Executives
Liz Bownman – Director of SEC Reporting
Nina K. Vellayan – Chief Operating Officer & Senior Vice President
Ronald W. Johnston – Chief Financial Officer & Senior Vice President
Keith S. Kendrick – Senior Vice President Strategic Marketing
Ronald L. Rossetti – Chairman of the Board & Chief Executive Officer
Analysts
Wayne Johnson – Raymond James
Gary Presopino – Barrington Research
Bradford Evans – Heartland
Tier Technologies, Inc. (TIER) F4Q09 Earnings Call November 10, 2009 5:00 PM ET
Operator
At this time I would like to welcome everyone to the Tier Technologies fourth quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question and answer session. (Operator Instructions) Ms. Bowman you may begin your conference.
Liz Bowman
My name is Liz Bowman, Tier Technologies Director of SEC Reporting. At this time I would like to welcome everyone to the Tier Technologies earnings conference call for the year ended September 30, 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 fourth quarter and year ended September 30, 2009.
This afternoon we issued a copy of the text of today’s call, not including the Q&A 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 www.Tier.com. We invite shareholders and analysts who wish to speak with management about the company and its performance to schedule a meeting by contacting our CFO, Ron Johnston at 571-382-1333 or RJohnston@Tier.com.
A taped replay of this call will be available on the company’s website beginning Tuesday November 10, 2009 at 8 pm Eastern time until 11:59 pm Eastern time on November 24, 2009. Alternatively you can hear a replay by dialing 800-642-1687 and entering the conference ID number 39918898.
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 the purpose of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. The forward-looking statements discussed on this call represent managements’ 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.
In this call references to the quarter or the fourth quarter refer to the quarter ended September 30, 2009 and references to the year or the full year refer to the fiscal year ended September 30, 2009. With me on the call are Nina Vellayan, Executive Vice President and Chief Operating Officer, Ron Johnston, Chief Financial Officer and Keith Kendrick, Senior Vice President strategic marketing.
Today’s call will begin with Ron Rossetti, Chairman and Chief Executive Officer.
Ronald L. Rossetti
Let me outline the agenda for this call. First, I will provide a brief review of our financial performance during the quarter and fiscal year 2009 and then I will provide a strategic update on our progress in biller direct market with our electronic payment solutions or EPS business. For an update on our progress against our goals I have asked Nina Vellayan, our EVP and COO to provide details regarding our recent operating results and plans for the immediate future. Next, Ron Johnston will cover our financial results for the quarter and full year including an update on our cash position and share repurchase program. Following Ron’s remarks I will open the call to your questions.
I am pleased to report that for the fourth quarter Tier has reported positive adjusted EBTIDA of $1.1 million from continuing operations as compared with a loss of $3.4 million in the prior year quarter. This $4.5 million improvement was achieved in part from a gross revenue increase of $2.9 million as compared with the prior year quarter. On a full year basis we reported adjusted EBITDA of $3 million as compared with a loss of $7 million, a $10 million improvement. Ron Johnston will provide additional information on our use of adjusted EBTIDA and net revenue later in the call.
Even in these difficult economic conditions where over 60% of our EPS revenue is directly tied to tax collections which have experienced steep revenue declines we believe that our strategy is beginning to prove itself as we were able to generate significant increases in both net revenue which we define as gross EPS revenues less discount fees, processing and interchange costs and adjusted EBITDA. This improvement is a result of increasing our profitability per transaction and driving substantial transaction growth while reducing overhead and holding platform costs relatively flat thereby creating margin expansion in both net revenue and adjusted EBITDA.
For the year ended September 30, 2009 our EPS transactions grew by 44.5% and our EPS gross margin, gross sales less direct and other costs by 245 basis points. For the fourth quarter by 70.4% and 176 basis points respectively. After our strategic restructuring of the past two years and the divestiture of seven non-strategic units Tier Technologies is now focused exclusively on our electronic payment solutions business.
These solutions provide payment services for web, automated interactive voice response or IVR call center and point of sale or POS environments. We offer our clients a front end platform designed expressly for the biller direct market with a single source solution that simplifies electronic payment management. Our solutions include multiple enhanced payment services including consolidation of income payments, bill presentment, convenience payments, installment payments and flexible payment scheduling.
We also offer our clients a range of payment solutions including credit and debit cards, electronic checks, cash and money orders and merchant payment methods to meet the needs of certain customers. By utilizing our solutions clients can reduce, if not eliminate their time and expense devoted to management and expense of payment technology and compliance with PCI data security requirements and other payment industry standards.
An overview of how our front end platform interfaces with the payment processing industry appears in Chart Three. An overview of our strategic plan and our progress against the plan appears in chart four. For fiscal 2009 we established five key priorities. We have completed the divestiture of non-strategic assets so that we can focus exclusively on the biller direct market. Please refer to Chart Five for a summary of the seven divestitures and two wind downs.
We have built a new management team. All of my direct reports have joined the company in the last 18 months and about half their direct reports are either new or have taken on new responsibilities consistent with our biller direct strategy. Brief biographical sketches of the executive team appear on Chart Six.
We are actively expanding our marketing capabilities. New resources are in place and a shift to direct customer relationships is proving successful. We are continuing to build share in the biller direct market by growing transactions, focusing on better margin opportunities, developing new markets which we call verticals and reducing our client concentration. Combined, these efforts resulted in an increase in transactions of 70% in the quarter and 45% for the year with net revenues growing 25% for the quarter and 17% for the year. In each case over the prior comparable period.
We are consolidating our platforms to reduce costs, established a unified fixed cost platform and accelerate and expand the development and roll out of new products, new payment channels and new payment options that enhance features. As a result of the progress that we made towards achieving these strategic goals, we achieved our financial objective which was to be EBITDA positive for fiscal 2009. Now, I’ll turn the call over to Nina Vellayan to provide additional information about our progress in sales, operations and marketing.
Nina K. Vellayan
The company has increased resources and marketing programs directed at our fastest growing margin verticals education and utilities. In education we added Jacksonville University in Florida and Franklin University in Ohio where we will begin collection tuitions and fees in December. This brings us to 52 new or additional schools for fiscal year 2009 in this fast growing vertical.
In our utility vertical we signed 93 municipal utilities during the fiscal year. During the quarter we continued our long established leadership in the government vertical including adding an agreement with Humbolt County California bringing our California tax payment clients to 38 out of 48 counties in California and adding Delaware County Ohio. Additionally we’ve renewed or agreement with the state of Connecticut to collect various personal and business taxes and expanded our relationship in the state of Arkansas adding sales and use tax and the state of Virginia adding corporate tax payments.
In total, we added 167 new payment types for the quarter. It is these types of consistent ongoing wins that are driving our diversification and strengthen categories beyond government tax collection. Our market leading footprint now reaches to all 50 states and the District of Columbia. Our vertical coverage is summarized in Chart Seven.
Our success in developing new markets is clearly detailed in Chart Eight. Real property tax is now our largest vertical even though we experienced a low rate of growth in that vertical in previous years. The continued expansion of our education vertical and utility vertical have established these categories as full scale verticals for Tier.
As a part of our strategic review we committed to shift from the sales to marketing based strategy. We have started an ongoing upgrade of ours 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 our primary brand Official Payments.
One of the first area of focus was to establish a direct relationship with end users by introducing and expanding My Account functionality and presenting with a persistent presence throughout our branded website. A screen shot appears in Chart Nine.
Performance exceeded expectations. In Q4 we added more than 140,000 new accounts bringing our total registrations to more than 1.3 million an increase of more than 154% over the prior year. In the nine months since the enhanced service and presentation was introduced new My Account registrations have increased more than 240%. With our new consolidated platform in place, we plan to launch new eCommerce products and payment options for partners and biller direct clients including additional payment channels such as mobile, walk-up payment and kiosk.
These sales and marketing programs led to our increase in net revenues of 25% for the quarter and 17% for the year and transaction growth of 70% for the quarter and 45% for the year. In each case over the prior comparable period. We are on plan to complete the consolidation of our current EPS technology platforms and datacenters in mid calendar year 2010. To date, we have completed the consolidation of all of EPS back office operations in Auburn Alabama and Reston Virginia.
This consolidation has resulted in increased efficiencies and reduced overhead, and has eliminated duplicative operations and functions. Most critically, the consolidation to a single platform and back end operations center will provide a unified fixed cost platform over which we can process ever increasing numbers of transactions. As of today, almost 50% of our transactions are processing on our new platform.
With a stable, fixed cost platform, we expect that increasing transactions will mean a higher level of margin contribution per transaction. Our objective for fiscal year 2009 was to be EBITDA positive in Continuing Operations. As Ron Rossetti noted earlier and Ron Johnston will elaborate on later, we achieved that goal reporting adjusted EBITDA of $3 million in Continuing Operations for the fiscal year.
I look forward to addressing your questions later on this call. For now, I'll turn the call over to Ron Johnston to discuss the fourth quarter and year-end results.
Ronald W. Johnston
Results from continuing operations for the quarter reflected total revenues of $25.7 million, up 12.9% from the same quarter last year. During the quarter, we processed over $1.3 billion of payments, which represents a 40.4% increase versus the same quarter last year. This increase was driven by a 70.4% increase in transaction volume.
EPS revenues for the quarter were $24.8 million. Revenue growth of 17.3% in EPS was driven by increases in payments processed for educational institutions and the effect of the ChoicePay acquisition earlier in the year. Revenues from our education vertical grew 45.1%. We also experienced strong revenue growth in our utility vertical. Chart 10 provides a summary of net revenue for our EPS business.
Gross margin from continuing operations which we calculate by subtracting our direct cost form our revenues plus 25.9% for the fourth quarter which was 1.1% higher than the same quarter last year. Gross margin in our EPS business was 25.0% up approximately 176 basis points from the same period last year.
General and administrative expenses for continuing operations were $5.1 million for the quarter, down 32% compared to the same quarter last year. The decrease in G&A was attributable primarily to cost reductions partially offset by the addition of the ChoicePay operations and strategic spending on production platform redesign and enhancement.
Selling and marketing expenses were $1.2 million for the quarter down almost 40% primarily due to tight cost controls and limited marketing partnership expenditures. Our consolidated net loss per fully diluted share in the quarter was $0.06 compared to a loss of $0.45 per fully diluted share in the same quarter last year.
As Ron noted Tier reported positive adjusted EBTIDA of $1.1 million from continuing operations in the fourth quarter as compared with a loss of $3.4 million EBITDA in the prior year quarter. We define adjusted EBITDA as that income from continuing operations before interest expense net of interest income, income taxes, depreciation and amortization and stock compensation in both equity and cash. Chart 11 provides a reconciliation of net income from continuing operations to adjusted EBITDA for the three and 12 months ended September 30, 2009 and 2008.
We have expanded the chart presentation to reflect the volatility of the variable accounting impact of restricted stock unit and performance stock unit awards that were granted during the fiscal year. These incentive units are tied to specific increasing stock price targets but unlike stock options or restrictive stock are settled in cash requiring medication of expense recognition on a quarterly basis which can have a confusing impact on financial results from quarter-to-quarter.
Throughout this call Tier may use the terms net revenues and adjusted EBITDA which are non-GAAP financial measures. Please see Charts 10 and 11 for the supporting financial schedules. Tier’s management believes these measures are useful for evaluating performance against peer companies within our industry and provide investor with additional transparency to financial measures used by management in its financial and operational decision making. Non-GAAP financial measures should not be considered a substitute for the reported results prepared in accordance with GAAP.
Tier’s definition used to calculate non-GAAP financial measures may differ from those used by other companies. We have compared our definition to other public companies and have found ours to be very consistent.
Financial highlights for the 12 months ended September 30, 2009 are as follows. Revenues from continuing operations were $128.2 million up $5.7 million or 4.6% for the same period last year. This growth was driven by our electronic payments business who’s revenues were $123.2 million up 5.7% over the same period last year. The 5.7% revenue increase in our EPS business versus the same period last year was driven by growth in the number of transactions processed.
During the year EPS processed 14.9 million transactions and $6.9 billion in payment volume, an increase in 44.5% and 17.6% respectively over the same period last year. I am pleased to report that this transaction performance exceeded guidance provided last quarter. Chart 12 summarizes the EPS revenue and transaction growth trends since fiscal year 2004.
For the year we reported a loss from continuing operations of $5.5 million or $0.28 per fully diluted share. This compares to a loss from continued operations of $12 million or $0.61 per fully diluted share in fiscal 2008. Details appear in Chart 13.
Turning to the balance sheet, our cash and marketable securities balance at September 30, 2009 was $65 million. This figure declined from the June quarter primarily due to stock repurchases in the quarter. The balance sheet appears in Chart 14. During the quarter we repurchased shares from time-to-time through our publically announced stock repurchase program. As of September 30, 2009, the company had repurchased a total of 1,565,000 shares as a part of these continued activities. Through October 31st, total shares repurchased amounted 1,651,900 an investment of $12,336,000.
The company’s headcount at September 30, 2009 was 229 composed of 197 full-time employees and 32 part-time contract hires. Lastly, I want to mention that our Form 10K was filed with the Securities & Exchange Commission this afternoon. I encourage all of you to review the statements in order to better understand our current operations. Now, Ron Rossetti has a few concluding remarks.
Ronald L. Rossetti
Looking ahead to fiscal year 2010 we will continue our policy of not providing guidance on revenue growth. The rate of growth is highly dependent on general economic trends. Our federal, state and local tax based businesses which still represent more than 60% of our business have experienced low to negative growth during fiscal year 2009 which is a departure from prior year trends.
This reduced growth has come in spite of the increase in the number of tax forms processed, an increase in the number of new government clients and the introduction of additional payment options. We expect this softness to continue until the general economic environment improves, our tax rates are increased by legislative bodies or both.
Even with this soft economic environment we expect to see continued growth in the number of transactions we process and our EPS business. With a continuing transition to stronger growth in higher margin verticals contributing to greater percentage growth in net revenues. While we are not providing earnings guidance for fiscal 2010, we do expect to see transactions growth to 20 million transactions, an increase of about five million transactions or approximately 34%.
As you reflect on our progress during fiscal 2009 I would urge each of you to consider the following. As Nina noted, as we complete our new platform we expect to have fixed costs base over which to drive an ever increasing number of transactions thus improving our margin contribution. Our results the last several quarters testify to this point. We are now at an inflection point where we believe a substantial portion of our incremental net revenue over our breakeven point after interchange and processing expenses will fall directly to the bottom line.
In combination with platform costs reductions we continue to seek areas of cost reductions throughout the company. We have focused our sales and marketing programs to continue our leadership position in the government segment while accelerating our growth in our non-government verticals to diversify and strengthen the long term health of Tier.
This point could not be clear than to note that despite of this deep decline in our government based business which was affected by unprecedented economic times 2009 net revenue increased 25.2% for the quarter over the fourth quarter of fiscal 2008 and 17% over the prior fiscal year. Stated differently, in spite of more than half of our business suffering from a deep economic recession your company was able to grow net revenue and improved its operating margins greater than our gross sales increase.
This is precisely the commitment management made to our investors when we embarked on this strategy in 2007. A return to normalcy in the government markets should only enhance your investment. I and the team on this call believe that the initiatives we are pursuing are for the best means for increasing long term value for all of our shareholders.
At this time I’d like to open the call to any questions you may have.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from Wayne Johnson – Raymond James.
Wayne Johnson – Raymond James
My question is how should I be thinking about general administrative expenses, sales and marketing expenses as a percentage of revenues going forward since a major part of any fixed cost story is that we tend to have some kind of stabilization or continued decline in those two expense items. Could you give me any color that you could on that?
Ronald W. Johnston
Let’s split them in to the varying pieces of sales marketing and G&A. A substantial portion of our G&A includes our platform costs so unlike some technology companies that breakout their development cost, we include ours in G&A. We feel very strongly that G&A will be relatively fixed so that if you look at today’s expenses – and fixed on a step-by-step basis. So, if you look at today’s costs you should not see substantial increases going up other than some modest increases short of inflationary costs.
In the sales and marketing area, you will see increases in sales and marketing but we do not believe that those increases will equal the increases in sales growth. So, I would say you’re going to see productivity coming out of sales and marketing and you’re going to see a basically fixed G&A costs over the next couple of years.
Wayne Johnson – Raymond James
So given the level where we are now, that’s a pretty good run rate for going in to 2010/2011 on G&A?
Ronald W. Johnston
What you need to be careful about are the seasonality aspects of the business more so on sales and marketing than in G&A. But, the fourth quarter of our fiscal year is one of the lower quarter activities for us. Some of the sales and marketing, particularly some of the partnership expenditures are not made in that quarter. So, if you’re going to annualize the quarter expenses I would caution you to look more at the annual expenses rather than picking a quarter and annualizing.
Wayne Johnson – Raymond James
If I take a look at the datacenter consolidation progress that you guys are making and given what’s going on with the margins you’re definitely making progress there. Would you say that there is more or less than 50% completion on that project at this time?
Nina K. Vellayan
Wayne from a datacenter standpoint, if that’s what you’re being specific about, we’re about 50% there. The goal is as we said to complete by mid calendar year 2010.
Wayne Johnson – Raymond James
And on a degree of difficulty basis are there any technological hurdles that you guys need to get over in order to achieve that 100% integration between now and essentially July of next year?
Nina K. Vellayan
That’s a great question. As you are consolidating platforms obviously we’re finding certain hurdles that we’re addressing as they come up. But there’s nothing from my standpoint show stoppers that are going to stop us from reaching our end result. There may be some customized clients that may take a little bit longer to consolidate but a good or substantial portion of all of our transactions, and as we are saying we’re at 50% right now, so I mean as we add a new client on to the new platform obviously that increases. Our goal is to get a good number, a substantial amount on the new platform by the end of 2010.
Ronald L. Rossetti
Two things that you have to understand Wayne about the platform, not only are we doing a build of the platform but we’re also building product out at the same time. The objective basically as I’ve said before in the past was to develop product and features by vertical and then be able to apply those products and features as we go out and sell rather than you get involved with customization by client.
That would really become a plug and play which fixed the costs. As we go back and as Nina alluded to and look at some of our larger clients that had custom applications, it’s the building out of that product and making sure that product applies across all of the clients within that vertical that could have some holds here. But they are not things that I think would be high risk in terms of the platform, not at all.
Then, you’ve got to understand that even though the platform is completed we may have some boarding issues with clients because they have to do some work on the other side so to get them boarded may drag out past May or June of 2010.
Wayne Johnson – Raymond James
Just so I’m clear, going forward for G&A I understand that the fourth quarter in sales and marketing in particular is not the seasonal high point for those expenses but just conceptually on an annual basis year-over-year, one year from now looking back on today G&A should continue to moderate on an absolute dollar value because at a minimum you still have more datacenter consolidation to go?
Ronald L. Rossetti
Yes, it should. Ron, if you were to give a projection in terms of where we would be for the year, I would estimate and I think Ron will be comfortable with this that if you look at SG&A in the $30 million range it’s probably a good number. Could it be another 2%, 3% higher? Yes, but it’s not going past $31.
Operator
Your next question comes from Gary Presopino – Barrington Research.
Gary Presopino – Barrington Research
Ron, I know you showed some growth in revenues here and all that but is it a safe assumption that the majority of that growth was really a function of the ChoicePay acquisition or is that not true?
Ronald L. Rossetti
No, no, no. ChoicePay did add some growth to it but it was not a function of – they were a good piece of it and they helped the utility growth but remember if you look at higher ed that was 100% ours, all of the government growth was us. ChoicePay was 90% 95% utilities and then it’s hard to say ChoicePay because we bought the company in late January. By the first of May, I think it was the first week of May we had completely consolidated it, closed down Tulsa and everything was consolidated on our platform in our back call center room so the question becomes we signed up a new utility is it a ChoicePay utility or is it ours?
We put a partnership together. Because they may have had an initial introduction, they couldn’t close one of the major utilities they had been trying to sell for six months, 45 days after the close we closed it. It’s very, very difficult. Yes, they provided revenue but more importantly as I said with the acquisition they provided us with a good robust platform. They provided us with a lot of connectivity to some of the payment types that we didn’t have to build out like kiosks and walk-ups and things of that sort and they had started to develop a different line of partnership relationships which we’ve expanded dramatically.
Gary Presopino – Barrington Research
Again, I’m just trying to get an idea, absent ChoicePay, or is this even a fair question there was still some revenue growth maybe mid to low single digits overall? Realizing that ChoicePay is growing our utility vertical.
Ronald L. Rossetti
ChoicePay was probably if I had to guess 70% to 80% of the utility growth, about that number. So, if you take that out everything else is not related to ChoicePay.
Gary Presopino – Barrington Research
Then the next question I would have is can you give us some idea of you gave us one of your vertical markets, the growth there, can you give us an idea what the growth was in some of the other vertical markets in the quarter?
Ronald L. Rossetti
There’s a chart that gives us our [cager] and we don’t breakout the verticals significantly by quarter. But, if you look at it we have a three year [cager] on page I think it’s eight of the chart and we did give you some information in the K as the percentage of business that each of these provide.
If you look at that, the educational vertical was up 61% for the last three years. In 2007 education represented less than 2% of our business so we’ve been driving that vertical every single year. In utilities, I think let’s say 70% of that 60% of that growth rate for just this year was represented by ChoicePay.
Gary Presopino – Barrington Research
Could you give us some idea maybe if we look at this and say your revenues less your EPS, discount fees and interchange, kind of getting to a gross margin number maybe – for the company it was 25.8% in Q4 but obviously it’s been increasing every quarter. As your mix moves more towards ACH and away from tax would we expect that gross margin to continue to go up?
Ronald L. Rossetti
Yes. We are looking – it’s not only ACH, it’s a combination of using our increase in transactions to get better pricing and processing costs at ACH so it’s not only a mix shift but it’s a pricing shift. It’s also using all different types of payment types from Greendot, Bill Me Later, our Revolution Card to walk-up channels, to partnerships where we’re really dealing with a transaction only and we’re not absorbing the interchange, that’s being absorbed by the client. A whole series of those things where one of the things that we’ve done.
I don’t want to get in to a lot of detail on the call but Ron’s group has pulled together a very, very sophisticated pricing model which allows us to really take a look at all the varying cost structures that go in go in to gross margin and it’s a very detailed and very sophisticated model and we’re driving margin and that’s what everybody’s focused on, that’s what’s Ron’s focused on.
Operator
Your next question comes from Bradford Evans – Heartland.
Bradford Evans – Heartland
A question for Ron Johnston, do you have a cap ex budget for 2010 at this point?
Ronald W. Johnston
The estimate for cap ex for 2010 is approximately $5 million brad.
Bradford Evans – Heartland
And depreciation and amortization should run?
Ronald W. Johnston
A little bit ahead of that.
Ronald L. Rossetti
We think if you’re extrapolating next year and even in to the following year, I need glasses to get 20/20 vision because sometimes I don’t see in to the future. We feel that we can keep cap ex below our depreciation and amortization at least for the next 24 months and I would hope in to the future. That really depends on whether we’re making a dramatic shift in business and an investment there. But, I would not look for us to be investing cash in our cap ex greater than our depreciation and amortization.
Bradford Evans – Heartland
It looks like there’s a good possibility you’d generate free cash flow in 2010. Is that a fair mosaic to build?
Ronald L. Rossetti
I think that would be a pretty fair statement. I would be very comfortable with that.
Bradford Evans – Heartland
When you look at revenue per transaction 2009 versus 2008 obviously as you continue to diversify away from the government vertical, that number continues to move down. Do you see the rate of decline in terms of revenue per transaction starting to moderate as you get in to 2010?
Ronald L. Rossetti
No, I think we’ll continue to see declines in gross revenue and increases in percentages. What happens is in the tax area we’re dealing with very, very high tickets. I mean our property tax Keith is what $3,500 to $4,000 on an average ticket today. That’s the size of the transaction we’re processing. You get in to utilities you’re dealing with a couple of hundred dollars. Utilities are a fixed convenience fee, property taxes is a percentage of the cash collected.
So you’re seeing a double hit, one is the move to transactions which have significantly lower gross sales but higher percentage margins and you’re seeing because of revenue as the government area substantially lower average tickets. The federal tax was down, I think it was 34% last year. In spite of that we were up 5% to 6% in transactions and only down 14%, I think the number is 14%, in revenue for that year.
So to give you an idea we, if you can call it share, we increased the percentage share within the tax basis of the IRS dramatically. It still wasn’t enough to offset a 30% plus decline in revenue for them and you’re having the same thing in property tax. We’re seeing declines all over. California which is a big property tax state for us, we have a substantial portion of the counties as Nina indicated.
Proposition 13, the fine print on the proposition was yes you cannot increase the tax rate more than 2% a year but the minute the property values go down the county’s must reevaluate immediately. So that they have seen dramatic reductions due to revaluation in the state of California and until they change the law on 13 they’re not going to be able to get the increases back again. These are the compounded problems that are going to affect the average gross ticket.
Bradford Evans – Heartland
Do you have a number in mind in terms of the decline we might see in 2010 on a dollar per transaction basis?
Ronald L. Rossetti
No. As a matter of fact, the greater we drive transactions which we all want to do, the greater the percentage will go down. So if we move from 20 to 25 million transactions, you’re going to see that percentage go down. Believe me Brad, when you look at the product mix and we’ve got four or five pricing models you really want to see that average ticket go down and you want the profitability as a percentage of transactions go up.
Operator
Your next question comes from Wayne Johnson – Raymond James.
Wayne Johnson – Raymond James
Ron, just a quick clarification , when I was asking about the G&A, I think you gave me the total expense just to be clear, abundantly clear as they say so that $30 million is total operating expense for next year, correct?
Ronald L. Rossetti
It’s total SG&A.
Wayne Johnson – Raymond James
Total SG& between the two?
Ronald L. Rossetti
Yes.
Wayne Johnson – Raymond James
Secondly, on the pipeline can you give us a sense of what the pipeline is and how that may affect potential revenue contribution going forward?
Ronald L. Rossetti
We don’t give out pipeline information. We think we have a reasonably robust pipeline. We’ve restructured the entire sales group and operation including marketing. Both Nina and Keith have been very active in that area and we’re focusing our investment dollars in the areas where we see the highest growth. So, while we’re keeping sales down what you don’t see is a redirection of those dollars in to the higher growth and higher profitable areas.
Also the same thing with marketing where we’re readdressing those dollars in to the higher growth areas. Also, the other thing that we’re doing and we’ve always done some of it but we’re really expanding it to a great degree is we’re driving a lot of business through our partners. They can sell a number of clients with one foul swoop so we’re working very, very heavily and we’ve established and entire part of both the marketing and sales group to focus on partnership transactions.
Keith is really leading that with the large partners and that appears to be working very, very well. We think we’ve got a robust pipeline but I really don’t want to give out that information at this point.
Operator
Your next question comes from Bradford Evans – Heartland.
Bradford Evans – Heartland
Ron, I was just curious as you become more comfortable with the business and the trends going forward have you reassessed the long term EBITDA profile of the business as you achieve scale?
Ronald L. Rossetti
I would say we’ve given you the net revenue number and I would be very comfortable telling you we expect to exceed equal in the next 12 months a 20% net revenue – margin over net revenue and we think we can exceed that in the next three to four years.
Bradford Evans – Heartland
So a 20% EBITDA margin, is that what you’re indicating?
Ronald L. Rossetti
A 20% adjusted EBITDA margin would be a target for next year. That’s of net revenue not gross revenue.
Bradford Evans – Heartland
I’m sorry, I just want to make sure, I’m a little confused I apologize. I’m just curious if you were to translate that number all the way down to an EBITDA margin target I know that in the past Ron you I think despite some setbacks you finished the year strongly here in 2009 and I think earlier you were looking for a 6% to 7% EBITDA margin for 2009 and I think you had indicated the entire call that you hoped to be around 9% to 10% for 2010 and I guess my question really pertains to thinking out over the next three years or beyond as you get more comfortable with the business have you refined what you think the longer term upside is from EBITDA margin perspective for the entire business?
Ronald L. Rossetti
Because of the difficulty we have in projecting gross revenue I would rather look at an EBITDA margin on net revenue and I think that a long term, and by long term I’m talking two to three years, we should be able to be in the mid to high 20s. Understand why I look at net revenue because it depends on how we drive the transactions in our growth area and what happens to the government space. I have more control over our ability to drive net revenue than I have over our ability to drive gross revenue.
Operator
Your next question comes from Gary Presopino – Barrington Research.
Gary Presopino – Barrington Research
Do you have an idea Ron when we’re going to be finished with these wind down operations?
Ronald L. Rossetti
They’re done. As a matter of fact the only thing we have left is the VSA business, pension is gone and that is probably, Ron would you answer that?
Ronald W. Johnston
Gary, that’s either a year or two out. The VSA which is the legacy business where we had investment in technology, sales and marketing and 50 or 60 people we now have eight people, it’s a legacy warranty maintenance business and as we run out those contracts we will not invest further in people or in technology and definitely not in marketing and sales activity. The revenues are coming down, they’re still cash flow positive and they’re EBITDA positive. So at least through the end of this year, at the end of this year we’ll take a look and see whether or not it makes sense to go forward an additional year.
Gary Presopino – Barrington Research
Can you give us an idea what kind of revenue shares you’re expecting off this, this single business this year this fiscal ’10?
Ronald W. Johnston
As you can see in the K, in the historics it had been $5 million in ’08, it was $3 and change I believe or $4 and change I believe in ’09 and probably about half of that in fiscal year ’10.
Ronald L. Rossetti
And, it’s basically GAAP neutral, slightly positive and cash flow positive.
Operator
There are no further questions at this time. I will now turn the call back over to the speakers for any closing remarks.
Liz Bownman
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 www.Tier.com. We invite shareholders and analyst 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 RJohnston@Tier.com. Thank you. This concludes our earnings release call for fiscal year 2009 for Tier Technologies. Good night.
Operator
This concludes today’s conference call. You may now disconnect.
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