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Higher One Holdings, Inc. (NYSE:ONE)

Q1 2014 Earnings Conference Call

May 8, 2014 08:30 ET

Executives

Kevin LeBlanc - Investor Relations Director

Marc Sheinbaum - Chief Executive Officer

Chris Wolf - Chief Financial Officer

Mark Volchek - Former Chief Executive Officer

Casey McGuane - Chief Operating Officer

Analysts

Andrew Jeffrey - SunTrust

Ryan Davis - Credit Suisse

John Rowan - Sidoti & Company

Wayne Johnson - Raymond James

Gary Prestopino - Barrington Research

Mike Grondahl - Piper Jaffray

David Scharf - JMP

Operator

Good day, ladies and gentlemen and welcome to the First Quarter 2014 Higher One Holdings Incorporated Earnings Conference Call. My name is Tawanda and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Mr. Kevin LeBlanc, Investor Relations Director. Please proceed sir.

Kevin LeBlanc - Investor Relations Director

Thank you, Tawanda. Good morning, everyone and welcome to the Higher One first quarter 2014 earnings call. Giving prepared remarks on the call today will be our Chief Executive Officer, Marc Sheinbaum and our Chief Financial Officer, Chris Wolf. Marc 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 maybe 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 number of risk 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 condition, changes in estimates, expectations or assumptions, changes in general economic or industry conditions or other circumstances arising and/or existing since the preparation of this presentation or to reflect the occurrence of any unanticipated events.

The forward-looking statements in this presentation do not include the potential impact of any acquisitions or divestitures that may be announced and/or 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, current reports on Form 10-Q and current reports on Form 8-K. Information about the factors that could affect future performance can be found in our recent SEC filings available on our website at 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 non-recurring or non-cash impacts to our results provide useful information regarding normalized trends related to the company’s 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 will turn the call over to our CEO, Marc Sheinbaum. Marc?

Marc Sheinbaum - Chief Executive Officer

Thanks, Kevin and thanks to everyone, for joining us today. It’s good to be here. With me on the call is our CFO, Chris Wolf, who will provide our financial update. Mark Volchek, one of the company’s founders and our former CEO will make a few comments. We also have Chief Operating Officer, Casey McGuane. He is here to answer any questions after our prepared remarks.

I want to start by publicly thanking the Board of Directors and particularly Mark Volchek and Miles Lasater for entrusting me to take over the leadership of this company and guide us to the next level of growth. I pursued this opportunity to become the CEO of Higher One, because I see an opportunity to join a company that already has great assets, including a terrific culture that focuses on delivering for our clients and universities, a strong suite of products and services that can be a platform for future development and expansion, a motivated employee base that is focused on doing the right thing for all of our constituencies.

I have seen firsthand how our customer service has played an important role in helping the company retain our clients at a greater than 98% retention rate. And I definitely view that as a strength upon which we can continue to build the company. I believe with our strong foundation and an increasingly diversified business lines that we can have the ability to create long-term value for our shareholders.

Over the last few weeks, I have met with employees in New Haven and Buffalo and I will be meeting with employees in Oakland, Atlanta and our Chennai, India sites in the future. In the coming weeks and months, I will also be meeting with administrators and colleges and universities to better understand how we can help them fulfill their goals and to make sure that they know that their business is vital to us.

I will reemphasize how Higher One can positively impact the students college experience through our comprehensive approach to financial literacy, which extends to our innovative low cost banking services, our concentration on increasing choice for students, our focus on helping the campus run more efficiently and our passion for breaking down data silos, so campuses can make more effective decisions in the pursuit of student success. I have also started meeting with our bank partners, while I am looking at ways that our current effective relationships can be further enhanced. I also look forward to meeting the investors and analysts who follow Higher One. And as importantly, I look forward to expanding the dialogue with the regulators that oversee the company.

I will discuss several other topics a little later, but now I would like to turn the call over to Mark Volchek for some comments.

Mark Volchek - Former Chief Executive Officer

Thank you, Marc. I wanted to take a moment to say thank you to everyone who has helped make Higher One what it is today. It has been a great journey growing this business from an idea to over $200 million in annual revenues and the unbelievable impact that we have had on 1,900 schools and 13 million students. I believe that Marc Sheinbaum and the executive management team will continue to evolve the company and provide it with experience and capable leaderships.

For those who missed the press release announcing the appointment of Marc as our new CEO, let me tell you a bit about his experience. Marc Sheinbaum most recently was the CEO of the Auto Finance and Student Lending business at JPMorgan. This unit had over 5,000 employees and $53 billion in auto loans in 2013. Prior to this, Marc spent 15 years at GE in its consumer finance business ultimately serving as the CEO and President of GE Money Services. Marc has experience in navigating complex regulatory matters within consumer finance. I have been asked about what I will be doing once I leave management of Higher One. And for now I intend to help in the transition of duties to Marc as well as remain a Director in the Board. I also look forward to take some time off after that transition.

Thank you to all who have participated and supported in the growth of Higher One. And with that, I will the turn the call back over to Marc.

Marc Sheinbaum - Chief Executive Officer

Thanks Mark. Thanks for all your efforts in building the company and I certainly look forward to working with you Miles and the rest of the Board. I would now like everyone to please refer to the accompanying slide deck that is available on our Investor Relations website as I discuss the quarter and other topics.

Turning to Slide 3, total revenue was 16% higher in the first quarter of 2014 compared to the first quarter of 2013. Payment transaction and higher ed revenue continued to be the drivers that led to higher results over 2013. The large portion of the increases in revenue came from our strategic acquisition of Campus Solutions last year. In addition, we continue to see significant organic growth through our payment business.

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 an adjusted EPS of $0.25 for the first quarter. We continue to see growth in our non-refund deposits as we experienced growth of 18% this quarter. These deposits now make up in excess of 10% of total deposits. The growth in the quarter was in part aided by the seasonal tax refund deposited into the accounts. Chris will give you more insights into the financials in a few minutes.

Now, turning to Slide 4, the Department of Ed’s negotiated rule making on cash management is in full swing. Casey McGuane, our Chief Operating Officer is primarily a negotiator on the committee and has been very active during the past few months representing the interest of third-party services. The goal of the committee is to reach consensus on new regulations that will then be opened for public comments. The committee plans to hold the session on May 19 and 20 to continue discussion of the draft rules. As we have previously stated, we are limited in the information we can provide in this form due to the protocols that apply to negotiators. However, let me assure you we are actively engaged in the process and are working hard to help craft new regulations that are appropriate for students, higher education institutions and third-party servicers.

Now, turning to our bank partners, clearly the regulatory environment as we operate is fluid and complex due to our relationships with multiple bank partners that are overseen by different regulatory bodies. Over the course of the past year, we have made tremendous strides in strengthening our compliance efforts. We continued to invest additional resources to make this area even stronger. And these improvements and investments in both compliance and internal audit are showing good progress.

Moving to Slide 5, I am pleased to report first quarter new sales of our refund disbursement platform of 90,000 SSE and our overall retention rate continues to exceed 98%. We had another good quarter of selling our payment processing suite adding an additional 11 campuses. A good portion of these sales included our SmartPay and our full service payment plan products. As a reminder, these products enhance efficiency and compliance for the business office and afford students with convenient options to make payments to the institution. The revenue from these two services comprises the majority of payment transaction revenue.

Now turning to Slide 6, as part of the 90,000 SSE that we signed in the first quarter, 62,000 SSE were from the former Campus Solutions clients that we signed to refund management contracts. Since our acquisition of Campus Solutions from Sallie Mae through March we have signed contracts with schools representing 454,000 SSE. Now we believe there are still opportunities to sell our refund management service to additional former Campus Solutions clients. We have made good progress with our integration from Sallie Mae, we have scheduled to transfer functions from Sallie Mae throughout the remainder of this year and expect to fully transition to Higher One by year end.

Moving on to Slide 7, over the past year the company has built or acquired services which uniquely positioned Higher One in the changing landscape of higher education, especially as it relates to the importance of enhancing efficiencies, achieving compliance and improving student success. Our product development efforts have largely been focused on enhancing our existing products and finding new ways we can combine our services to help students in the pursuit of their degrees. In the first quarter we enhanced the number of international currencies we process through our payment processing suite. We will continue to add currencies so that by the start of the fall semester our payment services will be able to help schools ease the transition for more than 50% of the international student population by allowing them to make payments in their native currencies. In addition, we continue development on our mobile cashiering solution to empower administrators to accept payments anywhere on campus.

We also created a tool for our education services suite which enables faculty members to solicit real time feedback from their students for the purpose of improving the quality of instruction. Our other future initiatives will be further characterized by the distinct emphasis on mobile solutions to meet student and administrator demand. On top of our product development we have invested in the continued enhancement of our comprehensive approach to customer service. We had strategically increased the number of customer care agents and have redeveloped our approach to train them. We have established more effective methods of tracking call resolution and have boosted our social media monitoring to ensure students receive the assistance they require. We have also created new channels for soliciting student feedback, so we may continue to make the necessary developments to keep our students, customers satisfied. So in summary we had a good first quarter with revenue driven by solid performance through our payment transaction suite. We also continued with solid sales of our refund management and payment transaction services to colleges and universities.

I am very excited to take over the leadership of Higher One. I know that there are issues that face us, but I also know that we have valuable assets that will help us as we work through these challenges. We will continue to develop our customer and consumer product brands, diversify our business and work to mitigate risks going forward. I believe by making these strategic investments that these actions will create value over the long run.

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

Chris Wolf - Chief Financial Officer

Great, thanks Marc. At this point I will 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, total revenue for the first quarter was $66.6 million compared to $57.4 million during the first quarter last year, an increase of 16%. I will get into more detail on the drivers of our revenue changes on the upcoming slides.

We had a gross profit margin of 58.7% in the first quarter of 2014 compared to 61.1% 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 account revenue. The year-over-year change in gross profit margin this quarter continues to be driven by the inclusion of the Campus Solutions business. As I have stated previously the margins on the acquired business are lower than the margins on our comparable core Higher One products. We expect to reduce costs as we sunset certain of the Campus Solutions offerings during the year.

Although the shift towards payments away from account revenue puts more pressure on our gross margin, we have been able to increase both profit and margin on our organic payments business year-over-year with better costing on certain convenience fee payment transactions. In addition to increased payment transaction expenses for SmartPay and full service payment plan products, we did experience an increase in cash based losses suffered from fraudulent related transactions during the period. We believe this increase is the result of a variety of factors and don’t expect losses to remain at these levels sustained in the current quarter.

Moving to Slide 9, we know that disbursement and trends are a topic that many investors are interested in, so we will start off with what we saw during the quarter on refunds. Enrollment data is released on a one year lagging basis, so this is the best proxy we have when we looking at enrollment at our client institutions. In summary, total unique recipients increased by 2%, which was aided by a 6% increase in launched SSE. But this increase was offset by the decrease in average refund size of 3% resulting in total dollars disbursed decreasing by 1%. This decrease in total dollars disbursed coupled with the clients and adoption rates in our total school population resulted in total dollars disbursed into OneAccounts being down 6%.

Turning to Slide 10, on a same school basis unique recipients were down 4% and we saw average financial aid dollars down approximately 3% for total dollars disbursed being down 7%. We also showed a decrease by 3% year-over-year on the dollars going into the OneAccount. All-in, total dollars disbursed in the OneAccount on a same school basis were down approximately 10%.

Turning to Slide 11, this waterfall slide illustrates the impact of the different drivers that affected our account revenue. For this presentation we have tried to isolate the impact of the number of changes that have happened over the course of the past 12 months. While we have shown them in separate columns change in one factor will often impact another factor. We have estimated the revenue impact based on the relationships that existed as of the first quarter 2013. To be clear this is an illustrative example to show directionally the moving parts of account revenue and the impact one factor can have on revenue. As shown in the second column our account revenue increased by approximately $1.8 million based on our launches of new schools compared to last year. As you can see this increase was offset by a combination of lower enrollment and financial aid disbursements compared to last year shown in column three as well as a decrease shown in column four in overall account adoption year-over-year.

Mark spoke about the increase in our non-refund deposits. This had an estimated $800,000 positive effect on revenue. Finally, column six shows that the change that we have made to our fee schedule compared to last year. The overall effects of the change in fees led to a decrease of approximately $230 million in account revenue year-over-year. As a reminder, the majority of changes to the fee schedule occurred on January 1, 2013. These changes had their anniversary and are not affecting the current change. However, in the third quarter of 2013, we eliminated the delinquent account fee beginning August 1, which is still continuing to impact our account revenue in the current period. It should be noted that the decrease in account revenue due to the elimination of the delinquent account fee was partially offset by other fees during the quarter.

Moving on to Slide 12, our revenue streams are continuing to be more diversified, this quarter is no exception as payment transaction revenue showed strength in the quarter, up approximately 118% over last year. During the quarter it comprised 22% of total revenue compared with 11.7% last year. The increase in payment transaction volume was primarily due to the additional revenue from the Campus Solutions acquisition and the strong revenue growth in SmartPay, which we discussed earlier.

Higher ed institution revenue grew 40% year-over-year and now comprises 15% of total revenue driven mainly by educational services revenue and also from revenue associated with the Campus Solutions business. The increase in educational service revenue is the result of fair value adjustments of deferred revenue, which reduced revenue during the first quarter of 2013 and year-over-year increases in client billings. We also had an increase in revenue associated with subscription revenue for our payment processing products due to a combination of new clients’ sales as well as additional sales to existing schools. One final point on this slide, account revenue now comprises of 62.6% of total revenue compared to 75.6% in the first quarter of 2013.

Moving to Slide 13, in general and administrative expenses, we had higher employee-related expenses due to increases in number of employees brought on board through our acquisition last year. We also saw an increase in professional fees related to additional compliance activities and to a lesser extent due to increases in depreciation and amortization. Product development was also higher due to transition-related expenses with the Campus Solutions acquisition, which increased our total product development cost. We expect such cost to continue to be at elevated levels throughout the integration. Sales and marketing expenses expense was up in the quarter. The largest component of the increase is acquisition-related amortization expense and personnel cost.

Turning to Slide 14, you will see that adjusted EBITDA was $22.7 million compared to $21.6 million last year. This increase was aided by larger adjustments for increased depreciation and amortization expense. The lower gross margin percentage and increased operating expenses both discussed above did contribute to lower EBITDA margin in the current period.

Moving to Slide 15, our adjusted diluted EPS equaled $0.25. In the current period, there was an increase in interest expense as we had $94 million outstanding at quarter end on our line of credit and a higher average balance outstanding compared to last year. The first quarter was a solid quarter for Campus Solutions as it contributed revenue of $6.1 million. On a non-GAAP basis, Campus Solutions was slightly accretive generating adjusted net income of approximately $200,000. We continue to make progress in reducing the losses from this business. As I mentioned earlier, we expect to reduce cost as we sunset certain of the Campus Solutions offerings during the year.

Slide 16 shows that our free cash flow decreased to negative $400,000 from the prior year quarter of $20.6 million. This was primarily due to the use of cash of $1.4 million in our operating activities in the first quarter of 2014, which included the funding for the class action settlement of $15 million. This compared to net cash provided by operations of $.22.5 million in the first quarter of 2013. There were higher capital expenditures in the first quarter of 2014, which were offset by the receipt of $3.5 million, which relates to state’s historic tax credits generated by the construction of our headquarters building.

Turning to Slide 17, we ended the quarter with a cash balance of $11.2 million. In addition to the free cash flow items, which I described on Slide 16, we had a net increase at outstanding on our line of credit of $5 million during the first quarter of 2014. As I previously mentioned, we now have $94 million drawn on our line of credit.

Moving to the last slide, Slide 18, we have previously discussed our views on what impacted sales in the first quarter 2014. The refund management SSE growth rate was 8% on a year-over-year basis ended March 31, 2014. Also previously discussed, a good portion of this growth has been driven by the conversion of Campus Solutions’ refund clients. Looking at our OneAccounts, you will see that it increased approximately 6% year-over-year.

In summary, the first quarter was a solid quarter in many respects. It does however reflect our historical sequential revenue and earnings pattern from the fourth quarter of the previous year. Although we are not prepared to provide specific revenue and earnings guidance at this time, we do expect our historical revenue and earnings patterns to occur in the second quarter. As such, we expect considerably lower sequential revenue and earnings during the period. This reflects the upcoming summer semester, which has lower enrollments and disbursements compared to the winter and spring semesters.

This concludes the prepared statements. And with that, we will be happy to take your question. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Andrew Jeffrey with SunTrust. Please proceed.

Andrew Jeffrey - SunTrust

Marc Sheinbaum, I look forward to meeting you and working with you, Mark Volchek it’s been a pleasure. Couple of things I guess and I realize you are limited on what you can say on the ongoing Neg-Reg sessions, but if we look at the most sort of onerous potential outcomes around marketing and fees perhaps can you talk and maybe more on marketing and fees, I suppose. Could you talk a little bit about how close you think you are to being compliant, especially on the marketing front with what could be a worst case outcome? And how you are thinking about sort of being proactive in the context of there is much uncertainty as there is out there as with what the final regulatory outcome is going be like, how you are thinking about that?

Marc Sheinbaum

Hi, Andrew this is Marc. Thanks for your comments. So, look I think you could appreciate that it’s a fluid environment and we really can’t speculate a lot on what’s happening with negotiated rule making. I can assure you that in my three weeks here I have spent a considerable amount of time with Casey and the team as he represents the third-party servicers and he has been actively at work in Washington. And right now, I think our efforts are doing our best to ensure that the industry’s voice is heard as well as the voices of our clients, the 600 institutions and of course representing the students that use our services, because our effort wants to be make sure that that college and students can receive a valuable service here. So, there will be one more negotiated rule-making session later this month and at the end of which the consensus of vote will be taken. And clearly, we are aware of all the discussions going on. So, I really can’t speculate on what outcomes are going to be. And again I know you respect that it’s a kind of a critical time right now with the discussions going on in an ongoing basis. So, I think that it’s safe to say to we are trying to be very constructive voice at the table to move forward.

Andrew Jeffrey - SunTrust

Is it reasonable to think that Higher One without going into specifics internally so to have some probability rated outcome scenarios and contingency plans. I assume you guys are thinking ahead in that context?

Marc Sheinbaum

I think we are spending a lot of time on this topic.

Andrew Jeffrey - SunTrust

Okay, fair enough. With regard to the Campus Solutions integration and that the efforts to sign those schools, it seems like maybe there is a little bit of a slowdown this quarter in terms of per event. What as you look out toward the end of the year, can you give us a sense of how many SSEs you think is reasonable in addition to the 454,000 you have signed already?

Chris Wolf

Sure. Andrew, this is Chris. I will answer that question. Really, if you go back in time when we talked about, when we did the acquisition, we said there was between 1 million and 1.0 million SSE that we are going to come over from the Sallie Mae business to the Campus Solutions business. Our original public comments were that we were going to shoot for approximately 500,000 of those. So, that really was our target. Obviously, we are going to try to get as many as possible. And I think you can appreciate that in the sales cycle, sometimes many schools are ready to sign, other times the process gets a little bit longer, a little bit slower. So, I don’t think you can read too much into one specific quarter, because I think you have seen the balances fluctuate. So, I am not prepared to say where we are actually going to be at year end yet. I’d go back to the target that we spoke about, but I do want to reemphasize and reiterate we are going to try to get as many as we can. And in a perfect world, if I would like to get all of them, I don’t think that’s realistic, but our goal is to get as many as possible.

Andrew Jeffrey - SunTrust

Okay. And one more if I may and then I will get back in the queue. With regard to the non-account revenue another good quarter, I calculated 14% organic revenue growth in the non-account business. Is there momentum building in those solutions? Is that a sustainable growth rate as you look out or somewhere in that you said, I know there is quite a bit of cross-sell potential in the installed OneDisburse space, could you just comment on sort of the momentum and trajectory in those businesses?

Chris Wolf

Andrew, this is Chris, I just want to clarify when you said on non-account revenue, are you meaning payments and higher ed?

Andrew Jeffrey - SunTrust

Correct. Right.

Chris Wolf

Yes, sure. I mean I have a couple of things and I will touch on that is first of all, obviously we are getting influx from also from Campus Solutions, right. The NetPay and the TPP business were big contributors during the quarter and in the campus side that business came on in the beginning of May last year. So we will annualize in Q2 there. But we continue to convert those schools but obviously, we are pushing to get them eventually on our CASHNet platform, but right now we are operating under the old platforms and those are generating good revenue. We are modifying and adjusting terms and contracts, the best we can.

And then also to touch on our organic revenue there, our CASHNet solution has done quite well as you can see through Q2 or Q1. I am sorry in particular SmartPay has been a great product for us, we have made some big advances as far as different credit card acceptances, have really added to volume there and as we have worked pretty hard on reducing costs as well. So I mean, once again I do want to be careful about talking about long-term trends here as we are staying away from guidance, but I did want to emphasize that the Sallie Mae portion of that business will annualize in Q2.

Andrew Jeffrey - SunTrust

Alright, okay. Thanks.

Operator

Your next question comes from the line of Ryan Davis with Credit Suisse. Please proceed.

Ryan Davis - Credit Suisse

Hey, guys. Well, this question is for Marc, since you have started could you kind of fill us in on maybe some things that you have been positively surprised about joining the company and maybe something you see as a focus area. And a follow-up on that I guess what’s the key priorities since taking the over as CEO that you see?

Marc Sheinbaum

Thanks Ryan. I appreciate that. I have spent a lot of time before I joined with a lot of the leadership team and the Board, so I can’t say too many surprises, but I guess just my impressions since the three weeks I have been here. I think it’s a great team, very dedicated to doing the right thing, very dedicated to the customer for customer service and delivering for our clients and students which is terrific because that’s a great culture, it’s tough to create that if you don’t have it. And I think when I look at the numbers like 98% retention rate I think that that’s pretty impressive. When you think about all the – let’s say, the noise and that’s certainly in the press and that’s out there for schools to basically since staying with us throughout, what that says can to me is that they see the value in our services, the value in our products and so when they renew that’s a good thing, because I always think that sales is great and you sell based on certainly what you are putting this is on and what you think you can do, what you want, what you tell the clients you can do and your reputation. But you keep clients because you will deliver for them. And so that’s a terrific trait to have.

I think we talked a little about the payments business and the Campus Labs, I think the continued diversification of the business lines is great. And I think it makes us more a balanced business. So that was – I won’t say it’s a surprise, but it’s a great trend that I am impressed with. And then I would say how I am spending my time is really trying to learn as much as I can. Obviously, it’s only been three weeks getting out and meeting everybody and listening to everybody and I would say I am starting with internal meetings like that, I have a bunch of external meetings set up over the next few months to get out to conferences and meet with CFOs of universities and going to market research panel for students in the next couple of weeks to understand some of our product ideation. And certainly getting started meeting with our regulator partners too at the same time because I want to obviously hear their voice and they are important partner at the table that I need to get to know and have them get to know me and what we are trying to do with the business, so a lot to do. I feel like in a very condensed period of time as I have said it’s only been three weeks, but I am excited to be here and I am definitely excited about the prospects for continuing to build this business.

Ryan Davis - Credit Suisse

Okay. Thanks. And I guess a follow-up on the – how is the pipeline in the refund management business and on top of that would you expect to see a ramp on that when the rule making is finalized?

Marc Sheinbaum

Yes. It’s Marc again, Ryan. I think and as you know the team has been focused primarily on the Campus Solutions conversions although they are doing, we are starting now as we get towards the back end of that conversion focusing their efforts on organic sales for refund management. There is no question that the Neg-Reg, the regulatory environment that is affecting the speed of closing some of those organic sales. So we are selling to clients they are coming onboard, but I think that there is no question that some clarity around Neg-Reg I think would go a long way to giving up our future prospects assurances to come onboard.

Ryan Davis - Credit Suisse

Okay. And one quick question on the call Chris I think you were talking about some fees offsetting inactive account fee changes last year, is that a new fee, could you clarify there?

Chris Wolf

No, let me answer that. No, it’s not, what I was trying to say there is that they are our normal fee base outside of the delinquent account fee, those fees we had some increases. And so – and when I say increases just in the amounts generated not that our price structure or anything changed. We had increases in some of those fees that offset the elimination of the delinquent account fee.

Ryan Davis - Credit Suisse

Okay, alright. Thank you, guys.

Chris Wolf

Thank you, Ryan.

Operator

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

John Rowan - Sidoti & Company

Good morning guys. Casey, excuse me, the last letter that you sent to the Board of Education on April 22, was that your last input on to the mark up of the proposed language on cash management?

Casey McGuane

Hi, John its Casey. Thanks. I appreciate the question. April 22, yes that was my last submitted written information to the department on that date, yes.

John Rowan - Sidoti & Company

Okay. And that from what at least I can tell that language does in fact eliminate point of sale or swipe fees, at least this version of the bell?

Marc Sheinbaum

Yes. Again this is Marc, I think as I have said earlier I think we rather not go into any details on anything that’s been in any of our correspondence with the Department of Education on Neg-Reg and I appreciate you understanding that but it’s something we have added and not get into details with at this time with the status of the discussions.

Casey McGuane

And if I could add to that John, as a primary negotiator I really want to respect the process and a there are protocols in place that really at this time I can’t discuss the specifics even within that written communication. But I do appreciate the question and I would like to share more, but I want to respect that process.

John Rowan - Sidoti & Company

Okay. I was just trying to get a little bit of information about what’s publicly disseminated information. Alright, okay. Moving on just can you guys maybe frame for us a little – and I know you haven't disclosed it in the past, how much of your revenue actually comes from swipe fees?

Chris Wolf

I will answer that and unfortunately I do have to give a disclaimer there. We just have not broken that out and at this time we are just not in a position to disclose at this time.

John Rowan - Sidoti & Company

Okay. Thank you.

Operator

Your next question comes from the line of Wayne Johnson with Raymond James. Please proceed.

Wayne Johnson - Raymond James

Hi, yes, good morning. If we look out 12 months from now and then 36 months from now, could you give some kind of long-term goal for how operating metrics or anything of that nature, where should we be looking for to Slide 12 had the pie chart breakdown of revenues, how is that going to look in a year, how is that going to look in three years, if you could provide any color on that that would be helpful?

Marc Sheinbaum

Yes, this is Marc. Let me start and I will turn it to Chris if you want to add and I'm not going to talk about any financial projections. I will tell you that we like all three of the core businesses that we have. We are going to be making sure that all three of them have leadership and plans to grow. They are all going to have plans to deliver product innovation for our customers for their respective customers, in some cases they are the same customers. We are going to be looking continuing to drive cross-sell opportunities and it will – certainly I am sure at times we will get into allocation of resource decisions, but that – I hope that’s a tough decision to make, because I hope all three of them have great prospects, great ideas, great product development pipeline, and great list of the customers. So, I think that’s how we are going to look at the business. I don’t think – I like the diversified mix with that and I think – that’s going to be important to us going forward, but I don’t think at this time we are ready to say that there is a goal we are shooting for in terms of the mix of where we want those three business to be.

Chris Wolf

And I will just add to that. This is Chris. Due respect to Marc coming through the door one of the things that we are looking at is where we do want to be in 12 months, 36 months. So, it’s a good question. I just think that as he alluded earlier with all the issues that are going on now it’s such a fluid environment. So, I think it would just be inappropriate for us to say what we think to be. But I will echo the diversification of the business is a big part of what we do. And obviously we are looking at that. And obviously we are looking at things like cost are going to be more efficient. So, we are looking at a lot of different types of scenarios there, but right now I just don’t think we are in a position to tell where we would be from a metric stand point in 36 months.

Wayne Johnson - Raymond James

Okay. And just a quick follow-up if I could. Can you just remind me what kind of timeline would you expect for resolution on some of these topics, when are we going to hear from Department of Education and all that?

Marc Sheinbaum

Excuse me, this is Marc again. I think the timeline is the meeting on the May 19, 20 Casey right and I think that the intention is therefore to be a vote on consensus at that time. And I think coming out of that we will know whether where we are.

Wayne Johnson - Raymond James

And I apologize for the one more follow-up. So, the process this is purely a vote from that committee that’s all that needs to happen nothing else as far as government process goes needs to take place to enable those recommendations?

Casey McGuane

Yes. Hi, this is Casey. The last session is May 19 and 20 we understand there will be a vote there on consensus or no consensus on all six of the issues that have been discussed over the previous four sessions. And if there is consensus, it’s my understanding that the department at that time would then publish a final rule in the register for public comment period and so forth leading to a final rule, which would be say at the earliest November 1 of this year effective for July 1 the following year 2015. In a situation, where there is not consensus, that path and that timeline I understand it’s really up to the department at that point how they want to handle that. I hope that’s helpful.

Wayne Johnson - Raymond James

Okay, great. Yes, it is. Thank you.

Operator

Your next question comes from the line of Gary Prestopino with Barrington Research. Please proceed.

Gary Prestopino - Barrington Research

Hi, good morning. Yes, a lot of my questions kind of revolve around what Wayne just asked so. But in terms of when you are talking about consensus, I mean, does that mean everybody on the committee has to vote, yea or nay, or is it just a plurality?

Casey McGuane

Yes. It means that everyone on the committee as a primary negotiator has a vote and has to vote in order to reach consensus in that situation would have to vote for all six items. It does not go issue by issue, it’s all six together. That’s my understanding.

Gary Prestopino - Barrington Research

Affirmative or negative this could get ticked back and we could still have back to the what is it the board or whatever and then we could still have a time period where we don’t know what exactly is going to come out of this, it’s not going to happen at the end of May, is that correct?

Casey McGuane

That’s my understanding, if there is not consensus on the committee that the Department of Education manages certainly next steps.

Operator

Your next question comes from the line of Mike Grondahl with Piper Jaffray. Please proceed.

Mike Grondahl - Piper Jaffray

Thank you. Could you talk a little bit about payment transaction revenue and how we should think about that the next couple of quarters kind of off this $14.6 million base?

Chris Wolf

Sure. Mike it’s Chris. Thanks for the question. Kind of going back to my comments in the script in a little bit, a big part or a good portion of the increase year-over-year did come from Sallie Mae through the NetPay and TPP business and that will annualize in May. So, we would expect that portion, which is a good portion of the increase to slow down at that point. So once it annualizes, I still see it growing, but clearly those clips once they annualize it will be, the comparables will be a little bit tougher on that. So, one would expect that the growth rate on that piece would slow down once we hit May. As far as the CASHNet suite, we have sold quite a bit there as we talked about. We have a number of installations to do there. So, that is really a reflection of timing, where our clients are, once we get those things going. So, there are a few variables there. I would say, generally speaking that business it has been good and the process there has been good, but it does have a little bit longer of a time horizon there. So, it would be as I get out into Q3 or Q4, my visibility isn’t quite as good there. So, I am a little hesitant to do that probably more in the next quarter I think is the flavor without giving specific guidance. I think directionally that’s what I see.

Mike Grondahl - Piper Jaffray

Okay. And then how should we think about, I know as you implement some of the Campus Solutions, SSEs, there is some added cost you have mentioned in the past, but there is also some sun-setting cost as you described and that go away as the Sallie Mae stuff comes on to your platform, how do we think about kind of those net expenses in the back half of this year?

Chris Wolf

Yes, Mike, this is Chris again. And I will go back to our original commentary of when we framed the deal we said we would we expect to be accretive in the deal at the end of 2014. So, that will be my overarching comment and see if I can give a little color on some of the platforms here. On the payment side, when we talked about NetPay and TPP, that’s kind of the equivalent of our CASHNet suite. There we are basically running parallel systems there and that’s where we have the greatest opportunity for cost reduction there as we migrate those over to CASHNet. And that’s going to take place throughout this year and it will probably run into a little bit in next year just depending on how quickly we can facilitate those. So that I see as the biggest opportunity for cost reduction there, it’s the duplicate systems and like I said we are working on that.

On the refund side of the business, there are some costs there the type of product that Campus Solutions use as far as there is no fee student checking and a prepaid card, there is some opportunity there that we can take some cost out as we bring them over to our platform and obviously convert them to our full service solution. But what I’d emphasize in terms of dollars where I think the big opportunity is is on the payment side as we migrate over on the platforms.

Mike Grondahl - Piper Jaffray

Okay. And then if I guess two more quickly, you had a settlement I think you still had to pay out $15 million or $16 million approximately in cash, any update on when you expect to pay that? And then maybe lastly you had mentioned sort of an adjustment to your depreciation and amortization, what was the delta or the benefit from that change?

Chris Wolf

On the TD&A, I will have to go back and look I don’t have that number off the top of my head. And it was really I think what we are talking about. I think if the context of the question was I think in the sales side, the increase in sales numbers was the increase in D&A and that had to do with the purchase accounting of our customers was from the Sallie Mae acquisition and a little bit from the Campus Labs. So, I will have to get to that number. I don’t think it’s a big material number, but let me take a look and I will let you know. And then I forget as far as the other question, oh, the settlement. I am sorry yes, so where we are at on that, Mike is that we disclosed last quarter that we had reached an agreement at 12/31 and we had actually accrued the amount there and for details there were settlement, there were some legal fees that were part of that. As part of the agreement we actually funded the amount into escrow in the quarter ended 3/31 and that’s where you see it flowing through the cash flow statement there. And then basically what has to happen at this point is my understanding is that the judge still has to approve the settlement, the plaintiffs do want the settlement to go through. So we expect that we are hoping that the judge will approve it, but at this point we have actually already funded the settlement so that’s already the cash is already in escrow.

Mike Grondahl - Piper Jaffray

Okay. Thank you.

Operator

Your next question comes from the line of David Scharf with JMP. Please proceed.

David Scharf - JMP

Thank you. Good morning. Just a few more, Chris I am just wondering I know you are not providing guidance, but just to kind of help us think about the earnings model in the context of your business mix, are you able to broadly kind of breakout for us the different gross margins for the account business if it were standalone versus the processing businesses. I mean, obviously we have a high 50% kind of blended rate on an annualized basis, but just to give us a sense for perhaps how the account and non-account revenue would be modeled separately?

Chris Wolf

Yes. Thanks for the question. You guys don’t ask me the easy ones. So we haven’t broken it out, it’s one of the things that we talk about internally and we have just really started to do that, so I am not in a position to give exact numbers. What I can point to though is if you do look at historical margin in the business before we acquired CASHNet back in 2009-2010, I think at least directionally you can see where the refund business was, obviously as some fees have declined it has put a little bit of pressure there. So that’s one area that I might point to there. Part of it and not to be totally evasive here is that as we get into Campus Solutions, we are still working on margin and that has clearly had an impact on margin. And I can say to you that their margins are materially less than our consolidated margin. And so that’s another variable that it does give me a little bit of pause and is part of why we are reluctant to talk about that because it is fluid. And then also in payment and higher Ed as those businesses evolve and become a bigger part the former Campus Solutions which we call Educational Services now there we have actually seen margin go up year-over-year. So the variety of those things is really why it’s hard to get that direct numbers, but like I said the best thing to do is maybe look at some of the historical rates.

David Scharf - JMP

Got it, got it, will do. Shifting to this summer when the disperse – when Campus Solutions is effectively sunsetted I mean what actually happens to these schools that don’t convert?

Chris Wolf

I will start that and maybe Casey will come in there. So I think that obviously we want to try to work with schools and their clients, I think it’s in everyone’s best interest they do have a solution. So I think maybe going back to some of the earlier questions, hopefully through our selling process that we won’t have too many of those discussions because I do think that people do have a solution and it’s working for their students. So I think that they would want to continue that. So hopefully, that will be the situation, I am sure, there will be some anomalies and we will try to have to work through it. But the reality is from the integration of our acquisition, there is a point where we do have to turn the systems off, that is a reality and hopefully we can sell through that and make those conversions. And Casey I don't know if you have anything you want to add to that?

Casey McGuane

Thanks Chris. Yes, just to build on that, certainly we are working I mean our efforts are on ensuring that those clients continue to have services through us and in some situations, it’s still challenging, as they are still trying to decide how they want to move forward, in some situation if we do have a final sunset date and we are not able to work something out with them, my understanding is they would probably look at a competing service or bring it in-house.

David Scharf - JMP

Okay, yes. Because it’s getting obviously, it’s kind of late in the day I am kind of curious why so many potential SSEs that were brought over with Campus Solutions having committed already. Got it. Two more questions, one on the non-refund deposits, which were up to 10%, is that a real number in the sense that I would imagine tax refund season impacts that figure considerably at the end of March?

Marc Sheinbaum

Yes, this is Marc again. Yes, I mean it’s a real number I mean it’s a real number in our numbers, no question that the tax refund played a role in the first quarter. And I think importantly I think the team here has probably discussed it on previous calls, it’s a big part of our efforts to try to add, make the card have more value to the students, have them find other ways to load the card, to load the bank account and use the card. So we are encouraged by the growth and we have got a lot of plans in place and our marketing plans, communication plans, expanding our capabilities giving them more ways to deposit. So we are encouraged by the progress and I hope you will see more of it.

David Scharf - JMP

And where – and outside of one-off transfers like tax refunds, are the majority of non-refund deposits coming from direct payroll people that are kind of earning wages at campus related jobs I mean do you have a feel yet where most of the cash is coming from because obviously I would imagine that would give you insights into how to market future initiatives?

Marc Sheinbaum

Yes, we don't have the numbers here in front of us, but definitely payroll, direct deposit is a big portion of our marketing efforts as well as some of the success efforts.

David Scharf - JMP

Got it. And any sense for what percentage of actual accountholders are on it, direct deposit program?

Chris Wolf

Yes. David, that’s something that we will – this is Chris. We will just have to check that, I know we have that data I just don’t have it at my fingertips here.

David Scharf - JMP

Got it. Lastly, on the regulatory side not to beat a dead horse, say I kind of respect the sensitivity of the Neg-Reg process, I am just curious is there any – so much of the focus obviously has been on the DOE and potential rule making out of this forum, but is there any update or anything to report concurrently that you are hearing from the CFPB as they look into the broader area of higher Ed finance?

Marc Sheinbaum

Not, again this is Marc, not directly but we certainly are looking forward to having an ongoing dialogue with the CFPB. We are monitoring what they are saying in actions. We are committed to delivering an account that meets the needs of the students and achieve industry standards for compliance. And I think as I said earlier that I believe that we have great product and transparency and pricing and disclosures that we will be meeting the needs not just of our customers but of the regulators like the CFPB.

David Scharf - JMP

Got it. Thank you very much.

Operator

Ladies and gentlemen, we have reached the end of our live time for questions. I will now turn the call back to Marc Sheinbaum for closing remarks.

Marc Sheinbaum - Chief Executive Officer

Thank you, Operator. So first of all, let me just thank everybody for participating today. Great dialogue, great questions. I am looking forward to continuing the dialogue on an ongoing basis. I am excited to be here. I think I am very much looking forward to get to know all of you better. I think I have made my point a couple of times, but just to reemphasize why I feel I am here and I think this has potential to be a great company going forward. We have got great assets and great foundation in place, I mentioned and our focus is going to be really very strongly on the customer, on customer eccentricity, a great customer experience, great customer products. And I think from what I have seen in my history is that that’s great for everybody, not just for the customers, the clients and the universities and students, but it lines up with all of our other constituencies because if our customers love our products, they are going to use our products which generates revenue for us. And I think if our customers are saying good things about our products and like using it, that’s because we have got not just great capabilities, but transparency and clarity. And I think that lines up with what I believe our regulatory partners are looking for at the same time. So, again thanks very much. I am looking forward to getting to know all of you and it’s great to be here and thanks very much for participating today.

Operator

Ladies and gentlemen, thank you for joining today’s conference. That concludes the presentation. You may now disconnect and have a great day.

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