Executives
Jeffrey Hodges - Chief Financial Officer and Senior Vice President
Alex Hart - Chief Executive Officer, President and Director
Elizabeth Bowman - Assistant Controller
Keith Kendrick - Senior Vice President of Strategic Marketing
Analysts
Gary Prestopino - Barrington Research Associates, Inc.
Brett Huff - Stephens Inc.
Bradford Evans
Elizabeth Lilly - Gabelli
Tier Technologies (TIER) Q3 2011 Earnings Call August 9, 2011 5:00 PM ET
Operator
Good afternoon, and welcome to the Tier Technologies Third Quarter FY 2011 Earnings Conference Call. [Operator Instructions] Ms. Bowman, you may begin with your conference.
Elizabeth Bowman
Thank you. Good afternoon, my name is Liz Bowman, Tier Technologies Assistant Controller and Director of SEC Reporting. At this time, I would like to welcome everyone to the Tier Technologies earnings conference call for the quarter ended June 30, 2011. Today's call is scheduled for 1 hour. After the market close today, we intend to file our 10-Q for the period ended June 30, 2011. We also issued a press release announcing Tier's financial results for the quarter ended June 30, 2011. A copy of the press release may be found on the Investor Relations section of our website, www.tier.com.
We invite shareholders and analysts, who wish to speak to management about the company's performance to schedule a meeting by contacting our Chief Financial Officer, Jeff Hodges, by dialing in (571) 382-1333 or by emailing him at jhodges@tier.com. A taped replay of this call will be available on the company's website from 8:00 a.m. Eastern Time, Wednesday, August 10, 2011, until Wednesday, August 24, 2011, at 11:45 p.m. Eastern Time. Alternatively, you can hear a replay by dialing (866) 357-4211, and entering the conference ID number 3666878, starting at 8:00 a.m. Eastern Time, Wednesday, August 10, 2011.
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 affects the company's financial results in all our markets, which we refer to as verticals, particularly the federal vertical, the state and local vertical and the property tax vertical; effectiveness and performance of our systems, payment processing platforms and operational infrastructure; our ability to grow EPS revenue while controlling our costs; the potential loss of funding by clients, including due to government budget shortfalls or revisions to mandated statutes; the timing, initiation and completion, renewal, extension or early termination of client projects; our ability to realize revenues from our business development opportunities; the impact of governmental investigations or litigations; and unanticipated claims as a result of project performance, including due to the failure of software providers or subcontractors to satisfactorily complete engagements.
For a discussion of these and other factors which may cause our actual events or results to differ from those projected, please refer to our quarterly report on Form 10-Q for the period ended June 30, 2011, which would be filed with the Securities and Exchange Commission.
In this call, references to the quarter, or the third quarter, refer to the quarter ended June 30, 2011. During this call, we will be referring to non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles. We define the non-GAAP financial measures used -- that could be used in this call, and we present reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures in the Form 8-K that we will file this afternoon. That Form 8-K will be available in the Investor Relations website -- section of our website, www.tier.com, under the heading Investor Relations.
With me on the call today are Keith Kendrick, our SVP of Strategic Marketing; Jeff Hodges, our Chief Financial Officer; and Alex Hart, our President and Chief Executive Officer. We'll begin the call with Alex. Alex?
Alex Hart
Thanks, Liz, and welcome, everyone. I've been at Tier for almost a year now, and as I look back at where we started, I'm relatively pleased with our progress, despite the fact that I'm not at all pleased with our financial performance at the moment. I joined the company with the belief that Tier was well-positioned to take advantage of the growth in electronic payment overall and the increasing importance of the biller direct model, in particular. And I can honestly say that I'm more excited about our prospects today than I was 12 months ago.
The challenges have been bigger and more numerous than I anticipated at that time, but I believe that we now have a team that is capable of accomplishing great things. Jeff Hodges, our new CFO, is the most recent addition to our team. Jeff has an extensive background on the Payments business and a very clear sense of what we need to do to improve. Jeff has focused on creating the type of planning, forecasting and management rigor that we need to both improve our results and provide more clarity and transparency to the investment community. In fact, one of his primary goals is to develop a set of metrics and models that will enable us to provide guidance for fiscal year 2012 during our next call.
In addition, we intend to give you a much better sense of where we see the business going over the next 3 to 5 years. We frankly have not had the tools, the information or the expertise to provide that level of guidance in the past, but we're making great strides internally and recognize the need to share as much of that information externally as we reasonably can.
Another recent addition to the team is our Head of Sales, Mark Lavin. Our inability to both sign new customers and expand existing relationships has been a major disappointment this year. And it's the primary reason for a lackluster of revenue numbers. But I'm confident that Mark is making the right moves to position us for a stronger performance in fiscal year 2012. Mark has only been on board for a short while, but he has already reorganized the sales force to reenergize our pursuit of new customers and refocus our account management efforts on improving customer satisfaction and new
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revenue.
He's implemented a new sales compensation structure that incents and rewards the activities that generate the most profits. He also is in the process of identifying the partners we need to increase our distribution capabilities and better leverage the products and services we provide that differentiate us from both other value-added payment providers and the commodity providers of payment processing services that we believe will increasingly look to value-added products and services to improve their margins.
On the technology front, we continue to make great progress in improving the performance and reliability of our existing platforms. We successfully completed another tax season without incidents, and even gained ground competitively due to superiority of our systems and support. We kicked off a major infrastructure upgrade that is needed to compensate for years of underinvestment, and that is essential to remaining a secure and reliable partner to the IRS and the other roughly 4,600 government higher-education and utility clients we serve today.
This effort will also build the foundation for a much more economical, unified platform in the future. We're taking a very pragmatic approach to buying and selling and integrating the hardware and software we need and lever to maximize reuse and minimize reinvestments. Our decoupled product development approach, resulting in new capabilities, will not only enables us to sign new clients and expand existing relationships, but it will also enable us to consolidate our free platforms sooner and more inexpensively than we would have with our historical approach.
At this point, I'd like to turn it over to our new CFO, Jeff Hodges, so that he can discuss our financial performance in more detail. Jeff?
Jeffrey Hodges
Thanks, Alex. Revenue from continuing operations recorded were $38.4 million, down 2.6% in the same quarter last year. In our core Electronic Payment Solutions business, or EPS, we processed nearly $2.5 billion of payments, which represents the 4.2% increase versus the same quarter last year. This increase was driven by a 6.8% increase in transaction volume, while we experienced growth in transactions of EPS revenues for the quarter with $38.1 million, down $0.6 million or 1.6% over the same quarter last year.
In our education and state and local verticals, revenue growth was 14.5% and 10.7%, respectively. During the quarter, we experienced lower revenues in our utility and federal verticals. The office and large utilities and reduced transactions, tried their best to do an online tax funds service caused the lower revenues in those verticals. Lower average payment size also contributed to our lower revenue, with the payments we processed for our clients continue to be affected by weak economic conditions.
Direct costs for continuing operations were $30.7 million, up 0.3% compared to the same quarter last year. For the quarter, EPS direct costs were $30.6 million, up 1.1% in the same quarter last year. Discount fees rose despite lower EPS revenues due to increase in interchange rates from one of our credit card partners, combined with the decrease in the number of order calls to ACH payments due to the previously mentioned loss in some large utility clients during the last year. Our other direct costs increased 7.1% in the prior year quarter.
General and administrative expenses from continuing operations were $5.5 million for the quarter, down 7.1% or $0.4 million compared to the same quarter last year. In the prior year, we recorded $1.2 million in severance expense, which is the main contributor to the decrease in expense from the prior year. However, we incurred additional expenses as a result of continued investment of our management team, IT infrastructure and platform development.
Sales and marketing expenses were $1.7 million for the quarter, up 21.1% from the prior year's quarter, primarily due to expanded advertising campaigns during the April tax filing season.
For the quarter, Tier reported a net loss from continuing operations of $1.4 million as compared with the loss of $0.2 million from continuing operations in the prior year quarter. Our consolidated net loss per fully diluted share in the quarter was $0.08 compared to a loss of $0.02 higher profitability share in the same quarter last year.
As of June 30, 2011, we have $36.4 million in cash and cash equivalents, $7.2 million in investments and marketable securities and $6 million in restricted investments for a total of $49.6 million. The unrestricted cash and investments in marketable securities of $43.6 million, $18.6 million is fund settled to us, but not yet distributed to clients and accrued discount fees, offset by $8.8 million of cash, which we expect to receive within 1 to 2 days after the end of the quarter as settlements from credit card companies or banks. This makes the cash available to Tier for business purposes, as of June 30, 2011, $33.8 million. We also had $6 million of restricted cash that is held with a compensating balance by one of our ACH processing partners.
We're in the process of moving this ACH volume to another bank and expect the $6 million to be available for general corporate use during the fourth quarter.
One further item of note on our liquidity, as mentioned in our earnings release, is that we have committed $8.3 million that create our core IT infrastructure over the next 15 months, which include the purchase of hardware, software and related professional services.
The company's headcount, as of June 30, 2011, was comprised of 227 employees and 21 contractors. Lastly, I wanted to mention that we expect to file our Form 10-Q shortly with the Securities and Exchange Commission. We encourage all of you to view the statements and notes in order to better understand our current operations. Now Alex has a few concluding remarks.
Alex Hart
Thanks, Jeff. As I said previously, we are not happy about our financial performance this year, and we recognize that we need to do a lot better in fiscal year 2012. We are hard at work developing our budget for next year, and we believe that there are significant opportunities to improve, especially on the cost side.
We are not in the position to provide specifics today, but we intend to provide you with a fairly detailed set of expectations for fiscal year 2012 during our next call. We also recognize the need to do a much better job of explaining and quantifying our excitement about 2013, 2014 and beyond. And we know that the only way that we will establish any meaningful credibility with the Street is by telling you what you can expect, and then delivering on those expectations.
I'm sorry that we haven't been in a position to provide this level of guidance in the past, but I believe we are well on our way to having a team, the tools and the information we'll need to reach the potential we see. And I look forward to sharing more information with you in the future. Thanks for your time and attention this afternoon. Let's open up the phone for questions. Brandon?
Question-and-Answer Session
Operator
[Operator Instructions] Our first question is from Brett Huff.
Brett Huff - Stephens Inc.
A couple of questions, just on the numbers. I think I was writing when you said these, can you just give us the total dollar volumes processed again. I think the number you gave us was just the EPS number?
Alex Hart
Total dollar volumes...
Brett Huff - Stephens Inc.
I think, was it $2.5 billion, is that right?
Jeffrey Hodges
The EPS was $2.5 billion.
Alex Hart
Yes, $2.5 billion.
Brett Huff - Stephens Inc.
And then, did you give the absolute number of transactions in EPS? While you guys are looking for that, can I ask a question on Durbin again?
Alex Hart
Sure.
Brett Huff - Stephens Inc.
We had gone over some of the Durbin questions last time, but now that we know the final rules, I wondered if you could give us your -- any update or thoughts you have, and I think what we talked about last time was a negative impact on the top line, just because some of that interchange is a pass-through, but it should be x. Are you having to give any of the pass -- assuming you can keep all of the lower costs, it would be very helpful. But any update on kind of what percent of those costs you think you might be able to keep?
Jeffrey Hodges
Brett, real quickly, the transaction number you were looking for is $5.2 million. [indiscernible] tell you before Alex could answer that one.
Alex Hart
Durbin was good for us, not as good as we had hoped. The 5-day explaining [ph] ad valorem was unexpected and gives us a little less certainty than we probably were going to get. But all in all, you're absolutely right. If we can hold on to our current pricing and see that reduction in costs, that has a very meaningful impact to where -- we're in the process of quantifying that, as we go through our planning process for next year and should have much more information for you in terms of how we think that will impact you or will impact us in 2012. A lot of it, frankly, is a function of how much we can keep, and equally importantly, how quickly we can implement the changes for the various processes and customers we serve. We're obviously trying to move the biggest rocks first, and there are some places where we can make it change on our side, and it has relatively little tougher impact, and we can start saving money pretty quickly. There are others who require us to do some work with our clients or our partners, and that will take a little bit longer.
Brett Huff - Stephens Inc.
And then, on the reversals that you guys have the accrual versus for the comp stuff, is this, x that in your G&A, is that still a pretty good G&A run rate if we assume that, that sort of -- you didn't get the benefit from that this quarter?
Jeffrey Hodges
I think that's fair, yes.
Alex Hart
It is a bit higher at the moment because of the infrastructure work we're doing. Going beyond the project we started last month, we have already invested significantly in showing up our infrastructure and trying to duplicate people that were single points of failure, trying to document what they know, so that if they get hit by a bus or leave for something else, we aren't stuck. We had a lot of single points of failure when I got here that we no longer have. But so there's a bit of an uptick in the pipeline, but it shouldn't come down appreciably for the next 12 months or so.
Brett Huff - Stephens Inc.
And then on that, it's a good segue, just give us your thought process on how you chose the amount to spend and the scope of the project. If I recall, I think you kind of gave us lowball-highball -- if you did -- if you wanted a kind of bare bones that you could spend $1 million or $2 million, but if you wanted the gold-plated version between your 25 and you kind of came out in the middle, it seems like, given both numbers, over time, kind of what was the thinking on priorities and what did you end up actually investing in?
Alex Hart
My latest directives to our technology folks when I first took a look at the problem was I want essentially a 2007 Honda Accord. I don't want to grow on the top of the line, right off the assembly line. I also don't want the relatively old high-mileage vehicle we've been driving for the last 10 years in, actually, in almost all 3 platforms. The ChoicePay platforms are a little bit newer, but for the most part, we've been on old technology for quite some time. And it really does come down to, first and foremost, maintaining what we have. Secondly, making sure that we can grow in a way that we all find acceptable. And third is building the capabilities that we think will get us to the next level, allow us to consolidate. So doing things in a decoupled way, rather than tying them directly to a particular platform that would be money well spent for the next few years that would go away. And so, that drove it, and I'm not sure we had the most competitive bid process we could. We've been very thoughtful about what we do ourselves, what we have consultants do for us, and we think that's really the minimal we can do. So the minimum outlook in spend is to do it well and make sure that over the next 3 years are solid.
Brett Huff - Stephens Inc.
And the $8.3 million number is the all-in cost, and if that's the case, kind of when does that come in? And how does it hit the P&L, and et cetera?
Alex Hart
That's going to be a -- we'll incur about $7 million of that capital. So -- and we will incur it over the next 15 months. Actually, the residual $1.3 million is going to be OpEx. It's going to be a 5-year asset, and we'll start putting pieces of it in service next year. So it will start to hit in the second half of FY '12.
Brett Huff - Stephens Inc.
So you start amortizing that in the middle of FY '12?
Alex Hart
That's the expectation. That's right.
Brett Huff - Stephens Inc.
That makes sense. And then any update on the MoneyGram deal? That was an exciting announcement last time around, and I know it was early -- I think you announced it that same day. Do you have any updates on that?
Alex Hart
Well, not a lot of news there yet. We have some very large companies that need to coordinate their efforts, not only from a technology perspective but from a marketing perspective. We have a much more focused approach than we did 3 months ago in terms of trying to create some critical mass in a given couple of geographies. Aside from that, there really isn't much to report yet, but we remain very excited about where that can take us. And if you saw the Online Resources report, they talked a bit about walk up and how that channel is growing, and we believe that's going to grow for us as well.
Brett Huff - Stephens Inc.
And then last question. The Property Tax segment in which I think you have a pretty commanding market share and competitive advantage, how does that particular segment fare, I think you gave us specific numbers on that, if you could just give us those again, and then tell us about competitive threats in organic growth, that kind of stuff?
Alex Hart
Sure. It's about 32% of our revenue for the year. It is a big part of what we do. It's one of the places where we have some of the most meaningful cost savings opportunities in the wake of Durbin and the DOJ settlements. But we haven't worked through all of those numbers yet, and that's part of the process we're going through over the next couple of months. Keith, do you have specific metrics for them.
Keith Kendrick
In fact, we have definitely seen a slow but continual turn in property taxes. The average ticket is starting to move up, and our year-over-year growth dollar profits improved in the second or third quarter. So we're cautiously optimistic there. We have major clients in that space, as you said, the transactions were up almost 10% in the quarter. So we expect to see that continue. And as Alex said, we are a bit heavily credit-card-focused there in ACH, and we think you're going to see some nice pickup in debit from Durbin, starting in our first quarter of next year of 2012 when Durbin starts to kick in.
Alex Hart
This fourth quarter of the calendar year.
Operator
Our next question is from Beth Lilly.
Elizabeth Lilly - Gabelli
I wanted to drill down a little bit and better understand what that $8.3 million investment is going to get you. What -- are you consolidating platforms, I mean what's your thinking about that?
Alex Hart
That will not enable us to consolidate. It will enable us to unify the development of capabilities going forward, so that we're well-positioned for consolidation. It will enable us to focus on the verticals that serve those particular platforms well. Frankly, a lot of us sleep at night and not have some of the adverse problems we had previously, and to make sure we get through the next few years, growing significantly without having to worry where we're going to fall down. We've had a couple instances, as you know, over the past several years where we just ran out of database, we ran out of processing power. We've been on Windows 2000 servers, et cetera, and this will bring us up to a much more modern technology base and allow us to continue to grow and support the customers that depend on us today.
Elizabeth Lilly - Gabelli
Well, it's going to give you a platform, in essence, to migrate all your customers to?
Alex Hart
It will not give as a single platform to migrate all of our customers to, no. It will give us -- there are pieces, for example, the first piece that we will build, probably concurrently with the infrastructure is a new payment processing engine. And that will be a single element that all of them use. We don't really think we're going to have the revolutionary single platform consolidation that was planned before, where it was essentially a boil of the ocean, stop everything and throw all your eggs in one basket. We think that it has to be a much more revolutionary process. The last thing we want to do, frankly, is to tell our customers that they have to make a change simply to benefit us. So we want to make it a fairly seamless migration to them, but become increasingly efficient, increasingly effective on a cost basis behind the scenes, and where appropriate, build new functionality that works on all 3 in a very decoupled way. So as we move forward, we don't build things 3 times.
Elizabeth Lilly - Gabelli
And so you'll spend the money over what? The next 2 years or the next year?
Alex Hart
Probably, the next 15 to 16 months.
Jeffrey Hodges
Yes, 15 months.
Elizabeth Bowman
15 months.
Alex Hart
Yes.
Elizabeth Lilly - Gabelli
Okay. And then Alex, I wanted to ask, you made a comment about the cost structure. So can you say more about that? You've taken out costs, but obviously, you think more can come out. So is that tied in then with these investments you're making?
Alex Hart
It is very much so. There are things we had to do 3 different ways. In the future, we'll only do it one way. There also are, just as some other group of old cars, we used to keep the mechanic on staff. There are things we need to do on a regular basis that a more modern platform won't require or the modern components won't require. So our costs are definitely higher than they need to be long-term. We have people that would either find something else to do or equally likely, be put to better use as we grow the company. But if that growth doesn't come, obviously, they have the option of not to continue to carry that full complement of FTEs.
Elizabeth Lilly - Gabelli
Will that come out of your G&A line, those costs? Or will it come out of the direct costs line?
Alex Hart
I think it will be a little of both, frankly.
Jeffrey Hodges
Yes, both.
Elizabeth Lilly - Gabelli
So you'll be able to say more. So as you talk about your outlook for 2012 on the next call, you'll be able to say more, as it pertains to this investment initiative in terms of where you think your margins can go?
Alex Hart
Absolutely. And we have a much better sense for where the costs are on an operating basis from the processing side, from interchange and discount fees, from ACH fees and other bank fees. As I mentioned on our last call, we're going to the process of examining all of our partnerships, all of our processing relationships, trying to cut down to a much smaller number, where we can not only gain more leverage but increasing -- increase our operating efficiency and get more pricing leverage.
Elizabeth Lilly - Gabelli
Do you think you will be earnings positive next year?
Alex Hart
Earnings positive, that's a good question. I think that's a process we're going through on our forecast right now. So we'll have a very detailed explanation of that on the next call. But I think it's too early to say. That certainly is a goal, but it's too early to say.
Elizabeth Lilly - Gabelli
And then the last question I wanted ask is just the cash on the balance sheet. And so, you've defined that you're going to spend $8 million. And I think in the past, Alex, you've talked about it takes what, $10 million to $15 million to run the business, is that right?
Alex Hart
All in all, yes. It sounds about right.
Elizabeth Lilly - Gabelli
So you've got leftover cash on your balance sheet?
Alex Hart
Yes.
Elizabeth Lilly - Gabelli
Can you talk about the potential for another buyback, for a debt auction, where is your mindset on that?
Alex Hart
Well, as I said in the past, we definitely recognized that we're not getting much for our excess cash. Now the definition of excess cash is what we're working on today. How we determine that, how much is truly excessive, we can return to shareholders or not. But that's part of the process over the next couple of months is to figure out how much cash is available to do something else, because we don't see any real value in leaving it in a interest-bearing account earning a handful of basis points. And we also are not in a position, given our current infrastructure, to go acquire anything that would perhaps add a lot of excitement and new products and earnings leverage or everything else, but it wouldn't be worth the risk right now. So on the list of things to do, we're returning cash to shareholders is certainly on the top of the list.
Elizabeth Lilly - Gabelli
So is that a discussion, obviously, you're talking about is at every board meeting. But is that a discussion now, that because you've defined that you're going to spend $8 million on this technology initiative, now you know what your outlays are going to look like over the next year, is that a discussion that's higher up the agenda?
Alex Hart
Yes, that definitely brings more clarity to that conversation.
Operator
[Operator Instructions] And our next question is from Brad Evans.
Bradford Evans
Alex, I'm just curious, please help us understand I know you're going to give us guidance next quarter for 2012, but I think you've been fairly open with shareholders that your engagement with Tier was one in which you're hoping to identify somewhat of a more speedy and fix the business to try to deliver shareholder value, or perhaps maybe conclude that Tier belonged -- is better off as part of a larger organization. So it seems that we're not going down either of those paths at this point. So can you help me understand what has changed?
Alex Hart
We are going down the first path. And frankly, the second path could occur at any time. I do think that there is still a lot of opportunity, a lot of low hanging fruit that, frankly, we'd like our shareholders to enjoy as opposed to an acquirer. I've been, as I mentioned in the call -- or in the script, I've been amazed at the number of things we don't do very well yet, or we used to do very poorly and are doing better now. And frankly, those add up to some fairly meaningful numbers. So I think you'll be pleased with where we're headed in fiscal year 2012. Obviously, it takes time to move things, and we have multiple relationships we have to take into consideration. We can't simply pull the switch. But I do think that there's meaningful opportunity, and I think that our shareholders deserve to benefit from that. But at the same time, if someone came in and offered us enough of a premium over where we're headed, right now, we certainly take that very seriously.
Bradford Evans
We'll look forward to the 2012 guidance, and I guess I'd encourage to maybe give us 3-year snapshot, 2 perhaps, maybe I don't want you to get too far ahead of your skis, but that might be helpful to maybe place the opportunity in context on a bigger picture sense?
Alex Hart
Absolutely, Brad. That is our intention to, at least, give you a 3-year view if not a 5-year view. It would be a perfect caveat, of course. But we are very excited about where this could go and want to share that.
Bradford Evans
If you did give the payment process, the number of transactions -- if you can excuse me, could you just repeat that, I did not catch that.
Jeffrey Hodges
$5.2 million.
Bradford Evans
$5.2 million?
Jeffrey Hodges
$2.5 million and $5.2 million transactions.
Operator
Our next question is from Gary Prestopino.
Gary Prestopino - Barrington Research Associates, Inc.
Alex, can you talk a little bit about -- you kind of flew through a number of things here. But I want to talk about this new gentleman who joined you in sales and how long has he been there, what is he doing? What does he plan to do to reinvigorate your efforts, getting to hunters rather than farmers?
Alex Hart
His name is Mark Lavin. He's a guy that Atul and I worked with at FleetCor. He's a very experienced guy, both from a salesmanship perspective and from a general management perspective. He joined us late May and has reorganized the sales force, identified which of those currently employed look like hunters, and in some cases, they were absolutely surefire winners in that category. Others we're not quite sure about, and some have left the company. Others have become account managers for farmers and are better suited to that and have done a great job in that capacity in the past. We also brought in some new talent as well to supplement those we already had. He also has changed the commission front, the compensation structure. As you may recall, we used to pay people based on not only gross revenue, but projected gross revenue. We now have a system in place that rewards them for net revenue, and we've seen some of the appropriate behavior modification that we would expect, including people that maybe for the first time in their tenure with us ask us if we could raise the price on certain things, because they think there is room there. So I think it's had a very positive effect. And lastly, he's very focused on partnerships, especially on the distribution side, finding out which people look like those that are successful partners today, which may not make the cut long-term and -- until we can add to that particular mix to get more leverage for what we do.
Gary Prestopino - Barrington Research Associates, Inc.
And how big is your sales force right now?
Alex Hart
It's roughly 14, give or take one.
Gary Prestopino - Barrington Research Associates, Inc.
So you have 14 marketing professionals. And then, what about -- you went kind of through this kind of path, can you give us some idea of the processing volume in the various verticals were? I think you said education 14%, state and local 10%, did I get that right?
Alex Hart
Let's see, where is that slide of that pie chart? We have a pie chart in our filing. Federal verticals, the federal verticals were roughly 20%, higher ed is roughly 14%, property tax is 32% and change, almost 33%. State and local is 9.4%, utilities are roughly 13%, and about 10% is what I call cats and dogs, various deals we've done as one-offs in the past. We're not looking for any more of those, but they're still profitable relationships that we're not going to turn our backs on.
Gary Prestopino - Barrington Research Associates, Inc.
Is that revenue or processing volume?
Alex Hart
That is just a percentage of revenue, not processing volume, per se.
Gary Prestopino - Barrington Research Associates, Inc.
Did you put that -- did you put the last year's quarter in there as well as comparison or you don't...
Jeffrey Hodges
Yes. Well, we actually have looked for the compound annual growth rate over a 3-year period. And as you can look at that and see how that mix has changed. The highest growth category has been utilities at 37%, higher education at 30%, followed by the other category at 8.5%. So those were clearly the biggest. Property tax has not grown much at all. We were large to begin with and continue to be well and down the provider there. Federal has actually dropped as a percentage of our total revenue despite the fact that on a year-to-year basis, we had a relatively flat total volume or of total revenue contribution, but it's down about 13% over the last 3 years.
Gary Prestopino - Barrington Research Associates, Inc.
And that slide is in the deck that you'll put up after the call?
Alex Hart
It is, it's Slide #6.
Gary Prestopino - Barrington Research Associates, Inc.
And then in terms of -- was there -- this accrual here, $1.1 million, so if you add that, that was just -- if you add that back in, you get about a $6.6 million SG&A run rate in Q3? Am I correct in that assumption?
Alex Hart
That's about right.
Gary Prestopino - Barrington Research Associates, Inc.
So that strikes me as being a little high, relative to the other 2 quarters you just posted. Is that really more or less to do with the fact that you're adding some senior management there? And is that a number we should use going forward?
Alex Hart
It's not really senior management as much as it is a project-related expense on the infrastructure side and technology development, in general.
Gary Prestopino - Barrington Research Associates, Inc.
But that's going to -- that would be a good run rate number for the next couple of quarters then?
Alex Hart
For at least the next couple of quarters, yes.
Gary Prestopino - Barrington Research Associates, Inc.
And then lastly, was there any stock comp expense in the quarter?
Jeffrey Hodges
Yes. I'm getting the actual number. I'll pull the number for you, $324,000.
Operator
Our next question is from Brad Evans.
Bradford Evans
Yes, I'm just curious. I think the company had been forecasting roughly 21 million transactions processed for fiscal 2011, is that the number you still think you can achieve? Or is that goalpost a little too far away for you at this point?
Alex Hart
It's still achievable, but everything has to go right. We'll definitely be in that 20 million to 21 million range, whether at the top of that range or in the middle of that range, it remains to be seen. But early indications for the quarter are that we are a little bit ahead of our case. We don't know if that will continue through August and September, however.
Bradford Evans
Alex, would you mind, if you could just give us -- I mean, give us a sneak peek into why you're so excited about the opportunity at Tier? I don't want to steal your thunder for next quarter, but maybe you could just give us a trailer of what we should hear about next quarter?
Alex Hart
Well we're in good segments, we have done additional segments. We've had 0 economic health in any of those segments. We've been under increasing pressure for the last couple of years. We have an approach that, frankly, is going to benefit from the DOJ settlement, in particular, where greater transparency becomes obvious to the consumer that they pay different rates or could pay different rates for different payment types. We already have that IP, we already charged convenience fees or transaction fees that a number of people would like to be able to upload to the consumer or to the student in the case of higher education. So we see that growing in importance. Durbin gives us an opportunity to save a significant amount on debit card transactions, which are 55% of our total transaction volume today. We do expect that there will be some pressure to share that savings with our customers. But it's not as simple as that. And obviously, it takes some time for that to be implemented. But there's certain categories where, for example, we haven't been getting an emerging markets rate, we're negotiating with our various partners to do get that emerging market's rate and that will have a very significant effect almost immediately. There other places where we have to go on the customer-by-customer basis or process-by-process basis and make some modifications. But in some cases, they will come right off the top or continue at the bottom and leave so much more interesting financial return.
Bradford Evans
So just to sum it up. And so, you're optimistic because you think the economy will perhaps give you a bit, at least, a tailwind at some point. Consumer trends, just the secular trend of dealer-direct taking share within the payment space and then lastly, just the regulatory environment, which provides a little boost?
Alex Hart
That's part of it. The economic conditions I don't think will change significantly over the next 12 months or 15 months, but my feeling is that they're probably not going to worsen. And we see a lot of opportunity, given where we are today. And frankly, the last piece I did mention is that this company's made so many, for a lack of better term, boneheaded mistakes, in terms of the way we get paid, the way we charge people, the way we provide service. There's been relatively little focus on the bottom line, relatively little recognition that you can't chase the bright shiny object every time it appears, relatively little profit mentality that we now have, but have lacked in the past. And so I feel very good about the number of things that are relatively low hanging fruit that we can go after. And those add up to some meaningful dollars. And so, I also think that biller direct is going to continue to grow. I think that increasingly, billers want to control that customer relationship. They want to be in charge of that interaction with the customer. They increasingly recognize that payment is a strategic part of what they do, and I think there's some big players out there that, historically, have not been paying it, let's face it, will need help getting into it. And I think we're well-positioned in the long run to help them do it. So I think there's a lot of reason for excitement. There's still a lot of basic blocking and tackling that needs to happen in the next 12 to 18 months, but I think we have the right people to do it now.
Bradford Evans
My last question, should we expect or do you have plans to hire a salesperson or somebody to face the community or the bank vertical to -- in light of the recent regulatory changes with Durbin. And I know that's hung up in the courts, perhaps, but will you be -- do you have somebody who's focused on that area? Or is that not an area where you will be paying a lot of attention?
Alex Hart
Well, if you mean bank, in the sense that those who provide consolidated bill payment service, that isn't on our list today, no. We're examining whether or not there are opportunities to leverage, for example, the $2.5 million official payments to dot-com or registered users and provide them the ability to pay more bills there, or to light label that capability for other people. We certainly could do, pay anyone bill payments, but we don't see any particular advantages for us in that particular market today. It's a very competitive space today, and I think check-free is the sort of taking of prisoners in that space. But it's something that we're, at least, looking at as something we could do down the road, if the market dynamics change.
Operator
We have no further questions at this time.
Elizabeth Bowman
Thank you once again for your time and attention this afternoon. We invite shareholders and analysts who'd like to speak to management about the company and its performance to schedule a meeting by contacting our Chief Financial Officer, Jeff Hodges at (571) 382-1333 or jhodges@tier.com. This concludes our third quarter fiscal year 2011 earnings call for Tier Technologies. Thank you.
Alex Hart
Thank you very much.
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