Higher One Holdings Management Discusses Q4 2013 Results - Earnings Call Transcript

Feb.13.14 | About: Higher One (ONE)

Higher One Holdings (NYSE:ONE)

Q4 2013 Earnings Call

February 13, 2014 8:30 am ET

Executives

Kevin Leblanc

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

Christopher W. Wolf - Chief Financial Officer

Casey McGuane - Chief Operating Officer

Analysts

David M. Scharf - JMP Securities LLC, Research Division

Michael J. Grondahl - Piper Jaffray Companies, Research Division

Michael Tarkan - Compass Point Research & Trading, LLC, Research Division

Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division

John J. Rowan - Sidoti & Company, LLC

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2013 Higher One Holding, Inc. Earnings Conference Call. My name is Mark, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Kevin LeBlanc, Investor Relations Director. Please proceed, sir.

Kevin Leblanc

Thank you, Mark. Good morning, everyone, and welcome to the Higher One Fourth Quarter 2013 Earnings Call. Giving prepared remarks on the call today will be our Chief Executive Officer, Mark Volchek; and our Chief Financial Officer, Chris Wolf. Mark will provide a summary of our quarterly performance, and Chris 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 www.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 that predicted or implied. Forward looking statements may be identified by the use of the 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 are based on the current beliefs and expectations of Higher One management 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 forward-looking information to reflect actual results of operations, changes in financial conditions, changes in estimates, expectations or assumptions, changes in general economic or industry conditions or 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 presentations do not include the potential impact of any acquisitions or divestitures that may be announced and/or contemplated after the date hereof. For further information regarding risks associated with Higher One's business, please refer to our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the most recent fiscal year end, quarterly reports on Form 10-Q and current reports on Form 8-K. Information about the factors that could affect future performances can be found on our recent SEC filings available on our website at www.ir.higherone.com.

We will also provide certain metrics on 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 related to the company's fiscal -- financial condition and results of operations. Reconciliations of these non-GAAP measures to their closest comparable GAAP measure are included in the appendix to the presentation that accompanies this call, as well as in our recent SEC filings.

With that, I'll now turn the call over to our CEO, Mark Volchek. Mark?

Mark Volchek

Thank you, Kevin, and thanks to everyone for joining us today. With me on the call is our CFO, Chris Wolf, who will provide our financial update. We also have our Chief Operating Officer, Casey McGuane here with us to answer questions after our prepared remarks. I'm pleased to say that our fourth quarter and the full year continued with year-over-year revenue growth. Our sales team continued signing refund clients from the Campus Solutions acquisition with an impressive SSE count associated with these sales. We believe the pace with which these sales have occurred as a result of both the efforts of our clients and prospects facing teams, as well as the strength of our proven approach to disbursing financial aid refunds to students. Our approach to refund disbursement will help these campuses achieve higher electronic adoption, which will improve service to students and create more efficiencies on campus.

Our Campus Labs suite continues to garner recognition. University Business Magazine recently recognized this software suite as a Reader's Choice top product. Nominations from campuses utilizing Campus Labs baseline, which provides the technology resources and expert consultation required to create an integrated and coordinated and comprehensive assessment approach across campus, and was designed to connect and translate assessment data for the purposes of improving the student experience, both inside and outside the classroom. We're also making progress towards developing new mobile applications for the OneAccount to encourage increased primary account usage for student population that relies on their smartphones or mobile devices for their banking needs. I will go into more detail on these items and several other topics that we will cover on today's call. So let's get started. Please refer to the company slide deck that is available on our Investor Relations website as I discuss the quarter and other topics.

Turning to Slide 3, the highlight of 2013 was acquisition of the Campus Solutions business. Through this transaction, we were able to increase our OneDisburse sales substantially. We also changed bank partners, and were able to complete the process on schedule. We have placed an increased effort to encourage primary usage from OneAccount customers of the past 2 years. One way to measure primary usage is the amount of nonrefund-related deposits, which are made to the OneAccount. During 2013, we achieved an increase of 23% in the these student-driven deposits. As we stated last quarter, these deposits constitute small but growing portion of overall account funding.

Looking at the fourth quarter more specifically, total revenue was 14% higher in the fourth quarter of 2013 compared to the fourth quarter 2012. Payment transaction and higher education revenue continued to be the drivers that led to higher results over 2012. As we have detailed in previous quarters, the increases in revenue came from our strategic acquisition of Campus Solutions. In addition, we have seen significant organic growth through our payments business. While the acquisition is already contributing, we believe more upside is still to come as we continue to sign Campus Solutions refund clients to our refund management platform. Due to changes that were made to the account revenues fee structure in the past year, we have continued to experience decreases in this revenue. Many of these changes have now annualized on January 1, while our comparables for changes in Lincoln Account fee will annualize on August 1.

Operating expenses were up during the quarter, which is mainly the result of added employee and other costs from our recent acquisition. This all led to our adjusted EPS of $0.17 per share for the fourth quarter. In early December, we announced the succession plan to bring in the next CEO to lead the company. The board formed a search committee, and is actively conducting a search for new CEO with the help of executive search firm. We are pleased with the overall progress, and believe that we have identified a group of highly qualified candidates.

The leadership team of Higher One is strong, with many long tenured and qualified managers. Looking at the executive team of Higher One, Casey McGuane, our Chief Operating Officer; and Rob Reach, our Chief Sales Officer, have been with the company for more than 10 years, while Chris Wolf, our CFO, has now been with the company for about a year. These senior executives are supported by a strong management team that know our organization well, some of whom have played a major role in the direction of the company for many years. To ensure the continuity and strong leadership remain in place during the CEO search, I'm committed to continuing my current position of CEO, and lead the company in this role until it is transitioned to my successor. My efforts will be focused on moving the company forward in 2014, and continuing to build a strong foundation for this year and years to come.

Now turning to Slide 4. I'd like to talk about sales and our Campus Solutions progress. I'm pleased to report fourth quarter new sales of our refund disbursement platform of 256,000 SSE. For the full year, including all of the Campus Solutions deals, we signed contracts with universities and colleges that represents 547,000 SSE. This is an increase from the just under 500,000 SSE that we signed in 2012. During the fourth quarter, we had a 100% renewal rate for OneDisburse clients. In 2013, we renewed over 100 contracts for refund disbursement, and our overall retention rate for OneDisburse continues to exceed 98% in 2013. Our overall renewal rate for our other products remained strong as well.

CASHNet had a strong sales quarter for our payment suite. This is a subscription-based software that generates recurring revenue each year. The Campus Labs suite sales quarter was strong for upsell. Nearly 50% of the business we signed was attributable to our current Campus Labs client base purchasing more modules. This is important because these campuses will obtain greater insight into their campus data as a result of implementation of more of our services. It also highlights our breadth of services within this suite as a competitive differentiator in this market.

Turning to Slide 5. Our sales team did a great job in the fourth quarter signing 16 refund management contracts from former Campus Solutions clients, representing 239,000 SSE. Since our acquisition of Campus Solutions from Sallie Mae, through December, we have signed 31 contracts representing 392,000 SSE. We continue to make progress on transitioning the Campus Solutions acquisition to Higher One. We have been able to recognize some savings through consolidations of certain functions, and we're scheduled to transfer functions from Sallie Mae throughout the year, and expect to fully transition to Higher One by the end of this year.

Now switching topics to discuss product development. Research shows that users of mobile apps are more engaged customers, and contribute to strong increases in nonrefund deposits. Therefore, as part of our strategy to appeal to these consumers and drive primary usage of our OneAccounts, we are actively developing unique and competitive features for our mobile apps. During the quarter, we released a new mobile security feature that allows students to temporarily disable their debit card if it's lost or misplaced. The “On/Off Switch” makes their card unusable if they've forgotten it somewhere or temporarily misplaced it. We also made enhancements to our mobile apps to include a remote deposit capture feature into our general app. Several small changes were also made to make capturing the check image easier and compatible across all Android and IOS devices. We ended 2013 completing a comprehensive set of research sessions with students specifically around their mobile money management routine. We will be using insights from that work to form a series of additional mobile enhancements around easier deposit option, bill pay and account balance of use in 2014.

Universities and colleges are always looking for ways to reduce costs. During the quarter, we completed our beta trial for cashiering for the iPad app. This app enables campuses to achieve a more mobile business office so they can accept payments on-the-go. This will help the university capture all revenue in campus through one source, and not have to spend funds on separate systems.

Turning to Slide 7. In November, the Department of Education announced that it will be establishing a negotiating rule-making committee to prepare proposed regulations to address program, integrity and improvement issues for the Title IV federal student aid program. The topics to be addressed include, among other things, cash management of funds, including the use of debit cards and the handling of Title IV credit balances. I'm pleased to announce that Casey McGuane, Higher One's Chief Operating Officer, was selected on behalf of third party servicers as a primary negotiator on the committee. Therefore, we will not be able to comment to media outlets, investor community or otherwise, speculate regarding the negotiated rule-making, and any company spokesperson will be limited in information they can provide. The first sessions will be held next week, with additional meetings scheduled for March and April. This is a public process, and the general public will have an opportunity to comment on the proposed rules.

More broadly, we continue to operate in a difficult and complex operating environment due to our relationships with multiple bank partners that are overseen by different regulatory bodies. We and our bank partners are subject to ongoing routine examination by their respective regulators. Various aspects of our business are reviewed and approved by bank partners and are subject to both periodic and special reviews by various regulatory agencies. These reviews can raise some specific consumer complaints to broader examination.

While we have greatly strengthened our compliance efforts over the past year, we continue to invest additional resources to make compliance even stronger. Even as the improvements and investments in compliance and internal audit are showing good progress, working with our bank partners and regulatory oversight remain key risks for the company. During 2013, a number of changes were made to our products and processes. Some of these changes have a direct effect to lower revenue or increase expenses. We made these changes, and we believe in the long run this will be positive for the business. We believe that these changes have helped our sales teams in our effort to sign new refund clients and in our relations with OneAccount holders. We've also increased our government relations effort. Additional resources are being directed in this area to make sure that our voice and the voices of our clients and customers are heard. We have a great product, and we help our campuses and students in so many ways that it is key for us to share these messages with the public and with policymakers in Washington.

In summary, we had a good fourth quarter with continued strong sales of Campus Solutions clients making the choice to use Higher One, and strong growth in payment transaction revenue. We're moving the company forward by further developing our consumer products and brand, diversifying our business and working to mitigate risk going forward. We believe by making strategic investments, both inside and outside of the company, that these actions will create value over the long run.

And now I will turn the call over to Chris Wolf for a deeper look at the financials. Chris?

Christopher W. Wolf

Thanks, Mark. At this point, I'll begin the discussion of our financial results for the quarter starting on Page 8 of the accompanying slide presentation. Please remember that all growth rates I mention will be year-over-year, unless otherwise specified.

Turning to Slide 8. I will start the discussion on revenue. Total revenue for the fourth quarter was $56.6 million compared to $49.8 million during the fourth quarter last year, an increase of approximately 14%. The current quarter was aided by $7.3 million of revenue from Campus Solutions. I'll get into more detail on the drivers of our revenue changes on the upcoming slides. We had a gross profit margin of 58.3% in the fourth quarter of 2013 compared to 59.9% last year. Gross margin in absolute dollars increased over the same period last year due to the addition of our new businesses, along with a strong quarter from SmartPay, offsetting lower service fee revenue. The year-over-year change in gross profit margin this quarter was driven by the inclusion of the Campus Solutions business. The margin on the acquired business currently run lower than the margin on our comparable core Higher One products. We expect to improve margins as we sunset certain of the Campus Solutions offerings by mid-2014.

Although the shift towards payments away from account revenue puts more pressure on our gross margin, the gross profit margin on the organic payments business increase with the introduction of Visa as a payment method earlier in the year. Offsetting these increases is the continued significant decrease in our provision for operational losses. The provision includes uncollectible fees, and was impacted favorably by the elimination of the delinquent account fee. We generally expect the provision to approximate its current run rate going forward, subject to normal fluctuation. As such, we do not expect to continue to experience the relative decrease in the provision in 2014 as we did in 2013.

Turning to Slide 9. Last quarter, we introduced a new waterfall slide that illustrated the impact of the different drivers that affected our account revenue. We have updated this slide for the fourth quarter. For this presentation, we tried to isolate the impact of the number of changes that have happened over the course of the past 12 months. While we've shown them in separate columns, changes in one factor will often impact another factor. We've estimated the revenue impact based on the relationships that existed as of the fourth quarter of 2012. To be clear, this is an illustrative example to show directionally the moving parts of account revenue and the impact that one factor can have on revenue.

As shown in the second column, we would have expected our account revenue to increase by approximately $3 million based on our launches of new schools compared to last year. As you can see, the expected increase was offset by a combination of lower enrollment and financial aid disbursements compared to last year, shown in column 3; as well as a decrease, shown in column 4 and overall account adoption year-over-year. Mark spoke about the increase in our nonrefund deposits, which had an estimated $700,000 positive effect on revenue. Finally, column 6 shows that the biggest impact year-over-year is the change that we've made to our fee schedule compared to last year. The fees that we have eliminated or reduced led to a decrease of approximately $5.7 million in account revenue year-over-year.

Let's review the variety of fee schedule updates, which took place over the past year that continue to impact our account revenue. Specifically, changes that went into effect in the first quarter were: one, eliminating fees that were previously assessed on abandoned accounts; two, addition of monthly fees for nonstudents who are not regular depositors; three, elimination of insufficient fund fees and recurring debit card transactions; and 4, caps on nonwithdrawal ATM fees. In addition, in the third quarter, we eliminated the delinquent account collection fee, beginning August 1.

Moving to Slide 10. I've pointed out in previous quarters that our revenue streams were becoming more diversified. This quarter is no exception, as payment transaction revenue showed strength in the quarter, up approximately 157% over last year. During the quarter, it comprised 24.2% of total revenue compared to 10.7% last year. SmartPay continued to experience robust organic growth as a result of both new clients added over the past year, as well as an increase in transaction volume from our existing clients. The addition of Visa as one of the payment methods during the past year has led to significant use of this card to pay for tuition. This, in turn, has helped in the growth of SmartPay, and has also helped our margins in the business. We continue to experience strong revenue contributions from Campus Solutions, NetPay and tuition payment plan. Additionally, during the quarter, we earned approximately $3.3 million of revenue from a portion of the Campus Solutions business that processes payments for college application providers. This revenue is primarily a fourth quarter event, and should be modeled as such.

Higher ed institution revenue grew 45% year-over-year, and now comprises 16.4% of total revenue, driven mainly by Campus Labs revenue, and to a lesser extent, Campus Solutions. Campus Labs experienced 78% growth in the fourth quarter compared to the fourth quarter of 2012. A large portion of the increase in Campus Labs revenue is a result of the fair value adjustments, which were booked as part of the purchase accounting. OneDisburse and CASHNet experienced a 13% increase in organic revenue. Finally, account revenue has decreased to 58.8% of total revenue from 76.1% in the fourth quarter of 2012.

Moving to Slide 11. In general and administrative expenses, we have higher employee-related expenses due to increases in the number of employees brought on board through our acquisition and additional compliance personnel. We also saw an increase in professional fees, including legal and IT consulting fees. G&A expenses were in line with what we reported in Q3. Product development was also considerably higher in total as a percent of revenue due to increases in personnel costs. We have also continued to incur transition-related product development expenses associated with the Campus Solutions acquisition, which increased our total product development cost. While our product development cost are down from Q3, we expect such cost to continue to be at elevated levels throughout the Campus Solution integration. Sales and marketing expense was up in the quarter. The largest component of the increase is the acquisition-related amortization expense, which contributed about 2/3 of the increase this quarter. We also experienced a noticeable increase in commissions, given the strong sales quarter. There were no merger and acquisition-related costs for this quarter compared to the $6.9 million benefit that was recognized in the fourth quarter of 2012.

Turning to Slide 12. You'll see that adjusted EBITDA was $16 million compared to $16.4 million last year. This decrease was driven by lower account revenue and increased operating expenses, which we discussed in the previous slides.

Moving to Slide 13, our adjusted diluted EPS equals $0.17. In the current period, there was an increase in interest expense as we had $89 million outstanding at quarter end on our line of credit. The fourth quarter was a solid quarter for Campus Solutions, as it contributed revenue of $7.3 million. On a non-GAAP basis, Campus Solutions generated adjusted net income of approximately $500,000. This equated to an adjusted diluted profit per share of approximately $0.01. As a reminder, Campus Solutions revenue was aided by college application payment processing revenue that we discussed previously. We continue to make progress reducing the losses in this business from pre-acquisition periods, and we should be able to further reduce overhead costs in future periods. Over the past year, our share repurchase program aided in the decrease of the weighted average diluted share count by approximately 10% or 5.7 million shares.

Slide 14 shows that our free cash flow decreased to $8.6 million from the prior-year quarter of $13.4 million. This was due to a combination of timing changes in our working capital accounts, higher capital expenditures and lower earnings.

Turning to Slide 15. We ended the year with a cash balance of $6.3 million. In addition to the free cash flow items, which I described on Slide 14, we paid down our line of credit by $11 million in the fourth quarter. As I mentioned before, we now have $89 million outstanding on our line of credit.

Moving to Slide 16. We have previously discussed our views on what impacted sales in 2013. The OneDisburse SSE growth rate was 8% on a year-over-year basis end of December 31, 2013. Finally, on Slide 17, you'll see that the #1 accounts increased approximately 9%. Our #1 accounts continues to be impacted in the way we close low balance accounts. As a result, we have accumulated additional accounts that may not be generating any activity or revenue for us.

This concludes our prepared remarks. And with that, Mark, Casey and I will be happy to take your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from David Scharf of JMP.

David M. Scharf - JMP Securities LLC, Research Division

Mark, wondering, setting aside Campus Solutions for a moment where it looks like you're having very good success converting a lot of those clients, can you just talk about kind of the -- sort of the core disbursement market out there in terms of just decision-making sort of what you're hearing from colleges? Is it still in a pretty static state right now as they await regulatory clarity? Or maybe just have you update on sort of what the sales force is hearing these days.

Mark Volchek

Sure. As we've sort of discussed, I think, for the last 6 months, a little over 6 months, we've really been focused on the conversions of the Campus Solutions clients to our disbursement platform. But at the same time, we've continued to build our organic pipeline and work through that. Certainly, as you point out, the uncertainty around the new regulatory process that's ongoing is sort of slowing down people's decision-making process, and I think we have some campuses waiting to see what the rules are before making a decision. With that said, I think we continue to make progress and work with our campuses to show the benefits that our products bring. And I think as we sort of continue to work through the Campus Solutions conversion, our sales team will then refocus on building some organic pipeline. But I also want to point out that very large number of campuses are our clients for one product or another. So even the campuses that aren't using Campus Solutions or our disbursement platform are using -- likely using one of our products and so that makes it easier for us to go in and have those discussions and build that long-term trusting relationship. This is a relationship business with our campuses. So as much as it's still a difficult environment, I do believe that we're continuing to make progress there.

David M. Scharf - JMP Securities LLC, Research Division

Got it, got it, and regarding the Campus Solution SSEs, it seemed like this quarter was a real sort of breakthrough in terms of 239,000. I guess, 2 questions, Mark. One is can you just remind me again kind of what the total number of SSEs are still out there for Campus Solutions? Because I seem to recall that it was sort of going to be turned dark come sometime this year that there's a point at which these colleges have to make a decision. And secondly, from a standpoint of capacity for converting such a large pipeline, if there are any issues there.

Mark Volchek

Sure. So -- the first point is just to clarify the timing. So we have said that we're going to sunset the Campus Solutions, various disbursement platforms this summer, sometime in Q2 or this summer. So that's sort of in terms of timing. The overall number was about 1 million SSE in total. As we've said today, we're still a little bit below 400,000 so that leaves over 0.5 million SSEs still in that conversion pipeline. Certainly, as you can imagine, some of that becomes more difficult as we get to some of the campuses that have unique requirements or other things that we have to work through. So I do think it'll become more difficult, but there's still a significant pipeline out there of Campus Solutions conversions that we'll be working through in maybe Q1 and Q2. And then find ways to retain even clients that aren't immediately ready to convert to our full disbursement solution. So we're working on different things there. In terms of capacity, we certainly have the capacity to do all these implementations as we've talked about before. We are sort of investing the full resources in each of those campuses that decides to convert and sign up for our disbursement platform as if they were completely new clients. That is a significant amount of resources, but we have that, and we've planned for it. And I think we're in very good shape in terms of implementing those schools for the fall. I do think that's a good time to also remind everyone that the folks we signed in Q4 likely aren't going to generate revenue til the summer or the fall semester because they obviously take a while to implement. So the large number that we've signed in Q4 will be implemented throughout Q1 and Q2, and then start producing revenue kind of summer or fall. So I think that is moving forward very well.

David M. Scharf - JMP Securities LLC, Research Division

Okay. Got it. And so Chris, couple of questions. One, I want to make sure I heard correctly on the Campus Solutions revenue this past quarter. It looks like you came in about $3 million above what we had forecasted. And did you say there's a seasonal element to -- hadn't realized, you said something about processing college applications?

Christopher W. Wolf

Yes. That's what we call our corporate partner revenue. We acquired that as part of the acquisition. And we process payments for application providers that -- for individuals that pay schools for college applications. So it is a little one-off, and I do want to emphasize this was a big Q4 boost because you have a lot of applications for the next school year that come through in December, in the December time period. So that was a little bit of an anomaly, a positive anomaly, absolutely.

David M. Scharf - JMP Securities LLC, Research Division

Okay, but we should just think of that as a regular seasonal event in the fourth quarter?

Christopher W. Wolf

Yes. I'm thinking that exactly, and that's what we said in our comments. There might be a little throughout the year, but it's really going to -- you're going to see the boost because people are applying basically for the 2015 or 2014 fall period, I should say.

David M. Scharf - JMP Securities LLC, Research Division

Got it. Hey, lastly, I apologize for making you go through this laundry list, but I just want to kind of walk through all of the sort of one-time events that -- for purposes of making sure we know when they anniversary in 2014 on the revenue-expense side. And in revenue, I know we had Visa allowing the convenience fees, which kicked in last quarter, I believe. I mean, does that -- when does that anniversary in 2014?

Christopher W. Wolf

I think it's Q2, rather, sometime during Q2. We picked it up during Q2, and one thing I do want to emphasize there is we're still trying to understand volumes there. I mean, we have gotten a big volume pickup there, and we haven't quite understood the behavior on the other cards so we're still working through that, how that's going to effect. And then obviously, the fees charge there, we're still trying to work through that. So -- but to answer the question, we will annualize it towards the end of Q2. But The total effect remains to be seen. Hopefully, it will get better so...

David M. Scharf - JMP Securities LLC, Research Division

And as far as the fee cuts that were implemented last year, I mean, how much -- I mean, what proportion of kind of the annualized fee cuts came sort of last January versus the August change?

Christopher W. Wolf

Yes. Along those lines, we haven't spoken about specific fees, so I do want to caution about giving numbers, but directionally, there were big numbers that were eliminated in January. There's no doubt about that, and that's where the bulk of it was. But I do want to emphasize the delinquent accounts selection fee that did kick in, in August. It was a material number for us, right, so that -- we will have some effect on that going through the year. So I would say if I could speak in qualitative terms, the bulk of it is January 1, but there is an impact that happens August 1.

David M. Scharf - JMP Securities LLC, Research Division

Okay. Beyond the Visa change, and the 2 rounds of fee cuts and the seasonality in Q4 on college apps, are there any other sort of anomalies we should be thinking about that lapped for anniversary this year on the revenue side?

Christopher W. Wolf

I think the big one is sort of the acquisition. In general, that was done halfway through Q2. So that will be a big impact embedded at revenue on the payments business in Q2.

David M. Scharf - JMP Securities LLC, Research Division

Right, but yes, just thinking organically. And then on the...

Christopher W. Wolf

I'm sorry, go ahead.

David M. Scharf - JMP Securities LLC, Research Division

No, no, go ahead.

Christopher W. Wolf

Well, I just want to emphasize, yes, that's what we know now. But I think we do want to reemphasize in Mark's comments that we are in a fluid environment, and so things continue to change. But as of today, that is right, the things that we have mentioned.

David M. Scharf - JMP Securities LLC, Research Division

Okay. And then in the same vein on the expense side, are there both increased compliance spending that may be thought of as one time last year, as well as integration cost that may be thought of as one-time? Is there a way we can think about when in the magnitude of how those anniversary this year?

Christopher W. Wolf

Yes. So let me step back there, and let's touch on the acquisition cost. We are -- that is still ongoing, and I would actually emphasize that 2014 is probably going to be a big year in the sense of cost that we absorb, but -- that we want to try to work off towards the end of the year. If you go back to our original discussion, we wanted the deal to be accretive as of the end of 2014, is how we positioned it. And we -- admittedly, we've gotten some pleasant revenue upside this year that has helped the numbers. But the big integration, especially on the payment side of the business, is really going to occur this year. So we are going to incur cost. I do want to emphasize that on the Campus Solutions integration there, so that's the first thing. On compliance, I do think it's ongoing. Hopefully, not at the clip that we had in 2013 because we did add a lot. But as we evolve, and we mentioned this before, as we work with new bank partners, they have different requirements and different regulators, and we have to work our way through that. So we do incur compliance cost there, but hopefully, like this is not at the clip that we had. And I want to caution about giving guidance too, but I'm just giving you some directional color. And then the last thing, which I mentioned in my comment there is the provision, right, that I've mentioned there. We have gotten a lot of benefit in the provision there for uncollectible fees, and basically, it's our provision for operation losses. We've gotten a lot of benefit this year because as we've had fee reduction, we've not had to book as much. It's essentially a bad debt reserve, and we've had a decrease in that. As I've mentioned in my comments, we don't expect the clip to decrease as we have had this year as well. So that one's going to normalize year-over-year so we won't quite get the benefit there. And where that comes into play, obviously, is at the gross margin line.

Operator

Your next question comes from the line of Mike Grondahl from Piper.

Michael J. Grondahl - Piper Jaffray Companies, Research Division

If we think about that, I think you called it corporate partnership revenue or the seasonal element. Is it somewhere around $2 million or $3 million? Was that the boost you got?

Christopher W. Wolf

It was about $3 million, yes.

Michael J. Grondahl - Piper Jaffray Companies, Research Division

$3 million, okay. And then the payment transaction line is tough to model with the acquisition there in the business. If we just take the $41 million you did in 2013, as you look out, can you grow 20% to 25% off that base or how does it all sort of line up for you?

Christopher W. Wolf

So Mike, let me -- this is Chris, let me try to answer that. And first of all, I need to caution that we're not giving guidance so I really want to be careful what I say here. But the one element I do want to point out that Mark emphasized earlier is that we will get a full year run rate from the Sallie Mae payments business, and that's probably the biggest variable that I can point out to you. So directionally, I can give that to you. Obviously, on organic business, we've experienced growth, but at this point, we're not really -- want to or able to give growth there. But I do think the biggest driver that you could factor in there is getting a full year run rate on the Campus Solutions payment side.

Michael J. Grondahl - Piper Jaffray Companies, Research Division

Got you. And what was that full number for 2013?

Christopher W. Wolf

I know we were 7 5 this quarter. I..

Mark Volchek

We've said at the time of the acquisition that part was $20 million...

Christopher W. Wolf

About $20 million. It's $20 million was the number for 2012. It was $24 million all-in. It was $4 million for the refund business, and $20 million for the payment side and the higher ed side of that, and higher ed being a much smaller piece than the payment side.

Michael J. Grondahl - Piper Jaffray Companies, Research Division

Got you. But it seems like it came in a lot better than that initial $20 million.

Christopher W. Wolf

Yes. We're working to drive that, and obviously, we're trying to tweak the model, and that's some of the fluidness that's going on here as we convert, we're doing that, and we're making those changes. So and plus -- and I do want to add too, is our organic CASHNet business did well too, and that's what's getting caught up in there as well. So we've spoken about the Sallie Mae piece, but clearly, our organic piece has really been a factor there. But it has done well, I would say that, and as we mentioned earlier, the corporate partners piece that came in, in Q4. We knew that was going to be a factor, but I would say it came in a little bit better than we expected as well.

Mark Volchek

And I think the one thing to point out on the organic side sort of for '13, what we have seen is we've got a benefit, one, from signing up more campuses for our payments business in general. So we did well in the sales side. We did well in the volumes side, some driven by continued improvement in features and marketing on campus, but also through adding Visa so that was important organically. And so I would say that, going forward, there's a large opportunity there, but it's difficult to forecast how we're going to take advantage of that because I do think there's opportunity over the coming years to convert some of the folks in the Campus Solutions platform from payments to the next-generation platform of payments that we're working on. So I think there is large opportunities there, but we're still sort of unsure in terms of planning the timeline or the magnitude of those improvement.

Michael J. Grondahl - Piper Jaffray Companies, Research Division

Got you. That's fair. And then gross margins, going forward, it's somewhere around 55, 56. Is that a reasonable place to be at as the core refund business is a little bit slower and the payments business sort of are growing faster?

Christopher W. Wolf

Yes. This is Chris again. Once again, I'll give my caveat about giving guidance here. But look, we are starting to see that shift as you mentioned. Once again, I would point out that as far as account revenues, most of this stuff will start to annualize this year. So I think you get a better sense where that is, and where that margin will stabilize. I think on the payment side, to emphasize Mark's point, is I think we have some opportunity to improve margin and -- but to be fair, that remains to be seen, and that's really where it's at. So I do think it is still a little bit fluid. I think, directionally, you see what's happening right now, but we're working to improve it, but like I said, I'm reluctant to give specific numbers at this point.

Michael J. Grondahl - Piper Jaffray Companies, Research Division

Okay. And then just last question. Once the August fee changes cycle through, how do you think about revenue per account?

Christopher W. Wolf

Yes, sure couple of things there is, look, a numerator/denominator issue as far as -- if nothing else changes and everything were static, which it never is, we would have comparable year-over-year. And so obviously, if that's the case compared to previous years, the numerator is going to be a little bit less. The other point I do want to emphasize, and we said it in my comments, is because of some of the fee changes that we made last year, we have more active accounts than we have historically, right, because they're low-balance accounts that might have been closed out historically. So we -- the comment we try to make is we -- on a comparable basis from the earlier periods, we have more accounts outstanding. So the combination of the 2 basically would point to a decrease per revenue per account of what we've seen historically.

Operator

Your next question comes from the line of Michael Tarkan from Compass Point.

Michael Tarkan - Compass Point Research & Trading, LLC, Research Division

I guess from a competitive standpoint, I know one of your peers is piloting a new program out there that would allow schools to reload or soon to reload any prepaid card with their tuition refund. I'm just wondering if you've seen more of these types of offerings or if you think the industry could potentially be heading in that direction could be as a result of negotiated rule making?

Mark Volchek

Sure. Thanks for the question. I think overall, I would characterize the competitive landscape as not having changed much. We continue to see a number of different solutions out there for years now from a number of banks and different software providers. We feel that we have the best product, and we're the leader in really refund, payments, data analytics. We've really strived to be the leader in each one of our segments. And I think the regulatory environment that we're seeing, that's really complex from the financial services side, also from the higher education side, makes it even more challenging for competitors to be successful in this space. Turning specifically to your suggestions around specific competitors and the new announcement of a product that may be launched to make it out there, we see those often. We've had that before. Every year, someone new tries to get into the market, and I think, our products have held up very good with the test of time. I think one of the key advantages we have is our customer service and our dedication to our clients. I think, specifically, some of the competitors who have launched products in this space have customer service issues and have a hard time with their clients. And I can tell you I've spent significant amount of time with clients in the past year, and I can consistently hear that our customer service is great and superior to some of the folks out there trying to sell some of their new untested products. So I feel good about where the competitive environment is. We continue to take all competitors very seriously though, and we continue to spend time to study what people are putting out there. We take it very seriously, and we have a team here focused on product development. They also focus on studying competitive products to make sure we do stay ahead, and we do continue to innovate to be the leader in the space.

Michael Tarkan - Compass Point Research & Trading, LLC, Research Division

And then with rule making's up for next week, I know you can't really comment on expectations or give us much on that. But do you have any sense for the timeline as far as when the hearings end to when we could potentially see new rules? Just anything on that and then as a follow up, anymore updates in the CFPB inquiry?

Mark Volchek

Look, why don't I take that first. This is Mark, and then I'll turn it over to Casey for a few words as well. First, in terms of the timeline for the Department of Education, it really depends on how the sessions go. Historically, rules could be done right after the end of the session, which would be April or May. But more often, there's not full agreement at the end of the sessions, and it can take a long time for the rules to be finalized. So we're hopeful that the department and all the negotiators will work diligently and come up with rules that are -- works for everyone for campuses, students and providers that are good and get agreed, but it is, at this point, uncertain for how quickly that's going to get done. And before I turn it over to Casey for a few more comments on that, I just want to comment on your question on the CFPB. We continue to closely monitor CFPB actions and things they put out there. There's nothing specific pending or ongoing there in terms of our business or the disbursement business as a whole. As you know, there's some recommendations that the CFPB has put out there regarding revenue-sharing, which is something that's been a hot topic. And as we know, many of the banks have engagement revenue-sharing to win additional contracts, something we have not done in recent times. And I want to remind folks that we only have agreements with less than 2% of our clients -- entire client base where we actually provide some payments for the school based on legacy contracts that were primarily signed before 2008. So in terms of the revenue-sharing, we feel like we're in a good position, and we're looking forward to implementing any rules or regulations that come out in terms of regulating or disclosure regarding revenue-sharing. And so Casey, I don't know if you want to say a few more words about the negotiator rule-making.

Casey McGuane

Yes, sure. Thanks, Mark. This is Casey, and I just wanted to briefly share that, as Mark mentioned as well, I'm certainly looking forward to contributing and working with the rule-making committee as a primary negotiator. The sessions start next week, 3 days next week, 3 days at the end of March and 3 days at the end of April. I wish I could comment more on the final timeline. I'm not really sure, I think Mark added a little bit of color there. And overall, I think we're supportive of updating the regulations, and I look forward to the discussions.

Michael Tarkan - Compass Point Research & Trading, LLC, Research Division

Okay. And then just one real quick one for me. Last quarter, you guys provided the number of Campus Solutions SSE conversions through the month of October. I'm just wondering if you have that number through January.

Mark Volchek

We don't have that handy. We haven't given it. So unfortunately, we can't update you that.

Operator

Your next question comes from the line of Andrew Jeffrey from SunTrust.

Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division

I apologize I jumped on here late so I hope I won't make you repeat yourselves. With regards to neg reg, and it's nice that this is finally something that we can talk about realtime, assuming that the outcome is no material change in the overall electronic disbursement environment, do you think that it has the potential to, perhaps, free up the pipeline? I wonder if you could just give us quantitatively a sense of are there an appreciable number of schools that have either sort of sat on the sidelines or have perhaps signed a deal but have delayed conversion until the final rules are clear? Is that something that we could view potentially as a catalyst for your OneDisburse SSE growth?

Mark Volchek

Sure. Thanks for the question. While, I can't comment, obviously, on the neg reg specifically or speculate on the outcome, I do think these questions [indiscernible]. Yes so I do think once it's concluded and assuming that the rules are advantageous to everyone in the industry, I do think we have a number of schools that have slowed down the sales process, and have not made decisions or have sort of put the project on hold until the regulations are finalized. I think there's more in that category than folks that are sort of delaying implementation. That's pretty rare for us for folks to not implement sort of pretty quickly after they signed, but I think in terms of pipeline, if you ask our sales team, certainly, one of the top issues for them out in the field is the regulatory uncertainty, which we expect to -- the uncertainty to improve sometime this year, and hopefully, sooner rather than later, but I do think that, that'll be important in terms of our sales pipeline and sales progress.

Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And with regard to direct deposit, which seems to me to have a pretty powerful potential to drive customer lifetime economics, is the lift you're seeing today kind of just organic or is being driven, do you think, by your own marketing and your own internal efforts? And if not, is -- how should we think about '14 in terms of your opportunity to ramp the direct deposit ratios in the business?

Mark Volchek

So thanks. This is Mark, and I'll take that one. So hard to predict to talk about '14, but what I can say about '13 is that I think it's really a combination of continued improvement in the OneAccount product, continued marketing. We've talked about for several quarters, we've invested in more specific targeting messaging so that we can target the right features and right messages to the right segments of our population. We're still not all the way there so I think that's actually an opportunity for '14 that we've invested a lot of these resources and haven't really been able to benefit from them much yet. So I think a little bit of that, we start seeing in '13, but I think that's going to be an upside in '14 if we're able to really leverage those resources we invested in, what we call life cycle messaging marketing to the students, and I think continuing to invest in the features is really important in the mobile. What we know from research is that if students use or engage more of the mobile app, they're more likely to use it as their primary account, something that we continue to test. We continue to see folks using edge and premier. So I think it's really increments on a lot of things that we have done and things we can do even better, going forward, to drive that direct deposit. The base is getting bigger so when the base was really, really small, it was easy to double it or grow it 50%. I think we are seeing the base becoming more substantial so we're talking a pretty large dollar volume of non-refund deposits, but I think there's still significant opportunity to grow that. I do know that the wallet share is still pretty small. So it's hard for us to predict how much more we can capture or what period, but there is a lot more wallet share available with our customers. Today, we mostly still have the refund share and not the payroll direct deposit business from our customers.

Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division

Right. And it seems like there's a lot of potential upside if you get that right.

Mark Volchek

That's correct.

Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division

And then last, and I apologize, Chris, again, I don't know if you talked about it. When I look at OneAccount revenue, could you give us a sense of how much of that is from interchange versus other fees?

Christopher W. Wolf

Yes. Andrew, as we've mentioned last quarter, we've just given a range, and that range was 40% to 50%, and so that's constant for this quarter as well.

Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division

Okay, and -- but I expect that could lift if you're successful in your direct deposit adoption issues.

Christopher W. Wolf

Oh, Absolutely, absolutely. We drive more volume, and that's clearly one of the aspirations we have, absolutely.

Operator

Your next question comes from the line of John Rowan from Sidoti & Company.

John J. Rowan - Sidoti & Company, LLC

Mark, you mentioned that there were a few topics that the neg reg meeting was going to address in the upcoming weeks. I'm just curious, are those the same 3 topics that are going to be discussed in all 3 of the planned subsequent meetings? Or are there different topics that are going to be addressed per meeting?

Mark Volchek

Yes. So there's actually 6 different topics for neg reg, and they really all intermingle. So it's really more of a progression where the first session, which is next 3 days next week is really meant around setting the stage, setting the agendas, organizational, vendor sort of working group. So there's no specific sort of days that are one topic versus the other. Again, it may be sequenced that way, but we won't know that until after next week's session, where it's really decided how the 6 topics will be addressed. So at this point, it's still open for the negotiators or the committee to decide how they want to handle the 6 topics that have many subtopics. So it's really a pretty long list of questions and issues that the team of 20 primary negotiators will be working through over the next coming months.

John J. Rowan - Sidoti & Company, LLC

Okay. And you also mentioned that the non-refund deposits were a small portion of overall deposits, but they're growing. I'm just wondering if you had actual percentage of what the deposits were.

Mark Volchek

Yes. I think, last time, we said that it was around 10% so I can tell you that it's over 10% now, but we haven't a given more specific number.

John J. Rowan - Sidoti & Company, LLC

Okay. And then just one last question. Chris, you mentioned something earlier, and I really didn't get a chance to get it down. But you mentioned something about a purchase accounting adjustment? Can you just go over what you were discussing?

Christopher W. Wolf

Yes. That relates to the Campus Labs business. When we bought that business back in 2012 for purchase accounting purposes, some of the fair value of the potential revenue was booked as a liability. So what happens, so when that came through, it makes revenue year-over-year a little bit lesser than on a GAAP basis than what it would normally be.

Operator

I would now like to turn the call over to Kevin LeBlanc for closing remarks. Please proceed.

Kevin Leblanc

Thank you, Mark. We appreciate that you have joined us on the call today, and the interest that you have in Higher One. We look forward to updating you on our next earnings call, and hope that you have a great day. Thank you.

Operator

Thank you very much. This concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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