategy. Our ecosystem of over 4,000 resellers and partners is one of our most valuable assets. We added over 450 new resellers and partners this quarter alone. The ISO channel remains a very important channel for us and we now have about 1,500 ISOs selling our services. The affiliate channel is less mature than the ISO channel, but becoming increasingly important to us.

Affiliates are companies that aggregate eCommerce merchants to provide services that are typically not directly related to payment. These affiliates may be Web hosting companies, Web developers, domain registration companies, et cetera. This is an important and relatively new channel for us. And in 2008, we added approximately 1,500 new affiliate resellers, and we now have about 2,500 affiliate partners. These are very important relationships to us, and we will continue to invest to attract new resellers and new partners and to support the ones we have.

CyberSource continues to be a preferred provider of payment solutions for financial institutions, payment processors, and system integrators. I am pleased to announce a new referral agreement with First Data Merchant Services. First Data will now actively send customer referrals to the CyberSource sales team, who in turn, will sell the full range of CyberSource's payment and risk management offerings to their merchants. We are very excited about expanding our relationship with First Data to deliver CyberSource's payment solutions to FDC customers.

We also signed a new reseller agreement with HSBC Mexico to allow them to resell our fraud management services as an additional service to HSBCs own Mexican payment gateway.

In 2009, we have an ambitious roadmap to expand our value proposition by adding both new features as well as opening new geographies. In Europe, we are growing our UK based operations to target new opportunities in Western Europe. We plan to expand the number of payment types and countries we support during the year. Our European based business generated a record 127 million transactions in the fourth quarter, an increase of 72% over the same period last year and up 24% sequentially.

We processed transactions in 70 different currencies this quarter. Our European business represents approximately 23% of total transaction volume, but only about 7% of our total revenue as merchant acquiring is not yet offered to merchants outside the U.S.

We've been working hard to finalize a partnership with our European bank sponsor to enable us to offer acquiring services to merchants domiciled in Europe. The contract has taken longer than expected primarily due to the turmoil in the banking sector, but we expect to finalize the agreement and take merchants live in the first half of 2009.

Operationally, I'm very pleased with the high level of service delivery on both our small business and enterprise platforms. Our operations team did an extraordinary job in 2008, and particularly, in our high volume fourth quarter, to deliver superb system availability and reliability on both platforms.

Our system availability on the enterprise platform average 99.99% for all of 2008 and 99.98% on the small business platform. During the year, we invested in these platforms and our people and those investments clearly paid off with record reliability and availability. The result of the excellent performance by our operations team and our customer support team in 2008 earned us three awards in 2008 for excellence in customer support and customer satisfaction.

We also invested heavily in our customer support team last year. We invested in technology, in people, and in training. The result was that virtually all the key metrics around support, speed of call answer, call abandonment rates, et cetera are all at the best levels they have ever been. This is true on the enterprise platform as well as on the small business platform. These results are further reflected in the record customer satisfaction scores we received in December from both enterprise and small business customers.

Finally, after a full year of consolidating our results with Authorize.Net, I'd like to make a few observations about the acquisition. This acquisition was a home run for us. The performance of both the CyberSource and the Authorize.Net teams was outstanding during the integration of the two companies and both segments of the business are performing extremely well.

All the functional teams except sales are fully integrated. The sales teams will remain separate because of the different go-to-market model they have, but the collaboration between the enterprise and small business sales teams has been excellent. We're seeing a lot of synergies between the organizations, not the least of which is our ability to meet the needs of our partners with a solution that addresses all segments of the market.

The A.Net business continues to grow at rates that in many cases are higher than before the acquisition. The customer and reseller satisfaction levels are as high as they have ever been. The acquisition enabled us to add many great people to the CyberSource team and the collaboration and cooperation between the A.Net employees and the historical CyberSource employees has been terrific. So, after a full year of combined operations, I could not be happier with how this acquisition has turned out.

So, now let me turn the call over to Steve for a more insightful review of our financial results.

Steve Pellizzer

Thanks, Bill. As Bill mentioned, our fourth quarter revenue was 62.3 million, 3.1 million to 3.6 million higher than our guidance of 58.7 million to 59.2 million and a 37% increase over the same period last year. During the quarter, we processed a record 547 million billable transactions, a 31% increase over last year and above our prior guidance for the fourth quarter of 505 million to 510 million transactions. Please note that with regard to both our enterprise and our small business platform, the transaction is counted if it is a billable event.

During the fourth quarter, we added approximately 27,700 new customers on a gross basis compared to 15,000 new customers in the fourth quarter of last year. We added approximately 7,400 customers on a net basis up from 7,000 in the fourth quarter of last year. Keep in mind that our acquisition of Authorize.Net closed on November 1st last year. So our fourth quarter 2007 results only include two months of Authorize.Net activity.

Our gross profit on a GAAP basis was 32 million higher than prior guidance of 30 million to 30.2 million. Operating expenses on a GAAP basis for the quarter were 30.8 million, higher than prior guidance of 29.4 million to 29.6 million. During the fourth quarter, our GAAP results include a reversal of the remaining valuation allowance against our deferred tax asset. This resulted in a tax benefit in the fourth quarter of approximately 9.7 million. The allowance was eliminated this year because the company believes we will be able to utilize the benefit of our past NOLs due to the ongoing profitability of the company.

The GAAP net income for the quarter was 10 million in fully diluted earnings per share, on a GAAP basis was $0.14, higher than prior guidance of net income of 400,000 to 700,000 or $0.01 per share. As we noted last quarter, our guidance for the fourth quarter did not account for any reductions in our valuation allowance against our deferred tax asset.

Non-GAAP net income was 13.6 million or $0.19 per share, higher than guidance of 11.4 million to 11.7 million or $0.16 per share. Our cash balance was 61.1 million, which doesn't include the 12.2 million payable to merchants at quarter-end.

Our cash balance is virtually back where it was prior to the acquisition of Authorize.Net a year ago. Cash flow from operating activities was 10.6 million for the fourth quarter of 2008 compared to 3.5 million for the fourth quarter of 2007. In addition, our DSO was 25 days. The company also generated approximately 200,000 in cash from employee stock option exercises during the quarter. Capital spending for the fourth quarter was 1.4 million in range with our prior guidance of 1.2 million to 1.5 million.

During the fourth quarter, we repurchased 596,081 shares of common stock at an average stock price of $13.15 per share under the stock repurchase plans that were approved by our Board of Directors in May and November 2008. On an annual basis, revenue for the full year 2008 was 229 million, up 96% over 2007. Net income on a non-GAAP basis was 48.1 million up 165% over the prior year while earnings per share on a non-GAAP basis was $0.67, up 60% over 2007.

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.

Given the current economic environment and uncertainty with regard to future consumer spending, we continue to be cautious with regard to our expected future performance. We expect revenue in the first quarter of 2009 to be approximately 60 million.

We currently estimate billable transaction volumes in the first quarter to be between 520 million and 525 million. We expect gross profit to be approximately 31.2 million during the first quarter. We expect total operating expenses for the first quarter to be approximately 31.3 million.

Included in cost of sales and operating expenses is approximately 6.7 million of intangible asset amortization expense relating to our acquisition of Authorize.Net. We currently expect net income in accordance with GAAP in the first quarter approximately 200,000 and break even earnings per share based on a weighted average share count of 71 million shares.

We expect non-GAAP net income for the first quarter to be approximately 10.5 million and non-GAAP earnings per share to be $0.15 based on a weighted average share count of 71 million shares.

As a result of the California legislators decision in late December to disallow the use of NOL carry forwards through December 31, 2009, we undertook an R&D tax study to assess our ability to use R&D tax credits to reduce taxable income.

Based on the favorable results of that study, we expect our non-GAAP tax provision to be approximately 5% of non-GAAP pre-tax income in the first quarter. We expect an ending cash balance of approximately 60 million as of the end of the first quarter.

Capital spending for the first quarter is expected to be between 6 million and 6.5 million. For the full year 2009, we expect total revenue to be between 258 million and 263 million. Total gross profit for 2009 is expected to be between 135 million and 138 million. Total operating expenses for 2009 is expected to be between 127 million and 129 million.

GAAP net income for the full year of 2009 is expected to be between 6 million and 6.5 million. GAAP earnings per share is expected to be between $0.08 and $0.09 per share based on a weighted average share count of 73 million shares.

Non-GAAP net income for the full year 2009 is expected to be between 52.5 million and 54 million. Non-GAAP earnings per share is expected to be between $0.72 and $0.74 based on a weighed average share count of 73 million shares.

We are forecasting a cash balance of between 80 million and 85 million, as of the end of the year, excluding any nonrecurring items such as cash that may be used for future repurchases of our common stock and fees payable to merchants. We expect capital spending for 2009 to be between 14 million and 15 million.

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

Bill McKiernan

Thanks, Steve. So, in summary, 2008 was a very strong year for CyberSource with consistent growth across virtually every segment of our business. Revenue was up 96% over the prior year, transaction volumes up 54%, non-GAAP net income was up 165%, non-GAAP EPS up 60%. We added 106,000 new customers during the year. We set new records for customer satisfaction and service delivery.

We processed transactions worth about $109 billion for the year. The U.S. portion of that $109 billion represents about 25% of all U.S. e-Commerce. So CyberSource processes about one of every four U.S. e-Commerce transactions and about one of eight worldwide. So we have great momentum going into 2009. While it appears that 2009 will be a challenging year, we see this as a great opportunity for CyberSource.

We intend to emerge stronger from this challenging economic environment than when we entered it. In environments like these, there is a flight-to-quality. There's a flight-to-quality among customers and among partners. Both customers and partners want a vendor they can rely on who can invest in the latest technologies, who can grow its global footprint, and who can meet the demands of the latest data security standards that are promulgated by the banks and the card associations.

In fact, we have underweighed no less than seven conversations with partners who are looking to migrate customers off another gateway to CyberSource because they are not convinced the existing vendor can stay current. In a number of these cases, the incumbent gateway is the partners own gateway, but they are finding that the demands for data security, reliability, scale are just outstripping their ability to fund those investments. All of this and the strength of our value proposition result in what we believe is a great opportunity for CyberSource going into 2009.

Lastly, I want to express my thanks to the entire CyberSource team for their hard work, their dedication, and their delivery of excellent results this past year.

With that, operator, let's open up the line for questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Franco Turrinelli from William Blair.

Franco Turrinelli – William Blair

Good afternoon, everyone.

Bill McKiernan

Hey, Franco.

Franco Turrinelli – William Blair

Happy New Year.

Bill McKiernan

Same to you.

Franco Turrinelli – William Blair

A number of questions, Bill, if I may. The first is are you seeing – and maybe it's too early to tell, but are you seeing anything unusual from the point of view of merchant attrition or merchant bankruptcy, I guess, or just merchants shutting down now that we're past the holiday period and maybe a few guys holding on by their finger nails sort of thing?

Bill McKiernan

Steve watches the terminations pretty closely. Steve?

Steve Pellizzer

Yes. No, we haven't seen anything in terms of negative trends with regard to churn. In the fourth quarter, we did see some continuation of clean up activity within the financial institutions, but to a lesser degree. But, we haven't seen anything just with regard to termination activity.

Franco Turrinelli – William Blair

Steve, on sort of related note, have you felt the need to change any of your policies with respect to risk management either in terms of accepting merchants or in terms of any escrows or anything else that you may be imposing on merchants?

Steve Pellizzer

We haven't really changed our policy, but that's really because we've been fairly conservative with regard to our policy from the outset. We continue to be diligent on the underwriting side and looking at financial viability and looking at delivery time frames in assessing whether or not we want to take a merchant on the acquiring side and we also continue to be diligent just about looking at daily activity. So, there certainly is a focus on that, but there always has been really.

Franco Turrinelli – William Blair

Alright. Hey, Bill, obviously, I think – I'm sure you're disappointed, but on the progress in establishing an international acquiring relationship but it sounds the progress is still being made on that front. Do you have any sense – I mean, how badly is that holding you back in the international markets from being able to generate some faster – even faster growth, I should say – maybe capturing a bit more market share.

Bill McKiernan

Yes. You're right, Franco. We are disappointed by not having that sponsorship agreement in place. I think what's important to note is that in the guidance that Steve gave; we haven't assumed a big contribution from that sponsorship relationship. So from a 2009 outlook standpoint, it's not like we're depending on a big ramp from that part of the business. But we do think that as our value proposition is resonated here domestically, we think it will resonate internationally. And so, our goal is to try to get out there as quickly as possible and establish beachheads in some of these markets, particularly Europe and then Asia and Latin America as well so we can exploit those market opportunities.

Franco Turrinelli – William Blair

Okay. So, two more related questions, and then I'll get back into queue. So, obviously, that was a heck of a teaser you just gave us on those seven customers looking to migrate off their current gateways. I guess, two questions. One, I'm assuming that none of those is assumed in the guidance. But, secondly, I mean are these potentially very significant relationships?

Bill McKiernan

Yes. Just to temper expectations, for the most part they're relatively small. We have an installed base of 253,000 customers, so none of those migrations would materially change that count, but I think it's indicative of a trend out there, which is that maintaining a gateway is becoming more expensive and more complex. So back to this theme of a flight-to-quality, I think we're going to see that trend continue throughout '09 where smaller gateways get subsumed by larger ones.

Franco Turrinelli – William Blair

Okay. And then, finally this one probably more for Steve, and I'm sure you'll get asked this a couple of different ways, but the first quarter guidance certainly presumes a greater than usual seasonal drop off, and I'm assuming that is primarily your cautious and conservative view of the possible impact of a macroeconomic environment on e-Commerce and CyberSource specifically. Is that a fair statement?

Steve Pellizzer

Yes. I think that is a fair statement. I mean, I think the results from the fourth quarter are all very positive. We just walked through, but there is obvious uncertainty out there just with regard to the macro-environment and how the consumer is going to behave in the first quarter. And so, that's a big driver in terms of tempering expectations going into 2009.

Franco Turrinelli – William Blair

Yes. We've always seen – actually a pretty solid first quarter relative to the fourth quarter and this – as I'm sure you're aware this is below most people's expectations and given such a strong fourth quarter, the drop off is pretty substantial.

Steve Pellizzer

We do typically see a strong first quarter, but last year was the first year, at least on the enterprise side of the business, where we did see a decline in the first quarter versus the fourth, just with regard to the transaction volumes processed as well as revenue. And so, that combined with, more importantly, the economic environment was the basis for the guidance that we provided.

Franco Turrinelli – William Blair

Sure.

Bill McKiernan

Franco, I think you made the exact same comment last year on this same call about Steve's guidance for Q1.

Franco Turrinelli – William Blair

Well, and if – yes, okay – and I won't comment on what then happened, which is that you positively surprised us once again, but that's okay. If you do what you're proposing to do for 2009 that will be a heck of a year, and I guess I'm not too worried about how you get there. Congratulations. Thanks. I'll get back in the queue.

Bill McKiernan

Thanks, Franco.

Operator

Your next question comes from Wayne Johnson of Raymond James.

Wayne Johnson – Raymond James

Hi. Good afternoon.

Bill McKiernan

Hey, Wayne.

Wayne Johnson – Raymond James

Hi. One – couple of follow-ups here. So, on First Data if they refer CyberSource – first of all, is that exclusive for all Internet or online related business for their merchants?

Bill McKiernan

No. I don't believe it is, Wayne.

Wayne Johnson – Raymond James

And is that for all of your services? Does that include payment gateway and credit card processing?

Bill McKiernan

Well, it would be for the payment – the non-acquiring service.

Wayne Johnson – Raymond James

Non-acquiring. Okay. That makes sense. Okay. Good. And then, do you have any update on Facebook that you could share with us?

Bill McKiernan

As we talked about, I think, on the last call, Facebook is meant to be simply illustrative in the sense that we don't think it's going to materially move the needle for us as an individual account. And I think as we talked about on the last call, Facebook is very concerned about keeping the details of the relationship confidential. But I do think it's indicative of this new segment – this social networking segment – and our – we currently have other related companies, companies like a Match.com and eHarmony and there are other ones that we're talking to. We think over time will have a meaningful volume going through their sites. So, we want to be a payment provider to those companies as they get bigger.

Wayne Johnson – Raymond James

Terrific. And also – can you remind us the current European marketing strategy? You guys have been very successful posting up great numbers. Can you just remind us on how you're doing that, what's driving that terrific year-over-year transaction volume growth that you just posted from that region of the world?

Bill McKiernan

Yes. We have a great team currently based in the UK. It's close to about 40 people now, many of whom were over here for our company kick-off meeting a couple of weeks ago. But, they just do a great job relying primarily on a direct sales force. But increasingly we're building relationships with key partners over there on the technology side and affiliate marketing side. And we've got accounts like British Airways that we've talked about before, we've made some big inroads in India as well. And I think what we're finding is that the value proposition is really resonating in that UK market. We want to expand that clearly to Western Europe and then Eastern Europe as well.

Wayne Johnson – Raymond James

Okay, great. Thank you very much.

Bill McKiernan

Thanks, Wayne.

Operator

Your next question comes from David Scharf of JMP Securities.

David Scharf – JMP Securities

Hi, good afternoon, Bill.

Bill McKiernan

Hi, Scharf.

David Scharf – JMP Securities

Hey, if you follow it, on the First Data, the FDMS referral, can you tell me how many online accounts they have presently that they're an acquirer for?

Bill McKiernan

Yes. I don't think we'd be in a position to disclose that, David.

David Scharf – JMP Securities

Okay. And historically they haven't referred any of their online acquiring merchants to you as a gateway provider. Have they usually dealt with somebody else or done it themselves?

Bill McKiernan

Yes. We've actually had a relationship with them probably dating back three years or four years. Not much happened with it – and they do have their own gateway that they acquired a few years ago, but I think what they're finding is that there are certain merchants who want to use the CyberSource gateway or want to get access to our fraud management services. And so, it makes sense for them to leverage a relationship with CyberSource to do that.

David Scharf – JMP Securities

Okay. Shifting to just Q4 performance, I was looking at kind of recent quarters, maybe last seven or eight. I don't think there's ever been a quarter in which you exceeded your transaction guidance by this magnitude. I think it was about 10% or 11% upside. And what I'm wondering is what exactly it came from and particularly in the context of your prepared remarks about fully two-thirds of your merchant base actually not being retailers. Are there any particular verticals, types of customers that led to the upside and is can you tell us anything about the outlook in the early part of this year in terms of the mix of your merchants and the verticals?

Bill McKiernan

Well, David, just to clarify, the two-thirds of the base that I talked about that is not in retail, really is just focused – we did a relatively unsophisticated survey of our top 200. We looked at the names and put them into buckets. And what we found among the top 200 is about 65% of those were in categories that were non-retail, and so that was the source of that earlier comment. Steve may have some views on this as well, but I think that overall, the volumes that we saw came from across the board and we have some retail accounts that are performing very well as they look to shift share from traditional channels to the Internet channels, and so their growth rates have been pretty strong as well in the fourth quarter.

Steve Pellizzer

And I will add is it really came from all areas of the business. I mean, it was small business and enterprise. It was transactions, the gateway side as well as on the acquiring side, so we really did see strength in all aspects of the business in the fourth quarter.

David Scharf – JMP Securities

Okay. Staying on this issue of client mix because what I'm really trying to get a sense for is how exposed to what we think of as traditional retailing this company is today and what it's going to look like in a couple of years. I mean, you just come off kind of four quarters in a row of record new client additions. I mean even though it was an unscientific study, Bill, is your sense that each successive quarter, CyberSource is becoming less and less relying on the retailing sector based on the nature of who you're signing up.

Bill McKiernan

I think probably true, David, and it's not because of a decline necessarily in the retail sector. It's just because of this increase in e-Commerce activity from other categories. I mentioned political campaigns, but colleges, universities, churches, synagogues. It's – a lot of these categories did zero a year or two years ago and now their volumes are becoming much more meaningful.

David Scharf – JMP Securities

Yes. I think that's one of the most positive kind of trends in the business. Just a couple more. On the European acquiring side, not to put you too much on the spot, but I know Franco asked this early on. Is there anything that would lead you to be concerned this can fall through? I mean, is there anything with the current bank partner regulatory wise, capital wise, obviously the issues they're probably dealing with that might lead you to have to seek another partner?

Bill McKiernan

In this environment, I think anything could happen. Scott Cruickshank, our President and COO has been focused on getting the deal done, and he's got some very good relationships over there. I think he's managed the process well and the external factors, so I think we'll get it done. I think it's – there are a lot of distractions certainly in that industry right now that's just causing it to take a lot longer than Scott or I would like.

David Scharf – JMP Securities

Got you. And is there a transaction growth figure you provide organically almost sort of a same store, same merchant figure –

Steve Pellizzer

Not on the transaction volume. I mean, we do disclose in our quarterly filings how much of our revenue growth coming from new versus existing customers, but we don't have any kind of similar metric on just the pure volume side.

David Scharf – JMP Securities

Okay. And then the last question relates to your assumptions about kind of the average ticket size for your acquiring transactions this year. I mean, I know third quarter you mentioned the average ticket was off about 5% heading into the holiday season. Are you making any explicit assumptions about the average size of a purchase in 2009 versus 2008?

Steve Pellizzer

Well, I mean, we saw some stabilization in the average ticket in the fourth quarter. When you look at the verticals, there was a decline from a retail and merchant perspective, but overall, there was some stabilization in the average ticket. And so when we do our '09 planning, for the most part, we're carrying forward the most recent metrics. There wasn't really anything too unusual with regard to the average ticket versus what we saw in the fourth quarter.

David Scharf – JMP Securities

Okay. Thanks a lot, guys.

Bill McKiernan

Thanks, David.

Operator

Your next question comes from John Maietta of Needham & Company.

John Maietta – Needham & Company

Okay. Thanks very much. Bill, you had mentioned maybe this year we'll continue to see some of the smaller gateway guys get subsumed. Do you think that could potentially accelerate in 2009 assuming the economy remains a challenging one throughout the course of the year?

Bill McKiernan

It wouldn't surprise me, John. Now, the thing is there aren't really any huge gateway providers out there.

John Maietta – Needham & Company

Yes.

Bill McKiernan

So it's more the smaller ones, but I do think that will only accelerate, not only because of the complexity associated with running a gateway, but also just the economic climate and company's abilities to invest.

John Maietta – Needham & Company

Got it. Okay. And Steve, just a couple of quick ones here. Do you have the headcount number in the quarter and maybe if you could talk about how you think about growing or not growing headcount in the first part of the year?

Steve Pellizzer

Yes, so, our headcount as of the end of the year was 614 and so for the first half of the year so I mean we are looking to add headcount predominantly in the technical area. We've talked about the office that we've started in Northern Ireland, the development center there, so we are hiring in that particular location. But, all in all, I mean we're looking at adding possibly 30 to – 30 or so headcount in the first half of the year.

John Maietta – Needham & Company

Okay. And then, I missed the non-GAAP tax rate for the full year. You had mentioned 5% for Q1.

Steve Pellizzer

Yes. We – I said 5% for the first quarter, I didn't really talk about it beyond that, but our expectation is that the non-GAAP rate will be about 5% for all of '09.

John Maietta – Needham & Company

Okay. Can you give me a rough sense as to what the NOLs were exiting '08?

Steve Pellizzer

We haven't updated that disclosure yet. I know we talked about it as of '07, but it will be updated in the 10-Q that we – or 10-K that we file.

John Maietta – Needham & Company

Okay. And then just the last question I had was – I may have missed it but did you talk about transaction volume growth for enterprise and SMB?

Steve Pellizzer

No, we didn't speak to them separately. We really just talked about our enterprise growth on a combined basis.

John Maietta – Needham & Company

Okay. Got it. Thanks very much.

Steve Pellizzer

Thanks, John.

Operator

Your next question comes from Gary Prestopino of Barrington Research.

Gary Prestopino – Barrington Research

Good afternoon, all.

Steve Pellizzer

Hey, Gary.

Gary Prestopino – Barrington Research

Steve, do you have what the global acquiring customers were at year-end last year off hand?

Steve Pellizzer

I don't have that in front of me.

Gary Prestopino – Barrington Research

Alright, I can get that from you. That's I just thought you might have it. This new referral agreement with First Data, Bill, are they going to be – is that's not for all of their online new customers. It's just for ones that want your fraud capabilities, for instance, or your higher level of reporting capabilities. Is that how it works?

Bill McKiernan

Or it could be that they want to leverage a plug-in integration we've got to their e-Commerce platform or whatever, so it's certainly available to all. I don't expect it will be used by all of their customers, but it is available to all.

Gary Prestopino – Barrington Research

Okay. And do you have any other of these kind of referral agreements with any of the other acquirers out there right now?

Bill McKiernan

Oh, yes, absolutely. I mean, BOA, Wells Fargo, our big –

Gary Prestopino – Barrington Research

I mean the non-bank ones.

Bill McKiernan

Some of the processors. We get referrals from other processors as well. FDC is the largest one out there, so it's probably the most meaningful.

Gary Prestopino – Barrington Research

Okay. Thank you.

Steve Pellizzer

Gary, we had about 1,800 global acquiring customers at the end of 2007.

Gary Prestopino – Barrington Research

Great. Thanks, Steve.

Steve Pellizzer

Sure.

Operator

Your next question comes from Brett Huff of Stephens, Inc.

Brett Huff – Stephens, Inc.

Good afternoon and congrats on a nice quarter.

Bill McKiernan

Thanks, Brett.

Brett Huff – Stephens, Inc.

Three quick questions after a quick housekeeping, can you just tell me the net customer numbers again, Steve? I missed those in the shuffle.

Steve Pellizzer

Sure. I think it was 7,700.

Katrina Rymill

Yes, 7,400.

Brett Huff – Stephens, Inc.

Okay. Thank you.

Steve Pellizzer

(inaudible) did you have a follow-up question?

Brett Huff – Stephens, Inc.

Yes. Sorry. I thought you were going to say something else.

Steve Pellizzer

No, 7,000 was the year ago number.

Brett Huff – Stephens, Inc.

Okay. Three questions. Did any large customer or notable customer come on or existing customer add particularly a lot to the transaction out performance, to ask the performance drivers question a different way.

Steve Pellizzer

No, I don't think we had any unusual trends with regard to new customers that may have gone live or increased services.

Brett Huff – Stephens, Inc.

Okay. And then any thoughts on transaction, any color on transactions quarter-to-date since the close of the year?

Steve Pellizzer

Yes, I mean, we always look at current activity, obviously, before the call, and there is nothing unusual that we're seeing in the first quarter to suggest that the guidance that I've provided is out of line.

Brett Huff – Stephens, Inc.

Okay. And then, finally just talking a little bit about expenses to follow up on the headcount question just a minute ago, what kind of expense controls do you have in case you need to use those? Where do you see an ability to rein in expenses if things do get tougher through the year and the back half of the year, I guess aside from head count?

Steve Pellizzer

Yes, well, headcount is the primary one and, obviously, last year we added about 100 employees. This quarter – or this year we're not looking to add certainly to that degree. As I mentioned, first half of the year it's about 30 and really even less than that in the latter part of the year based on our current plan. So that is one lever I mean, obviously in this kind of environment I think everybody is looking at their internal cost and existing contracts with vendors and that's something certainly we do as well. So, there's opportunity for renegotiation there, but, in terms of lever, I mean headcount is really the primary one.

Brett Huff – Stephens, Inc.

Okay. That's I wanted. Thanks for your help.

Steve Pellizzer

Thanks.

Operator

Your next question comes from Gil Luria of Wedbush.

Gil Luria – Wedbush

Good afternoon.

Steve Pellizzer

Hey, Gil.

Gil Luria – Wedbush

Are you adding any countries in 2009 in terms of being able to accept local currency – local payment types?

Bill McKiernan

Absolutely. Yes. We'll tell you as soon as we put out the press release.

Gil Luria – Wedbush

What – can you summarize the major countries that you added in 2008?

Bill McKiernan

Yes, China was the big one, obviously, and that was to be in time for the Olympics. We enhanced the Brazilian gateway, and India we put a connection in as well. I think that was in the beginning of '08.

Gil Luria – Wedbush

Got it. And then in the answer to the competitive question, I think you said there is mostly small guys out there. About three years ago, PayPal bought the gateway from VeriSign and at that point in time that business was as big as yours. Has that business faded with time? Have they deemphasized it since it belonged to PayPal?

Bill McKiernan

Gil, that's a good question and we don't see that gateway out there very often. We don't bump into it in the market. So I'm not sure exactly what PayPal's plans are with respect to the old VeriSign gateway.

Gil Luria – Wedbush

So, PayPal is now more of a partner because you provide them to your merchants.

Bill McKiernan

Correct. That's very true. We do support PayPal as a payment type, so customers can get access to PayPal through their CyberSource API.

Gil Luria – Wedbush

Great. Thank you.

Bill McKiernan

Thanks, Gil.

Operator

Your next question comes from Glenn Greene of Oppenheimer.

Glenn Greene – Oppenheimer

Hey, good afternoon guys.

Bill McKiernan

Hey, Glenn.

Glenn Greene – Oppenheimer

First question, I just want to get back to this strong transaction growth in the quarter and just come at it from another angle and you guys did much better than industry metrics that might be out there whether it's comScore or Cayman Texon Index [ph]. Is there anyway to help us think through why you – your results might be – might differ so much from the industry?

Bill McKiernan

Well, Glenn, I think a lot of it relates to the point I made in the opening remarks, which is that so many of the indices that are out there really capture retail sales. comScore data, for example, I think comScore indicated that Q4 was down about 4% year-over-year versus the numbers that we posted. And again, I think while retail is important to us, it's certainly by no means all of what we do and a lot of the categories that we're active in now are ones that are growing much, much faster than the traditional retail category. So I think we benefit from that. And also the fact that we've got a good geographic coverage, 22%, 23% of our volume is coming from outside the U.S. and I think that can help us as well.

Glenn Greene – Oppenheimer

It sounded like your retail vertical though cutting through it, grew very strongly as well. Well, you didn't really quantify it. You kind of suggested that there is no real divergence. That is pretty broad-based and that all the verticals are really growing pretty well, which I suspect included retail.

Bill McKiernan

Yes, I don't want to put too fine a point on it because frankly I don't have all of our install based customers listed by SIC code, so I can't do that kind of analysis. But just anecdotally, I know we have accounts that are really pushing their customers to buy online. And so their online growth rates are pretty good relative to what you've seen in comScore and some of the other data points that are out there.

Glenn Greene – Oppenheimer

Okay. And then just one more question for – probably for Steve. But if I look at the transaction growth sequentially relative to the revenue growth sequentially, basically there is a delta meaning that the transaction growth grows much faster than the revenue growth. Is there anything we can read into that from either a vertical mix perspective or I doubt it's pricing but if you want to comment on that at all?

Steve Pellizzer

Yes. I think, sometimes what you see especially in the fourth quarter is that acceleration in volume, but not necessarily correlate into revenue growth, to get some of our merchants that previously got billed flat fees, actually processed because of the holiday season and maybe didn't cross their threshold. So, they still got billed the same amount of money despite the fact that they did process so that's a typical trend that we see in the fourth quarter.

Glenn Greene – Oppenheimer

Okay. So, there is nothing on pricing or anything like that and that should reverse or we shouldn't see that trend in the first quarter.

Steve Pellizzer

Yes. I mean, we haven't really – there is not much that's changed with regard to pricing. Our price list is still the same as it was. There is tiered pricing, so the more a merchant processes in a given month, the less they pay for transactions so that also kicks into some of the lower price points.

Glenn Greene – Oppenheimer

Okay. Thank you very much.

Steve Pellizzer

Thank you.

Operator

Your next question comes from Andrew Jeffrey of SunTrust.

Andrew Jeffrey – SunTrust

Hi, guys. Good afternoon. You put up some nice operating leverage this quarter, so it's the first time since the Authorize.Net deal closed and yet the '09 you're talking about – fewer head count reductions and yet the '09 guidance doesn't seem to contemplate the same level of leverage. Is there anything – I mean is this just again I'll go back to the question on conservatism or is there something else that we should be thinking about here?

Steve Pellizzer

Well, I think it's a combination of the conservative outlook from a top line perspective going into '09 and, yes, we don't have the hiring plan that we did going into last year, but you also have the impact of the investment that was made in 2008 with regard to hiring. You're seeing the full year impact of that in 2009, so I think it's a – it's sort of a combination of those two factors.

Andrew Jeffrey – SunTrust

Okay. Conceptually, I mean, is there a point at which – I mean, this theoretically should be a really scalable business. Where do we start to see the leverage drop to the bottom line? I mean, is that an '09 event? Is it a '10 event? I'm just wondering when you feel like you're staffed up and the technology infrastructure is in place and you start to get what should be intrinsic operating leverage here.

Steve Pellizzer

Well, I think that certainly 2008 was an investment year. Going into the year following the acquisition of Authorize.Net, if you look at the two legacy companies, both of them were aggressively hiring to get to kind of where they really needed to be and so that investment was made. I think that the headcount that we're hiring this year is I think more typical and I think, as a result we will start to see the leverage assuming that the market improves.

Andrew Jeffrey – SunTrust

Okay. And then we obviously saw a massive data breach at Heartland Payments last week. Can you talk a little bit about your – the security of your database, steps you may have taken, lessons you might have learned from a couple of data breaches now in the last month or so. How can you address that? I mean, it looks it's almost possible for that to anybody. How do you view that?

Bill McKiernan

Well, I think you're right, Andrew. I mean, it's – it was a very sobering event and unfortunately, not one that's unique and we take data security extremely seriously. As a matter of fact, as soon as I saw the announcement, we had a meeting with our security team just to see if there was anything new that we could learn and things that we should change. We – it's nothing we take joy in to see another payment provider go through one of those breaches. But I think it does illustrate the point I made earlier about how the bar is continually raised in terms of meeting the data security requirements out there, investing in the systems, in the personnel to make sure that data is secure and the challenges associated with that are only going to get greater with time, so we spend a lot of time and energy on that issue I can assure you.

Andrew Jeffrey – SunTrust

Okay. And then, to go back and repeat a theme here or ask maybe a question little bit differently. You mentioned a couple of new relationships in the quarter that sounded like they could be potentially transitory even though they represent a theme, specifically, the DNC and the Obama Transition. At – were those measurable contributors? It sounds like you were pretty well diversified, but I mean, obviously, given the election and so forth in the quarter, is there anything of note there?

Bill McKiernan

Yes, Andrew, those were meant to be more directionally illustrative and not to highlight accounts that are meaningfully moving the needle for us. With the DNC, they're going to be around and active for a very long time. And as I tried to point out the election cycle is not a four year cycle from an Internet standpoint. It's going on all the time in local races and state races. It's a 12-month a year activity, so we're happy to be a part of it. And it's a same thing with colleges and universities, churches, and synagogues. It's just – it's remarkable how the non-profits are really gravitating toward the Internet as a way to raise money.

Andrew Jeffrey – SunTrust

Great. Thanks guys.

Operator

Your final question comes from Tom McCrohan of Janney Montgomery.

Tom McCrohan – Janney Montgomery

Hi, Bill. Hi, Steve. Just two quick questions. On the merchant acquiring side, can you just give us a sense of what type of customers you're actually providing those services for? Is it retail customer or these not for profits, colleges, and universities and the like?

Bill McKiernan

Well, the 4,000 plus accounts, I mean, they really are probably representative of the whole install base. They – it's a variety of everything you can imagine.

Tom McCrohan – Janney Montgomery

And I too was surprised by the really strong transaction growth this quarter and from your comments how less sensitive it seems like you are to the consumer slowdown. And one of the reasons I had that view is purchase of Authorize.Net, selling your services through these 4,000 ISOs, which my understanding was they're assigned to kind of small mainstream retailers and kind of brick and mortar retailers, which I would have thought would have created a little more exposure to you folks to the consumer slowdown, but that doesn't seem to be the case. So, can you maybe just give us an update again on this 4,000 distribution network that you have access to – I mean, who are they selling to if it's not the mainstream retailer?

Bill McKiernan

Well, they're selling to a lot of the same accounts that I talked about earlier. It's – and it's not just retail. It's all these different verticals. But, Tom, if history is any guide what Authorize.Net saw back in the 2000/2001 downturn, dot com downturn was actually an increase in new merchant setups because a lot of merchants were shutting down brick and mortar stores and moving online, lot of people were looking to supplement their income by setting up a Web site and selling golf bags or cigar boxes or whatever. And it doesn't surprise me that in Q4 we had our strongest sign up quarter ever, because I think that same trend is happening again where people are looking to the Internet to supplement lost income or replace income from a job that went away.

Steve Pellizzer

The other thing that I would add is that when we talk about 35% of being retail oriented – again, that was focused on looking at the top 200 merchants in the portfolio in Q4. And so that would not include any of the small business merchants. They're obviously not included in our top list.

Tom McCrohan – Janney Montgomery

Yes, yes, that's fair enough. So you have a little 80/20 rule pertaining to your folks, most of your – you might have 80% of your– not to say this is the case, 80% of your merchant account, 253,000 could be retail oriented, but they're a heck of a lot smaller. And the 20% of your merchants are the trot which are not retail based just driving so much volume. Can you give us any breakout in your merchant base between beyond that top 200? Is that 35% much higher if you look at the whole base of 253,000?

Bill McKiernan

Yes. The candid and honest answer, Tom, is we just don't have the data. I mean, we don't categorize every merchant by SIC code, but certainly just from scanning the list it's apparent that the install base is very diverse.

Tom McCrohan – Janney Montgomery

Great. Thanks for taking the questions and congrats on a really strong quarter.

Bill McKiernan

Alright. Thanks, Tom.

Operator

That concludes our Q&A portion for today. Mr. McKiernan, do you have any closing remarks?

Bill McKiernan

No. Thank you very much and thanks everyone for dialing in.

Operator

That concludes today's teleconference. You may now disconnect.

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