Executives
Jack Browne -
Alex P. Hart - Chief Executive Officer, President and Director
Jeffrey W. Hodges - Chief Financial Officer, Principal Accounting Officer and Senior Vice President
Analysts
Gary F. Prestopino - Barrington Research Associates, Inc., Research Division
Bradford Alan Evans - Heartland Advisors, Inc.
Dan Weston
Elizabeth Murphy Lilly - Gabelli Funds, LLC
Official Payments Holdings (OPAY) Q1 2012 Earnings Call February 8, 2012 5:00 PM ET
Operator
Welcome and thank you for standing by. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the call over to Mr. Jack Browne. Sir, you may begin.
Jack Browne
Thank you. Good afternoon. My name is Jack Browne. I'm the Controller for Official Payments. At this time, I would like to welcome everyone to the Official Payments Holdings, Inc. Earnings Conference Call for the quarter ended December 31, 2011. As a reminder, we have changed our name from Tier Technologies, Inc. to Official Payments Holdings, Inc. and changed our NASDAQ ticker symbol to O-P-A-Y or OPAY. Today's call is scheduled for one hour.
After the market closed today, we issued a press release announcing our financial results for the quarter ended December 31, 2011. A copy of the press release can be found on the Investor Relations section of our web site, www.opay.officialpayments.com. We filed our Form 10-Q for the period ended December 31, 2011, this afternoon after the market closed. We invite shareholders and analysts who wish to speak to management about the company and its performance to schedule a meeting by contacting our Chief Financial Officer, Jeff Hodges, by calling him at (770) 325-3102 or by e-mailing him at jeff.hodges@officialpayments.com.
A taped replay of this call will be available on the company's website from 8 a.m. Eastern time, Thursday, February 9, 2012, until Thursday, March 8, 2012, at 11:59 p.m. Eastern time. Alternatively, you can hear a replay by dialing (800) -- I'm sorry, (866) 460-9737 and entering the conference ID number 1921847, starting at 8 p.m. Eastern Time, Wednesday, February 8, 2012.
I want to remind you that various remarks that we make about the company's future expectations, plans and prospects constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. The forward-looking statements discussed on this call represents management's current expectations about the company's future financial performance, based on the information available to us today. This information may change and our actual results may differ materially from these forward-looking statements. We undertake no obligation to update any such forward-looking statements.
There are numerous risks and uncertainties that affect our business and may affect these statements, including but not limited to, general economic conditions, which affect the company's financial results in all of our markets, which we refer to as vertical markets or 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 Payment Solutions revenue or reducing our costs, including processor and interchange-related costs; the timing, initiation, completion, renewal, extension or early termination of client or partner contracts or projects; our ability to execute on our sales and product strategy and realize revenues from our business development opportunities; the impact of regulatory requirements and the unanticipated claims as a result of project performance, including due to the failure of software providers, processors, vendors, partners or subcontractors to satisfactorily perform and complete engagements.
For a discussion of these and other factors which may cause our actual events or results to differ from these projected, please refer to our periodic reports on Form 10-K and Form 10-Q filed with the Securities and Exchange Commission.
In this call, references to “the quarter” or “the first quarter” refer to the quarter ended December 31, 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 in this call, and we have presented the reconciliations of these non-GAAP financial measures on a historical basis to the most directly comparable GAAP measures in the earnings press release that we issued earlier this afternoon.
With me on the call are today are Jeff Hodges, our Chief Financial Officer; and Alex Hart, our President and Chief Executive Officer. We'll begin the call with Alex. Alex?
Alex P. Hart
Thanks, Jack. On our last call, I mentioned that in fiscal year 2012, we expected to start seeing a return on the investments made in fiscal year 2011. I think today's reported results show that we're on the right track. In the first quarter of 2012, we saw meaningful increases in both net revenue from our Payment Solutions business and in adjusted EBITDA from Continuing Operations. Jeff Hodges, our CFO, will cover our first quarter operating results in detail in a moment, then I will give you an update on our progress related to the strategic initiatives we discussed last quarter and our expectations for the remainder of fiscal year 2012. Jeff?
Jeffrey W. Hodges
Thanks, Alex. We're pleased to report that we generated $2.2 million in adjusted EBITDA from Continuing Operations for the first quarter of fiscal year 2012. This represents an 88% increase over the same period a year ago. As detailed in today's earnings press release, we define adjusted EBITDA from Continuing Operations as net income from Continuing Operations before interest expense, net of interest income; income taxes; depreciation and amortization; stock-based compensation paid in both equity and cash; and restructuring charges.
During the first quarter of fiscal year 2012, we generated approximately $12 million in net revenue from our Payment Solutions segment, which is a 31% increase over the same quarter last year. We processed nearly $2.5 billion of payments, which represents a 12% increase versus the same quarter last year. This increase was driven by an 8% increase in average transaction size and a 4% growth in our transaction volume, with approximately 5 million transactions processed during the current quarter.
During this period, we experienced strong growth in our education, federal, state and local tax and property tax verticals, which was partially offset by previously mentioned reductions of payment volume related to the loss of a large utility client last year.
Direct costs in our Payment Solutions segment is $23.8 million, a decrease of 4% compared to the same quarter last year, primarily as a result of savings realized from improved debit card interchange rates related to the implementation of changes prescribed by the Durbin provisions of the Dodd-Frank Act, which we refer to as the Durbin Amendment.
General and administrative expenses from our Continuing Operations were $9.2 million for the quarter, an increase of 35% or $3.3 million compared with the same quarter last year, primarily due to the $1.5-million restructuring charge associated with the move of our corporate headquarters from Reston, Virginia to Norcross, Georgia and a $1-million increase in incremental performance bonus expense recorded in the current quarter in connection with the company's fiscal year 2012 management incentive plan. The remaining increase is primarily attributable to payroll and payroll-related costs in our technology organization.
For the quarter, we reported a net loss of $1.6 million as compared with a loss of $1.1 million in the prior year quarter. This represents a loss of $0.10 per fully diluted share compared to $0.06 per fully diluted share, respectively.
As of December 31, 2011, we had $46.9 million in cash and cash equivalents. Of this balance, $7.7 million is funds settled to us, but not yet distributed to clients, and $8.6 million of accrued discount fees. This makes the cash available to the company for business purposes as of December 31, 2011, $30.6 million. As mentioned last year, we've committed $8.3 million to upgrade our core IT infrastructure over the next 12 months, which include the purchase of hardware, software and related professional services. Through December 31, 2011, we've incurred approximately $6.7 million related to this project.
The company's headcount as of December 31, 2011, was comprised of 225 employees and 30 contractors.
Lastly, I want to mention that we will be filing our Form 10-Q for the quarter ended December 31, 2011, with the Securities and Exchange Commission today. We encourage all of you to review the financial statements and related notes in the 10-Q in order to better understand our current operations.
Now Alex would like to talk about our future expectations for the business.
Alex P. Hart
Thanks, Jeff. As I mentioned previously, I believe that we're very well positioned for an improved fiscal year 2012. We have a sound strategic plan and a team that's capable of executing the plan. The first quarter was very encouraging and I believe that we will continue to execute on a number of fronts to improve even more.
The bulk of our time during my first year on the job was spent improving our operational performance, refining our strategy and ensuring that we have the people, processes and products necessary to pursue our strategy. I feel very good about the progress we've made and I believe that we're focused on the right things for this stage in the turnaround.
The 5 major objectives that we're currently focusing on are: one, reducing processing costs; two, increasing sales to new clients; three, improving adoption and utilization within our existing customer base; four, creating new products and services; and five, improving our technology infrastructure. We've made progress on each of these initiatives during the first quarter and we'll share information about each on a go-forward basis as we get more comfortable that we can share information without compromising our competitive position.
The initial improvement in the processing costs was largely attributable to the implementation of changes prescribed by the Durbin Amendment. We're not comfortable sharing specifics here for competitive reasons, but I can tell you that we expect to see continued Durban-related improvement for the remainder of fiscal 2012. We're also engaged in a number of additional processing-related activities that could represent more upside in the second half of the year and beyond.
Our sales organization, charged with both increasing the number of new clients and increasing the satisfaction, growth and profitability of our existing client relationships, is a combination of new and previously existing sales and business development personnel. I feel very good about the team we're putting on the field and I'm confident that their efforts will have a positive impact on fiscal year 2012 and lay the foundation for even better results in fiscal 2013 and beyond.
Adoption and utilization have historically been quite low in our verticals, and even small increases in these measures will have a significant effect on the growth and profitability of the company. We're not willing to share our specific goals in this area for competitive reasons, but we are very focused on the marketing, product and technology activities required to improve adoption and utilization. And I believe that we will see some improvement in our financial results from the broader adoption of electronic payments across the economy, regardless of how much we invest here.
Our product development capabilities are greatly improved versus a year ago, and building new products or improved versions of existing products is a fundamental part of our plan for fiscal 2012. One new product that's off to a fast start is payment plan, which enables students and their parents to pay their tuition and related expenses in installments. Payment plans have been around for quite some time, but the success we've achieved in selling this product in a relatively short time, combined with the list of competitors we've beaten in our first 4 competitive selling situations, gives us confidence that we've built a product that is a significant improvement over others in this space.
Lastly, our technology infrastructure upgrade project is ahead of schedule and on budget. So the operational quality that we've achieved during the past year will continue to improve during the next 12 months.
I believe that the blunders of the past will fade from memory as quickly as the Tier Technologies name. The change to Official Payments Holdings, Inc., which took place shortly after the end of the first fiscal quarter, reflects our concentration on the payments industry and eliminates a certain amount of confusion in the marketplace, which has long recognized the Official Payments brand, but had little idea who Tier Technologies was or what it did.
We're confident that the new Official Payments will continue to improve and we're now convinced that the guidance that we provided last quarter is no longer appropriate. We believe that the gains we achieved in the first quarter of FY 2012 justify increasing our annual guidance for adjusted EBITDA from Continuing Operations from $3 million to $3.7 million. We appreciate the opportunity to discuss our progress with you this afternoon and we'd now like to open the lines for questions. Operator?
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Gary Prestopino from Barrington Research.
Gary F. Prestopino - Barrington Research Associates, Inc., Research Division
Jeff, you kind of went through a lot of those payment -- those metrics on payments: volumes processed, average transaction. Could you just go through those a little more slowly so I can write them down?
Jeffrey W. Hodges
Yes, sure. Let me get back to the right place and I'll give them to you. All right. So if -- we had $2.5 billion processed, which was a 12% increase in volume. We had an 8% increase in the average transaction size, 4% growth in overall volume and then 5 million transactions processed.
Gary F. Prestopino - Barrington Research Associates, Inc., Research Division
And then the verticals that did well for you? Again, I tried to write this all down. I couldn't -- you said education...
Jeffrey W. Hodges
Federal, state and local, and property tax were the leaders.
Gary F. Prestopino - Barrington Research Associates, Inc., Research Division
So really, the only one that you had some issues with was utilities, right?
Jeffrey W. Hodges
Yes. And most of that is a function of -- it was in last year. It wasn't in this year. It's not necessarily that we lost any material clients in the quarter. It's just...
Alex P. Hart
It's just not that we have lost any [ph] bigger clients in quite some time, but the full-year effect of them is showing up now. But we expected that. And as you know, we are focused on the municipal part of the utilities market, not the large utilities that, for the most part, left us when we entered a big partnership about a year and a quarter ago.
Gary F. Prestopino - Barrington Research Associates, Inc., Research Division
Okay. And then as far as the technology infrastructure that you're doing, you're still on track here to close a data center, I would assume, right?
Alex P. Hart
Yes. We'll move the San Jose data center to Norcross before the end of the calendar year.
Gary F. Prestopino - Barrington Research Associates, Inc., Research Division
Okay. And then the other major thing you were doing was moving to a single architecture. And is that still on track to be completed by the end of '14?
Alex P. Hart
Yes, that's the second stage. And while there have been some steps in that direction, that won't begin in earnest until the technology infrastructure project is done.
Operator
[Operator Instructions] Our next question comes from Brad Evans from Heartland.
Bradford Alan Evans - Heartland Advisors, Inc.
Can you give us any guidance as to how you think cash balances will progress over the remainder of the year? Is it a high-water mark? Or do you think -- I realize a seasonally strong quarter here, but do you -- how do you see cash progressing over the course of the year?
Jeffrey W. Hodges
I would say this is the high-water mark for the year. I mean, we've -- in terms of CapEx, we've gotten the majority of the infrastructural project behind us. Third quarter will be another positive working capital, but I think this will probably be the high-water mark. So it won't go much lower, but this is it, the highest you'll see this year, I believe.
Bradford Alan Evans - Heartland Advisors, Inc.
Okay. Because your CapEx level was actually fairly low in the quarter. What's your CapEx budget for the full year?
Jeffrey W. Hodges
For the full-year -- the biggest item in the CapEx right now is the $8.4-million infrastructure project; however, a lot of that was spent last year. But we've got another -- I mean, we're $6.27 million into that, so the biggest CapEx item we have left is, call it $1.7 million of that left. So there's $2 million to $2.5 million-ish in CapEx left.
Bradford Alan Evans - Heartland Advisors, Inc.
Alex, with roughly $30 million of liquidity, so to speak, how are you thinking about the best -- in shareholders' best interest in deploying that capital at this point?
Alex P. Hart
Well, our position really hasn't changed. We look at it on a quarterly basis. We have a special subcommittee of the board that looks at cash and whether or not we should be using it to do something else. We also did a Dutch auction last year, which had a minimal effect but made some people happy. But we feel that given our ACH needs and the uncertainty that we see in the market for raising money down the road, we haven't seen a need to go out and do anything aggressive with it yet, but again, we look at that on a regular basis, at least every quarter, and Jeff and I look at it far more often than that.
Bradford Alan Evans - Heartland Advisors, Inc.
Have you refined your thinking as to how much you think you need just to run the business day-to-day?
Alex P. Hart
No, we really haven't. We are seeing improvement, as you can see in our results. But it's still early. It's -- as one of directors said earlier today, it's one quarter in a row. So we're trying not to get overly confident at this point, but we feel very good about where we're headed.
Bradford Alan Evans - Heartland Advisors, Inc.
Okay. Could you just amplify a little bit on the new products? You mentioned -- did you say -- payment plan was the one you highlighted. Anything else? Can you amplify on that a little bit and maybe provide us some insight into some other products you might be working on that we should be paying attention to?
Alex P. Hart
Well, there are other things, but for competitive reasons we'd rather not discuss them, both in terms of actual product enhancements and new products, as well as some integration with ERP providers that make the selling process a lot easier, because we go in with a pre-integrated product that a school or a government agency can use fairly quickly. So those things are -- they're sort of like replacing the coil in your air conditioner. It doesn't necessarily have a lot of sizzle, but it makes it a much more functioning organization.
Bradford Alan Evans - Heartland Advisors, Inc.
Okay. The roughly 5 million payments processed, can you delineate within that number what percent came from existing customers versus some of the new customer efforts you've got in place?
Alex P. Hart
It is largely from existing customers, to be honest with you. We had very poor sales year last year and the year before that. So our sales organization is running well, but it's still early in the day there. We've signed -- I think we've signed more customers in the first quarter this year than we did in all of last year. It's going to take some time for those to show up in the numbers. Most of the increase is due to improved marketing efforts. I think we get some lift from the overall adoption of online payment and electronic payment overall. But we've done a much better job of using Google Analytics and being smarter with where we buy, how we buy. We don't share much of that information because it's proprietary and frankly, we're doing some things that no one else has figured out. And that's showing up on our results, so we want to keep that advantage for as long as we can.
Bradford Alan Evans - Heartland Advisors, Inc.
Okay. So we'll stay tuned to that. Can you just -- we've seen some stability in terms of dollar value per transaction the last couple of quarters. Has something changed? Or are we just gotten to a level now where we've kind of found the floor and we shouldn't see the diminution of -- on a per transaction base of some of these smaller transactions that have been working their way into your mix? I mean, is there a trend afoot here?
Alex P. Hart
We're not entirely sure, Brad. The fact is that some of those utility clients have left and we're finally seeing more of the effects of that. So smaller value transactions are out of the mix, which would make our average go up a bit. We also do think it's leveled off and that it's not getting smaller anymore. So I think that both of those factors have made the average transaction size increase. We really don't know how much that's going to increase over the course of the year because we are going after additional utility clients and they will suppress that average transaction size.
Bradford Alan Evans - Heartland Advisors, Inc.
Okay. Two other questions, quick. When will a metric such as the percentage of transactions from new customers -- when will that be a good question to ask you and be a meaningful metric?
Alex P. Hart
I think next year is certainly -- it may be something we can start talking about in the second half of the year, but most likely, it's a fiscal year 2013 kind of metric.
Bradford Alan Evans - Heartland Advisors, Inc.
Okay. And is there anything -- any update on -- ready -- anything you're doing in the mobile space at this point that you can talk about?
Alex P. Hart
Well, we do have a mobile app -- excuse me, a mobile functionality out there. It's not yet an iPhone, iPad or Android app, but we are working on those. We're actually getting a fair amount of traffic just on our mini-browser-based app for mobile and we're very encouraged by that. But there hasn't been a huge clamor among our customer base for mobile. We recognize that they aren't always the first to recognize the need for a great mobile app, so we're building it anyway. But we're taking a very thoughtful approach and looking for some key customers to help us with the funding of some of those new apps.
Bradford Alan Evans - Heartland Advisors, Inc.
Okay. I lied. I got one more question. If you back out the restructuring charge, you came in with cash operating expenses below the direct cost line of around $9.1 million. Is that a number we should kind of be thinking about going forward? Or does that move down from here? Or how should we think about that number?
Jeffrey W. Hodges
It should -- for the rest of the year, if you average it out over the next 3 quarters, it should come down, because we had a big fat bonus expense in this quarter.
Bradford Alan Evans - Heartland Advisors, Inc.
So that million dollars won't recur entirely?
Alex P. Hart
No. It won't.
Operator
We do have another question from Gary Prestopino from Barrington Research.
Gary F. Prestopino - Barrington Research Associates, Inc., Research Division
Yes, just when does this VSA totally run off?
Alex P. Hart
We think, Gary, sometime in '13 and it's -- we originally thought it'd be gone a little bit sooner, but it's continuing to flourish, so...
Gary F. Prestopino - Barrington Research Associates, Inc., Research Division
Okay. Since you've added some new salespeople, can you -- and I know it's early in the game here, but could you talk about some of the things that you're seeing your sales force out there that's different than where you had been in the past?
Alex P. Hart
Well, I think, to some extent, it's a different focus. As you know, we shifted from paying people based on potential gross revenue to actual net revenue. That's had a very positive effect, although frankly, it's also created some turnover, which you would expect. I think that some of the old guard had a pretty favorable comp plan that didn't require them to work nearly as hard as our guys are now. And so it's understandable that they may have sought greener pastures. But for the most part, we are now out calling on people in person. A lot of what was done in the past was done over the phone and through the web, which is very efficient, but frankly, it was not very effective. And so we're going into places that haven't seen one of our sales people in 3 or 4 years. And the reception has been very favorable. So we feel very good about where we're headed about the growth in the pipeline. And while it's early in the day, we're really feeling pretty bullish about our sales organization.
Gary F. Prestopino - Barrington Research Associates, Inc., Research Division
So when you mentioned the pipeline, are you actually developing a pipeline now versus maybe not even having one in the past? Or...
Alex P. Hart
Well, that's an accurate statement. We had pipeline that was, I think, largely fantasy when I first got here. It said something that was 70% probable to close because that's what it needed to be to hit the number that they were supposed to get, had nothing to do with the actual stage of the sale. We now have professional sales management and a sales management system that gives us a much better sense for what's really happening, and so the pipeline we have, we feel great confidence in as opposed to the one we inherited, which was a nightmare.
Gary F. Prestopino - Barrington Research Associates, Inc., Research Division
Are most of what you're targeting now -- I mean, these would become entities that obviously don't do anything in this processing space. I mean, have they heard of you in the past? Or...
Alex P. Hart
On the government side, we are the market leader and we have great brand recognition. We rarely go into an agency, state, local or otherwise, that has not heard of us. And so our name recognition does help there. The fact that we serve the IRS and are in 27 states and have over 4,000 agencies on our customer list really helps there. In some cases, these are smaller guys that don't have anything other than cash or check today, although there are some surprisingly large municipalities that you would expect to be very well down the path of electronic payment that fit that category or that description as well. And then there are those that are either fed up with or otherwise dissatisfied with their current provider. They're looking for a better answer and we've done a pretty good job there as well. We just haven't had enough selling pressure in the past. I think we've had a lot of reports, a lot of discussions, but not a lot of actual selling taking place.
Gary F. Prestopino - Barrington Research Associates, Inc., Research Division
Okay. And then getting back to this technology upgrade. I may be a little bit confused here, but is that -- is what you're doing there just actually installing a lot of hardware and some software?
Alex P. Hart
It's a combination of hardware, software and the professional services required to implement it. So the things that frankly should've been invested in 5 or 6 years ago are finally getting upgraded to the level where we all sleep a lot better at night. It's not moving us forward. As I said earlier, it's a bit like replacing your air conditioner. You expect it to be there. It's not sexy, but it has to be there to have a comfortable operation. And so that investment is well underway and in fact, it's a bit ahead of schedule and will pay big dividends, both in terms of allowing us to continue to provide the level of service that our customers expect and deserve, as well as allowing us to grow in the fashion that we think that we can.
Gary F. Prestopino - Barrington Research Associates, Inc., Research Division
Okay. And just to be clear, as I look at your -- this is on Brad's question. Your G&A was about $9 million. You back out the charge at $7.5 million, and Jeff, what you said is that it will trend down throughout -- or from this quarter, because there was bonus payments involved in there.
Jeffrey W. Hodges
It will -- well, it was accrual. Based on the results that we achieved, it'll be -- if you back out the restructuring charge, we should have a relatively similar number in third quarter, but second and fourth are going to be definitely lower.
Alex P. Hart
Yes. Historically, our third quarter is our largest, our first is second and then second and fourth are about the same, but they're both lower than the first. And our expenses should reflect that. There may be some timing issues related to sales comp and things like that, but for the most part, it should trend down.
Operator
Our next question comes from Brad Evans from Heartland.
Bradford Alan Evans - Heartland Advisors, Inc.
Was there anything in the Durbin Amendment that helped you on a net realization basis, on a per transaction basis? Or is that -- am I -- is that not a -- is that a bad question?
Alex P. Hart
No, it's a fair question. The Durbin Amendment regulates the amount that certain issuers can charge for debit card transactions. There are a number of unregulated entities, government entities and banks and other financial institutions with assets of less than $10 billion, what we call unregulated transactions. One key metric is the percentage of unregulated versus regulated debit card transactions. Thus far, we've been fairly accurate in terms of projecting those. We hope that trend will continue, but if unregulated becomes a much bigger piece of the pie, then it won't have as nearly as positive an effect as it has this first quarter. But there's no question that, that's had a meaningful impact and will continue to. Debit cards are about 50% of our transactions, not 50% of our dollars, but of the actual transactions. It's a sizable number.
Bradford Alan Evans - Heartland Advisors, Inc.
Okay. To your point, one quarter a row, so the recent uptick -- it looks like we've come off of a trough in terms of year-over-year rate of change on the number of transactions processed from the fourth quarter. Looks like last year there was a trough in the first quarter. We're looking a little better here, but the -- is that the economy? Or is that -- do you feel that the economy is getting better? Or do you think that it would have -- you continue to see the secular shift of moving from paper to electronic?
Alex P. Hart
I don't see any economic tailwind at all. I do think that there's sort of a steady march toward electronic payment, but the biggest factor, I believe, is that we've gotten much better at figuring out how to use our marketing dollars and getting much more impact. That's both a marketing issue and a technology issue. We've done a much better job of tracking the results and shortening that feedback loop so that we can make adjustments on the fly. And I probably shouldn't say any more about that, frankly.
Bradford Alan Evans - Heartland Advisors, Inc.
So, Alex, would you personally be disappointed if you didn't see more than 22 million transactions this year? Or do you think that's aggressive?
Alex P. Hart
I would personally be disappointed, yes.
Bradford Alan Evans - Heartland Advisors, Inc.
Okay. And then just one last question on the IT upgrade side. What are the risks at this point in terms of -- from an operational perspective that you could envision as a result of the upgrade project?
Alex P. Hart
The only real risk I see is that we -- would be those associated with not doing it. I think that -- I think we're -- we have it well in hand. We're getting great help from a third party that's providing great support. We have a number of people that are new to the organization that have gone through similar exercises before. And so as long as we continue to execute, I feel very good about where we're headed. I just would like to get there as fast as possible.
Bradford Alan Evans - Heartland Advisors, Inc.
Okay. I'm sorry, just one other question. And so the guide up from $3 million to $3.7 million, is that just reflecting the better first quarter that you saw, so you're holding your expectations for the remainder of the year to fairly constant, so there -- I don't want to say there could be upside, but you clearly -- is it reflecting the out-performance in the current quarter?
Alex P. Hart
It does. It reflects that our better case is coming to fruition.
Bradford Alan Evans - Heartland Advisors, Inc.
And then, I don't want to ask a leading question, so don't mistake this. But why shouldn't those trends persist?
Alex P. Hart
We think they will. We think they will. The fact of the matter is, though, that for Durbin in particular, there could be a shift from the large issuers that, for the most part, make up the bulk of those regulated transactions, will likely deemphasize debit card in my mind over time. Now that's a long-term shift. But to the extent that they put their marketing dollars behind other cards, credit cards in particular, in an attempt to avoid having such a low-revenue product, that could have an impact and we could see more unregulated transactions in the mix, which would dampen our results a little bit. But we've -- I think we've accounted for that pretty well and have been pretty conservative, so we don't see it ending, but we want to be thoughtful.
Bradford Alan Evans - Heartland Advisors, Inc.
So if I may paraphrase you then, so again, just so we're grounded here, the raised guidance reflects the better-than-expected first quarter. You're hopeful those trends continue, but you don't want to -- do you prefer to keep the bar relatively low as you set expectations on a full year basis?
Alex P. Hart
I wouldn't say that the expectations are low, but we think that they're appropriate. We're trying to be as forthright and honest about what we really think as can be and always will. And that's what we really think we can do.
Operator
Our next question comes from Dan Weston from WestCap Management.
Dan Weston
A couple of questions. The -- on the net revenue line, it looked like you had a pretty significant improvement there, well over 50% from what I understand to be your seasonally strongest quarter. And I was just trying to figure out if we can drill a little deeper into where you're seeing most of the benefit on your direct cost line.
Alex P. Hart
Well, there are a couple of things. As we mentioned previously, the Durbin Amendment and our reduced processing costs related to debit card transactions is having a big impact. We also made some key strategic decisions when I got here to stop chasing every transaction that was out there. We were involved in a number of deals that, frankly, generated a lot of gross revenue, but very little net revenue. We were paying our sales people, in fact, for doing that. And so that shift has obviously had some costs associated with it during my first year, but I think it's starting to pay off now and we're focusing on not just revenue but revenue that's going to flow to the bottom line ultimately. And so it's both improved economics on the processing side, as well as, as I think, being smarter about who we do business with and the kinds of deals we do, and recognizing that there are times when you have to walk away from something.
Dan Weston
Good point. I guess when you look at the -- I just want to go over your seasonality again. Did you mention -- in terms of strength for your year, your Q4 is your strongest -- oh, excuse me, your Q2 is your strongest?
Alex P. Hart
No. Q1, which we just completed, is our second strongest and is a very strong quarter from a margin perspective. Our third quarter, which includes tax season or the bulk of tax season, really from April 1 on, is our highest transaction quarter typically. Not necessarily our highest margin quarter, but it should be a very healthy one. Second and fourth tend to lag the first and third.
Dan Weston
Yes. Okay, that makes sense. So your -- do you anticipate that any of your seasonally slower quarters will generate a negative EBITDA this year?
Jeffrey W. Hodges
Possibly the fourth quarter, but hopefully not since it's too early to tell yet.
Alex P. Hart
I would -- I'd be disappointed, but not completely shocked if it was break-even or slightly negative, but that certainly is not the goal.
Dan Weston
Yes. And just as a follow-up to one of your previous caller's questions. I'm just kind of running some numbers here and it was great that you upgraded your guidance from $3 million to $3.7 million of EBITDA. And then I'm looking at a first quarter where you reported $2.2 million, which is seasonally your second strongest quarter, which would lead me to believe that your Q3, I guess, is your strongest quarter, would produce more EBITDA than that. And if your other 2 quarters, you're not generating a negative EBITDA, it would seem that your EBITDA would be well north of $5 million-ish.
Alex P. Hart
Well, keep in mind, Dan, that the third quarter is our highest transaction quarter. It's not necessarily our highest margin in terms of the average transaction. The first quarter had a number of property tax payments, which are among our best types of transactions, both in size and in margin. We have a pretty dominant position in the property tax market and in fact, one of the key initiatives for this year is to expand our presence in the property tax business. The third quarter is largely dominated by the IRS business and the federal and state income tax, which tends to be a lower margin business than property tax. And so we're working to improve there, but we don't know how big that improvement is going to be, or how quickly it will show up yet.
Dan Weston
Got it, and I appreciate that. Jeff, do you happen to have the total net revenue produced from Continuing Operations in fiscal '11?
Jeffrey W. Hodges
It's in the press release, isn't it?
Dan Weston
Oh, it is in the press release. I don't know if I saw that.
Jeffrey W. Hodges
We're looking right now. Yes, it is in the press release. If you wanted the total net, it's $9,158,000.
Dan Weston
I'm asking for total net revenue for all of fiscal year '11.
Jeffrey W. Hodges
Oh, I'm sorry, I gave you the quarter. That I might have to get for you, Dan, not in front of me.
Dan Weston
Okay. Let me just make sure I have it. When you guys gave your guidance for last quarter at the end of your year, you anticipated a -- I guess, just kind of like a double-digit growth of your net revenue for the year '12. And seeing as you had such a strong first quarter, is there any chance you can tighten that estimate up a little bit, maybe from a -- just a simple double-digit to something more meaningful?
Alex P. Hart
Yes. I think once we get through the third quarter, we'll have a much better sense for that, but there isn't enough variability in the transaction mix between first, second and third that it probably wouldn't be wise to try to make that estimate at this point.
Operator
Our next question comes from Beth Lilly from Gabelli.
Elizabeth Murphy Lilly - Gabelli Funds, LLC
Alex, I have a couple of questions. Can you -- your Payment Solutions net revenue growth rate in the quarter, do you see that sustaining -- being able to sustain itself during the course of the year?
Alex P. Hart
Again, that's something that we just don't know yet because of the transaction mix and the varying profitability of those transactions. And frankly, we don't know enough yet about exactly how profitable each type of transaction by payment type, by transaction type, should be. It's a level of intelligence that we expect, but was not here when we got here. And so we're working through putting in the systems and people that know how to get that. So it's a little bit early to project that.
Elizabeth Murphy Lilly - Gabelli Funds, LLC
Okay. What about your...
Alex P. Hart
I'm sure we have [ph] hope.
Elizabeth Murphy Lilly - Gabelli Funds, LLC
Your hope. Okay. Is that your goal?
Alex P. Hart
We don't have a specific goal tied to that but it certainly is something we are shooting for, yes.
Elizabeth Murphy Lilly - Gabelli Funds, LLC
Okay. And what about the consolidation of the IT platforms? Can you just update us on how many platforms that you're running? And I know you're spending, what, $8 million?
Alex P. Hart
$8.3 million, yes. We have 3 primary product platforms: the western, which is the original Official Payments platform that was largely focused on the government vertical; the central platform, which is the old ChoicePay, which is a combination of utilities and is the actual back-end payment engine for the IRS business; the eastern platform, which is the former EPOS business that was focused, first and foremost, on higher education. Those 3 are continuing to run somewhat independently, although there is some coordination and some customers are actually on more than one platform for certain products. The goal of course is get a single architecture, but we're not there yet. We also have things like the corporate accounting system and the corporate customer service modules and so on that are serving all 3. Over time, those would be a single platform as well.
Elizabeth Murphy Lilly - Gabelli Funds, LLC
Okay, so you're still running all those platforms.
Alex P. Hart
We are. The primary focus of the IT project is to improve the infrastructure, not necessarily eliminate any of the platforms, but make them all more stable, more flexible, more extensible and to consolidate data centers to reduce our operating costs so that they're easier to run. And so we'll be down to 2 primary data centers by the end of this fiscal year -- excuse me, by the end of this calendar year in Norcross and in Tulsa. And so the San Jose center will go away. The San Ramon center went away the fall of last year. San Jose will migrate to Norcross during this year.
Elizabeth Murphy Lilly - Gabelli Funds, LLC
Okay. And you don't -- all right. And you don't see eliminating any of those platforms, then.
Alex P. Hart
Not in the near term, no. And in fact, we don't know that we would ever truly eliminate any of them, in the sense that the last thing we want is to force our customers to make a choice of either migrating with us to our new platform or migrating away from us to a new company, a competitor. What will likely happen is that we will increasingly displace or replace the functionality of the platform they're on today with a centralized architecture, and that those platforms that they're on today will increasingly become merely a front end and an integration point. An So there won't be a major displacement of customers and an opportunity for them to go elsewhere.
Elizabeth Murphy Lilly - Gabelli Funds, LLC
Okay. And then my last question is, can you just talk about what you think, in terms of the cash on the balance sheet and your priorities with capital allocation? And I know you did the Dutch tender, but does another share repurchase play makes sense at this point? Or is there an authorization out?
Alex P. Hart
Well, we have not decided to do that yet. But again, it's something that we look at every quarter, that Jeff and I talk about on a regular basis. And it certainly is -- it's something that could happen. We need to make sure that we have sufficient cash, not only for the development projects we're undertaking, but also to make sure that our ACH banks are comfortable with our position. Obviously, as we get cash generating, it becomes a lot easier to look at those things. And so we're very excited about the progress we've made, but we don't feel like we're quite there yet.
Elizabeth Murphy Lilly - Gabelli Funds, LLC
Okay. And is there an authorization outstanding?
Alex P. Hart
I don't -- no. Not at the moment.
Elizabeth Murphy Lilly - Gabelli Funds, LLC
No? Okay, okay, you've exhausted that.
Alex P. Hart
Yes.
Operator
And we do have another question from Brad Evans from Heartland.
Bradford Alan Evans - Heartland Advisors, Inc.
Alex, where do you think you could -- on the Payment Solutions side, where do you think you can take direct cost per transaction over the long term?
Alex P. Hart
That's a very good question. We don't know exactly on a per transaction basis where they are today. It's perhaps unwise to admit that, but the fact is that the people running this company previously were not payments people, didn't even know that, that was important. And so we have a lot more help today. We're driving aggressively toward getting that kind of information so that we can make better decisions. But we really don't have a good baseline today for where transaction costs are. Certainly not on any kind of a detailed level where we can make good decisions about where to invest.
Bradford Alan Evans - Heartland Advisors, Inc.
But is it directionally accurate to take the direct cost per period in the numerator and take the number of transactions processed in the denominator and that gives you a fairly reasonable guidance to what it's cost you to process each transaction?
Alex P. Hart
Sure, sure.
Jeffrey W. Hodges
Yes, but which is -- I mean, what Alex is saying is, I mean, you're looking at a fully loaded transaction cost that way. I mean, what we want to be able to get down to what the -- what our full overhead base is versus what our direct transactional cost is and so on. But I mean, directionally, what you're saying, of course, makes sense.
Bradford Alan Evans - Heartland Advisors, Inc.
That's what I'm asking about. It's not -- I guess, I'm not asking for the variable costs. I'm asking for the fully loaded costs. I mean, can you get it down to $3 a transaction?
Jeffrey W. Hodges
I think we can get there. And when is -- I don't know when yet though.
Bradford Alan Evans - Heartland Advisors, Inc.
Okay. Well that's -- that would be pleasing.
Jeffrey W. Hodges
Yes. I mean, as we move into our FY '13 planning cycle, I mean, this will be a key focus and so that's a nice target to shoot for, but I don't know when we're going to get there yet.
Bradford Alan Evans - Heartland Advisors, Inc.
Well, it would be nice to see you making $3 a transaction.
Operator
There are no further questions at this time.
Jack Browne
Thank you, once again, for your time and attention this afternoon. And we look forward to speaking with you again next quarter. We invite shareholders and analysts who wish to speak to management about the company and its performance to schedule a meeting by contacting our Chief Financial Officer, Jeff Hodges, at (770) 325-3102 or e-mailing him at jeff.hodges@officialpayments.com. This concludes our First Quarter Fiscal Year 2012 Earnings Call for Official Payments Holdings, Inc. Thank you.
Alex P. Hart
Thank you, guys.
Operator
Thank you for participating in today's conference call. You may disconnect at this time.
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