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Executives

Beth Halloran – Senior Director of Corporate Communications

Matt Lawlor – Chairman and CEO

Cathy Graham – EVP and CFO

Ray Crosier – President and COO

Analysts

Joshua Jabs – Roth Capital

Wayne Johnson – Raymond James

Matt McCormack – Friedman Billings Ramsey

Brett Huff – Stephens Inc.

Glenn Greene – Oppenheimer & Co.

John Kraft – D.A. Davidson & Co.

Online Resources Corporation (ORCC) Q1 2008 Earnings Call Transcript May 6, 2008 5:00 PM ET

Operator

Good afternoon. At this time, I would like to welcome everyone to the Online Resources first quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions) Thank you. Ms. Halloran, you may begin your conference.

Beth Halloran

Thank you to everyone who has joined us today on our conference call for the first quarter 2008 results. Shortly, Matt Lawlor, Chairman and CEO; Ray Crosier, President and COO; and Cathy Graham, Executive Vice President and CFO will present Online Resources financial and operating performance.

Before we get started, I want to invite you to view our press release in the Press Room and in the Investors section of our Web site at orcc.com. Also posted with the press release, we have provided some slides on our strategic performance that are integral to following today's conference call. The link is labeled First Quarter 2008 Earnings Conference Call Slides. But first, as is our practice, I'd like to preface our remarks today by taking full advantage of the Safe Harbor provisions of the Securities Litigation Reform Act. The following conference call contains statements about future events and expectations of Online Resources that are forward-looking and involve risks and uncertainties detailed in filings made by the company with the Securities and Exchange Commission. I will provide a more detailed review of the Safe Harbor provisions at the end of this call. Now to you, Matt.

Matt Lawlor

Welcome, everyone. This was a quarter in which the company executed particularly well. Today, we'll cover three topics. First, we'll discuss our first quarter financial results. Year-over-year revenue and earnings were both up sharply. Cathy will provide more detail and update our guidance for the second quarter and full year. Second, we'll discuss our first quarter operating fundamentals. Transactions and users continue to expand in line with expectations and above expectations in our eCommerce unit.

We also hit our marks in sales and new product launches. Ray will elaborate further in his operating report. Finally, we will discuss how our commitment to scale and agility allows us to excel, particularly in today's weakened economy. I will get to sink my teeth into this topic. What that, I would like to turn the call over to Cathy.

Cathy Graham

Good afternoon, everyone. Today, I'm going to review our first quarter 2008 financial results, as well as provide you with second quarter and updated full year 2008 guidance. For the first quarter, revenue and core net income were above the guidance we previously provided.

Net loss available to common stockholders was at the top, and EBITDA was near the midpoint of our guidance ranges. These outstanding results were driven primarily by revenue from stronger than anticipated transaction growth in our eCommerce business. Our earnings measures were then impacted by unplanned accounting costs related to our year end tax work, which cost us $0.02 to $0.03 per share.

For core net income and net loss available to common stockholders, these additional expenses were substantially, but not fully, offset by an associated tax benefit also arising from our year-end tax work. Both of our earnings per share measures showed significant growth in the first quarter compared to the same quarter of 2007. Core net income for the quarter was $1.5 million or $0.05 per share, compared to a loss of $0.01 per share for the prior year.

Net loss available to common stockholders was $3.6 million or $0.12 per share, improved from a loss of $0.36 per share in 2007. These substantial year-over-year improvements reflect continued leverage in our business model and the successful integration of our acquisitions to drive revenue, realize cost synergies, and justify acquisition financing costs.

EBITDA for the quarter was $7.4 million, 15% above EBITDA for the same quarter of 2007. There are two reasons that EBITDA growth was slower than the growth in our other earnings measures this quarter. First, by definition, it is a pre-tax measure, and so did not have the tax benefit to offset the unusually high accounting charges.

Second, EBITDA absorbs the full effect of the significant interest rate declines that have occurred since late last year. You will recall that as a part of our revenue, we include the interest we earn on the approximately $158 million to $200 million in balances we carry from bill payment funds in transit. Declines in this revenue result in a dollar for dollar impact to EBITDA.

Our other earnings measures, core net income and net income available to common stockholders have this impact partially offset by the positive effect the declining interest rates have on our debt service. On the top line, revenue for the quarter was $39.2 million, representing 27% year-over-year revenue growth. The first quarter is typically one of our seasonally strong growth quarters, and this year, we saw even higher than anticipated eCommerce transaction growth.

The resulting additional revenue largely offset lost revenue from interest rate declines, though obviously at a lower margin. Revenue growth in the quarter also benefited from two additional factors. First, with our August 2007 acquisition of ITS, which offset the couple of large client departures we experienced last year. And second, we had the last two of our previously discussed client departures take longer to transition off our platform than we had anticipated. We generated $1.5 million in free cash flow for the quarter. We used this and other cash on hand to settle $2.2 million in price protection obligations to ITS shareholders.

Our obligation to provide price protection to these shareholders continues through the first anniversary of the transaction, and additional payments, if any, can be made in cash or shares at our option.

Turning to the balance sheet, our unrestricted cash equivalents and short-term investments totaled $13.5 million at March 31. This balance appears significantly lower than what was presented at year end for three reasons. First, we have now completed the segregation of funds related to ITS bill payments, bearing that in our other business lines. This has allowed us to move those accounts and the offsetting payment liability off balance sheet.

Since we had not completed this restructuring process at year end, the December 31 balance sheet included approximately $3.5 million in bill payment funds classified as cash and cash equivalents, and $8.3 million in consumer deposits receivable. Second, we saw a large increase in receivables during the quarter. This was due to delays and follow up efforts during the implementation of our new accounting system. We expect our receivables balance to return to more normal levels in the second quarter.

Finally, we reclassified $1.5 million of our investments from short term to long term, reflecting our belief that they will not be liquidated until 2009. Now, looking forward, we have provided you with guidance for the second quarter of 2008 and updated our guidance ranges for the full year.

For the second quarter, the midpoint of our revenue guidance range represents strong 21% growth over the same quarter of 2007. The factors I mentioned that influenced first quarter revenue growth will largely apply to second quarter as well. You will note that the midpoint of our second quarter guidance range is sequentially lower than first quarter revenue. This had been expected, given the previously discussed departure of two large clients in April.

It is further the result of the fact that average second quarter interest rates will be substantially lower than in the first quarter, due to the timing of interest rate cuts. The midpoint of our second quarter guidance ranges for EBITDA, core net income per share, and net income available to common stockholders' per share all show sequential growth, despite the slightly lower revenue midpoint. This is because the tax-related accounting charges, which cost us $0.02 to $0.03 in earnings per share in the first quarter, will not recur.

We are updating our previously issued full year 2008 guidance to slightly reduce the top end of our core net income and net loss available to common ranges. As a result of completing our year end tax work, we have determined that our non-cash tax provision for the full year is likely going to be higher than we anticipated, despite the tax benefit we recognized in the first quarter.

Therefore, we are bringing down the top end of those ranges by $0.02 each. As this change in our expected tax provision does not reflect our business fundamentals, and these remain strong. Our EBITDA and revenue guidance for the year remains unchanged.

So, in summary, we had an excellent first quarter financially. Our strong business drivers continue to produce results and propel us through both a choppy economy and the tail end of our large client losses.

Now, let me turn you over to Ray for his operating update.

Ray Crosier

Thanks, Cathy. In my comments, I will be referring to the operating data attached to the press release and the slides posted in the Press Room and Investor sections at orcc.com. I would like to focus on three things I particularly liked about the quarter and one concern that I had. Let's start with the highlights.

First, our eCommerce team had a great quarter. Looking at slides one and two on the Web site, biller payment transactions were up 21% sequentially and 59% year over year. We are paid by the transaction in this side of our business, so the high transaction growth translates directly into revenue and earnings growth. What you can't tell from the numbers, and is particularly pleasing, is the growth isn't coming from just one area, but rather across the entire eCommerce biller products set. It's good to be hitting on all cylinders.

A second highlight of the quarter is the Web-based collection service. We are especially encouraged by the continued growth in transactions and dollars collected. As I mentioned in the February call, we received two verbal agreements from household names that are in the final stages of contract edits, and already well along in implementation.

The third highlight of the quarter was the completion of the data for banking expedited payments to our full service and Internet bill payment clients. That led to the simultaneous launch of the product in April to 485 client institutions serving over 800,000 bill payers, who can now make guaranteed same day or next day payments for a fee. Now, it's too early to tell what kind of results we will see, but in the first month or so, the take rate and the transaction volumes are within our product forecast, obviously, more to come later in the year as the product matures and we get some meaningful statistics.

Now, taking a quick look at the quarterly operating data attached to the press release, the concern that I had as the quarter unfolded was the number of banking bill payment transactions, which was flat at $41.8 million sequentially. The decline was really in the remittance only area, where you would expect it, given the loss of the clients we all talked about. And we know the need to get those departed clients replaced and get back to growing that piece of our business, and we are committed to doing so.

But conversely, the full service bill payment transaction volume, where we control the screens, the marketing and the user experience, continues to see steady growth at 4% sequentially. And if you look at slides three and four on the Web site, transaction growth overall from continuing clients has remained fairly steady over the last four quarters, and the most recent 6% sequential and 21% year-over-year results show the underlying business continues to perform.

To wrap things up, we had another really strong sales quarter. We closed 18 banking and 21 eCommerce sales for a total of 39. Also, the contract value per client increased, as a result of closing larger prospects in both banking and eCommerce. Additionally, we added to and advanced an already strong pipeline. We launched banking expedited payments, and we held an outstanding annual Client Summit. Good results in Q1, lots more to do. Matt?

Matt Lawlor

That completes our first quarter performance report. We made great progress on a year-over-year basis, even after paying homage to the fair value accounting gods and an aggressive Federal Reserve. I'm pleased with our execution. Clients are happy, end user satisfaction is hitting record levels, new sales are strong and gaining momentum; transaction growth is healthy, new products are launching smoothly.

Equally significant, it's reassuring to see the signs that our overarching, integrated network strategy is working. This is a strategy, accelerated in recent years by a number of strategic acquisitions that enables us to be both horizontally and vertically integrated, in essence, forming a matrix as described in slides five, six and seven with the benefits of both scale and agility.

Thanks to our eCommerce acquisitions, Princeton eCom in 2006 and IPX in 2007, we are beginning to see some of the benefits of horizontal integration bridging our banking and commercial clients. At the same time, our 2005 acquisition of California-based Integrated Data Solutions has contributed mightily to our vertical integration capabilities, adding customized Internet banking, business banking, and account opening to our unmatched, fully integrated suite of web-based financial services. So, things went well, both operationally and strategically.

It's taken an incredible amount of focus to get us this far, and I very much appreciate the confidence and persistence that both our staff and investors have shown. But the challenge continues. More than ever, with success in the web dependant on dual and diametrically opposed demands of scale and agility, focus is needed. This is hard stuff. Scale requires attention to cost and quality gained through lots of volume and a disciplined approach to processes.

Agility requires flexibility, speed to market, and a willingness to assume some risk in order to pursue niche market opportunities. Scale without agility or agility without scale is like the sound of one hand [ph] clapping. You need both hands to compete in the channel. Some established financial technology competitors have scale, but lacked the agility to compete on the web. Correspondingly, some small niche competitors have agility, but lack the scale to compete on a quality and cost basis, now that the web is mainstream.

Let's turn our discussion to the weakened economy. Clear, it's had an impact on the IT stocks. I saw a chart the other day that showed that the IT and telecom sectors have declined more than any sectors on the year-to-date basis, even the (inaudible) financial services sector. The decline in financial technology stocks is even more pronounced than the IT sector as a whole. The concern is this, if the banks catch pneumonia, then perhaps we who serve them will catch cold. I think this concern is fair. Who is immune to an occasional sneeze? But I'm also a lot more sanguine about ways that we can help our banking clients and help ourselves in dealing with the economy. Remember, there are three drivers of web profitability for our clients.

First, the web deepens existing relationships. Second, the web reduces the cost of delivery, and third, the web can efficiently expand sales. The first driver, customer retention, has been pretty well documented. Bill pay in particular drives retention for both billers and banking companies. It's the other two drivers, cost of delivery and low cost sales that our clients are increasingly recognizing in the weakened economy.

Take our web-based collections, for example. It really is an effective tool in reducing delinquencies. However, in this environment, reducing direct costs of collections and call center support is even a larger driver. Here's another example. Our community bank and credit unions are looking more towards check processing savings. Five years ago, outsourced check processing costs between $0.07 and $0.15 per item. Now, it's double or triple that amount, lots of reason to keep pushing electronic bill pay.

So, with a critical mass of their consumers now using the web, our biller and banking clients are starting to enjoy some cost of delivery savings. The critical mass of end users also opens up opportunity for low cost selling. There are enough adopters and new database CRN tools to focus on niche selling for a far less cost than traditional selling by mail or office. It's well understood that when shopping for a car, consumers often start with the web, and then complete the purchase at the car dealer.

The Boston Consulting Group has completed some research that this is happening for financial services. They found that between 52% and 76% of consumer financial and payment service purchases start with the web. But what surprised them most was the very high percentage of sales, 12% that were web only, at a far lower cost than traditional channels. Believe me, our banking and commercial clients get it. It's the driver behind the increased interest in electronic account opening and CRN services. My bet is that with a weakening economy, they will aggressively pursue self-service to significantly lower their cost of delivery and sales.

So, as we look ahead, we will celebrate our 20th year as a company in 2009. It's been an interesting ride thus far, with many ups and downs. We have thrived, not simply survived during two prior recessions by keeping focused on our clients' needs. And now we're doing it again. What our clients need in the period ahead, especially in a weakened economic environment is our efficient sales and service capabilities and our unique commitment to deliver both scale and agility. Thanks for listening.

We would be happy to take your questions.

Question-and-Answer Session

Operator

(Operator instructions) Josh Jabs, Roth Capital.

Josh Jabs – Roth Capital

Cathy, can you quantify the impact of climbing interests rates has had on payment flow? Maybe what it was in Q1 and what you are expecting in Q2?

Cathy Graham

It's not so much what we are expecting. Think of it this way. We said for the full year that we were going to reduce – we thought it would have a net $2 million impact on us for the entire year. And that's net of some additional revenue that we thought was coming up. If you think about it this way, Josh, we are carrying somewhere in the neighborhood of $200 million in overnight balances. And that number isn't changing much. So, if you just want to look at the difference in interest rates, you can probably see what that is.

Josh Jabs – Roth Capital

Okay. And your interest in other in Q1 was a bit higher than we had modeled. Is there something going on there or is that going to be pretty consistent throughout the year?

Cathy Graham

It should be reasonably consistent.

Josh Jabs – Roth Capital

Okay. Then maybe one for Ray here, just wondering if you can give us an update on – I know you talked about a couple of the product that have actually launched now, but can you give us a little more color on some of the upcoming product launches, maybe the call center stuff that was (inaudible) debit and the rest of the products that are in data?

Ray Crosier

As you probably remember from our Analyst Day last year, we laid out a laundry list of things that we had on the drawing board in development or coming out. And candidly, I think we said then that some will work and some won't. What we have been doing over the last couple of quarters is talking about them as they come out, which is why we continue to talk about DCA and now we just started talking about banking expedited payments. But I really hate to tip my hand on anything that we have got coming up in the future to competition or anybody else.

Matt Lawlor

One thing that we are particularly excited about Josh is business banking. As you may know, Online Resources' roots for many, many years were strictly on the retail side, and we outsourced the business banking side. We created our own product. It was betided, and then now is in actual launch here. And things are going well, and we expect that it will be – it's getting a lot of good customer, client receptivity. So, that's one area that I think we have talked about publicly.

Josh Jabs – Roth Capital

Okay. It seems like the credit crisis has actually made the timing of your web-based collections tool pretty good here. And I guess I'm just wondering, with the rest of the upcoming product launches, has the macro environment changed how you are viewing those opportunities?

Matt Lawlor

Yes, it has, and I hit on some of those remarks. Again, a little bit of a surprise to see account opening. We have always helped our clients drive their consumer adoption. So, having an integrated account opening capability of our own design and fully integrated with all our offering was always a key part to it. But I must say that with the attention towards sales costs, that we are getting much better receptivity on account opening than we otherwise expected. And I think Ray has also already outlined the continuing strong receptivity of our web collections. I think we are now, with these other two clients which are for all practical purposes, in process of being implemented, we are now 10 of the top 30 credit card issuers. We now have the largest debt collections that launched just in the first quarter. We are getting very good receptivity from the ITS client base. So, these are – and now starting seeing some further expressions of interest from other credit type services, including many of the banks and credit unions that we serve. So, we are finding that these cost-oriented products and services are doing quite well.

Josh Jabs – Roth Capital

Okay. Great. Nice quarter. Thank you.

Operator

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

Wayne Johnson – Raymond James

Good afternoon. Just a couple of housekeeping items. First, what was the EBITDA impact of the accounting expenses? Like, what was the actual negative dollar value impact?

Cathy Graham

Depending on how you look at it, Wayne, and what you attribute to it. It was somewhere in the neighborhood of $800,000 to $1 million.

Wayne Johnson – Raymond James

Okay, and so that should not be recurring?

Cathy Graham

That should not be recurring. It's to $0.02 to $0.03 per share, and which is roughly $800,000, $900,000.

Wayne Johnson – Raymond James

Okay. That's helpful. And just one thing that, Cathy, I think you were talking about the $200 million in overnight balances on the previous question. My question would be why isn't that dollar value growing if subscribers and transaction volume are? Is that the result of lost customers or why is that?

Cathy Graham

Actually, it's a result of speed of payments increasing. That's what we have seen over the last couple of years. It's a combination of electronic rate increasing and speed of payment on everything increasing. So, we have seen that even though our volumes keep increasing, the percentage of paper goes down and the speed of processing is going up. So, those things are seeming to offset one another.

Wayne Johnson – Raymond James

Okay. That's helpful. Then could you discuss a little bit about or maybe this is better for Ray, the conversion rate of the backlog or the pipeline to enable customers? Is that progressing at the rate that you hoped it would? And I have a follow up question to that.

Ray Crosier

It depends on which side of the business you are looking at, if I understand the question correctly. In the eCommerce side, we now had five very strong sales quarters in a row. When you think about it, sales plus implementations equals transactions, and when you do that and you implement them faster, and you are selling some larger clients who have more payments to process in the first place, you get the kind of transaction growth that we are looking at. So, we got some practice at it and we are getting better at it. In other parts of our business, it doesn't seem to be slowing, but it doesn't seem to be getting any faster, either. And I think that's something that we are going to have to work on as a team.

Wayne Johnson – Raymond James

Okay, so, let me ask a – that's helpful. Let me ask the question a different way. There hasn't been any slowdown or any resistance on behalf of the would-be customer to enabling them with your services after you have already been awarded the contract?

Ray Crosier

Actually, it's quite the contrary. It's hurry up, how fast can you do it? It's the age-old, we wait for the yes, and when we get the yes, it's okay, can you get it up tomorrow? And it doesn't work quite that way.

Wayne Johnson – Raymond James

Okay. That's helpful. All right. Good quarter. Appreciate it.

Operator

Your next question comes from the line of Matt McCormack with FBR.

Matt McCormack – Friedman Billings Ramsey

Yes. Hi, to follow up on the strong eCommerce volume, you did say you had five good solid quarters of sales. Can you talk about what industries you are seeing that's driving that? Or is it just somewhat broad based?

Ray Crosier

Matt, I think you hit the nail on the head. Certainly we are seeing it in the card business. Certainly we are seeing it in the asset receivable management client base that we acquired when we got ITS. But we are also starting to see it in other portfolios where delinquencies are rising. And you can't pick up a paper today without seeing that it's a card portfolio, it's health care, it's a backlog, it spills over into utilities. I mean, it's really in all the verticals that the eCommerce group is working in. So, while we have been focused in one area, card, that's where we started it's spreading to others as well.

Matt McCormack – Friedman Billings Ramsey

Okay. Then Cathy, turning to the guidance, obviously there is a ramp of EBITDA margins in the back half of the year. Can you just remind us what gives you the confidence that that ramp will be achieved?

Cathy Graham

Certainly. You'll recall that if you watched us for a couple of years, Matt, as you have, that the first quarter is always a quarter where we see 4 to 5 percentage points decline in our EBITDA margin. So, that was not unusual to see this year, and then it was compounded, of course, by the accounting costs which will not recur, and of course, the impact of flow, which is dollar for dollar to that. We look at the growth in revenue and again, the leveraging over our fixed cost base, taking advantage of the leveragability that we have in the model. And looking forward to the end of the year, we still see being able to add those revenues over our base and come out where we had discussed with you guys earlier, when we gave guidance on our February call, which is about 26% by fourth quarter.

Matt McCormack – Friedman Billings Ramsey

Okay. And the second quarter guidance is lower than the year ago in terms of the percentage midpoint. I think it's around 21%, 24%, 25% in the year-ago period. What's going on there?

Cathy Graham

Couple of things. Combination largely of loss of large clients that we had. When you take out large clients on a highly fixed cost base, it tends to magnify down. We don't lose any costs because of it. And the second – again, is looking at compared to it's float interest. Always remember that every dollar you lose of float revenue is a dollar lost of EBITDA. So, that had huge impact on the margin.

Matt McCormack – Friedman Billings Ramsey

Okay. Then in terms of the balance sheet, as you mentioned, the cash did go down. Can you remind us of your liquidity position? I do believe you have a debt payment coming due this year, and I know you don't give free cash flow guidance, but is it safe to assume it will be similar to your core EPS?

Cathy Graham

We should be – we will generate significant cash, more cash, in fact, first quarter is generally not our highest cash generation quarter. So we have no concerns about servicing the amount of debt that the debt payments that we have for this year. We should generate significant cash over the next several quarters to be able to take care of that easily.

Matt McCormack – Friedman Billings Ramsey

Okay. Thank you.

Operator

Your next question comes from the line of Brett Huff with Stephens, Inc.

Brett Huff – Stephens, Inc.

Good afternoon. Nice quarter.

Ray Crosier

Thanks.

Brett Huff – Stephens, Inc.

Just a couple of quick questions, on the competitive landscape, anything changing from the other competitors out there based on mergers and acquisitions and what they're going through?

Matt Lawlor

We haven't seen anything yet. We know, obviously, check -free is well under process of integration into Fiserv. They are looking to get their bill pay services down into the community banks. But then again, we were seeing PayTRAX as a competitor all along with one of their affiliates where we are partnered. So, we really haven't seen anything there that would affect us. Some of the other companies that have been acquired also, no change from what we've reported last quarter. Again, they are focused on integration, whereas our focus is really on winning market share.

Brett Huff – Stephens, Inc.

Okay. And then you had talked about looking at your costs just overall and broadly through this year. Is that process beginning? Or I know it's kind of going to be, maybe mid/late year if I remember correctly? Do you have an update on that?

Matt Lawlor

Ray is continuously looking at costs for the company. So, you know, Brett, that there's not a day that goes by. He works for yours truly, and (inaudible). But on a strategic basis, that process, we decided to defer until the second quarter, when we would step back and take a strategic look at our costs, looking to simplify processes, looking to enhance the quality and then drive down costs. We have spent the first quarter instead of doing that on another priority, which is what we call one company, where we are trying to look to our clients as one company, although we might be selling multiple products from different divisions to that client. So, we put in an MIS system and added some CRM and changing some of our processes, which will also lead to lower costs. But the real strategic exercise won't occur until the second quarter, but we're very, very confident from just some of the ideas that has been generated so far, that this is going to be a very successful exercise, but not yet formalized.

Brett Huff – Stephens, Inc.

Okay, and then last question, Cathy, I just wanted to make sure I got this right. The tax rate, do you have a cash tax rate expectation or guidance that you could give us?

Cathy Graham

Okay. If you'll recall, we are not paying anything other than AMP and state. So, we usually have talked about that somewhere in the 2% range from a cash tax standpoint.

Brett Huff – Stephens, Inc.

Okay, that's what I need. That's all I had. Thank you.

Operator

(Operator instructions) Your next question comes from the line of Glenn Greene, Oppenheimer.

Matt Lawlor

Hi, Glenn.

Glenn Greene – Oppenheimer & Co.

The first question is on the same store adoption, the 13.1% that looks like it was roughly flat sequentially. Could you just talk about that? It's the first time I can recall it being roughly flattish. Very unusual –?

Ray Crosier

Obviously, I saw that as the quarter was unfolding, too. It almost goes hand-in-hand with what I talked about. As it happens from time to time and typically at the end of the year, we have clients who clean up their user base, their inactive user base. And last quarter, quite by coincidence, we had several larger than normal cleanups occur. So, I went back and looked at previous quarters, and candidly, I think this is an anomaly and don't expect it to recur in the future. I might also point out, though, as I'm looking at the quarterly operating data chart, that while the adoption rate was flat, transactions for our full service clients, who typically make up the majority of those same-store client base, they were up quarter over quarter. So, it's encouraging to see that while we may have had some users cleaned out, it didn't affect usage. In fact, usage continued to grow.

Glenn Greene – Oppenheimer & Co.

Okay. The second question is for Cathy. If I'm looking at the payment services line and just looking at it sequentially, 1Q versus 4Q, it looked like it was up $2 million, yet the payments users were flattish sequentially. Transactions were up some, but it looked like most of the transaction growth was on the eCommerce side? I was just trying to reconcile the two and if there were any unusual items in the payment services line, i.e., termination fees or anything like that?

Cathy Graham

No. And we would never put termination fees in that line. That will always be in professional services. But what you are really seeing there is a combination of the eCom transaction growth being very high, and higher than we had expected in the first quarter. And what you are seeing on the banking side offsetting that is remember, that Jack Henry left in Q4. So, you are seeing a great deal of that increase in Q1 being driven out of the eCom side of the business, which matches with the metrics.

Glenn Greene – Oppenheimer & Co.

Okay. Then fourth or next question, is the 39 deals closed in the quarter, maybe this is for Ray, the 18 banking and 21 eCommerce, is there any way to either give us contract value or give us some kind of frame of reference for the order of magnitude of the deals – (inaudible)?

Ray Crosier

If I can give you a frame of reference, a couple of quarters ago, we said we are going to stop talking about numbers of clients because it really wasn't indicative as our business changed in the main drivers, which happen to be users adoptions and transactions. But anticipating this one, the fourth quarter, we sold 49 deals. It happened to be a very big quarter for us. As you remember, Jack Henry stopped sending us those small remittance services clients. So, while the number of sales went down, the value per went through the roof, as we started selling our own, in both eCommerce and banking. And in the fourth quarter, those were split 16 for eCommerce and 33 for banking, and we had several very large hosted full suite Internet banking sales, Q4. So, those are currently in implementation. And while we sold about 39 against 49, Q1 to Q4, they were actually worth more. So, the fact is what I pull out of that is we are selling to larger prospects, and which means they've more volume to begin with, and typically they will buy multiple products from us, too, instead of one or two things.

Glenn Greene – Oppenheimer & Co.

All right, great. I'll leave at that. Thank you.

Operator

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

Wayne Johnson – Raymond James

Yes, just a quick reminder for myself. Were there any customer de-conversions in the first quarter of '08?

Matt Lawlor

Towards the beginning of the CNE conversion at the very tail end, and that was completed in April. And then the second conversion was Certegy, and that was in April. So there was a little bit in the first quarter.

Wayne Johnson – Raymond James

Okay. All right. Good. Fair enough. Nothing new there, and then Matt, if you could talk about your expectations for the expedited bill payment, it's been long on promise here for a number of years, and could you just provide some range of expectations for the year? And how did the first quarter '08 unfold for that service? And what were the lessons that were learned while it was in beta test?

Matt Lawlor

Wayne, I guess it was about 11 years ago that I started talking about banking expedited payments, all sitting aside. I think we really started talking about expedited payments after we had purchased Princeton eCom. So we are – and of course, you know the history. We focused on the cost synergies first and then started deploying building the product, and one of the product and revenue synergies was expedited payments. So, we are right on the button in terms of the deployment to the group. I'm very pleased with the deployment. It had its usual bumps a couple of places here and there, but we did almost 500 of these banks. And they went very, very smoothly. As Ray mentioned, the actual usage was pretty much consistent with our forecast, Wayne, but I think I have been on record here as saying we lowered our forecast. Our expectations are very low this year for this product, as well they should. We are just still learning how to sell it, and we have done a nice job of getting it into the distribution channel for some of the full service and Internet banking providers. We need to now focus on getting banking expedited payments deployed to some of those that we are a remittance provider to. That's a challenge. So, we've got that ahead of us, and then we got to watch the consumers here and see how they do. I really feel reluctant to change our expectations, which are pretty modest this year. Again the back –.

Wayne Johnson – Raymond James

Have you provided a dollar figure to that expectation?

Matt Lawlor

Never. Never, and won't.

Wayne Johnson – Raymond James

I thought I would try.

Matt Lawlor

And candidly, the bet is in 2009, Wayne, and there I think we will have a better indication in the fall, where pay will have more water under the dam in terms of the consumer acceptance. But secondly, as I mentioned all along, we have always felt that we have got these number of new products working and you need to look at this on a portfolio basis before you start putting numbers out. So, bottom line is everything has moved on schedule, both in terms of forecast and deployment. That said, we just can't give you any more guidance in terms of the receptivity until later on this year.

Wayne Johnson – Raymond James

Right, understood. I appreciate the response. My last follow up question is can you talk a little bit about the win/loss ratio for new business pitches? So, you talked about number of customers won in the first quarter, number of customers won in the fourth quarter, could you just give us a sense on what's the win rate ratio?

Ray Crosier

Wayne, the only ones I hear about are significant ones when we lose them. Right? I hear the sales bell ring, sometimes as far away as from here to Princeton, and I jump out of my chair and I go see what we won. But the only time anybody tells me about a lost sale is when it was significant, and no one has said boo to me since the first of the year.

Wayne Johnson – Raymond James

So, does that mean that you are winning 90% of the pitches? 95% of the pitches?

Ray Crosier

No, no, no. You look at closed ratios, that's different from winning. Obviously, as you move to later stages of the sales process, your odds go up. When you get it all the way, I'll just pick a number, a stage 5, which is one away from closing the deal. Yes, now, you are talking 75%, 85%, 90% range. When you are just talking to people and making presentations and pitching your products and services and solutions, you are down in the 5%, 10%, 15%, 20% range. So –

Wayne Johnson – Raymond James

Okay. So on that note, could you just give us without naming names, and if you want to name names, that's fine, but under what conditions do you feel that Online Resources has the best prospects for winning? And under which circumstances does Online Resources have a less favorable outlook for winning, either eCommerce, banking or the other services that you guys are pitching?

Ray Crosier

So, let me give it to you from the eCommerce side and the smaller community banking and credit union side first. The breadth, the integration, the single point of accountability of the product suite, all that's starting to resonate, obviously, those folks are looking for more than a single provider of a single service. They are trying to put more eggs in a single basket. Now that you have got adoption of these kinds of services of the front end, well north of 30%, it's important to have a robust and reliable, comprehensive suite of services that you can sell to your customers. Candidly, that goes right to our strength and our differentiation. When you look to the larger bank market, where best of breed typically plays, those folks are looking to give you pieces. You can think of certainly your top 20, 25, 50 institutions do lots of things in-house. As you move down, you find people still wanting highly customized solutions but don't necessarily want or need to run them themselves. So, they might allow you to host it. And that's where Matt actually, very briefly, touched on the acquisition of IDS in California. We now have an ASP environment, a hosted, highly configurable and customizable environment, and an on-premise solution for Internet banking and payment and small business and online lending and account opening and all these services. So, I think we have got a story that's resonating to the three markets that we serve.

Wayne Johnson – Raymond James

Okay, I'll follow up off line. Thank you.

Operator

Your next question comes from the line of John Kraft with D.A. Davidson.

Ray Crosier

Hi, John.

John Kraft – D.A. Davidson & Co.

Just a couple follow ups here, and I apologize, I don't have the release in front of me. But Cathy, the $0.02 to $0.03 in higher accounting charges, that has not been added back to the core net income, right? I mean, that would have meant that you would have had $0.07 or $0.08 core net income number?

Cathy Graham

Yes, that's not been added back.

John Kraft – D.A. Davidson & Co.

Okay. And that was not anticipated when you provided original guidance for the year?

Cathy Graham

It was not. We did not anticipate the work that would have to the level of work that would be done around the evaluation allowance or the fact that having two accounting firms involved would up the time and the level of work to the degree that it did.

John Kraft – D.A. Davidson & Co.

So, is it fair to say that that's part of the reason why the high end of the year guidance came down and maybe just better operating performance kept the low end where it was?

Cathy Graham

Not so much. Really the reason that the high end of the guidance just coming down because we would have been comfortable within the guidance range, with the exception of the fact that as we went through that year-end process of working through the release of valuation allowance, and timing things on that and really scrubbing that put us in the belief that our tax provision for full year 2008 is going to be higher than we had originally anticipated, and because of that, that really is the full $0.02. And remember, that's non-cash. We are not talking about paying it, we are just talking about what the technical tax provision will be on our books.

John Kraft – D.A. Davidson & Co.

Fair. So, $0.02 extra then expected in GAAP –?

Cathy Graham

In GAAP taxes.

John Kraft – D.A. Davidson & Co.

Okay. Then also just to clarify, I thought, Cathy, you said in the prepared remarks that there was a delay in the timing of these customer migrations. They stayed on a little bit longer, but then you also said that Jack Henry was completely gone at the end of Q4?

Cathy Graham

It was. Jack Henry was completely gone at the end of Q4. However, the two remaining clients that we had, that were departing, we had anticipated would depart during Q1, and both of them left in April. So, they stayed on slightly longer than we had anticipated.

John Kraft – D.A. Davidson & Co.

Got you. And the timing of Jack Henry, though, specifically was when in Q4?

Matt Lawlor

November and December.

Cathy Graham

Yes, it was spread over November and December, they phased off, but they were entirely gone by the end of the month of December.

John Kraft – D.A. Davidson & Co.

Okay, great. Thanks, guys. That's it.

Operator

At this time, there are no audio questions. You may continue with your presentation or closing remarks.

Matt Lawlor

I would like to thank everyone for participating in our call. I will now turn it back to Beth, who will read the final Safe Harbor statements.

Beth Halloran

As a reminder of our intent to take advantage of the Safe Harbor provisions, any statement in the preceding conference call that is not a statement of historical fact may be deemed to be a forward-looking statement. These statements include forecasts of growth in Online Resources' customer base, increases in the transaction fee and processed by customers, and growth of the number of consumers using online banking and bill paying services. Other forward-looking statements include those regarding Online Resources' business outlook for 2008 and beyond, and statements containing words such as anticipate, believe, plan, estimate, expect, seek, intend and another similar words that signify forward-looking statements. We encourage you to review Online Resources' detailed periodic filings with the Securities and Exchange Commission for full disclosure of risks and uncertainties. Thank you for joining us and this concludes our call.

Operator

This concludes today's conference call. You may now disconnect.

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