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Higher One Holdings (NYSE:ONE)

Q1 2013 Earnings Call

May 07, 2013 5:00 pm ET

Executives

Joseph Villalta

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

Christopher W. Wolf - Chief Financial Officer

Miles Lasater - Co-Founder, Chairman and President

Analysts

David M. Scharf - JMP Securities LLC, Research Division

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

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Wayne Johnson - Raymond James & Associates, Inc., Research Division

Michael J. Grondahl - Piper Jaffray Companies, Research Division

Operator

Good day, ladies and gentlemen and welcome to the First Quarter 2013 Higher One Holdings Incorporated Earnings Conference Call. My name is Caris, and I will be your coordinator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like hand the call over to your host for today, Mr. Joe Villalta, Investor Relations. Please proceed.

Joseph Villalta

Good afternoon, everyone, and thank you for joining us on Higher One's Q1 2013 earnings call. With us today are our Chief Executive Officer, Mark Volchek; our President, Miles Lasater; and our Chief Financial Officer, Chris Wolf. Mark will provide a summary of our quarterly performance and Chris Wolf will provide more detail on the financials before opening the call up for Q&A. There is a slide presentation that accompanies our discussion of the quarter that is available on our Investor Relations website at ir.higherone.com. This call contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Management's projections and expectations are subject to a number of risks and uncertainties that could cause actual performance to differ materially from the predicted or implied.

Forward-looking statements may be identified by the use of words such as expect, anticipate, believe, estimate, potential, should or similar words intended to identify information that is not historical in nature.

Forward-looking statements contained herein include among others, statements about the expected benefits of the acquisition of Sallie Mae's Campus Solutions business by Higher One and such statements are based on current beliefs and expectations of Higher One and Sallie Mae's management as applicable and are subject to known and unknown risks and uncertainties.

There are a number of risks and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statements. These statements speak only as of the date they are made and the company does not intend to update or otherwise revise the forward-looking information to reflect actual results of operations, changes in financial condition, changes in estimates, expectations or assumptions, changes in general economic or industry conditions or other circumstances arising and/or existing since the preparation of this presentation or to reflect the occurrence of any unanticipated events. The forward-looking statements in this presentation do not include the potential impact of any acquisitions or divestitures that may be announced and/or completed after the date hereof.

For further information regarding the risks associated with Higher One and Sallie Mae's businesses, please refer to the respective filings with the Securities and Exchange Commission including annual reports on Form 10-K for the most recent fiscal year and quarterly reports on Form 10-Q and current reports on Form 8-K. Information about the factors that could affect future performance can be found in our recent SEC filings available on our website at ir.higherone.com. We will also provide certain metrics on a non-GAAP basis including adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted EPS and free cash flow. We believe that these non-GAAP measures, which exclude amortization of intangibles, stock-based compensation and certain nonrecurring or noncash impacts to our results provide useful information regarding normalized trends relating to the company's financial condition and results of operation. Reconciliations of these non-GAAP measures to their closest comparable GAAP measure are included in the appendix of the presentation that accompanies this call as well as in our recent SEC filings. With that, I would now like turn the call over to our CEO, Mark Volchek. Mark?

Mark Volchek

Thank you, Joe. And thank you, everyone, for joining us today. With me is Miles Lasater and joining us for his first Higher One earnings call is Chris Wolf, our new Chief Financial Officer. He came on board on March 5. Chris is a great fit for our management team and has extensive experience in both operational and financial management at a variety of companies will be instrumental for Higher One's future success. We also have Casey McGuane with us today, and I'm pleased to announce his appointment to be our new Chief Operating Officer. Congratulations, Casey. He has been with Higher One since 2000, most recently as our Chief Service Officer and a member of the executive team. Miles Lasater will remain President and Chairman of the board and will focus his time and efforts on product innovation, one of our key strategic initiatives. With lots of other exciting topics to cover on today's call, let's jump right in. I'm extremely excited to announce that we have acquired Sallie Mae's Campus Solutions business, which provides e-commerce, payment and refund disbursement services and tuition payment plan administration to more than 450 college and university business offices across the country. Both Higher One and Sallie Mae are committed to providing schools, students and families with exceptional, transparent and compliant products and services. In addition to more detail on the acquisition, I will also cover updates on sales and our competitive position, product development and the regulatory and compliance environment. Please refer to the accompanying slide deck that is available on our Investor Relations website as I discuss these topics. Now, turning to Slide 3. At our core, Higher One remains focused on 3 key things: lowering the cost of education by improving administrative efficiencies and reducing fraud and waste; providing financial literacy and low-cost financial services to college students; and helping schools improve student success by providing better data to sufficiently allocate resources. Our technology and services help lower the costs and enhance the quality of higher education in the U.S. And we believe that our structural cost advantage and unique understanding of the higher education market puts us in a position to profitably offer low-cost, high-value financial services and other products to the student population. Studies show that getting a college degree remains the best way to increase one's earnings potential. People in college today drive the economy tomorrow and the ability to form trust and relationships with over half of the college population to help improve financial literacy, increase graduation rates and offer low-cost, high-value products and services, provides an exceptionally strong foundation for us to continue to grow in the future. Turning to Slide 4. There are many factors that make the acquisition of Sallie Mae's Campus Solutions business a great fit for us. This acquisition gives us the opportunity to significantly grow our refund and payment client base, further diversify revenue and to provide future opportunities to work with Sallie Mae on other products and initiatives. For many years, both Higher One and Sallie Mae have shared a clear focus on serving higher education. And our business office solutions strive to bring more cost savings and efficiencies to higher education. Let's take a look at Campus Solutions' 3 main products. Tuition payment plans, or TPP, is an outsourced payment plan that allow students to pay tuition fees over time rather than in one lump sum. NetPay is Campus Solutions' building and payment solution. TPP and NetPay address the same needs on campus as our CASHNet suite of payment products. Campus Solutions Refunds is the refund processing service linked to prepaid cards and checking accounts. Sallie Mae selected Higher One's proposal to acquire the Campus Solutions division in part due to our great track record of client satisfaction and market-leading products. I'm also excited to have many members of the Campus Solutions team join us. These talented individuals will be instrumental to making the transition and beyond a success. Now turning to Slide 5. The purchase price of the Campus Solutions acquisition is approximately $47 million and was funded with a combination of cash and our existing credit line. In 2012, Campus Solutions reported revenue of approximately $24 million. We expect the transaction to be slightly dilutive in 2013 and accretive for 2014. The key to the transaction will be to migrate the existing Campus Solutions refund processing clients to OneDisburse. By migrating clients to OneDisburse, we expect to significantly grow revenue. We also anticipate a large cross-selling opportunity over time to our award-winning CASHNet suite of products as well as our Campus Labs products. The real key here is to generate more revenue while also taking advantage of the cost synergies of migrating everyone to one technology platform over the next 12 to 24 months. Turning to Slide 6. I'd like to touch on the following topics: sales on our competitive position, product development and the regulatory and compliance environment. First, let's discuss a brief update on sales. While the total pipeline for OneDisburse remains robust, OneDisburse sales continued at a slower rate than I would like. On the other hand, CASHNet and Campus Labs sales are accelerating. From a competitive perspective, we continue to operate from a position of strength. We believe that we provide the best and most comprehensive suite of products, services and value in our market. And we continue to increase the number of products and services we offer at institutions. We can now offer attractive pricing for add-ons and further deepen our relationships with clients. As we discussed last quarter, we have a renewed focus on product development and innovation. Miles will now spend the majority of his time focused on directing our product innovation efforts to ensure we continue to have the very best products in our segment. We have already added to the team in this area, and we'll continue to invest resources here that will lead to future revenue growth. And now, I'd like to turn to the regulatory environment. We have been tracking the negotiated rule making, or neg reg, announced by the Department of Education in April 2012. The topics and initial notice included leveraging electronic disbursements despite financial aid fraud and considering students' choices in how to receive their refund in view of the costs associated with the various options. On April 16, 2013, the Department of Education issued another notice regarding its intent to add additional topics to the existing neg reg, including among other things, potentially shortening the time frame in which an institution must disburse student refunds. We remain supportive of the key objective Ed is working on. The possible media attention could continue to cost some uncertainty until the rules are finalized. As we are in a regulated consumer business, a focus on compliance and regulation remains key for Higher One. When people understand the services we offer and compare us to other options, the value we provide is clear. We save money for schools and offer choice to students including low-cost, high-value financial services. In fact, if you look at the problems that regulators and legislators are trying to solve: fighting financial aid fraud, lowering administrative expenses for schools, improving graduation rates and others, our products and services help do just that. That said, the regulatory environment remains challenging. So I think our investments and compliance staff and compliance programs are moving us in the right direction. Over the past few years, we have made a number of changes to our products and processes to respond to the regulatory environment, which have had a direct impact in our revenues. Chris will touch on some of these changes in just a few minutes. We will continue our outreach to communicate what we do for schools and how we help students manage their finances, reduce fraud and improve graduation rates and educational effectiveness. In summary, while we have been operating in a challenging macro environment, we're building a strong foundation for future growth. Last year and the first quarter of 2013 presented a number of challenges, and I'm pleased with how we have addressed them though there's a lot more work to be done. We're making progress in further developing our consumer products and brands, diversifying our business and mitigating risks going forward. And we will continue to make investments that will create value over the long run. I'm confident that we're doing the right thing for the business, and I remain optimistic about the future. And with that, I'll hand the call over to Chris Wolf for a deeper look at the financials.

Christopher W. Wolf

Great. Thanks, Mark. At this point, I'll begin the discussion of our financial results for the quarter starting on Page 7 of the accompanying slide presentation. Please remember that all growth rates I mention will be year-over-year unless otherwise specified. Turning to Slide 7. I'll begin our discussion on revenue. Total revenue for Q1 was $57.4 million compared to $57.8 million last year, a decrease of just under 1%. Current year amounts include $2.2 million of revenue from the recently acquired Campus Labs business. Excluding this revenue, organic revenue declined by approximately 4.5%. I'll discuss the drivers of account revenue changes in more detail on the upcoming slides. Gross profit margin for the current quarter was 61.1% compared to 63.1% last year. Gross margin was affected by the mix of revenue with lower amounts of high margin account revenue and higher amounts of lower margin payment transaction revenue, primarily from our CASHNet product. Despite lower account revenue, the cost to service the accounts remain constant, which put pressure on our margin.

Turning to Slide 8. I wanted to update you on the environment which we've been operating in over the course of the past year. As we have previously discussed, enrollment trends have been a headwind over the past few semesters. We first began experiencing the effects of lower than expected enrollment in the second half of 2011 as the number of 2-year college financial aid recipients was below expectations. Similar to what we presented to you in the third quarter of 2012, the operational metrics on the next few slides will help explain the broader trends we're seeing in the spring disbursement cycle. When analyzing these trends, we looked at the period from January through March. This semester, on a same-school basis, we saw the number of unique disbursements recipients down 6%. That number is down 8% at 2-year schools and down 3% at 4-year schools. Aggregate enrollment data is released on a one-year lagging basis, so this is the best proxy we have when looking at enrollment at our client institutions. As we expected last quarter, spring enrollment trends follow fall behavior. Anecdotally, what we've heard has been mixed but enrollment trends definitely seem to look better at 4-year schools compared to 2-year schools. In the wake of the financial crisis, we saw enrollment skyrocket with enrollment growth peaking in the 10% range for the fall of 2009 school year. Government projections have called for a return to more normalized, low single-digit growth rates for this and the prior school year. However, it appears as though enrollment continues to decrease. We have stated previously that it is difficult to predict enrollment. However, our disbursement, payment and data analytic products increase efficiency and save money for schools regardless of what's happening to enrollment. We continue to believe that more people will be going to college for longer periods in the mid- to long-term. However, the decrease in enrollment has put pressure on short-term results. Another impact we've seen on results is that financial aid dollars per unique recipient is down approximately 2% on a same-school basis. Within this, we actually saw 4-year schools down around 3% while 2-year schools were down 2%. Consistent with what we discussed at the end of the fall semester of 2012, we believe that tuition has grown at a higher rate than aid per student. The number of unique recipients from the financial aid disbursement per recipient are inputs that impact our business, and they are not controllable by us. Together, they caused total financial aid disbursement dollars to be down 8% on a same-school basis. One metric that we do have some ability to influence, however, is the OneAccount adoption rate. On a same-school basis, we saw the dollars disbursement to OneAccounts as a percent of total financial aid dollars disbursed, down approximately 4%. That includes the expected impact of the account adoption changes from the fall semester continuing into Q1. I'm pleased with the early success we've seen in improving this, however, there will continue to be a tail from the fall 2012 disbursement cycle weighing down the percentage of dollars disbursed to OneAccounts for the near future. Together, all these factors led to total disbursement dollars into OneAccounts being down 12% on a same-school basis. Over the course of the past year, we've made consumer-friendly and improved disclosure changes that put pressure on adoption rates in the short term. We continue to make improvements to our product suite focused on increasing long-term customer engagement and retention. Over the past couple of years, we have experimented with new account structures, we've taken customer feedback and refined our fee schedules, we have a positioned ourselves to offer more choice to students with 3 distinctly different account options.

Turning to Slide 9. Growth in the number of students enrolled in schools that were launched for OneDisburse was strong, up about 17% from the prior year. However, the growth in total dollars disbursed, including newly launched schools, was only 4.7%. The last slide covered how there was an 8% decrease in dollars disbursed at existing clients driven by a decline in the number of unique recipients and the average refund per recipient. This is the main driver of the difference between the growth in launched SSE and the growth in total refund dollars disbursed. The last slide also covered how impacts to adoption rates caused dollars disbursed into OneAccounts to decline more than dollars disbursed at existing clients. In aggregate, including newly launched clients, the dollars disbursed into OneAccounts as a percent of total dollars disbursed was down 4%. This is offset by the increase in non-refund deposits into OneAccounts. When this is factored in, total dollars deposited to OneAccounts are down 2%. This is a lot of data to absorb, so let me summarize what it all means. We grew our launched SSE by 17% over last year. However, total dollars disbursed was only up 4.7%. The delta between growth and launched SSE and the growth in total dollars disbursed was driven by declines in the number of unique recipients and average refund size. Dollars disbursed into OneAccounts was down 4% for the spring disbursement cycle, offset by non-refund dollars into OneAccounts for a total decrease in deposits to OneAccounts of 2%. The difference between the growth in total dollars disbursed and total dollars disbursed and deposited into OneAccounts was driven by a decline in adoption rates. Some of the trends causing these impacts are likely to be more short term in nature while others could persist.

Turning to Slide 10. Let's further analyze revenue starting with account revenue. As you can see from the slide, account revenue decreased approximately 8%. On the previous 2 slides, we provided data that accounts for a portion of the decline in account revenue, so let's review what drove the total decline. Interchange revenue was up slightly, but this was offset by a decrease in service fee revenue. Service fee revenue decreased primarily as a result of changes to our fee schedule and practices. Based in part on the regulatory environment and to improve customer value and choice, we made a variety of these schedule changes over the past year that continue to impact our account revenue; specifically, changes that went into effect in Q1 R1, eliminating fees that were previously assessed on inactive accounts; 2, elimination of insufficient fund fees on recurring debit card transactions; and 3, caps on non-withdrawal ATM user fees. To summarize, the combination of dollars deposited into OneAccounts and the reduced service revenue as a result of our fee schedule changes are what drove the decline in account revenue. Payment transaction revenue, on the other hand, showed good strength in the quarter, up approximately 26%. A number of new signings for our CASHNet payment module has helped drive the growth. I expect continued growth in this revenue source as we continue on increasing our sales of SmartPay and My Payment Plan plus. Additionally, we have a healthy backlog of installations, which we are actively implementing. Further, we saw strong growth in higher ed institution revenue, driven mainly by our inclusion of revenue from the Campus Labs product suite, which we acquired in August of last year. The Campus Labs suite contributed approximately $2.2 million in GAAP revenue to the higher ed institution revenue in the quarter. On Slide 11, I'll delve into more detail about our operating expenses. General and administrative expense increased over the prior year due to increases in professional fees for legal matters. We also saw higher levels of depreciation and amortization and had higher employee related expense as we continue to invest in enhancing compliance and other functions. Product development was also considerably higher as a percent of revenue as we included the full quarter of Campus Labs, which was not included in our result last year. A fair number of the employees focused on Campus Labs work in R&D around new product features, which is reflected in our product development expense line. In addition, we incurred some additional labor costs and other product development as we renew our focus on furthering our market lead in product strength and innovation. Sales and marketing expense was up slightly in the quarter, mostly due to increased cost from Campus Labs for its sales and marketing functions. Overall, operating expense increased $3.7 million or 24.9% over the prior period. As we discussed on our fourth quarter conference call, we consider our spending in investment in the business, and this spending reflects our confidence in the long-term prospects for the business. Our plan was to have incremental discretionary operating expense investments totaling between $5 million and $7 million in 2013. The majority of these investments will be focused on growth initiatives. These include more product development spends, better lifecycle management and building out a more predictive analytics capabilities. We will also continue to improve how we serve, educate and communicate with consumers. These investments should help us deepen customer engagement and improve retention. Some of these initiatives started in 2012 and were encouraged by the initial success we've seen in certain metrics such as growth in non-refund deposits. We expect these investments to enhance future growth and produce a strong return over time. The remainder of these investments will focus on strengthening the business in a variety of ways. This includes investment in government and media relations, enhancing our compliance program, improving our fraud reduction and loss prevention capabilities and strengthening our banking operations and procedures. We have hired and will continue to hire outstanding people to further these goals internally and we'll also continue to spend on outreach to Washington, DC, and around the country, educating parties about the benefits we provide to higher education. As we discussed on our last call, we do not expect many of these investments to drive meaningful, new revenue in 2013 but they will impact EPS this year. That said, I am confident that the investments we're making now are best for the long-term growth of the business. We are excited at the opportunities in front of us and are focused on what will create the most shareholder value for the company over time. But I assure you that we are continuously monitoring our spending and regularly reexamining spending levels. Although we remain optimistic about our long-term prospects, we understand that as conditions warrant, we can and will adjust our spending to reflect any changes in the near-term outlook.

Turning to Slide 12. You'll see that adjusted EBITDA was $21.6 million compared to $25.2 million last year. Margin decreased by approximately 14%. This decrease was driven by a decline in gross margin and the increase in operating expense that was discussed in previous slides. On Slide 13, you'll see that adjusted diluted EPS equaled $0.25. In the current period, there was an increase in interest expense as we have $63 million outstanding at quarter end on our line of credit. Also, the tax rate was slightly higher in the current quarter compared to last year as there was a minimal increase in the state rate due to a portion of changes. Offsetting these negative impacts on EPS, our share repurchase program helped decrease the weighted diluted share count by approximately 18% or 10.5 million shares.

As you can see on Slide 14, free cash flow grew over 31% from the quarter to $20.6 million. Operating cash flow decreased due to a lower net income and for changes in operating assets. We received a significant tax refund in the prior period, which provided significant cash benefit for that period. The return to lower CapEx levels following the completion of the building renovation project has provided a boost to our free cash flow generation. For 2013, we expect CapEx to be in the range of 6% to 8% of revenue and in the first quarter, it was approximately 3.3% of revenue. Mark had previously discussed the investment we are making in our business. As with operating expense spending, capital expenditures are a reflection in our long-term confidence in the business. I, again, want to assure shareholders that if circumstances warrant it, we will moderate our capital spending as we deem prudent. Turning to Slide 15. We have previously discussed our views on what impacted sales in 2013. There's one point that I'd like to stress again. At quarter end, one or more of our services is now available at schools with enrollment totaling 11.2 million students. This is over half the entire education student population of the U.S. With the addition of Campus Solutions, this number increases to over 13.2 million students. On the next slide, Slide 16, you'll see that the number of OneAccounts increased approximately 2%. This is due to fewer implementations over the course of the year and is also partially due to a change in the way we close low balance, inactive accounts. This change caused a onetime step down in the number of accounts in the second quarter of 2012. This will impact year-over-year growth rates until we anniversary the change in Q2 of this year. While the changes we have made to our accounts and fee practices discussed in previous slides could cause volatility in our revenue per account metric in the near term, I'm optimistic that we can continue to deepen our customer relationships going forward by offering more high-value services to a more engaged customer base. Turning to Slide 17. You can see the free cash flow increase primarily due to lower capital spending, which I discussed on Slide 14. Cash was decreased as we paid $17 million down on our line of credit to bring the outstanding balance to $63 million, and we also spent $6 million on our share repurchase program. We purchased approximately 528,000 shares in the quarter at an average price of approximately $11.35 per share as we substantially completed the $100 million share repurchase authorization in January of this year.

Turning to Slide 18. I'd like to provide color on our latest financial outlook. We expect 2013 revenue to be in the range of $220 million to $230 million and we expect 2013 non-GAAP diluted EPS to be in the range of $0.58 to $0.64. These revised estimates take into account our estimates of how the acquired Campus Solutions business will perform for the remainder of our fiscal year. To reiterate what Mark discussed earlier, although we are adding additional revenue from the newly acquired business, we're expecting the Campus Solutions business to be dilutive in 2013 as we incur some duplicate operating costs including technology platforms and absorb cost for integration. I'm looking forward to the remainder of our fiscal 2013 year. Some challenges remain, however, we are responding to these challenges with intelligent and strategic refinements to our business model. I'm confident we are making the right investments in the business, including the acquisition of the Campus Solution business to position us for long-term growth. We continue to evolve and to improve the services that we offer to both schools and students. And with that, Mark, Miles, Casey and I will be happy to take your questions. Operator?

Question-and-Answer Session

Operator

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

David M. Scharf - JMP Securities LLC, Research Division

A couple just on the core business and then on the acquisition. But can you expand a little more on the decline in refund dollars going into OneAccounts? And I know we talked, since last fall, about some of the additional steps that were required during the enrollment process. But I'm trying to get a feel for whether any existing OneAccount students, let's say a sophomore, was then choosing to open up an account and receive their refunds as a junior into maybe a credit union or a bank, or is this all headwinds and incoming students?

Mark Volchek

Sure, David, this is Mark. And I'll -- thanks for your question. So, I think, as you've pointed out, we've outlined the general steps, the unique recipients being down, the average refund being down and the percent of dollars going into the OneAccount being down, and that's really a headwind from new folks going through the process of selecting their refund choice. So we have not seen a significant change in sort of the number of folks that is very small that change their preference once they've already made a selection. So it's really around the new students making that choice and that's sort of affected by the changes we made through last year. And we're working hard to make that process easier again and improve the customer experience, building on those changes we made last year, and we feel pretty positive about how that's going.

David M. Scharf - JMP Securities LLC, Research Division

Got it. Got it. And, Mark, can you maybe elaborate a little on just some of the kind of macro assumptions behind the annual guidance? Because it looks like, clearly, there's still enrollment headwinds and tuition headwinds as reading into how much aid can actually flow into account. But it sounds like you're still generally assuming flat enrollment and flat refund size behind your annual guidance. Is there a disconnect there, or perhaps I'm not focusing on the right metric?

Mark Volchek

Sure. So we are sort of continuing to assume flat enrollment and flat refund dollars for the fall year-over-year. So as you've pointed out, we've seen 2 years of decline in enrollments, and it's very difficult to predict enrollments for the fall. There's some folks that are expecting an increase in the fall, but there is certainly some risks to the downside, but also opportunity for the upside in terms of enrollment. And we know examples where, in California, for example, enrollments have been down drastically this academic year, and there is lots of initiatives to create opportunity for more students to go to school. And if those initiatives are successful, some folks believe that enrollments will be up in the State of California especially for the 2-year community college segment, where we're seeing more volatility. So it's important to sort of remember that in the community college space, often, enrollment is not known until the first day of class or even beyond the first day of class. So that's the sort of the guidance question, we're assuming flat total disbursements from our clients for the fall year-over-year, certainly building in all the decreases we've already seen from prior years. But that's really the biggest variable -- sort of unknown variable for the fall. Certainly, some of the few changes that Chris discussed in his prepared remarks will also affect us throughout the year, if we look at year-over-year metrics, and there's still some uncertainty around those as well.

David M. Scharf - JMP Securities LLC, Research Division

Got it. Got it. And if you don't mind, just a couple on Campus Solutions. The first has to do with migration. I believe, in the presentation you talked about the margin opportunity of ultimately converting those colleges on Sallie Mae's disbursement platform to OneDisburse. It seems like, over the years, one of the key attributes of OneDisburse is that once you're on it, it's awfully hard to switch. And I assume that's the same for any outsourced disbursement platform. What are the incentives to get a college that's already on Sallie Mae's disbursement platform to go through the disruption of migrating a second time in perhaps just a few years?

Mark Volchek

Sure. That's a great question. We essentially have spent a lot of time looking at product plans and, sort of, think about specifically on refunds. Sallie Mae's Campus Solutions business offers multiple different refund solutions currently. And as you know, they announced that everyone was going to migrate to a new solution in the near future and instead of making that migration, our plan is to move everyone to OneDisburse. That will be certainly a technical challenge and implementation challenge that we're certainly ready to do. And so it's really more of a conversion that we'll work very hard to make as seamless as possible for customers and clients to do in a timeframe that works for them. We expect to jump into that as soon as possible, and we'll make it a priority for this summer on our implementation schedule to prioritize our Campus Solutions clients that want to migrate for this fall. And certainly, we'll have a pretty accelerated timeframe for anybody who's ready to move since we do see, sort of, bringing everybody all the Campus Solutions clients to the Higher One platforms within 12 to 24 months. So that's really the timeframe, and we plan to transition everyone in that timeframe and prioritize, really, the refund clients to move as quickly as they are ready to move.

David M. Scharf - JMP Securities LLC, Research Division

Got it. Got it. And just lastly, this is more of a longer-term, I guess, bigger picture financial question. It clearly seems like the combination of enrollment unpredictability and regulatory overhang that you're looking to diversify the revenue mix away from being so reliant on the bank account economics. When you look at what you see as the revenue of product mix going out a couple of years, is this still a 30% EBITDA margin business? Is that, kind of, still the way to think about a target on an annual basis?

Mark Volchek

Sure. That's a great question as well. And with this acquisition, certainly, the short term creates revenue diversification. But one of the keys to this deal is to really grow OneDisburse and grow the client base there. So we're not projecting specific margins going forward, but the mix of revenues will be important. So what we're really focused on is to create a platform that can grow the absolute margin dollars in the coming years and, really, react to the market and grow the businesses that we can grow, as we mentioned, Campus Labs is growing, CASHNet is growing, and we're certainly looking to get back on track to grow OneDisburse and we believe, with this acquisition and with the opportunities in the coming years, we'll really see OneDisburse get back on the growth track. So in the short-term, we will see revenue diversification, but we're really focused on total margin dollars and EBITDA and net income dollars, rather than to serve the margin percent.

Operator

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

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

So first, I want to get an update on the issue with Representative Miller and the ATMs. Any additional thoughts particularly around providing more free ATM access for online students?

Miles Lasater

Thanks for your question, this is Miles. We certainly examine the proper value mix for our customers on an ongoing basis, and access to free ATMs is something we've improved this year in 2013. In Q1, we rolled out the Allpoint network for our premier customers, which is 38,000 surcharge-free and totally free ATMs. We have the top 25 ATM fleet in the country, and over the last few years, I think, we had an ATM every day or every 2 or 3 days, so we think there's a lot of value there. We want to continue to monitor how people are using the Allpoint network, what the convenience level is there and how that's working for folks, what the level of transactions are, et cetera, how that's working for us and we'll evaluate. We roll that out more. We also evaluate for each client what is the right number of ATMs to meet the needs of their students and to meet the regulatory requirements. We're certainly, in constant dialogue with those interested parties from D.C. and elsewhere, to have a conversation about any questions that they have and take that feedback into the business as well. It's an important part of the environment as one of our stakeholders.

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

Okay. So essentially, no update?

Miles Lasater

Yes, so no particular news. No.

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

Okay. A couple of questions on Sallie Mae. So first of all, sorry if I jumped on a little bit late. But did you mention when exactly it closed?

Mark Volchek

I'm not sure we actually specifically mentioned it on the call, but it closed today.

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

Oh, okay. Got you. That's helpful. And then so just to clarify then on the guidance, Mark. Prior revenue guidance was $215 million at the midpoint. So if you assume 7 or 8 months of Sallie Mae, so you're up to like $2 million -- was it $230-ish million? So your new guidance is $225 million at the midpoint. So you're basically guiding down by $5 million or so, is that about right on the revenue?

Christopher W. Wolf

This is Chris. I'll take that there as far as that goes. I mean, I think the first part is right that obviously, we didn't have the revenue for the first 4 months of the year for Sallie Mae. So that is going to come off. And then the other thing I would say is look -- and Mark talked a little bit about this in his comments, we are going to try to convert every client and get everything over as much as we can this year. But for our estimate purposes, we are assuming there is going to be some slippage in those numbers, and we really can't determine exactly how much that is. So I would say, we'd try to be conservative in that estimate, and that's how we built up to that number.

Miles Lasater

And I would just also add that certain revenues that were associated with the business aren't actually coming over with the business. So some pieces are being phased out and the revenues being -- is remaining with Sallie Mae during the transition period.

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

Okay. Got you. And the -- on the EPS, the guidance there, the reduction, is that solely due to Sallie Mae then?

Christopher W. Wolf

I think the short answer is yes. I mean -- we just have a fair amount of cost there in transition this year.

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

So as we're looking at modeling a business going forward, there were -- the different pieces of the Sallie Mae business, so there's the tuition payment plans, there's NetPay and there's the disbursement. I understand where disbursement is going to fall, but where will the other ones fall in your revenue category?

Miles Lasater

Those will generally match up the same way our CASHNet business falls. So primarily, in payment transaction revenue.

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

Okay. Great. And then just the last one for me, on the negotiated rule-making process. Particularly now that you've acquired Sallie Mae's business, you're by far the largest player out there doing what you do. So, I mean, the negotiated rule-making as it relates to debit cards, which I know is only a piece of it, is essentially really only focused on Higher One. So the question is just, why isn't that possible for you to figure this all out outside of the negotiated rulemaking process?

Miles Lasater

So this is Miles. I think you're proposing a more direct dialogue with the Department of Education, we're certainly open to that, and I do have conversations where appropriate. There are other competitors in the marketplace. We are not the only ones. And we do believe we have the best product and strive to provide the best service and have deep relationships with our university clients. So that scale, I think, is important enough having employed into the process and we'll continue to provide our knowledge and what we know about the marketplace and our opinions into that negotiated rule-making process. It has been announced as a formal regulatory rule-making process to change the regulations across the country. And I'm not sure the exact mechanism, but given that, that ball is rolling, I'm not sure that, that changes course so easily.

Mark Volchek

And I would just add -- this is Mark. I would just add that, as you remember, there's a number of topics that's part of this rule-making. So debit card is really just a very small piece. The key factors of reducing financial aid fraud is really key consideration of shortening timeframes. So many of these things are not related to Higher One, as part of the rule-making. We do take it very seriously, and are working with the Department of Education to make sure we are best lined up to work with whatever the new rules are and we're very supportive of the key initiatives that the department is working on.

Operator

And your next question comes from the line of Julio Quinteros, Goldman Sachs.

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Just to go back to the organic growth calculation. The $210 million to $220 million, previously, is now $220 million to $230 million. But that does include the contribution from this acquisition today. What is the run rate that you guys are expecting for the 8 months, I guess, or so that we'll have from the Sallie Mae acquisition contribution?

Christopher W. Wolf

Julio, this is Chris. To go back to that point there, I think what we were trying to say there is that with the factors of the conversions that we have to get and then also with the business that is not going to come over on the refund side, our best estimate is that $10 million. That's really what we built in. And since the range was rather narrow, we did lock in on $10 million instead of, say, $9 million to $11 million or something like that. So it was narrow. But that's our best estimate, and I think as Mark talked about, if we're able to convert more, it could go up. But right now that's the best view that we have.

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Okay and then on Campus Labs, what's the expectation for Campus Labs then for the rest of 2013? Because that acquisition came on board at the end of last year, so there should still be some contribution as well from an acquired perspective this year?

Mark Volchek

Sure. This is Mark, and I'll take that one. So Campus Labs has been progressing very well and continues to be a great success for us. We're very happy with the integration.

We're making great progress in moving it forward. We're on track to see 30% growth year-over-year, and Q1 was a great sales quarter, the best one for Campus Labs. And it's very uniquely positioned, it's a unique product in its space and we're really excited about that. So it's going to be great for this year and I think it's going to be a great story going forward as well.

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Okay. And then on the profitability of Campus Solutions. Is there a profit profile that you guys are willing to share now?

Christopher W. Wolf

This is Chris, Julio. I can give you some general direction there. We will -- there actually -- we will publish 2012 audited financials for them, and we're in the process of doing that. But historically, it was a pretty profitable business over the last couple of years, the business has turned around or, I should say, gone the other way. If the company has made some investments in the business, there's been a fair amount of what I take a corporate overhead there in the business. So what I can tell you is basically the guidance that we're given on the $0.04 range, is that is what our estimate is, which has actually been a little bit better than the run rate has been there. To finish that thought though, is part of our integration and the cost that we want to take out of the business, we are expecting it to be accretive in 2014. So hopefully, that answers your question.

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Okay. Great. That's helpful. And then just lastly on the conversion plan, clearly there's going to be a little bit of overlap where you're going to be running multiple platforms. It wasn't clear to me if all that would be done by the end of this year or, at some point, next year so you have to essentially run the old refund platform along with the OneDisburse, or do you guys plan on converting them over as fast as you guys can? I guess, theoretically into the back half of the year as the school year starts, you wouldn't want to be doing any conversions, so anything you couldn't get done would possibly carry over into next year, as far as conversions are concerned?

Miles Lasater

Yes. That's a good question. This is Miles. We have a commitment to Campus Solutions client that we've made and announced today to support the payment plan -- tuition payment plans and NetPay products through, at least, the end of 2014. And that is something we're working with Sallie Mae on, they're actually running the technology for us. We will convert people out as they're ready from those products. On the refund products, those -- we are on a tighter timeframe to move and transition and migrate people over. There's various flavors of the Campus Solutions refund products, and we're opening a dialogue with a client to see how soon we can make that change. Some will go to summer. We're not expecting all. But we certainly want to put folks on the schedule for as soon as it makes sense for them.

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

And just out of curiosity, is there any overlap in this Sallie Mae business with the GPR business that was awarded to Green Dot? Or are these different platforms completely?

Christopher W. Wolf

Yes. You're correct. They did have a deal with Green Dot, which had not been launched live at any universities. So therefore, students weren't using any cards that had been issued, we do not expect to move forward with that. And that's one of the flavors of the Campus Solutions refund business that I referred to, that we do want to migrate people over to OneDisburse. And those that are ready to make that change, and we're expecting to launch that new program you alluded to, our plan is prioritize them above all others, for summer launch, as much as possible.

Operator

And your next question comes from the line of Wayne Johnson with Raymond James.

Wayne Johnson - Raymond James & Associates, Inc., Research Division

So as a follow-up on the Sallie Mae acquisition, the Campus Solutions. The -- and I apologize if you've touched on this, because I think you did. But what exactly is their technology or service that you guys -- you feel you have to have? Or is it really just an increased market share? By buying these guys, you take out a competitor, and you get to consolidate the results and potentially strip out expenses and get some margin out of it. So I'm just trying to rationalize in my own mind like what was the priority reason you guys decided you had to pull the trigger on this acquisition?

Miles Lasater

So this is Miles, and I think others may chime in. I'll start with it. Campus Solutions was a business that had a lot of good people and some expertise particularly revenue around the tuition payment plans, was a good chunk of revenue there, which offers us revenue diversification. I think the other thing to remember is that Sallie Mae was looking to divest its business, and we thought we were a logical owner for it. And so we're happy to have that expertise and those people join the organization, and we'll take the best parts of their products, the best practices and features and build them in to our CASHNet platform for going forward. So we're excited about that. Anything you'd want to add, Mark?

Mark Volchek

I would just add that we're really excited to -- some of the people that are joining with this acquisition, joining our team now. Some of them have been with the business for over 2 decades and have very deep experience not only with the products, but also with the clients. And so we're really excited about the folks that are joining and all the clients. And these opportunities don't come very often, it's a very rare opportunity to see an acquisition opportunity such as Campus Solutions. So we're really excited that we've gotten this to the finish line.

Wayne Johnson - Raymond James & Associates, Inc., Research Division

Okay. I appreciate the color there. And are those employees going to move to New Haven?

Miles Lasater

This is Miles. We have joined to the team now a number of folks from Campus Solutions to do work in various parts of the country. I think the bulk, sort of, that center of gravity is some folks outside of Boston will continue to work out of the Sallie Mae office there, and we'll engage in a conversation about what's best for the future.

Operator

And your next question comes from the line of Mike Grondahl with Piper Jaffray.

Michael J. Grondahl - Piper Jaffray Companies, Research Division

The first one is just, I think x Sallie Mae, the core is a little bit weaker, not a lot, but a little bit. And could you just kind of rank order what the headwinds have been? Is enrollment #1? Financial aid dollars, #2? And maybe the new products pressure, #3? Just help us understand, kind of, biggest pressure to littlest pressure? And then maybe, secondly, over the last year, you spent about $100 million on the buyback. And now today, you're spending $47 million on this acquisition. Just, kind of, help us understand the thought process you went through in looking at this acquisition versus spending that $47 million buying back stock.

Miles Lasater

Sure. Thanks for those 2 questions, and I'll take them in, in the order you asked. So the first one was around the headwinds. And -- so part of the difficulty with answering that question is you said, compared to what, right? So when I think about it year-over-year, I think the biggest headwinds are really total disbursement dollars, which is a combination of unique recipients being down and average refund size being down, and then on top of it, it's sort of the percent of refund dollars to go into OneAccount, which we talked about related to some of the changes we made. So when I look at that, I think those are big impacts. But then, additionally, there were the changes to some of the fee schedule and practices that also accounted for some of the revenue -- account revenue weakness. So I think that's kind of the 2 big areas, the total refund dollars being sort of the biggest factor and then the fee changes on top of that. And -- I don't know if that answers the first part of your question?

Michael J. Grondahl - Piper Jaffray Companies, Research Division

Yes, it does. And let me just -- as a quick follow up, when do you think we see that roll through? And not the enrollment stuff or the average refund dollars, but the fee pressure in some of the practices you changed, do we still have a couple quarters to go there?

Miles Lasater

Sure. So enrollment, as you pointed out, in the fall will have a good year-over-year comparison, and see where that runs. When we look at sort of the fee schedule changes, certainly, the changes that went into effect in Q1, we will continue to see for the rest of this year. They do so affect different quarters differently because of some of the nuance of the changes so the impact could be less in some of the other quarters. But that's something we're watching very closely and monitoring. In terms of additional changes or other changes, there's nothing else specific that's sort of implemented or we have actually put into place. That said, this is an environment, it's a very pro-consumer environment, and we're looking always to add additional value and benefit for customers. So we always evaluate other changes. But again, there's nothing specific that we can point to at this point or that's in process of being made. And so again it's the Q1 changes that will see roll through the rest of the year that we're looking at.

Michael J. Grondahl - Piper Jaffray Companies, Research Division

Okay. And then maybe just -- if someone can take a shot at just the buyback versus the acquisition?

Mark Volchek

Sure. Sure. So the second part of the question, when we think about that, we really evaluate the capital allocation, as we've talked about in the past, between the -- doing M&A, investing in capital projects or internal spend, and then, sort of giving back to shareholders, which is a combination of buyback or dividend. We've, certainly, in the past have done that through buyback. And as we evaluate those, we really try to build a model, and I think when we look at this acquisition and the opportunities for cross-selling, for conversion to OneDisburse, it's really a great deal and a great fit with our business that doesn't come up very often. As I said, it's sort of the timing of it is often not in our control, but things are available and we were the best buyer for it. So we do evaluate that with the return we believe these different things give to shareholders, and we're looking to maximize total shareholder return and do a pretty careful analysis. And certainly, Chris, now being part of the team here will make sure that we continue to do analysis even better than we have in the past.

Operator

And your next question will come from the line of Chris Shutler of William Blair.

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

Just a couple more questions on Sallie Mae. So, first, I was wondering how many SSEs Sallie Mae had on the disbursement side of their business, and if you can give us some idea, how much concentration there was by school?

Mark Volchek

So -- this is Mark. The first part of your question, there was over 1 million SSE serviced by the various products in their refund solutions. And so that's a big opportunity for us to convert and up-sell or cross-sell. The second part, on the concentration, and I don't have a specific number there, but certainly, there's lots of customers there in that base, and I think we gave a total campus count earlier in the script, but that's not just for refunds. So I don't think we've disclosed a specific number for refunds.

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

Okay. And then, how many students at Sallie Mae schools were choosing the prepaid debit card option versus the direct deposit or paper check option?

Miles Lasater

This is Miles. One of the things that we're excited about moving forward for the future is to take what we've learned over many years of running a refund platform, OneDisburse, to existing Higher One product, and feed that in and share that with those clients so that we can improve the adoption rates. We're not sharing exact numbers, but it was significantly lower, and we look to bring more value to both the clients, the universities and the student customers by bringing the expertise there and rising the -- raising the adoption rate.

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

So then if under a certain scenario, if the adoption rate were to equal your adoption rate and the revenue per account were to equal yours, what type of accretion opportunity will we be talking about on an annualized basis? Just to kind of give us a frame of reference.

Miles Lasater

I would say, one that we'd be very happy with. Chris, any...

Christopher W. Wolf

I mean, we did model scenarios but I'd be reluctant to give it out. But I mean -- I think that, that is really what drove us to take the business, quite frankly, right? I mean, and our wanting -- it's a compelling argument, as Mark talked about, if we can convert those people then it becomes very lucrative for us, I can say that. And as far as ranking returns of where we spend our money, it would clearly be the best place to make our investments.

Operator

At this time, there are no further questions in queue.

Mark Volchek

Thank you, everyone, for joining us on our call, and we look forward to updating you on how Q2 panned out in August. Thank you. Have a good night.

Operator

And, ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.

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