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Liz Bowman - Director of SEC Reporting

Ronald Rossetti - Chairman of the Board, Chief Executive Officer

Ronald Johnston - Chief Financial Officer

Nina Vellayan - Chief Operating Officer

Keith Kendrick - Senior Vice President of Strategic Marketing


Wayne Johnson - Raymond James

Gary Prestopino - Barrington Research

Tier Technologies, Inc. (OTC:TIER) F2Q09 Earnings Call May 12, 2009 5:00 PM ET


Good afternoon. At this time I would like to welcome everyone to the Tier Technologies fiscal second quarter earnings conference call. (Operator Instructions)

Ms. Bowman, you may begin your conference.

Liz Bowman

Good afternoon. My name is Liz Bowman, Director of SEC Reporting for Tier Technologies. I would like to welcome everyone to the Tier Technologies earnings conference call for the quarter ended March 31, 2009. Today's call is scheduled for one hour.

After the market closed yesterday we issued a press release announcing Tier's financial results for the second quarter ended March 31, 2009. In addition, we issued a copy of the prepared text of today's call and accompanying presentation, which includes charts that will be referenced during this call. A copy of these materials can be found in the Investor Relations section of our website,

We invite shareholders and analysts who wish to speak to management about the company and its performance to schedule a meeting by contacting our CFO, Ron Johnston, at 571-382-1333 or you may e-mail Ron at

With me on the call are Ron Rossetti, Chairman and Chief Executive Officer, and Ron Johnston, Chief Financial Officer. Also in attendance are Nina Vellayan, Chief Operating Officer, and Keith Kendrick, Senior Vice President of Strategic Marketing.

A taped replay of this call will be available on the company's website beginning Wednesday, May 13 at noon Eastern time until Monday, May 26, 2009 at 11:59 p.m. Eastern time. Alternatively, you can hear a replay by dialing 800-652-1687 and entering the Conference ID No. 97948995.

I want to remind you that various remarks that we make about the company's future expectations, plans and prospects constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. The forward-looking statements discussed on this call represent management's current expectations about the company's future financial performance based on the information available to us today. This information may change and our actual results may differ materially from these forward-looking statements. We undertake no obligation to update any such forward-looking statements.

There are numerous risks and uncertainties that affect our business and may affect these statements, including but not limited to failure to achieve anticipated gross margin levels due to unanticipated costs incurred in transaction-based projects, increasing competition, timing, the company's ability to realize revenues from its business development opportunities, changes in laws and government regulatory compliance requirements, ability to attract and retain qualified personnel, and other risk factors that are set forth in our SEC filings.

Now I would like to turn the call over to Ron Rossetti.

Ronald Rossetti

Thank you, Liz, and good afternoon.

Let me outline the agenda for the call today. First, I will update you on our position with the Internal Revenue Service contract and our performance in the current tax season, and then I will provide a strategic update on our growing success in the biller direct market with our Electronic Payment Solutions business. Next I have asked Ron Johnston to cover our financial results for the quarter, the state of our restructuring and our share repurchase program. Following Ron Johnston's remarks we will open the call to your questions.

As you probably know, on April 12th we announced that the Internal Revenue Service has awarded our wholly owned subsidiary, Official Payments Corporation, a new multi-year contract for providing electronic payment solutions. This contract is for base period through the end of this calendar year and for four one-year options running until December 31, 2013.

Since 1999 when Official Payments began processing federal tax payments for the IRS the company has processed over $9 billion in federal taxes. Official Payments was selected by the IRS to pilot federal electronic tax payments and is the only company that has provided these services continuously since 1999. As we enter the new contract we anticipate offering more payment options and services.

I am sure many of you want to know the performance results for the April IRS tax period. While the tax season did not fall in the quarter, I can provide some insight. In short, it was a difficult season. As we said on our last call, we expected total transactions to climb but we were unable to predict what the payment volume would be due to this unprecedented economic environment.

Our expectation with respect to total transactions proved true. Our April transactions increased 5% over last April while our average payment size declined 22% as compared with prior year. The result was a total payment volume decline 18% or a total decline of approximately $129 million in transaction dollar volume from last year, reducing our planned revenue by approximately $3 million. This decline was greater than our revised plan and we now expect our full year continuing operations revenue to be basically flat with fiscal year 2008. To place the April performance in context, Official Payments increased its share of transactions from 50% to 55%.

As you recall, I noted last quarter that beginning fiscal 2009 we are now reporting our results as continuing and discontinued operations, reflecting the fact that our restructuring is substantially completed and that Tier is now a single company focused exclusively on providing electronic payment services to the biller direct market. As a result, operating expenses that were formerly separated between EPS operations, wind down and corporate overhead have been combined and presented as selling and marketing and general administration expenses, with a consolidated statement of operations.

On that call we provided guidance that the target was for positive EBITDA in continuing operations as we grew in the middle single-digit range. Higher education and utilities, which I will speak about a little later, continued to exceed our expectations. We have continued to implement cost reductions and our ChoicePay acquisition is performing ahead of plan. In fact, our transaction volume is fully on plan and we affirm our transaction guidance, which appears in Chart 3. Despite these positive trends, we no longer anticipate that the company will grow in the mid single-digit percentage range and instead will be basically flat year-over-year.

In anticipation that revenues would be tested further, we took additional cost reduction measures during the quarter. These actions, coupled with the strengths of our other segments, should produce breakeven to positive EBITDA from continuing operations for the entire fiscal year assuming that there are no further revenue declines in other verticals.

During 2007 management and the Board undertook a comprehensive strategic planning process to determine the most effective means to maximize shareholder value. At the conclusion of this strategic review it was decided to divest all of the operating units except for our EPS business. As noted earlier, we have completed our planned divestitures, allowing the company to focus exclusively on providing electronic payment solutions to merchants who provide service directly to customers, which we refer to as the biller direct space.

In fiscal 2009 we have established five key priorities - complete the divestitures of non-strategic assets; build a new management team; develop our marketing capabilities; build share in the biller direct market by growing transactions, developing new verticals, and reducing our client concentration; and consolidate our platforms to reduce cost and accelerate and expand the development and rollout of new products and features.

We are actively managing each of these priorities. A short overview of our strategic plan appears in Chart 4. The status of the major objectives are as follows:

Divestitures. In November 2008 we completed the divestiture of our Financial Management Systems or FMS operations, which was part of our former Packaged Software Systems Integration or PSSI segment. In February 2009 we sold our Unemployment Insurance or UI operations, which was part of our former PSSI segment. These sales completed seven of seven announced planned divestitures since early 2008. All planned divestitures are now completed. A summary of the restructuring appears on Chart 5.

Ron Johnston joined us in April 2008 as CFO. In July 2008 Keith Kendrick assumed the role of SVP Strategic Marketing and our new COO, Nina Vellayan, began her assignment in October 2008. During last year management reviewed our expense levels, undertook cost containment programs in light of the current economic environment, and streamlined our expenses accordingly.

Marketing. As part of the strategic review the firm has started an ongoing upgrade of its strategic information systems to allow us to establish direct relationships with end users of the company's services to grow transactions across verticals and deepen the strength of the primary brand, Official Payments.

We are launching programs to increase customer adoption and utilization through expanded cross-selling capabilities and enhanced My Account functionality. On January 1 we launched a new Official Payments website, which provides persistent presence for our My Account customer registration service. With the new website our My Account registrations tripled compared with the prior year quarter. New registrations totaled 155,296; in fact, we added more new account registrations in the first 90 days of the new site than in the prior six months. Importantly, this fresh presentation more than doubled opt-ins or permission-based marketing communications and scheduling of future payments. A screen shot of our new website appears in Chart 6.

We are investing in these online direct relationships to encourage and cross sell our products and service through new e-mail and online marketing initiatives. As our new consolidated platform becomes available we will launch new ecommerce products and payment services for partners and direct biller clients, including additional payment channels such as mobile walk up payment and kiosks.

We launched a pilot of the Visa debit fixed fee program. It was launched during the quarter and we will review the results with Visa and the IRS later this year. As most of you know, the number one challenge to growth in the biller direct government category is the convenience fee. We experienced less volume for this payment choice than we would have liked, but we did see new users at our site.

Like many innovations in this category, it can take several years to penetrate the market. We are working with all of our payment partners to find new innovative means to create greater value in the marketplace. Consistent with our strategy, we continue to expand the number of clients offering ACH as a payment method. During the quarter we signed another 93 agreements, bringing us to 149 for the fiscal year.

Build share. The company has increased resources and marketing programs directed at our fastest-growing verticals - higher education and utilities. In January 2009 we completed the acquisition of ChoicePay, Inc., a leading e-payment solution provider. We believe the acquisition of ChoicePay, Inc. will enhance our technology platform and provide us with a significant expansion of our utilities vertical.

During the quarter we added our 27th state to the Official Payments family, Wyoming. We will begin production for Wyoming in September. At the local level we were awarded an RFP for San Diego County. When contract negotiations are completed we will process a number of payment types, including property tax. In higher education we added nine schools this quarter, led by Holy Family University in Pennsylvania, where we will begin handling tuition payments in July and 29 year-to-date.

The acquisition of ChoicePay will provide an acceleration of our growth in the utilities category. In fact, we have already signed an additional large utility since we closed our acquisition of ChoicePay, giving us 11 of the top 100 utilities. In total we signed 104 new accounts during the quarter. It is these types of consistent ongoing wins that are driving our diversification strength in categories beyond government tax collections.

Our success in taking our intellectual property to new categories is clearly detailed in Charts 7 and 8. As you can see, we have built higher education and utilities into full-scale verticals for our company.

Platform Consolidation. In the first fiscal quarter of 2009 we began an extensive analysis of our operating platforms and began a consolidation of our processing platforms and infrastructure to improve efficiency and reduce cost while providing the capacity for future growth. Based on our current plan, we expect to complete the consolidation of our current EPS technology platforms in early calendar year 2010. To date we have completed the consolidation of some of our EPS operations, facilities, departments and positions in San Ramon, California and Tulsa, Oklahoma with our operations in Auburn, Alabama. We expect this operations consolidation to increase efficiencies, reduce costs, reduce overhead, and eliminate duplicative operations and functions.

Last month was our first tax season in which we operated our consolidated customer care unit from Auburn, Alabama. I can report that we operated very smoothly and without disruption. With the introduction of new technology and operating strategies, we processed more agent-handled transactions with fewer agents than in prior years. The transfer from San Ramon to Auburn was an unqualified success.

While we anticipate minimal revenue growth during fiscal 2009, as we believe the current macroeconomic climate will reduce the average payment size in key vertical categories, we do expect to see continued transaction growth in our EPS business. To date, transactions are up 8.2% over the prior year, with dollar volume up 3.3%. Without the loss of our K through 12 client in December 2007, our transaction growth year-over-year would be up 18.5%. When we add the ChoicePay data to the analysis, transactions are up 39%.

As I mentioned earlier, our strategic acquisition of ChoicePay, which closed on January 27, 2009, is performing ahead of plan. With their technology, billers can accept customer payments by electronic check, credit card or cash using state-of-the-art Internet interactive voice response, call center, kiosk and agent payment platforms. With ChoicePay we gained more than 50 clients and the transaction was immediately accretive. With our stronger balance sheet, we have closed 8 accounts that were in their pipeline. A summary of ChoicePay appears in Chart 9.

Finally, I'm convinced more than ever in our core value proposition - our front end platform designed expressly for the biller direct category. I am often asked to compare our performance to one of the major payment processors. The question itself is misleading. In fact, we outsource the basic transaction processing to several of the major payment processors so that we and our clients can benefit from their scale efficiencies. We bring deep domain expertise to the major billers by providing a sophisticated, highly tailored turnkey payments platform and processing gateway.

Our payments platform utilizes multiple payment channels, including the Internet, IVR, walk up payment centers or channels and kiosks and front-end applications, including electronic bill presentment, installment plans and white-labeling capability. Our proprietary platform and our customer care services are designed to meet the specific demands of billers offering secure, multiple payment types and channel choices and electronic receipts.

We are PCI and NACHA compliant and in addition undergo an annual comprehensive audit by the IRS. Our clients choose us because we provide secure services that are extremely difficult and costly for them to provide themselves. They view us as providing complex domain expertise that they do not have nor wish to develop on their own. A pictorial of how we interface to the payments processing network appears on Chart 10.

I look forward to talking more about our focused payments company and addressing your questions.

Now I'll turn the call over to Ron Johnston to discuss the second quarter results and then we'll open the call for Q&A.

Ronald Johnston

Thank you, Ron.

During this call I will address the status of our divestitures, the acquisition of ChoicePay, and general operating results for the quarter ended March 31, 2009.

On February 13 we completed the sale of our UI or Unemployment Insurance business. The completion of this transaction means that we have sold all the seven units we had placed in held for sale classification during late full year 2007. We now have one pension contract that we will see to completion this summer and the wind down of our VSA unit. As previously noted, the VSA unit is EBITDA positive. You can see a summary of the restructuring on Chart 5.

With these transactions completed we have met our previously announced plan to reduce our total headcount from 958 on September 30, 2006 to 203 by the end of our second quarter, including the additional associates added due to the ChoicePay acquisition.

In January 2009 we closed the purchase of certain assets and assumed certain liabilities of that Tulsa, Okalahoma-based company named ChoicePay. At the time of acquisition ChoicePay had 77 employees and was generating annual revenues of approximately $10 million. The acquisition price of $7.5 million was paid in cash at closing.

For the quarter our business continues to be divided into continuing and discontinued operations. In our continuing operations are our core EPS business and businesses that are winding down. Effective January 27, 2009 we have included the operating results of ChoicePay acquisition in EPS and as such are in continuing operations.

Revenues from continuing operations for the quarter grew 10.2% to $28.6 million as compared to $26.0 million in the same quarter last year. We are pleased to report growth in our utilities, sales and use tax and property tax categories. Revenues from our income tax and K to 12 education categories were below year ago levels. The difficult economic conditions contributed to the federal and state income tax decreases.

We expect that demand for our services will continue to increase as more and more state and local jurisdictions offer electronic payment processing to their constituents as a means to improve service levels and reduce back office processes and related costs in the economic downturn.

During the quarter we processed over $1.4 billion of payments which represented a 23.3% increase versus the same quarter last year. This total increase was driven by a 52.3% increase in transaction volume. The increase in transaction growth was due primarily to the acquisition of ChoicePay and our current verticals such as state income tax and higher education.

Our wind down operations contributed $1.3 million in revenues and $600,000 in EBITDA for the current quarter.

Gross margin from continuing operations, which we calculate by subtracting our direct costs from our revenues, was 27.4% for the quarter, which is 2.6% higher than the same quarter last year. Gross margin in our EPS business was 26.1%, up approximately 2.3% from the same period last year. The addition of ChoicePay helped increase overall gross margins nicely.

General and administrative expenses for the continuing operations were $7.5 million for the quarter, up 9.3% compared to the same quarter last year. The increase in G&A was attributable primarily to higher legal fees and the ChoicePay acquisition impact.

Selling and marketing expenses in continuing operations were $1.9 million for the quarter, down 4.6%. We are focusing our efforts on the EPS business and streamlining sales and marketing programs to control expense levels.

Net interest income was $200,000 for the quarter, about $600,000 or approximately 69% less than the same quarter last year, which reflects a decrease in the interest rates experienced in the financial markets.

Turning to our discontinued operations, we completed the sale of our Unemployment Insurance or UI unit in February, therefore our losses in discontinued operations are attributable to the UI unit through the sale and abandonment charges related to FMS as well.

Net loss from continuing operations was $2.9 million or a loss of $0.15 per fully diluted share. Net loss from discontinued operations net of income taxes was $2.4 million in the quarter compared to a $600,000 loss in the same quarter a year ago. Our consolidated net loss per fully diluted share in the quarter was $0.27 compared to a loss of $0.18 per fully diluted share in the same quarter last year.

Total company headcount at March 31 was 203 personnel, including the employees acquired through ChoicePay.

Our financial condition and balance sheet remain strong, with cash and marketable securities of $78.9 million at March 31. That figure is comprised of cash and cash equivalents and investments in marketable securities of $71.1 million and restricted investments of $7.9 million. Restricted investments include $1.4 million pledged in connection with performance bonds primarily in our PSSI segment and $6 million pledged as compensating balances for an ACH banking service relationship in our EPS segment. Cash and marketable securities declined by $5.5 million from December 31, 2008, principally due to the ChoicePay acquisition and operating losses in the quarter.

In January 2009 we announced a stock repurchase program which authorizes the repurchase of up to 15 million of our company's stock in the open market. We will fund this program using the proceeds from the liquidation of or borrowing against auction rate securities or other liquid corporate assets. During the quarter we purchased shares from time to time in the open market. In March we established a formal 10b5-1 plan and have been automatically purchasing shares under this plan since that inception. As of March 31, 2009 the company had repurchased 112,400 shares as a part of this program. Through April 30, 2009 total shares repurchased increased to a total of 212,400.

Lastly, I want to mention that our Form 10-Q has been filed with the Securities and Exchange Commission. We encourage all of you to review the statements and footnotes in order to better understand our current operations.

Now I'd like to turn the call back over to Ron Rossetti.

Ronald Rossetti

Thanks, Ron.

Before we open the call to questions I want to highlight the following: We are investing in and successfully growing our non-government verticals, diversifying and strengthening the long-term health of the company. The integration of the ChoicePay acquisition, which provides us a modern technology platform and a strong new vertical in utilities is under way and exceeding plan. Our 15 million share repurchase program is in the market and performing. The Board remains comfortable that the UBS rights offering and other corporate are viable and appropriate.

In light of the progress on the restructuring and the acquisition of ChoicePay, our job now is to focus on executing the strategic plan. We have put a new management team in place that is confident and highly capable of executing on that plan.

Everyone on this call knows how serious the economic environment is. Notwithstanding the environment, we are seeing increased demand for electronic payment solutions and we believe that the initiatives that we are pursuing offer the best means for increasing long-term stockholder value.

As always, I wish to thank you, our long-term investors, for your continued support of our company.

Liz Bowman

At this time we'd like to open up the call to Q&A.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Wayne Johnson - Raymond James.

Wayne Johnson - Raymond James

I'm just trying to get my hands around the expenses a little bit more, gross profit margins a little bit better, SG&A a little bit higher. Going forward for the next few quarters how should we be thinking about that as a percentage of sales?

Ronald Johnston

Let me answer it in this fashion. The margin improvements that we're seeing are coming principally as a result of the ChoicePay acquisition and the mix of cost of goods associated with their revenue base. So as they maintain and hopefully grow that revenue base we should continue to see an improvement in overall gross margin.

On the SG&A side in the quarter the general and administrative expenses increased in the quarter and by approximately $600,000 as a result of really two factors - one was now the general and administrative expenses associated with the ChoicePay acquisition and, as I said earlier, legal expenses incurred in the quarter as a result of the stockholder meeting.

Wayne Johnson - Raymond James

So for ChoicePay what kind of growth rate do you think that they bring to the table? I believe it was $10 million in revenue, is that right, if I recall correctly?

Ronald Rossetti

That was the run rate of the business at the time of acquisition and we've subsequently added additional clients.

Nina is here. Nina, do you want to speak to that?

Nina Vellayan

Sure. Wayne, since the close we've actually added 8 additional accounts, as you saw per Ron's comments. And from a growth rate standpoint I believe it's growing at -

Ronald Rossetti

Well, you have to look at ChoicePay in two segments in terms of what it does for our growth. In the first place we think that the utilities category for us is going to grow at least in the 35% to 40% growth rate over the next year or so, maybe two. And so they're adding to that growth.

But also ChoicePay brings us a couple of other payment types, mainly walk up payments as well as some of the heavier level in ACH. To give you one example, in one utility we're increasing transaction volume probably by 250,000 to 300,000 a year just by the use of walk ups. We plan on applying that to all of our government space. And the addition of payment types like bill me later and a number of others, [inaudible] and a number of others, are going to add to that ability.

So it's a combination of what do they do in terms of driving that utility vertical where 85% of their business was in utilities, and secondarily what do the additional payment types do when added to our 3,500 clients drive volume?

So it's very, very difficult for us to point to ChoicePay per se. It's a lot easier for us to start talking about verticals, and what ChoicePay did is it doubled our utility size and give us a better product enhancement to go after the larger utilities.

In addition to giving us a significant number of different payment types that we were able, as we start to board all of our clients on a consolidated platform, they'll automatically be able to have access to those payment types.

Wayne Johnson - Raymond James

So on the expenses side I should think, about on the margin side I should think about gross profit margins maintaining the same level or getting higher from here?

Ronald Johnston

Historically over the last couple of quarters the margins were in the 22.5% - 23%. In this quarter we've ticked up, again, as I indicated, because of the ChoicePay contribution. So I would assume that the margins that we are experiencing in this current quarter are the margins that we will anticipate to see through the remainder of the year.

Wayne Johnson - Raymond James

And how much of a wind down in expenses should I be looking for for the remainder of the year below the cost of service line?

Ronald Rossetti

Well, we gave some visibility last year - I think it was not last call, but the call before - in terms of looking at quarterly expenses and we did this without the ChoicePay acquisition. But you should see a significant decline in expenses beginning in the third and fourth quarter because one of the things that we're experiencing in the first and second quarter of this fiscal year is a lot of the restructuring costs such as severance, relocating, operations.

If you look at what we've been doing, we've taken basically three companies - our San Ramon operation, which was [inaudible] payments, our E-Post company, which was in Alabama, and the addition of ChoicePay, and we're consolidating them into one. So we've moved the entire back room - client services, call center, implementation - from Tulsa and from California into Auburn. As a matter of fact, ChoicePay from a back room basis doesn't exist; I mean, Tulsa doesn't exist anymore with any back room operations and we're rapidly closing down a substantial part of the San Ramon Official Payments.

We are at the same time taking the best of breed that we have on our three platforms, using a fairly brand new architecture - the ChoicePay architecture is, what, 2, 2.5 years old, Nina; she's nodding affirmatively - and we're taking that as a base architecture but then taking the features and products that we have on all three platforms and adding them to that. And as we do we're going to start boarding our clients.

As of June we would expect to take the entire client base from E-Post, which was the Alabama plant, and consolidate that with everything that's on ChoicePay. Somewhere mid-summer, early fall we expect to have the IRS boarded on that platform as well. And I would say somewhere in the first quarter, the middle quarter of 2010 we'll have our entire company on a single platform.

So what you're going to be able to see is not only what we've seen in the reduction of call center and customer service representatives. Remember, you heard me say that we moved a substantially greater amount of transactions over our April tax period. I believe when you start adding some of the ChoicePay and E-Post clients it was probably 35% more in volume in terms of transactions that moved through the month of April, with substantially less payroll and people. And that you're going to start to see in profitability, so all of these things will start to show significant drops to the bottom line.

But from a dollars basis, if you took our total expenses for last year it would be very easy to estimate somewhere around a 25% reduction on a run rate basis come the last quarter of this calendar year.


(Operator Instructions) Your next question comes from Gary Prestopino - Barrington Research.

Gary Prestopino - Barrington Research

Do you know the absolute number of transactions that you did this quarter? I didn't get that.

Ronald Rossetti

Just a second, Gary.

Ronald Johnston

3.7 million, Gary.

Gary Prestopino - Barrington Research

Okay, 3.7 million transactions.

Ron, again, on these expenses, I went through my notes from prior quarters and I think you kind of said that SG&A and selling and marketing would be running at about a $7 million run rate by Q4. Is that correct or is that without ChoicePay?

Ronald Rossetti

That's without ChoicePay.

Gary Prestopino - Barrington Research

So obviously it's going to be -

Ronald Rossetti

And that is about, if I remember, the percentage right, it's about 26% below what we ran the previous quarter. If you look at the last quarter of this year, I believe it's about 26%. And I'm going from memory so you'll have to forgive me; I'd have to look at the numbers. But it's about 26% below where we ran. So the only thing you have to do with that $7 million number is to add the ChoicePay to it.

Gary Prestopino - Barrington Research

Right now you're running on two processing systems, right?

Ronald Rossetti

No, we're running on three processing systems.

Gary Prestopino - Barrington Research

And you'll have it down to one by Q1 of next year?

Ronald Rossetti

We will be on two processing systems by September of this year and by Q1, at the latest Q2, calendar Q2, we will be on one system.

Gary Prestopino - Barrington Research

By calendar Q2?

Ronald Rossetti

I think we'll be on the one system a little ahead of time. We may not have all of the product built out by that time. What we've got is a product road map as well as a consolidation road map which includes the building out of some new product as well as consolidating the systems and we're anticipating that to be done somewhere in the first to middle quarter of 2010. Basically by September we will have all of the E-Post, all of the ChoicePay, the IRS and we'll starting boarding some of the other tax clients as we move along.

Gary Prestopino - Barrington Research

So the processing system costs, they're not in direct costs, they're in G&A and selling and marketing?

Ronald Rossetti

That's correct, they're in G&A. The only thing that is in our margin that you're calling direct costs are our cost of sales, if we could call it, it would be our interchange and the variable costs of implementation, client services, customer services, and there may be some telephony costs in there as well and the data center costs. Our direct costs are substantially interchange.

Gary Prestopino - Barrington Research

Right, I understand that.

This is one for Nina. Could maybe she share - I know you were going back to all of the Visa or MasterCard or you're acquiring partners to try and get some better rates from them, how is that going? I mean, are they amenable to working with you there, to the extent you can talk about it?

Ronald Rossetti

Let me step in here. That's confidential information that the company doesn't give out. I can just say to you that we think that we will have through the reduction of processing costs, with the reduction of implementation, customer service costs at the headquarters, and the use of the driving of the growth in verticals which have lower interchange costs and aren't directly related as to a percentage of revenue collected, we should see the margin grow.

So the margin is going to grow by a combination of two things - one is mix shift and the other is improved costs across the board. But we're just not going to get into the discussion of what our rates are with our various card companies and partners.

Gary Prestopino - Barrington Research

Oh, no, I wasn't asking for that. I was just asking if those negotiations really are ongoing and you're finding that the parties are amenable to at least talk.

Ronald Rossetti

Well, they're talking and they're ongoing. Go ahead, Nina, why don't you answer that now.

Nina Vellayan

Yes. Gary, actually, to answer your question, they're going very well and we've made some significant strides, so you will start seeing some of that saving in the next few quarters.

Ronald Rossetti

And the savings will continue because, as you know, these aren't things that, even if you effect a saving, you're talking today, they might take six to 12 months before you'll see them fully flow through the P&L. But, believe me, it's an ongoing battle. We look at these things if not every 30 days, every 15 days.

Gary Prestopino - Barrington Research

And are you seeing increased usage of debit cards across the spectrum of what you're offering or is it still mostly credit?

Ronald Rossetti

No, we're seeing increased usage of debit cards. We're seeing a significant increase usage of ACH. We're no different than what's happening in the general economy in terms of payments. Credit cards are declining as a relative percentage. I mean, they're increasing with transactions, but the mix is shifting more to immediate deductions from individuals' accounts.

Gary Prestopino - Barrington Research

And you can offer debit and ACH across all of your markets?

Ronald Rossetti

We can offer debit and ACH. That depends sometimes on the client, but we're finding the clients very, very receptive to it at this point.

Oh, excuse me, one thing, I'm sorry. We can't offer ACH in federal; we can't offer debit.

Gary Prestopino - Barrington Research

You can't offer debit on federal, right?

Ronald Rossetti

We can offer debit on federal; we cannot offer ACH. The IRS has a separate e-check program that they handle themselves internally.


(Operator Instructions) And I'm showing no further audio questions at this time. You may proceed with closing remarks.

Liz Bowman

Thank you. As I mentioned at the beginning of this call, a copy of the text of this call and accompanying charts are posted in the Investor Relations section of our website at

We invite shareholders and analysts who wish to speak to management about the company and its performance to schedule a meeting by contacting our CFO, Ron Johnston, at 571-382-1333 or Thank you.

This concludes our earnings release call for the second quarter of fiscal year 2009 for Tier Technologies.


This does conclude today's conference call. You may now disconnect.

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