Tier Technologies, Inc. F3Q10 (Qtr End 06/30/10) Earnings Call Transcript

Aug.10.10 | About: Official Payments (OPAY)

Tier Technologies, Inc. (NYSE:TIER)

F3Q10 (Qtr End 06/30/10) Earnings Call Transcript

August 10, 2010 5:00 pm ET

Executives

Liz Bowman – Assistant Controller

Chuck Berger – Interim CEO

Ron Johnston – CFO

Analysts

Brett Huff – Stephens

Gary Prestopino – Barrington Research

Brad Evans – Heartland

Beth Lilly – Gabelli

Operator

Good afternoon. I would like to welcome everyone to the Tier Technologies’ third quarter earnings conference call for fiscal year 2010.

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) Thank you.

Ms. Bowman, you may begin your conference.

Liz Bowman

Good afternoon. My name is Liz Bowman, Assistant Controller for Tier Technologies. At this time, I would like to welcome everyone to the Tier Technologies’ earnings conference call for the quarter ended June 30, 2010. Today’s call is scheduled for one hour.

Yesterday, we issued a press release announcing Tier’s financial results for the third quarter ended June 30, 2010. 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 web site, www.tier.com.

We invite shareholders and analysts who wish to speak to management about the Company and its performance to schedule a meeting by contacting our CFO, Ron Johnston, at 571-382-1333 or rjohnston@tier.com.

A taped replay of this call will be available on the Company’s web site beginning Tuesday, August 10th at 8:30 PM, Eastern Time until Tuesday, August 24, 2010 at 11:59 PM Eastern Time. Alternatively, you can hear a replay by dialing 800-753-0360 and entering the conference ID number 3668013.

I want to remind you that various remarks that we make about the Company’s future expectations, plans, and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

The forward-looking statements discussed on this call represent management’s current expectations about the Company’s future financial performance based on the information available to us today. This information may change and our actual results may differ materially from these forward-looking statements. We undertake no obligation to update any such forward-looking statements.

There are numerous risks and uncertainties that affect our business and may affect these statements, including but not limited to

general economic conditions, which affect our financial results in all our markets, which we refer to as “verticals”, particularly our federal, state and local income tax and property tax verticals; the timing and the cost of consolidating our payment processing platforms and migrating our customers on to a consolidated platform; failure to achieve anticipated gross margin levels due to unanticipated costs incurred in transaction-based projects; increasing competition; 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 third quarter” refer to quarter ended June 30, 2010.

On the call this afternoon, are Ron Johnston, Chief Financial Officer and Keith Kendrick, Senior Vice President of Strategic Marketing. Today’s call will begin with Chuck Berger, Tier’s interim Chief Executive Officer. Chuck.

Chuck Berger

Thank you, Liz and good afternoon. As you know, in late June our Board appointed me to the position of interim CEO. I have served on Tier’s Board for approximately eight years so I have been able to come up to speed relatively quickly in this role.

I will review the financial highlights from our third fiscal quarter, review the market opportunity we see for Tier and then update you on progress against our strategic plans and goals.

Revenues from continuing operations were $39.4 million compared with $44.2 million for the prior year’s third quarter representing a decline of $4.8 million, or 10.8%. The revenue reduction is primarily attributable to the extended economic downturn, which has impacted our revenues throughout our government tax verticals which include federal, state and local, and real property tax. Our federal vertical is composed primarily of two components: one, a partnership with an online tax filing service and two, our contract with the IRS, which we implement through our primary brand, Official Payments.

Both components faced new competitive pressures this tax season. Our partnership with the online tax filing service which had been exclusive to the Company is now shared with another payments services company. Our contract with the IRS also faced increased competition for the first time this tax season, the IRS awarded contracts to three providers of electronic payment services instead of just two. The IRS gives us information only on the transactions processed by these three providers pursuant to their contracts with the IRS. Based on this data, it appears that despite the increased competition with the third competitor, we only lost mid-single digit share in both transactions and dollars processed in this component of our federal vertical.

Our transactions processed through the IRS contract for this tax season which started January 1, 2010 increased 18% through the end of the quarter as compared with the same period in 2009. The 18% increase in transactions was offset by a decrease in average payment size, resulting in a small decline in payment volume processed.

On a GAAP basis, net income from continuing operations for the third quarter was a loss of $0.2 million or $0.01 per share. This compares to a positive $0.6 million or $0.03 per share in the prior year’s quarter.

I’m pleased to report that we once again reported positive adjusted EBITDA. Adjusted EBITDA from continuing operations for the quarter was $1.1 million, which compares to $3.2 million in the prior year’s third quarter. Ron Johnston will provide additional information on our use of adjusted EBITDA from continuing operations and other non-GAAP financial measures later in the call. For your convenience, a summary of non-GAAP definitions used in this call appears in Chart 3 of the accompanying chart deck.

For the quarter, both net income and adjusted EBITDA were negatively impacted by an accrual of $1.2 million for severance expenses expected to be paid to our previous CEO and approximately $100,000 of legal expenses relating to corporate governance issues that we do not expect to be recurring.

Additionally, as noted in prior quarters, the IRS business generates lower margins than other verticals because of restrictions on the number of payment choices and channels we are allowed to offer in accordance with the terms of our contract with the IRS.

Despite the challenges we face as a result of the overall economic climate, we continue to be bullish on the market opportunity ahead of us. As Chart 4 shows, the total bill payment market for the US is approximately $4.5 trillion. Within the overall bill payment market, the biller direct category is showing the greatest growth. Chart 5 forecasts growth from 10% of the market to 31% over the 2004 to 2012 time frame.

With well over 4,000 billers or clients, as we call them, we are a major player in this large, rapidly growing segment.

In order to best take advantage of this market opportunity, we continue to focus on the following areas which are highlighted on Chart 6. Expand market share in the biller direct market, consolidation of our various platforms, establish a market driven approach to our business and improve profitability.

During fiscal 2009, we acquired ChoicePay, which increased our share in the biller direct market for the utilities industry. During fiscal 2010, we continue to explore strategic partnerships and potential acquisitions that would allow us to penetrate new markets and increase our share in existing vertical markets consistent with our strategic intent to be a multi-vertical player in the biller direct market.

While our IRS business remains important to the Company, we have reduced our dependence on our IRS business as we have invested to grow other verticals. As Chart 7 shows, the IRS business has dropped from 36.1% of our revenue for the twelve months ended June 30, 2007 to 20.5% of our revenue for the twelve months ended June 30, 2010. As a result of our continued growth, we provide services to billers and their customers in all 50 states and the District of Columbia as shown in Chart 8.

Switching to the platform, as a number – as a result of a number of acquisitions, including Official Payments Corporation (OPC), EPOS Corporation and most recently, ChoicePay Inc., we operate our business on multiple technology platforms. In 2009, we made the decision to consolidate our operations onto a single technology platform over time. The goals of the consolidation are to facilitate our ability to develop, sell and implement new and enhanced product offerings.

Improve margins by spreading fixed platform costs over a growing number of transactions, simplify our operations and reporting structure and make it easier to integrate potential future acquisitions. While we have made considerable progress in the consolidation efforts, we have found that completion of the development of a consolidated platform and the migration of our approximately 4,000 biller direct customers to that platform will take longer than originally anticipated.

Our original plan was to complete development this calendar year and complete customer migration in calendar 2011. We are continuing to evaluate the platform consolidation. At this time, it appears that the development of a consolidated platform and the migration of our customers on to that platform will require an additional 12 to 18 months beyond calendar 2011.

I would also like to note that in one of the slides for last quarter’s call we indicated that approximately 50% of our volume was running on our “Go Forward” platform. While we have had as high as 47% of our volume running on the enhanced version of the ChoicePay platform on certain days, the average over the last several months has been slightly below 40%.

We have increased our focus on understanding the dynamics of our markets so that our market strategies and product offerings better meet the evolving needs of the market. We continue to broaden our product offering in line with the evolving needs of our customers. We have expanded our payment channels and payment options while developing new products so that we can offer our billers a single source solution that simplifies electronic payment management.

We have started an ongoing upgrade of our strategic information systems to allow us to establish direct relationships with end-users of the Company’s services, allowing us to grow transactions across multiple verticals and deepen the strength of our primary brand, Official Payments.

Chart 9 shows the growing number of My Account registrations opt in registrations as well as the growing traffic our web site is generating.

Finally, from a strategic old basis, with regard to increasing profitability, having completed the divestiture of business units that were not profitable or not in line with our strategic focus on the biller direct market, we have aggressively worked to reduce our sales, marketing, general and administrative costs over the last several years. This has involved substantial headcount reductions and facilities consolidations including the consolidation of our data centers, which is now in progress. We expect to continue to focus on improved profitability by growing revenues while continuing to aggressively manage SG&A expenses.

We are also working to manage our direct costs which are primarily the interchange fees, payment processing fees, banking fees and dues and assessments we pay at the card companies. We expect to continue to improve our margins by negotiating better rates with our merchant acquirers and payment processors, adding lower cost providers and incenting our billers and their customers to use payment options and channels with increased margin structures.

These continue to be challenging economic times and we are unable to provide revenue guidance in this environment. We simply do not expect tax-based payment revenues to return to traditional levels before our FY 2012 fiscal year. While many states have balanced budget requirements, it is yet to be seen if legistectures will – legislators will raise taxes in the midst of continued high unemployment and concerns over the strength of the recovery.

Although achieving revenue growth will be challenging, we continue to expect total transactions to grow for the foreseeable future. We still forecast an increase of approximately 5 million transactions, or more than 33% as compared to the prior year. This guidance appears in Chart 10.

Finally, I’m very pleased to announce that Alex P. Hart will join Tier later this month as our new Chief Executive Officer, on a permanent basis as opposed to my interim role. Alex has deep expertise in payments and especially in the electronic bill payment market. Most recently he was President of Fuelman FleetCard programs of FleetCor. Previously, he has held senior leadership positions at CheckFree, Microsoft, NationsBank, as well as the CEO position at Corillian Corporation.

For now, I’ll turn the call over to Ron Johnston to discuss the third quarter financial results in greater detail.

Ron Johnston

Thanks, Chuck. During this call, I will address the third quarter results, our cash position and ending headcount.

Revenues from continuing operations for the quarter declined 10.8% to $39.4 million as compared to the same quarter last year. We are pleased to report growth in our higher education, utilities, and sales and use tax categories. As Chuck mentioned, revenues from our income tax business were down. The consolidated statement of operations appears in Chart 11.

During the quarter, we processed $2.4 billion of payments, which represents a 0.4 of 1% increase versus the same quarter last year. This total increase was driven by a 12% increase in transaction volume. Gross margin for continuing operations, which was 22.4% for the third quarter, was 2.1% less than the same quarter last year.

General and administrative expenses for continuing operations were $6 million for the quarter, down 5.1% compared to the same quarter last year. The year-over-year reduction would have been larger if we had not incurred the severance and governance expenses Chuck mentioned.

Selling and marketing expenses in continuing operations were $1.4 million for the quarter, down 37.6% over the prior year’s quarter. We define EPS gross revenue as revenue from continuing operations less revenue from our wind-down operations and EPS net revenue as revenue from continuing operations less revenue from our wind-down operations, discount fees, processing and interchange costs. Chart 12 provides a reconciliation of revenue from continuing operations to EPS gross revenue and EPS net revenue for the three months ended June 30, 2010 and 2009.

We define adjusted EBITDA from continuing operations as net income from continuing operations before interest expense net of interest income, income taxes, depreciation and amortization and stock-based compensation in both equity and cash. Chart 13 and Chart 14 provide a reconciliation of net income from continuing operations to adjusted EBITDA from continuing operations and adjusted EBITDA from EPS operations for the three months ended June 30, 2010 and 2009.

EPS gross revenue, EPS net revenue, adjusted EBITDA from continuing operations and adjusted EBITDA from EPS operations are non-GAAP financial measures. Please see Charts 13, 14, and 15 for the supporting financial schedules and reconciliation to GAAP figures. Non-GAAP financial measures should not be considered a substitute for the reported results prepared in accordance with GAAP.

Our financial condition and balance sheet remain strong with total cash and marketable securities of $69.5 million at June 30, 2010. That figure is composed of cash and cash equivalents and investments in marketable securities of $62.2 million and restricted investments of $7.3 million. We were able to liquidate all – I repeat all of our auction rate securities under an agreement we had with UBS. We have reinvested these funds in short-term instruments to provide flexibility going forward. The consolidated balance sheet at June 30, 2010 appears in Chart 16.

The Company’s headcount at June 30, 2010 was 218 and there were various contractors providing services totaling an additional 39 individuals. Lastly, I want to mention that our Form 10-Q has been filed with the Securities and Exchange Commission. We encourage all of you to review the statements and footnotes in order to better understand our current operations.

Now I would like to turn the call back over to Chuck.

Chuck Berger

Thanks, Ron. Looking ahead, as I mentioned, we will continue our policy of not providing general guidance. While we are not providing revenue or earnings guidance for fiscal 2010, we do expect to see transaction growth, as I mentioned before, to approximately 20 million transactions, an increase of about 5 million transactions, or approximately 33%.

Chart 10 offers an overview of our historical gross EPS revenue and transaction trends. Our federal, state and local tax-based verticals, which still represent more than 60% of our business, have experienced low to negative growth for more than a year 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 or tax rates are increased by legislative bodies, or both.

Liz Bowman

At this time, we would like to open the call to Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) First question does come from Brett Huff, Stephens. Your line is open.

Brett Huff – Stephens

Good afternoon.

Chuck Berger

Hi Brett, how are you?

Brett Huff – Stephens

Good. Couple of quick questions. On the G&A, what was the – what was the main driver, if you exclude the one-time stuff, the severance and the legal fees, it was down substantially, sequentially from last quarter to this quarter, and I’m curious what specifically drove that and sort of as a follow-up to that. Is that sustainable, or is will we should be expect to see that come up or down or can you give us some insight looking forward?

Chuck Berger

I would say Brett, that the G&A, as you know, has been coming down for the last three years rather dramatically quarter-over-quarter as well as year-over-year. And I would speculate that we are approaching a point where the G&A costs are going to be flat and level with the exception of some expansion in some of our development dealing with the platform but as far as what you would think of is being corporate SG&A, human resources, accounting, financial planning, legal, those numbers shouldn’t remain relatively flat going forward.

Brett Huff – Stephens

Okay. And just to try to get an insight first question too, what was it specifically from last quarter to this quarter that was so meaningfully that allowed a meaningful decline?

Chuck Berger

Headcount reduction and also some reduction in legal expenses what we incur in 2009, excluding that we’re not included in 2010.

Brett Huff – Stephens

Okay. And then on the revenue front, can you give us a sense of – it looks like the three verticals that you’re talking about that are having trouble that that decline has accelerated pretty meaningfully this quarter versus a last couple of quarters. Is the primary driver the contract changes that happened in the IRS, was that the main different sequentially or were there other things as well. Can you give us some color on that?

Chuck Berger

It’s principally the contract change as you know we reduced our fees also the headwinds of the economy and lower level of – although we had a higher level of transactions in the quarter, we – the taller value per transaction is down because people’s income is down and their or the balance due is down. So we’re processing less revenue per transaction and that’s what’s causing the shortfall in revenue. We also saw a continued shortfall in real property taxes as a result of the economy and that’s principally California, Arizona, Texas and Florida.

Ron Johnston

Yeah. I would intersect here. The fact that we increased the number of government customers and pretty significantly increased the number of transactions and you had so-called decline in revenue really shows the impact this economy it’s having on all levels of government from local all way up to the federal government and the impact of 10% unemployment rate, the sort of second way about margins foreclosures that we seem to be in the middle of right now has driven cost – it’s driven payments to all government and it is down dramatically and you see that troubled state budgets, my home say California being one of the most notable of those where the mortgage situation is continues to be very problematic. The unemployment situation, it is very problematic and as a result, tax collections are lower and are fee-based services are being impacted by that.

Brett Huff – Stephens

Got you. Did the other verticals that you all are – have been investing in the utility, higher ed et cetera, you commented a little bit on those, have those trends in terms of growth rates for, for either transactions or revenue or whatever metric you’d like to give us, have those been relatively steady through the decline in the other verticals that you’ve already talked about?

Chuck Berger

We’ve – as Ron mentioned, we’ve seen continued growth in both higher ed and utilities which are our next two largest verticals and the ones that we are focusing continued growth on. We hope that – are going to expect to continue going forward and in particular have a lot of success in signing up conditional higher ed customers. While we are coming into the big season for higher ed and expect to see the impact of continued growth in number of customers and different payment types as we come into late August, early September and you’ll hear more about that in our fourth quarter results when we have that discussion in a few months.

Brett Huff – Stephens

Right. And the – just in terms of the magnitude of growth, has it been relatively steady as in addition just you had mentioned that it’s growing and it didn’t know if you give so more color on the magnitude of that?

Chuck Berger

I’ll let you comment on that Ron.

Ron Johnston

Okay. We are enjoying growth rates at higher education that are substantially more than any other vertical. However, lagging slightly from what we enjoyed over the last two years and in the utilities we’re seeing growth in the municipal utilities more so than in the larger utilities that are principally the ChoicePay clients. Those are RFP type contracts. So we need to dislodge incumbents get it to an RFP and then be able to be it. So we’re pushing hard to get the larger ones to grow but we continue to add and penetrate municipalities.

Brett Huff – Stephens

Okay. And then last question on cash deployment, obviously that you’ve all have done a great job in getting your cash back on your balance sheet in a liquid form. What are your thoughts on how you’re going to use that?

Chuck Berger

Well as I mentioned, we have a new CEO who will start on the 24th of August. We’re also coming up toward to the end of our fiscal year. So we are finalizing capital budget plans for the upcoming year and beyond as well as our normal P&L budgeting and our long-term strategic view and we’re assessing what continued development cost, most of which are capitalized but they are cash outflows but the platform are going to be so I think you can see us over the next 30 to 90 days with a new CEO at fiscal year end, new budgeting cycle completed coming up with answers on how we’re going to handle that. But right now, for the moment we have no actions plan.

Brett Huff – Stephens

Okay. That’s all I need thank you.

Operator

Next question comes from Gary Prestopino with Barrington Research. Your line is open.

Gary Prestopino – Barrington Research

Hi. Couple of questions here, just want to make sure what this G&A expense Ron, if I take out the 1.3, you were saying a 4.7 million per quarter somewhere in that range is a good number going forward right?

Ron Johnston

What I – no – let’s see. Let me look at my numbers here.

Gary Prestopino – Barrington Research

It is 5.9 million I believe this quarter. And then you have 1.3 of non-recurring.

Ron Johnston

Yes. I would agree with that Gary.

Gary Prestopino – Barrington Research

Okay. That’s fine. And then, could you maybe talk a little bit about what has happened here with this consolidated platform and the migration that is getting it pushed out. As of last quarter, you were pretty certain that you would get this done 12 to 18 months earlier the once you are now saying, so could you maybe elaborate on exactly what has forced us to be pushed out into I wish like almost 2013 now?

Chuck Berger

It’s so closer to 2012, but and I’d like to emphasize that we are continuing to analyze this and we’ll refine this as we do that, but essentially as we got further and further into the development of this we’ve discovered two things that we’re assumptions, one was the assumption that we made that ultimately as we try to implement it, it did not turn out to be true and one is, frankly something that we’ve just learned in the process. The first being, the ChoicePay platform is a lot more complicated than we thought it was when we acquired the company, principally for the added share in the utilities vertical. We’d also hope that we will have less work to do with their platform as far as consolidating on to that platform in the future. We’ve just run into issues that that we didn’t anticipate and frankly we’re not discovering and would have been hard to discover in the due diligence we did at the time we made the acquisition of ChoicePay.

Secondly, we realized in this process, we buildup 4,000 direct bill customers over, in some cases closer to 20 years at EPOS and 10 plus years at OPC. Some of those customers have been pretty hard wired into those two platforms and moving them over to a common platform will take more time and more work than we had originally anticipated and those are really the two drivers that are causing this delay. In the mean time, I really want to make sure I make it clear that our business continues to run very well on the platforms we have and as you’ve seen we’ve done a great job of cost management both increasingly in our direct costs as well as certainly in our sales, marketing, general and administrative expense area and we will continue to do that and continue to drive towards getting a common platform. So while this is a delay we don’t feel it’s one that will materially affect our ability to keep the business on the current quarter since to be that it’s on.

Gary Prestopino – Barrington Research

So right now you are on three different platforms for one ChoicePay, one EPOS, one OPay is that correct?

Chuck Berger

That’s correct and that’s been true in essentially it brought to those companies we’ve maintained their platform for that customer vertical that came along with those companies.

Gary Prestopino – Barrington Research

Okay. And this is, you’re having three platforms like this is directly impacting your gross margin, correct. That’s where we’re going to see that once this is consolidated it does beneficially impact your gross margin, correct?

Chuck Berger

Well, we’re hoping to see it in number of places. We certainly would hope that you’ll see it in gross margin meaning the difference between our gross revenues and our net revenues as we’re able to use a more advanced platform to take advantage of lower processing costs in the marketplace and ship business towards transactions like ACH that have lower, lower cost inherent to the transaction. Some of that we can do on all three platforms and we may invest in getting more of that on to the off three platforms to get that benefit. Below line, we’ll also see costs as we get the platform done and potentially have lower development costs going forward. We’ve been able to aggressively reduce headcount and facilities devoted to supporting the current platforms because they are so stable and so tested over time that we’ve already gotten quite a bit of benefit even though there will be a delay in those platform development.

Gary Prestopino – Barrington Research

Okay. Thanks.

Operator

Next question comes from Brad Evans, Heartland. Your line is open.

Brad Evans – Heartland

Yeah. I have a few follow-up questions and I’ve couple of deeper dive questions. Ron, did you say the transaction were up 10% in the quarter is that correct?

Ron Johnston

Yes. It is.

Brad Evans – Heartland

So 4.86 million is that – is that a right number?

Ron Johnston

I’m just trying to find, yeah. That’s correct.

Brad Evans – Heartland

Okay. I’m just curious the level of stock that was brought back in the quarter was relatively low, I mean less than, I guess year-to-date it’s less than $1 million I guess with the cash flow statement. Can you just talk about you’re thinking behind that?

Ron Johnston

I think that Chuck pretty much explained it in the prior answer and that being that we were – our price of our stock was appreciating in the early part of the year. We sensed that the amount of the value in the company at the moment probably didn’t weren’t further acquisition of the stock at that very time. Subsequently, obviously the stock price has come down and what we’re evaluating now is that and we were waiting Brad for the liquidation of the auction rate securities so that we can make an overall capital plan of not only potentially additional stock repurchase but also acquisitions, the investment in the CapEx and the capitalized labor for the platform and we’re really just now at a point were my team kind of advise the board as to where we are and some recommendations for them to consider to go forward.

Brad Evans – Heartland

Would these expectations…

Chuck Berger

I want to punctuate that with two things – a couple of thing. One, we weren’t sure and in fact as you note from our past financial statements, we classified the auction rate securities in the long-term section of our balance sheet on the asset side. Having cleared the hurdle, only including the last $11 million that closing after the quarter ended which is why you still see $11 million on the balance sheet for the balance sheet having in front of you. We now those are liquid and that gives us some information and on top of that, we’re a year-end planning cycle for the year coming for – upcoming new year, new fiscal year as well as the new CEO but cash planning is very high on this priority list as you arise on a job that we could feel.

Brad Evans – Heartland

Just in terms of in light of the more difficult environment, I mean is there an opportunity to readdress the cost side of the equation here, I mean have you – are there – is that avenue exhausted?

Chuck Berger

I think we’ve pushed close to as hard as we can on the SG&A including marketing expenses. I wouldn’t say that the avenue fully exhausted and again we have a fresh that of eyes with new energy to look at that with the obvious goal being to continue to increase both operating income margins and adjusted EBITDA margin. So we’ve made dramatic improvements year-over-year as you saw on the numbers and the discussion that Ron had it few minutes ago. But you’re not going to see that kind of continued improvement obviously in running a company of this size but the margin growth will be far more added revenue growth than from any more dramatic cost reductions.

Brad Evans – Heartland

Would you expect to be adjusted EBITDA positive in the fourth quarter?

Chuck Berger

That’s our plan but again we’re no more specific to that at this point.

Brad Evans – Heartland

Can I’m if you – couple of other questions, bear with me. The cost of the capital expense for the platform migration in 2011, what is that expected to be?

Chuck Berger

Ron, I don’t know if we disclosed that in the past so I’ll turn it back to you.

Ron Johnston

Well, I think that number one, we haven’t – had still specificity disclosed but number two, the planning process, Brad is really does coming to a pinnacle here over the last couple of months as to exactly the direction exactly what we do with the platforms. As you know historically, we spent between CapEx and capitalized labor about $5 million per year and from what I am hearing from our technical and the management meetings I expect that for the next two or three years, we can expect the same amount of expenditure and we will expect about $6 to $6.5 million of amortization and depreciation in each of those years, so greater depreciation, amortization than new cash.

Brad Evans – Heartland

Okay. So we’re not – we’re not facing an eminent massive capital bubble here that would be required to facilitate that migration then?

Chuck Berger

No. We will not.

Brad Evans – Heartland

So the company – assuming that there is some stabilization in the federal government vertical at some point and continue growth in your new efforts than one can hope to see improving levels of adjusted EBITDA as we have about into 2011 and 2012?

Chuck Berger

No. Yeah. Other than that there is lot of efforts in there.

Brad Evans – Heartland

Well. Sure.

Chuck Berger

I guess the biggest of which is the one that’s most of our control as you’ve seen we’ve grown number of transactions for a number of customers but revenue has not grown in and that’s the biggest effort whether or not the tax based returns to a level that that drives that revenue on a positive growth trend as opposed to the negative one we experienced in this quarter.

Brad Evans – Heartland

Okay. But last my comment is a comment, not a question and this is coming from a shareholders that involved with the company for a multiple years now, so that’s not a short-term stock rendered board investor in the company and I would just urge the board and new management, the new CEO, you need to have a sense of urgency. I realized this has been a very difficult and lengthy transformation of the company and we do understand that but I urge you to understand the need to have a very shareholder friendly focused going forward in terms of balancing the need to invest for growth and also returning capital to shareholders. It has been a very frustrating and painful experience for shareholders. Your stock is back to a level, it hasn’t gone anywhere of over ten years and I think you need to be aware of the pain that long-term shareholders have been doing and then there needs to be a very strong focus in terms of creating shareholder value with the sense of urgency. Thank you.

Chuck Berger

I would – first of all, thank you for your continued long-term support and a number of institutional investors who have been long-term investors. I can only tell you as a board member for the eight years and in particular the past year or so the sense of urgency on pushing on all the levels to drive shareholder value including having the right leadership in place, the right strategic plan in place and the right level of investments and the right return of capital are the highest in our priorities with the greatest sense of urgency and using some actions on a different front to return of capital right now that were pretty dramatic and pretty, I think showed significant sense of urgency to drive success in this company faster than might have happened if we just let contract expire and certain other things happened.

Operator

(Operator instructions) The next question comes from Brett Huff, Stephens. Your line is open.

Brett Huff – Stephens

Thanks. Just a couple of quick follow-ups. Number one, what other partnerships are similar sort of relationships like that or even big renewals do you have coming up that we should sort of keep our eyes on is the year and next even quarters coming around?

Chuck Berger

We continue to grow our business with a number of key partners. Most of whom have asked us not to discuss their, our contract relationships with them directly. Clearly we’re impacted negatively by the partnership in the federal tax market and on the other hand we have a couple of growing partnerships in the higher ed marketplace and one of our key partners there is about to release – new release their software we’re writing stuff with them and being able to plug into that new release of software.

We have grown a couple of growing and strengthening partnerships in the utility vertical and we expect those to continue to be productive for us. We’ve added focus in our sales force to go after those partnerships that are significant and kind of impact for us and to leverage those to be credits to be possible, some of them do require that we keep our technology in pace with them and we’re doing that, others just require joint sales and marketing efforts and we’re pursuing those as aggressively as we can. There is nothing of landslide performance of every proposition that coming up for renewal or any big one that we have a scenario and we hope that we’re thinking will come on the hook soon but that’s a focus of the way we do business or our go-to-market strategy or continuing to put emphasis on.

Operator

The next question comes from Beth Lilly with Gabelli. Your line is open.

Beth Lilly – Gabelli

Good afternoon.

Chuck Berger

Hi, Beth, how are you?

Beth Lilly – Gabelli

Good Ron. How are you?

Ron Johnston

I’m great thank you.

Beth Lilly – Gabelli

I wanted to get a little more – it’s a follow-up to Gary’s question about the platform and the issues with the consolidation of it. Can you help me understand – I understand the piece about the customers and trying to transition them and it’s going to – it’s very difficult to do because they’re used to the older platform. That’s fine. But can you help us understand what the problem is in terms of the ChoicePay platform and it being more complicated than you originally thought? What exactly are the problems and when did this – when did you become aware of the problems with the ChoicePay platform?

Chuck Berger

Let me premise my comments by the fact that I’ve been managing technology companies for the past 30 years though. Understanding technology and platform and technology transformation is something I’ve learned a lot about over a fair number of years and I’ve yet to see one of these, particularly, some of this scale go exactly as planned and the delay we’re seeing here isn’t of a magnitude that shocking to me coming into this roll so many weeks ago. Although this cleaned up obviously and we’d rather been on target. We’re not going into a lot of detail which I don’t think will be appropriate. We found database structures in particular that were not only more complicated than they needed to be and working and putting new applications on top of that database being more complicated but the database itself having capacity limitations that probably won’t allow us to take all of the volume. So the only with that issue principally is going to be is going to take the greatest amount of effort and responsible for the biggest amount of the delay.

Beth Lilly – Gabelli

And so up until you found the problems, you were running what percent of the transaction on the platform?

Chuck Berger

We are today running just shy of 40% of our transactions on the platform. By the way that includes the back-end of our IRS business through the highest volume days in April which are of course as they are to before April 15th, so it is handling a big chunk of our business today and we have ported our most important customer on to that platform and it’s to sustain that volume. Overall, we’ve gotten on different days as high as 47% as I said but on average we’re about a little less than 40%.

Beth Lilly – Gabelli

So it’s easier to run one big customer with a pretty common set of parameters as opposed to lots of different customers with various needs. Is that the problem?

Chuck Berger

Totting a customer is somewhat independent of size. And so there is lot of effect it’s more dependent on how much customization or how hardwire they are into one of our older platforms than it is on how big the customers.

Beth Lilly – Gabelli

Okay. Right, I was under the assumption that when you bought ChoicePay, one of the things that the prior CEO had said was they had a great platform and you could just transition to it and it was much more highly technical and it was a better platform than the one that the existing Tier had.

Chuck Berger

We’ve got certainly pieces of that that we found to be true and there are pieces of that we found with more time to work on a platform to just not be – we had made bad assumptions at that time.

Beth Lilly – Gabelli

Okay.

Chuck Berger

And we only really became aware of this to answer your question at the timing of this over the last several weeks in detail and I can tell you in my six or seven weeks whatever that’s I’ve been in the interim CEO role here that’s the one of areas I spent the most time on because this is not where we thought that would be.

Beth Lilly – Gabelli

Okay. Okay, that’s helpful. And then, Ron, I just want to – I missed – so if we adjust the EBITDA and we take out the $1.6 million, a good EBITDA number to use on an ongoing basis for quarterly assuming revenues don’t drop off is about $3.7 million?

Ron Johnston

You need to watch the seasonality; remember that the first fiscal quarter is our second smallest quarter. Our second fiscal quarter is our first smallest quarter than we’re in the quarter that we just ended where we spike because of the IRS and then the fourth fiscal quarter which we’re in now is the second largest quarter and that has to do with the tail end of property taxes and with higher education enrollments so you can’t really normalize it across on a flat projection.

Beth Lilly – Gabelli

All right. Okay.

Chuck Berger

Yeah. I remember that it’s the quarter we – that we’re discussing on this call but their fiscal quarter now have the IRS that you have the second installment of California tax – real estate taxes do, which has had an significant impact on our top line as well.

Beth Lilly – Gabelli

Okay.

Chuck Berger

I know that because I send that check every April.

Beth Lilly – Gabelli

Okay. And my last question is about the new CEO. Can you provide a little insight into the search process that you undertook? And I went onto the existing website for where he is right now, FleetCor. And it looked as though he was still associated with that company. Did you hire him away from the company or can you give a little background on that? And then secondly, can you talk about his compensation structure and is it going to be incentive based? Is it going to be – is the short-term and long-term incentives going to be based on EBITDA and getting the stock price up? Can you give us some sense of that?

Chuck Berger

Sure. Let me first talk about the search process. We realizing that our prior CEOs contract was expiring this coming April and to my comment earlier of increasing the sense of urgency on increasing shareholder value, the board made a decision a couple of months ago to begin – to retain a national search process to form a special committee of the board which I think we call a succession planning committee and to aggressively go look for the best CEO we could find for this company realizing that would mean determination of Ron’s employment earlier than his contract, just expiring in April again all this driven by urgency to drive shareholder value.

We were very pleased as a board to get a 10 to 12 extremely strong candidates and we got this down to a group of finalist of three or four, anyone of which we would have been pleased with but we’re fortunate that Alex hard his lives, his name I mentioned before, chose to accept the job and he was our number one pick. So after a national search, we got a number of rate candidates and we were able to land the one that we wanted the most. I was particularly encouraged as I interviewed all of these, particularly in my interim CEO role that people of the caliber that we’d gotten our finalist down to have that much confidence and believe in the future of potential adhere that they were leaving that in the case of Alex a current exceptional role to come and drive the success here at Tier. So we did do a very broadened search.

We retained a national firm which was Korn/Ferry that specializes the payment processing industry and frankly having been involved in the number of searches on both sides of the table this is the best one I’ve seen in terms of the speed that we got it on the quality of the candidates. Alex just today resigned from his current position so not surprise that you see him still on their web site. Clearly, he and I, last night, where hammering out the final terms of his agreement. So this is very fresh news and again not surprise that you’re seeing him as still part of the team at FleetCor.

As far as compensation goes, we did a study through recognized compensation group called Compensia. I will disclose all of this of course in our CD&A when the 10-K gets done. We benchmarked the various components of his compensation to the survey results from that. We think we’re well within the part of the market compensation that we want to be in. We are definitely focused on – we think there is a good balance on base salary, incentive compensation, the exact target parameters of which we haven’t set yet but as part of the new year’s planning process we will certainly do that. I think you can count on the board determining to focus on both margin and revenue growth as well as some strategic objectives like the platform.

But those, I want to emphasize that those specific objectives have yet to be set other than the amount of his target bonus and then finally he will have reasonably equity which will be disclosed when we file the 8-K in the next day or two that certainly give him a lots of incentive to move the stock price from where it is today to an higher price as he would be. One individual that will stand to gain heavily from that, so we took all those factors and set him a compensation structure.

Beth Lilly – Gabelli

And when you talk about a sense of urgency, what does that mean to Tier? And I would echo Brad Evans’ comments prior, which is as a patient holder of this Company, we’ve – there has been a process of making acquisitions and then trying to consolidate the acquisitions and implement the strategic plan and it just feels like there’s been one stumble after another. And so when you talk about sense of urgency, what does that exactly mean to the Board of Directors?

Chuck Berger

Well again, to repeat myself. I think it clearly means having a right leadership in the company and we think we found that with Alex, in particular, now he has proven himself as a CEO and particular as CEO of a public company but more importantly, he has been a CEO in the payment processing space and we’ve not had that before. And again, we didn’t wait for the prior CEO’s contract to expire. We moved on this as fast as we thought we could. We certainly had a sense of urgency in divesting in the company’s that we do not think we’re contributing to shareholder value and I think the investors of echoed that in terms of their reaction on their holdings on the stock price. And the – I think the most important thing is the leadership that is heavily motivated for all the right reasons not only just financial to make this successful as fast as we can.

Beth Lilly – Gabelli

Yes, is Alex going to be relocating to Reston?

Chuck Berger

He will over time, yes. He currently lives in (inaudible) as you probably saw from your visit to the web site but he will be relocating to Reston in the future.

Beth Lilly – Gabelli

Is that – I think that…

Chuck Berger

He is already mapped out the flights to be here from 8:30 Monday morning to close of business on Friday. So he can then – as you probably know we also have a significant amount of headcount in Auburn and at least in the immediate term, Atlanta is the only place you can launch yourself off to Auburn from. So he will have that advantage and the time before he chooses to relocate.

Beth Lilly – Gabelli

Okay. Okay, great. Thank you.

Operator

The last question does come from Gary Prestopino with Barrington Research. Your line is open.

Gary Prestopino – Barrington Research

Yeah. Ron, just – could you refresh us on in terms of what kind of working capital you have to keep in this business to run it? What would be the real free cash that you have on the balance sheet?

Ron Johnston

I would – to answer that question, I think it’s heavily dependent on the factors that I’ve discussed plus one more and we cleared billions of dollars through a variety of pen and processors including ACH transactions and our processors look to our balance sheet strength before they’re willing to take the risk of even a day or two of payment flow on this. So there is that variable in there, which has the ad new processors and switch our payment mix in particular hopefully more heavily towards ACH which gives us better margins we’re figuring that piece of it out but beyond that over the next weeks and small number of months we really need to understand what our 2012, excuse me, 2011 business plan looks like from both our P&L and cash generation standpoint as well as our CapEx standpoint. So I would discourage you from thinking if there is some number of that we all believe that it is easing near-terms free cash in the balance sheet right now.

Gary Prestopino – Barrington Research

Okay. Would you be willing just to give us an idea of what the magnitude of the drop in revenues on the federal side was to give us what the percentage of revenues were this quarter versus last year at this time?

Chuck Berger

I don’t have that number in front of me. So I don’t know if you do Ron.

Ron Johnston

I can get it in just a minute.

Gary Prestopino – Barrington Research

And then also in terms of – you said the strongest quarter is the first – is the third quarter, the fourth quarter is the second strongest from the standpoint of revenue. And then you said the first is the least and the second is the third. Is that correct?

Ron Johnston

That’s correct.

Gary Prestopino – Barrington Research

Okay. And then in terms of the federal impact, the bulk of that is in this quarter or does some of that dribble off into Q4?

Ron Johnston

No. It’s in this quarter Gary.

Gary Prestopino – Barrington Research

Okay. I guess I just have a last question too. You have been on this Board for what, eight years, Chuck?

Chuck Berger

Yes I have.

Gary Prestopino – Barrington Research

8.5?

Chuck Berger

8 years. I guess I have been on the board for 8 years.

Gary Prestopino – Barrington Research

You have been through the CEO that got terminated because of the numbers, then the CEO thereafter and now we have CEO number three. And you’re saying the Board has a sense of urgency here but like a lot of people on this call, you can sense that we have been patient but we’re not very happy with the end results. I mean what is going to be different here versus what has happened over the last six to eight years? I mean, is this gentleman truly going to be able to take this Company where it should be?

Chuck Berger

Well, we certainly and let me comment on over the last six to eight years. We went through an unbelievable two years of those six to eight years of correcting some severe accounting and financial efficiencies that we had that as you know causes to be delisted and need to get relisted and it’ll certainly result in an independent investigation that let to the termination of Jim Weaver as CEO and we had previously terminated the CFO. The magnitude of the effort to get through all that was dramatic with Ron Johnston in the CFO role where he has been now for nearly two years, if I correct me if I’m wrong, we’ve not had any of those issues and in fact we’re able to close books far ahead of regulatory requirements in many cases and secondly, I would say over that period of time to the credit of the past CEO, the immediately past CEO, we’ve divested which was a harder and longer than we would have liked to have been but we’ve succeeded in getting rid of all of the businesses that we’re not really contributing to shareholder value and our judgment were – or strategic to our future that makes some of the things that happen to us in the past unlikely to happen to us again in the future.

We were the singular business focus here on the biller direct marketplace and the rapid growth in that marketplace along with frankly an increasing trend for consolidation in this marketplace where we could on either side of that that stick. I think there is significant opportunity ahead of us, as we continue to make progress like we have some symbols like this platform issue, yes, but I think we’re better than we’ve ever been in the last eight years that I’ve seen transitioned well for the future. I’d add one last piece of that is the composition of the board has changed pretty significantly over the last two or three years. We’ve added an investor in the company, who is still on the Board, Zach Sadek, from a large private equity fund, Parthenon. We’ve added Phil Heasley who has now become our Chairman and separated the Chairman and the CEO role. Phil runs a nearly billion-dollar technology and platform company in this space. He is adding significant value and a great sense of urgency.

David Poe has joined the Board. David is one of the lead partners in a consulting firm that specializes in the payment processing space. He brings strategic vision as well as relationships in the industry that are very helpful. So I think in terms of leadership of the company, leadership of the board and a whole lot of the problems that have nagged out us in the past behind us, which is why again I emphasize that our current platform are handling our current level of business is just fine. So this platform delay will not end up by itself stopping our growth or causing a major ripple. We’re confident that future in confident of the candidate we’ve picked to be the new CEO.

Gary Prestopino – Barrington Research

Hey Ron, do you have those percentages?

Ron Johnston

29%.

Gary Prestopino – Barrington Research

29% this quarter?

Ron Johnston

Yes. Quarter-over-quarter.

Gary Prestopino – Barrington Research

And then what was it last year as a percentage of revenue?

Ron Johnston

That’s the decline.

Chuck Berger

Wait a minute, that’s a decline here. Your question was – what was the decline, this quarter fed versus last year.

Gary Prestopino – Barrington Research

Decline in revenues were 29%, yes. What I was trying to get was, what was the percentage of fed this quarter versus last year at this time?

Ron Johnston

I will get that back to you.

Gary Prestopino – Barrington Research

I think I can get that off-line. All right, thank you.

Chuck Berger

Yeah. It’s also in one of the charts, and then my scripts, so you’ll see then I afraid what’s the chart now but there is a chart that shows 2007 dependency on IRS revenue versus the share. So we assume sort of we can try and give you specifics off-line.

Gary Prestopino – Barrington Research

That’s good. Thank you.

Liz Bowman

And thank you everyone. 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 analysts who wish to speak to management about the Company and its performance to schedule a meeting by contacting our CFO, Ron Johnston, at 571-382-1333 or rjohnston@tier.com. This concludes our earnings release call for the third quarter of fiscal year 2010 for Tier Technologies. Thank you and good evening.

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