Higher One's (ONE) CEO Marc Sheinbaum on Q4 2015 Results - Earnings Call Transcript

| About: Higher One (ONE)

Higher One Holdings, Inc. (NYSE:ONE)

Q4 2015 Results Earnings Conference Call

February 18, 2016, 08:30 AM ET

Executives

Patrick Pearson - Director of Corporate Development and Investor Relations

Marc Sheinbaum - Chief Executive Officer

Christopher Wolf - Chief Financial Officer

Analysts

Oscar Turner - SunTrust

Operator

Good day, ladies and gentlemen, and welcome to the Higher One Holdings Incorporated Q4 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today's conference is being recorded.

I would now like to introduce your host for today's conference call, Mr. Patrick Pearson, you may begin.

Patrick Pearson

Thank you, Kevin. Good morning everyone, and welcome to the Higher One Fourth Quarter 2015 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 up the call for Q&A. There is a slide presentation that accompanies our discussion of the quarter that is available on our Investor Relations website at www.ir.higherone.com.

This call contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Management's projections and expectations are subject to a number of risks and uncertainties that could cause actual performance to differ materially from that predicted or implied. Forward-looking statements may be identified by the use of words such as expect, anticipate, believe, estimate, potential, should or similar words intended to identify information that is not historical in nature.

Forward-looking statements are based on the current beliefs and expectations of Higher One management and are subject to known and unknown risks and uncertainties. There are a number of risks and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statements. These statements speak only as of the date they are made, and the Company does not intend to update or otherwise revise the forward-looking information to reflect actual results of operations, changes in financial conditions, changes in estimates, expectations or assumptions, changes in general economic or industry conditions or 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 completed after the date hereof. For further information regarding risks associated with our business, please refer to our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the most recent fiscal year end, quarterly reports on Form 10-Q and current reports on Form 8-K. Information about the factors that could affect future performance can be found in our recent SEC filings available on our website.

We will also provide certain metrics on a 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 relating 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 now turn the call over to our CEO, Marc Sheinbaum. Marc?

Marc Sheinbaum

Thanks Pat, good morning everyone, thanks for joining us today. On the call with me this morning is our CFO, Chris Wolf, who will provide our financial update for the quarter. Following our prepared remarks Chris and I will gladly take your questions.

Please refer to the accompanying slide deck that is available on our Investor Relations website as I discuss the fourth quarter details beginning on slide three.

The fourth quarter of 2015 was a busy one for us as we executed on a number of key initiatives that were imperative for the company. First, we officially closed the Campus Labs on November 25 and received the related funds from Leeds Equity Partners. Chris will cover the use of those proceeds in his remarks.

Second, we entered into consent orders with both the Federal Reserve and the FDIC. We have paid the civil money penalties as well as funded the settlement accounts for restitution and those cash outflows are reflected in our year-end financials.

Finally, on December 15 we signed a definitive agreement to sell substantially all of the assets of our Disbursements business including the OneAccounts to one of our current bank partners, Customers Bank for gross purchase price of $37 million. As a reminder that $37 million will be paid to Higher One as follows: Higher One will receive $17 million at the time of close. Higher One will then receive $10 million on each of the first two anniversary dates of the closing.

As I said on our December call we expect this transaction to close in the second quarter of 2016 pending shareholder approval. Once the transaction does close a 12-month transition services agreement will commence under which Higher One will provide certain transition services to Customers Bank related to the Disbursements business. Higher One will receive a total of $5 million payable monthly by Customers Bank in exchange for these transition services.

Our team has been working closely with Customers Bank over the past few months. We're primed for the close and transition activities including making the changes needed to be compliant with the new Department of Education rules scheduled to go into effect on July 1, 2016. We are also spending a lot of time with our clients and prospects reassuring them that both Higher One and Customers Bank are committed to a seamless transition for them and their students.

And concurrent with our announcement of this deal, I also announced our intention to reveal all strategic options of the remaining business which includes our payments business and we continue to work through that review with our financial advisors at Raymond James.

So with all that covered, I'd now like to tell you about how the business performed over the quarter.

Turning to slide four. Consolidated revenue for the quarter was $49.4 million a 7.1% decrease from the prior year period. As a result of the resolutions of the Federal Reserve and FDIC matters I discussed earlier, net revenue was affected by $24.4 million this quarter. We ended the fourth quarter with a non-GAAP adjusted earnings per share of $0.10 compared to $0.14 in the prior year period.

Chris will provide more details on the performance of the Disbursements business in his remarks, but now I'd like to discuss the performance of the payments business beginning on slide five. Our Payments business experienced another solid quarter with revenue increasing more than 5% from the prior year period to $21.4 million. Similar to past quarters growth in the Payments business this quarter was a result of increased payment transaction revenue which was up 6% on a year-over-year basis.

On slide six you'll see that we continue to sign and implement new business which is fundamental to future revenue growth of Payments. This quarter we signed eight new CASHNet lines and sold additional modules to 29 existing Payments clients, all of which we project will deliver over $0.5 million in annual subscription revenue.

Turning to slide seven, 2016 will be a year of change for Higher One as we continue to move towards being dedicated to the Payments business. As I stated earlier, we are working through a capital strategic review of the company with the help of our advisors at Raymond James. Our goal for this process is to set the company on a path that will allow us to maximize shareholder value while continuing to provide superior payment solutions and service to the higher education market.

With that, I will hand it over to Chris to begin our discussion of the financials starting on slide eight. Chris?

Christopher Wolf

Thanks Marc. At this point I'll turn to a discussion of our financial results for the quarter starting on slide eight of the accompanying presentation. Please remember that all gross rates I mention will be year-over-year unless otherwise specified. So turning to slide eight, gross revenue for the fourth quarter was $49.4 million compared to $53.1 million during the fourth quarter last year a decrease of approximately 7.1%. Net revenue was impacted by $24.4 million allowance for the customer restitution related to the Federal Reserve and FDIC matters recorded this quarter.

For comparison purposes, during the remainder of my presentation I will refer to gross revenue. I will get into more detail on the drivers of our revenue change on the upcoming slide. Please note that our gross revenue and income from operation excludes the results of the Data Analytics business for the quarter. Results of this line of business have reflected within discontinued operations for the current and prior period and as a result I will have limited narrative about the operations of this business for the period.

We had gross profit margin excluding the impact of the allowance for customer restitution of 52.4% in the fourth quarter of 2015 compared to 53% last year. The year-over-year change in gross margin this quarter was primarily due to lower gross margins in the Disbursements business which I'll discuss on the upcoming slides.

Turning to slide nine, Payments revenue was up approximately 5.5% in the quarter to $21.4 million. The increase in Payments revenue was due to higher payment transaction revenue mainly due to an increase in the dollar volume of transactions processed through the SmartPay payment module in the current period compared with the prior year.

The increase in payment transaction volume was also due to increases in volume at existing clients and to a lesser extent clients we implemented during the year. Our Payments line of business accounted for approximately 43.3% of our total revenues this quarter. Disbursements gross revenue decreased 14.8% from the prior year to $28 million primarily from 15.6% decrease in account revenue. This decrease was due to fewer dollars being deposited into and spent from OneAccounts.

Now we'll look at changes in our Refund Management Signed School Enrollment or SSE and OneAccounts for the period beginning on slide 10. The Refund Management SSE account is down 3% on a year-over-year basis ended December 31, 2015 which reflects overall enrollment decreases and the impact of client losses which were discussed in previous quarters.

Looking at the number of OneAccounts you'll see that it decreased 8% year-over-year. This decrease is primarily the result of a reduction in the selection rates of the OneAccounts at same schools and in line with the decrease in the number of students who have received disbursements through OneAccounts this fall compared to last.

Moving to gross margins let's turn to slide 11. As a reminder, consolidated gross margins percentage this quarter was 52.4%. Gross profit margin for Payments this quarter was 53% compared to 52.8% in the prior year period. Our cost of sales in Payments was approximately $10 million in the fourth quarter compared to $9.6 million in the prior year period.

Similar to trends seen in recent periods, the largest driver of cost increase was additional volume related merchant expenses as a result of increased transaction accounts and volumes in the SmartPay payment processing business.

Gross margin for Disbursements excluding the impact of the allowance for customer restitution was $14.6 million this quarter compared to $17.5 million in the prior year. The decrease was driven primarily by lower account revenue. Gross profit margin was 52% compared to 53.1% in the prior year. Our cost of revenue decreased during the quarter due in part to the lower transaction volumes and decreases in fraud and operational losses.

Turning to slide 12, looking at operating expenses we continue to invest in product development, but did cut back in certain areas. Overall for the quarter our operating expenses did increase primarily due to the civil money penalties and administrative costs related to the settlement of our Federal Reserve and FDIC matters.

General and administrative costs were $15.5 million in the quarter or 31.3% of gross revenue compared to $15.6 million in the fourth quarter of 2014 as a result of lower professional fees. Product development costs were $1.7 million this quarter which equates to 3.4% gross revenue.

Sales and marketing expenses decreased 9.2% during the quarter to 6.9% of gross revenue. The decrease in sales and marketing expense was due primarily to a decrease in discretionary marketing spend.

Turning to slide 13, you will see that consolidated adjusted EBITDA was $11.9 million compared to $14.7 million last year. This decrease was largely driven by the decrease in account revenue covered earlier partially offset by decreases in certain operating expenses.

Now let’s look closer adjusted EBITDA for the three lines of business beginning on slide 14. Adjusted EBITDA for Payments was $6.1 million an increase of approximately 7.8% over the prior year period, while adjusted EBITDA margin was 28.7% in the current period up from 28.1% last year. Adjusted EBITDA for Disbursements was down 30.9% to $5.3 million in the quarter driven by many of the factors I discussed earlier in my remarks related to this line of business.

Adjusted EBITDA for Data Analytics is included here as a non-GAAP measure and was $500,000 for the partial period due to the disposal of that business during the quarter. The Data Analytics business generated $2.8 million of revenue during the quarter compared to $3.9 million in the prior year. The data for this line of business in 2014 reflects the four quarter’s results where as the 2015 data includes approximately two months of results.

Turning to slide 15, our adjusted diluted EPS equaled $0.10 compared to $0.14 last year. Adjusted EPS was impacted largely by many of the factors that I covered earlier in my remarks.

Moving to slide 16, we ended the quarter with a cash balance of $26.9 million. There were a number of significant transactions which impacted our cash flows during the quarter.

The proceeds from the sale of Campus Labs were approximately $82.1 million, $30 million of which were paid directly to reduce our credit facility. Therefore our reported proceeds from the sale of Campus Labs was approximately $52.1 million. The pay down on the credit facility brought our balance from $59 million down to $29 million drawn at the end of the quarter.

As I discussed earlier, we paid the total restitution amount in civil money penalties during the quarter. That resulted in a $59.5 million outflow during the quarter. Excluding the payment of restitution and associated penalties, we generated $7.8 million of operating cash flows during the quarter down from $9.3 million in the prior year. Capital expenditures were approximately $1 million during the fourth quarter 2015, a decrease of approximately $764,000 compared with the same period in 2014.

Turning to the final slide, slide 17 as Marc said earlier, we’ve been working diligently with the Customers Bank to prepare for the closing of our transactions as well as the transition plans for the post-closing period. Simultaneously, we are focusing on strengthening our payments business to ensure that we continue to provide a premier service offering for the higher education market.

And with that, we have concluded our prepared statements; we will now take your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Oscar Turner with SunTrust.

Oscar Turner

Good morning. Thanks for taking my questions.

Marc Sheinbaum

Good morning, Oscar.

Oscar Turner

Hi, I was just wondering how did the sell of Disbursements and Campus Labs affect the growth prospects for Payments? Are there any synergies between the Payments segment and the other two that you will now forego, just given the sale?

Marc Sheinbaum

Yes, well, thanks Oscar, its Marc. I think if I look at our 2015 sales results, I think the majority of our sales last year came from either new clients which have no relationship with Higher One in the past or with CASHNet upgrades. We did have some sliver of sales from refund clients, but it was a small sliver of our relationships. And while we did have some sales that we did our clients that had Campus Labs it really wasn’t cross-sell because I thin as we've described in previous calls the buyer of Campus Labs on Campus is a very different place in Campus then it was the financial office that typically buy the Payments and Disbursements business. So we are pretty confident in our ability to continue to grow the CASHNet business as a standalone.

Oscar Turner

Got you, okay and then just broadly, I was wondering if there is anything you see that you think the growth in EBITDA, so revenue growth and EBITDA margin prospects for Payments would differ going forward, I guess differ materially from what we saw in the fourth quarter. So fourth quarter for Payments grew mid single digits, and I know you guys don’t give guidance, but I was just wondering is there anything that you foresee that changing wildly and also the same on EBITDA margin?

Christopher Wolf

Sure, Oscar. This is Chris. I'll start there, I mean I think if you just look where we've trended generally, we have done better on margin with merchant expense we've been able to increase margin there. So that’s something that we do constantly work on there at the gross margin line, also if the mix is bit more for subscription and say transaction revenue that has a different margin profile that historically has been better and so those are probably the bigger drivers on the topside.

On the operating expense side, I mean we continue to try to be efficient. We do have to make investments in products as the business grows. So it is the standalone side of Payments I would probably look more to the gross margin side. The one thing I did want to add here just for clarity, we are answering this context in the question of just the Payments business only. As we go into 2016 our corporate overhead structure still resembles what it was when we had three business units including Campus Labs and the Disbursements business. As with Campus Labs being sold and we’re in process of divesting the Disbursements business, the profile of the corporate overhead expense should change, but that period of time that will take is probably a little bit longer than obviously when we consider our strategic alternatives for Payments as well. We will have to look at our corporate overhead concerning what the size of the business will be.

Oscar Turner

Okay. That makes sense and then looking at corporate overheads, so could you give a rough estimate just if I’m looking at total OpEx, how much of that is, you would consider as corporate overhead, $15 million G&A but maybe we could follow-up later?

Marc Sheinbaum

Yes, why don’t we do that because the reason I say that is so many of the costs are intermingled between direct costs and so that if you wouldn’t mind following up that, I would appreciate that.

Oscar Turner

Okay, thanks guys.

Operator

Ladies and gentlemen, this does conclude the Q&A portion of today’s conference. I would like to turn the call back over to Marc Sheinbaum for closing comments.

Marc Sheinbaum

Okay, well thanks everyone. I appreciate everyone joining us today. I also as I close would like to thank my Management Team and the Board of Directors for helping us guide the company through this very critical time in our history. I look forward to continuing the journey in 2016. So thanks again everyone. See you next time.

Operator

Well ladies and gentlemen, this does conclude today’s presentation. You may now disconnect and have a wonderful day.

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