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CyberSource Corporation Q2 2008 Earnings Call Transcript

August 07, 2008 | about: CYBS

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CyberSource Corporation (CYBS)

Q2 2008 Earnings Call Transcript

July 24, 2008 4:30 pm ET

Executives

Katrina Rymill – Director of IR

Bill McKiernan – Chairman and CEO

Steve Pellizzer – SVP of Finance and CFO

Analysts

Gora Bora [ph] – Raymond James

David Shore – JMP Securities

Franco Turrinelli – William Blair & Co.

Brett Huff – Stephens Inc.

John Maietta – Needham & Co.

Colin Gillis – Canaccord

Gary Prestopino – Barrington Research

David Parker – Merrill Lynch

Gil Luria – Wedbush

Michael Shepherd – Morgan Keegan

Leonard Decroso [ph] – Junior Montgomery [ph]

Nick Farwell – Arbor Group

Presentation

Operator

Good afternoon. My name is Christine, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the CyberSource second quarter earnings 2008 conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer period. (Operator instructions) I will now turn the call over to Katrina Rymill, Director of Investor Relations at CyberSource.

Katrina Rymill

Thank you, and welcome to CyberSource’s second quarter conference call. During this call, we will discuss our financial results for the second quarter of 2008. If you have not received a press release summarizing our second quarter results, it's available at www.cybersource.com. These prepared remarks will run for approximately 20 minutes, and then we will open up the call for Q&A. Before we get started, I need to alert you to our Safe Harbor provisions.

During the course of this teleconference, we will make certain forward-looking statements regarding our business and results of operations. Statements made today that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including without limitation, statements regarding the company's expectations, objectives, anticipations, plans, hopes, beliefs, intentions, or strategies regarding the future. Such forward-looking statements include those relating to strengths of the second quarter results, value proposition, business model, and eCommerce market; benefits of the Authorize.Net integration, acquiring services continuing to be a major (inaudible) driver for the company; strengths in customer sign ups indicating health of the eCommerce market and the selling power of the company’s value proposition; the company’s offering acquiring services to the (inaudible) merchants; the company’s ability to deploy broad solutions internationally being a key differentiator; the Northern Ireland office greatly accelerating the company’s ability to provide global solutions; financial guidance including without limitations, those regarding revenue, transaction volume, gross profits, operating expenses, net income, earnings per share, deferred tax assets, and cash balance; the continuing health of eCommerce despite current economic trends; and, the company meeting needs of small and large businesses looking to exploit eCommerce opportunity.

We wish to caution you that such statements are just beliefs or predictions, and that actual results might differ materially from those projected in any or all of these forward-looking statements. These statements are also subject to risks and uncertainties, including, but not limited to the following, changes in customer requirements; potential financial risks relating to the company's global acquiring business; changes in general economic conditions and eCommerce, in particular; changes in legal requirements and litigation arising from time to time; unforeseen technical difficulties relating to the Internet in general or our technology in particular; potential system failures including, without limitation, disruptions intentionally caused by third parties, and the intense competition in our industry, and the need for rapid technological change associated with such competition.

Further, CyberSource's past financial business operations and stock performance are not necessarily indicative of CyberSource's future performance. Listeners are referred to the documents filed with CyberSource with the SEC, specifically Form 10-K filed on March 11, 2008, covering the one-year period ended December 31st, 2007, and our quarterly reports filed on Form 10-Q from time to time. All of which include these and certain other important risk factors. And now, let me introduce Bill McKiernan, Chairman and CEO.

Bill McKiernan

Well thank you, Katrina. Good afternoon, and thank you all for joining us. It’s a pleasure to welcome you to our second quarter 2008 earnings call. Our strong results this quarter reflect the power of our value proposition after the integration of Authorize.Net and the overall strength of the eCommerce market.

In the second quarter, we generated record revenue of $55.7 million, a 143% increase over the same period last year, and a 4% sequential increase over the first quarter. Our growth was driven primarily by our transaction processing and merchant acquiring offerings. And we also saw strength in both our enterprise and small business segments.

During the quarter, we processed a record 449 million billable transactions, a 67% increase over the same period last year. The dollar value of the transactions we processed this quarter was approximately $27.4 billion, up 158% over the same quarter last year.

Net loss on a GAAP basis was $45,000 and earnings per share on a GAAP basis was breakeven. Because these results include significant non-cash charges such as stock options, compensation, amortization of intangibles, and reversals to the allowance to the deferred tax assets, we also provide non-GAAP financial metrics. Steve will provide a more detailed explanation of GAAP versus non-GAAP in a moment, but we also reconciled GAAP and non-GAAP metrics in the press release.

This quarter, non-GAAP net income was $11.3 million, a 362% increase compared to $2.4 million a year ago. Non-GAAP EPS was $0.16 per share, a 129% increase compared to $0.07 per share a year ago. Our net operating margin this quarter on a GAAP basis was approximately breakeven. Our net operating margin for the quarter on a non-GAAP basis was approximately 20%, up 11% from a year ago. This 900 basis point increase highlights the strength of the business, our business model, and the benefits of the acquisition of Authorize.Net.

CyberSource’s global acquiring business generated revenue of approximately $19.7 million in the quarter, a 15% increase from the first quarter, and up 116% over the same period last year. Global acquiring represents about 35% of our total revenue. The value of transactions where we acted as the merchant acquirer was approximately $630 million, but this is only about 2% of the $27.4 billion that we processed this quarter.

This quarter, we added approximately 1,000 new acquiring customers, which is the highest number of new acquiring adds in a quarter, and seven times higher than before the A.Net acquisition. We’ve been working hard to grow the number of leads coming into our call centers. By doing this, we have greatly expanded the merchant acquiring opportunity for both ourselves and our resellers who receive some of (inaudible). We now have approximately 3,300 global acquiring customers, and we expect merchant acquiring services to continue to be a major growth driver for the company.

This quarter, we also set another record in the number of new customers signed in a quarter. We signed over 26,000 new customers across a wide variety of industries and of both the enterprise and SMB market segments. This strength in our new customer sign ups is key indicator of the health of the eCommerce market and the selling power of the CyberSource value proposition.

We now have approximately 238,000 active customers who rely on us for payment solutions. Large enterprise customers added this quarter include IBM Canada, Hertz Europe, National Lampoon, and Samsonite. Existing customers who added new services or renewed agreements during the quarter include Jet (inaudible) Airways, LOT Polish Airlines, and the Art Institute of Chicago.

In the small business market, we saw continued strength as evidenced by the increase in new customer sign ups. Our channel of over 4,000 resellers and partners is a very important asset to our business. And we continue to invest in these resellers and partners to provide them with the additional tools, training, and programs necessary to increase their sales and the sales of CyberSource services.

These investments are paying off as 70% of our 75 largest resellers have increased merchant setup activity with Authorize.Net over the last year. We have also been aggressively growing our affiliate reseller channel. We are signing up a healthy number of new affiliate resellers that are actively setting up an increasing number of new merchants every month. We now have over 1,000 affiliate landing pages that promote Authorize.Net and link the customer directly to our merchant application.

We’ve also made a significant investment and improvement in our customer support department, particularly directed at the SMB segment. We successfully hired and trained 42 new customer support reps, and improved our customer support infrastructure, tools, and processes. These efforts are really paying off. Since January, we’ve improved our average speed of answering support calls by 83%, improved our abandoned call rate by 66%, and increased our average customer satisfaction score by 21% to 8.35 on a scale of 10. These are some of the best customer support metrics in the history of our SMB platform and have resulted in increased confidence and satisfaction from our resellers and merchants. Customer satisfaction is a core ethic of the company, and I’m very pleased with the progress our support and operations teams have made in the first half of this year.

Our European business continues to have strong momentum generating a record 87.8 million transactions in the quarter, an increase of 90% over the same period last year, and now represents approximately 20% of total transaction volume. Although Europe represents about 20% of our transaction volume, it represents only about 7% of total revenue. This is because we are not offering acquiring services to merchants domicile, to outside, to US. Our European business serves primarily European and India-based merchants by providing them with gateway services, fraud services, tax calculation, and export control.

In the last few months, we have made very good progress for offering acquiring services to European domicile merchants. We recently implemented new European processor connections that are now being tested. And I’m confident that we will have merchants live on those connections in the next 90 days.

CyberSource’s global opportunity is two-fold. One, expanding the capability of our US merchants to sell to consumers outside the US by supporting new payment types and localizing our fraud solutions for those markets; and two, the opportunity to sell CyberSource solutions to non-US-based merchants. Today, about 24% of our total transaction volume is in a currency other than the US dollar, highlighting the global nature of the Internet.

Last quarter, we processed 73 different currencies, up from 68 in the first quarter. We are continuing to build payment connections around the world to open new markets for our customers by supporting different payment types that are preferred in those local markets. This is an important part of our value proposition. This expansion of our global footprint becomes even more important as some of our domestic customers target international sales to offset the economic slowdown in the US.

We are now live and processing transactions in China. The demand for merchants to have an eCommerce presence in China has certainly been accelerated with the 2008 Olympics in Beijing. Today, the payment types we support in China include credit cards, over 20 types of bank-specific debit cards, and also wallet technology. Wallet technology is where a consumer can load a wallet held in partner site with cash, and use it to buy things online. We have also localized our decision manager technology to reduce the risk of fraud from merchants selling in China. Our ability to localize and deploy our fraud solutions in these rapidly developing markets is a key differentiator for CyberSource.

With the expanding global view of our business, we announced plans for a new CyberSource software development center to be established in Belfast, Northern Ireland. We are partnering in this expansion with Invest Northern Ireland, a government agency that selected CyberSource based on rigorous screening and due diligence. As part of our agreement with INI, we will receive a grant of about $1.7 million, which effectively covers our first year operating expenses. We chose Northern Ireland because of the availability of high caliber engineering talent, the technology focus of their university system, and the cost advantages of locating there.

Over the next three years, we expect to hire approximately 60 software development professionals to work in our Northern Ireland development center. A move that we believe will greatly accelerate our ability to provide global solutions to our customers. This new facility will complement our US software development centers in Bellevue, Washington; Mountain View, California; American Fork, Utah; and Austin, Texas.

Now, I’ll ask Steve Pellizzer to provide some more details on the financials.

Steve Pellizzer

Thanks, Bill. As Bill mentioned, our second quarter revenue was $55.7 million, $1.2 million to $1.7 million higher than our guidance of $54 million to $54.5 million, and a 143% increase over the same period last year. During the quarter, we processed a record 449 million billable transactions, a 67% increase over last year and at the mid range of our prior guidance for the second quarter of 445 million to 455 million. Please note that with regard to both our enterprise and our small business platforms, a transaction is counted if it is a billable event.

During the second quarter, we added approximately 26,000 new customers on the gross basis, compared to 2,100 new customers in the second quarter last year. We added approximately 1,000 customers on a net basis, which is about the same as we added in the second quarter last year.

This quarter, one of our large small business resellers conducted an extensive cleanup in June to deactivate inactive merchants. We expect this to have minimal impact on our revenue as these accounts were virtually all non-transacting accounts. After this event, net adds for small business would have been approximately 9,700 customers during the quarter.

Our gross profit on a GAAP basis was $28.1 million, higher than prior guidance of $27 million to $27.2 million. Operating expenses on a GAAP basis for the second quarter were $28.6 million, higher than prior guidance of $28.2 million to $28.4 million. The GAAP net loss for the second quarter was 45,000 and fully diluted earnings per share on a GAAP basis was breakeven, higher than prior guidance of a net loss of 500,000 to 600,000 and a loss per share of $0.01. Non-GAAP net income was $11.3 million or $0.16 per share, higher than the guidance of $9.8 million to $10 million or $0.14 per share.

Our cash and short term investment balance was $52.7 million, not taking into account the $12 million payables to merchants at quarter-end. Cash flow from operating activities was $12.5 million for the second quarter compared to $2.8 million for the second quarter last year. The company also generated approximately $3.7 million in cash from employees’ stock option exercises.

Capital spending for the second quarter was $2.2 million, below our prior guidance of $5 million to $5.5 million as certain capital purchases slipped to the third quarter.

During the second quarter, we did not repurchase any shares of common stock under the $10 million stock repurchase plan that was approved by the Board of Directors in May of 2008. However, stocks points quarter-end, the company did repurchase 172,900 shares of common stock at an average price of $14.45 per share.

Now I’ll give you some detailed guidance with regard to our expected future performance. In light of SEC fare disclosure, this forecast, which is made in good faith and is based on all the market information we have available today, will be the only numbers that the company will comment on going forward or until updated by the company. We also assume no duty to update any numbers at any time. Guidance does not take into account any further reductions in our valuation allowance against our deferred tax assets, which will result in a tax benefit during the period of the reduction. We will continue to evaluate whether a further reduction is appropriate.

We expect revenue in the third quarter of 2008 to be between $55.8 million and $56 million. We currently estimate billable transaction volumes in the third quarter to be between 450 million and 455 million. We expect gross profit to be between $28.3 million and $28.5 million during the third quarter. We expect total operating expenses for the third quarter to be between $29.5 million to $29.7 million. Including (inaudible) and operating expenses is approximately $7.2 million of intangible asset amortization expense relating to our acquisition of Authorize.Net.

We currently expect a net loss in accordance with GAAP in the third quarter of $400,000 to $600,000 and a loss per share of $0.01 based on weighted average share count of 72.5 million shares. We expect non-GAAP net income for the third quarter to be between $10.1 million and $10.3 million, and non-GAAP earnings per share to be $0.14 based on a weighted average share count of 72.5 million shares. We expect our non-GAAP tax provision to be approximately 1% or 2% of non-GAAP pretax income.

Capital spending for the third quarter is expected to be between $4.5 million and $5 million. As a result of our strong performance in the first half of 2008 as well as the strength in eCommerce expected for the remainder of the year despite the overall challenging economic environment, we are raising our guidance for revenue and net income for the year.

For the full year 2008, we expect total revenue to be between $220 million and $225 million. GAAP net income for the full year of 2008 is expected to be between $800,000 and $1.3 million. GAAP earnings per share is expected to be between $0.01 and $0.02 per share based on a weighted average share count of 72.5 million shares. Non-GAAP net income for the full year of 2008 is expected to be between $45 million and $46.2 million. Non-GAAP earnings per share is expected to be between $0.62 and $0.64 based on a weighted average share count of 72.5 million shares.

We are forecasting a cash balance between $70 million and $75 million as of year-end, which doesn’t take into account any non-recurring items including cash that maybe used to repurchase our common stock and fees payable to merchants. We still expect capital spending for 2008 to be between $10 million and $11 million.

With that, I’ll now turn the call back to Bill for his concluding remarks.

Bill McKiernan

Thank you, Steve. So in summary, CyberSource had a very strong first half in 2008. In the first half, we set new records in virtually every metric of our business, including transaction volumes, revenue, non-GAAP net income and earnings per share, customer additions, and dollars profits.

In the first quarter of this year, we also saw some very strong year-over-year growth rates across most metrics. In the second quarter, many of those same growth rates were even higher including those for revenue, dollar volume processed, non-GAAP net income and EPS. So at many of these key areas, we actually saw our business accelerating in the second quarter of the year.

Ecommerce remains one of the few bright spots in an otherwise choppy economic environment. The eCommerce market continues to grow at a healthy rate, and our growth rates consistently exceed market growth rates indicating that CyberSource continues to capture market share. Frankly, I believe many aspects of the current economic environment in the US helped eCommerce grow. For example, in a tightening economy, people look to save money, and consumers are much more likely to get a good deal online than they are driving around the stores and malls. And with gas close to $5 a gallon, why would anyone drive to stores when they can shop online.

Our growth in SMB sign ups indicates people continue to see the Internet as a way to supplement their income. Large companies continue to view the Internet as a very cost-effective way to drive global sales and sell into markets where the economic conditions maybe stronger than in the US. CyberSource’s value proposition fits well with all of these growth drivers. We meet the need for both large and small businesses as they look to exploit the global eCommerce opportunity.

Finally, I couldn’t be happier with the way the acquisition of Authorize.Net has got. We have combined with a great business, added great people to our company, and created a value proposition that addresses the needs of all segments of the market, from the smallest business to the largest. The growth metrics in our business, our customer satisfaction metrics, our employee retention rates all indicate that the combination of the two businesses has been great for all of our constituents, our customers, partners, employees, and shareholders. We remain very bullish about our business and the global eCommerce market. And we remain very excited by CyberSource’s multiple growth opportunities including our international expansion, merchant acquiring ramp, and our continued penetration of the SMB market.

I also want to thank the entire CyberSource team for their hard work this past quarter. And so with that operator, let’s open up the line for questions.

Question-and-Answer Session

Operator

(Operator instructions) We’ll pause for just a moment to compile the Q&A roster. So our first question is from Wayne Johnson with Raymond James.

Gora Bora – Raymond James

Hello.

Bill McKiernan

Hi, Wayne.

Gora Bora – Raymond James

Hi. Actually this is Gora Bora [ph]. I work with Wayne. I’m going to ask a question on his behalf.

Bill McKiernan

Sure.

Gora Bora – Raymond James

All right. So could you expand on pending European merchant connections, and are European banks involved in that process? And I guess, which ones?

Bill McKiernan

Yes. So Gora, we – as we’ve talked about on prior calls, we’ve been working hard to develop a relationship with the European who provide sponsorship to CyberSource to allow us to underwrite merchants outside the US. We have identified a potential sponsor. Those discussions have matured very nicely. We’ve got a pilot currently underway. The final agreement is not done yet, but we’ve gotten far enough where we got a pilot underway to test the connection and get some merchants live.

So as I said in my earlier remarks, within the next 90 days, we’ll be able to share more about the relationship and the opportunity there.

Gora Bora – Raymond James

Okay. Sounds good, looking forward to hear it. And one more question, do you guys have plans for future expansion overseas in China or any other Asian countries?

Bill McKiernan

Yes. That’s a good question. What we’ve talked about is that Europe was – is at the top of our list, but Asia is right behind it. As a matter of fact, our COO, Scott Cruickshank, is heading off to Asia this weekend to meet with potential partners in that region of the world as well, so. I think we’re buoyed by the progress we made in Europe, and now looking at Asia as the next big opportunity for us.

Gora Bora – Raymond James

Great. Thank you so much. Appreciate it.

Operator

Your next question is from David Shore with JMP Securities.

David Shore – JMP Securities

Hi. Good afternoon, Bill.

Bill McKiernan

Hi, David.

David Shore – JMP Securities

A couple of questions here. First, just on the small business side, on A.Net, any comments you can give us about the pricing environment with contract renewals. Is it staying pretty firm in this environment?

Steve Pellizzer

Yes. I mean we haven’t seen anything change with regard to the pricing of that small business and small business market. In fact, if you look at sort of the average transaction price with that small business sector, it’s actually increased $0.01 compared to last quarter, so. It’s been a positive change, if any.

David Shore – JMP Securities

Got you. And next, well, they’re related to my next question, if it’s taking up slightly the average transaction price, is that a reflection of any early success selling some additional products such as fraud into that user base? Or is it just a mix issue?

Bill McKiernan

No. In fact, the SMB team has been aggressively selling value-added services around automated recurring billing, and our customer information manager, which helps our merchants comply with PCR requirements, and things like that are definitely having an impact on the revenue per merchant that we’re generating from that SMB segment.

David Shore – JMP Securities

Okay. Great. And a couple of quarters ago, I think it was earlier in the year or maybe it was the end of last year, there was a quarter in which for the first on an undisclosed basis that there was a 10% customer (inaudible) – now obviously with the A.Net. merger that gets diluted down. But is that customer still in there and maintaining the same levels? Is it actually contributing more so to the growth of the company? Can you just give us a little commentary on client concentration?

Steve Pellizzer

Yes. That customer still exists. The revenue has sort of plateaued. It’s going slightly, but the percentage of overall revenue continued to decline each quarter just given the fact that the rest of the business is growing, especially with the addition of the Authorize on that business.

David Shore – JMP Securities

Great, great. And last question, the new client additions were terrific this quarter. It looks like they were weighted one by that one reseller you mentioned who was doing some cleanup. Do these resellers give you much of a heads up when they’re doing a purge like this? Or do you kind of find out at the last moment? Or does it just happen incrementally? I’m kind of curious. As you provide quarterly guidance going out 90 days, you pretty much have a heads up if any other reseller’s going to engage in that kind of purging.

Steve Pellizzer

Well, we try to be proactive, and we’ve account managers that have good relationships with the resellers. And if instance, the reseller does it so late in the quarter that we didn’t have enough information in April to sort of give you a highlight that that was coming, so typically we try to be aware of what’s going on, the base. But in this case, we weren’t aware in time.

David Shore – JMP Securities

Okay. Now you had mentioned there, these are very low transactions as of merchants, but are they still paying the same monthly fee as even a high transaction would?

Steve Pellizzer

Well they are paying a monthly fee. They’re not running transactions for the most part. So as a result, the impact to our revenues is going to be (inaudible).

David Shore – JMP Securities

Okay. Got you. Thanks a lot. Great.

Bill McKiernan

Thanks, David.

Operator

Your next question is Franco Turrinelli with William Blair & Company.

Franco Turrinelli – William Blair & Co.

Hey, Steve. Hey, Bill.

Bill McKiernan

Hi, Franco.

Steve Pellizzer

Hi, Franco.

Franco Turrinelli – William Blair & Co.

Actually, I have the same question on the future impact of those customers. But just to understand, I mean are these customers still – I mean were you still, in fact, are able to collect those monthly fees? Or is the reseller paying those monthly fees to (inaudible) anyway?

Bill McKiernan

Yes. We still get paid because we would generally bill the reseller. So what happens in these situations, Franco, is that the reseller goes through their installed base, their portfolio, and realizes that a lot of these merchants are totally inactive and maybe not paying them. So they clean up their portfolio, and they terminate those accounts as Steve mentioned. And virtually every case, these accounts are doing no volume and we think a small amount. But the economic impact to us in terminating these inactive accounts is not that significant.

Franco Turrinelli – William Blair & Co.

Okay. I guess I’m surprised like – I mean I guess I get from the impression you can raise your revenue guidance even – despite what (inaudible), the purge. I mean I forget, I guess, maybe I need to do some more research on the average price for an Authorize.Net customer. But I would have thought the cost and the impact would be reasonably significant.

Steve Pellizzer

No. I mean it’s – you have the monthly fee, but all in all, it’s not that significant.

Franco Turrinelli – William Blair & Co.

Okay. Hey, Steve, one separate question for you. You mentioned that the revenue was well above your guidance with the transaction counting within the range, what was the delta relative to your expectations?

Steve Pellizzer

What was the delta in –?

Franco Turrinelli – William Blair & Co.

Why did revenue end up being above your expectations whereas transactions were within your expectations?

Steve Pellizzer

Yes. And I think, if you look back in time, that’s not an unusual trend on a quarterly basis. Maybe I’m more bullish on transaction volume than I am on revenue when I pull my guidance together. Part of it is acquiring because we continue to see acquiring grow as a percentage of revenue. So that has a more meaningful impact to the top line versus the transaction volume. And I think historically, in general, that’s kind of the reason why you have that difference.

Franco Turrinelli – William Blair & Co.

Okay. Great. And then just one final question, maybe back to Bill. I just want to make sure that I fully understand what you were trying to tell us in your comments about the macroeconomic situation, eCommerce, et cetera. I think I heard you say that things actually got better during the better and not worse. Is that a correct read?

Bill McKiernan

That’s right. If you look at – really, the comparison of Q2 to Q1, we saw some acceleration in some of the key growth measures in Q2 versus Q1. So we do feel very good about the state of eCommerce and where it’s heading. And I think that’s corroborated by some of the results that came out in the last couple of days from Amazon and Global Commerce, and some other key eCommerce players.

Franco Turrinelli – William Blair & Co.

Yes. Hey, one final housekeeping thing. Steve, can I – do you have how much – what the processed volume internationally was?

Steve Pellizzer

I don’t have that with me, but I can get that for you.

Franco Turrinelli – William Blair & Co.

Okay. Thank you very much. Congratulations.

Steve Pellizzer

Thank you.

Bill McKiernan

Thank you.

Operator

Your next question is from the Brett Huff with Stephens Incorporated.

Brett Huff – Stephens Inc.

Good afternoon, guys.

Bill McKiernan

Hi, Brett.

Steve Pellizzer

Hi, Brett.

Brett Huff – Stephens Inc.

Two quick questions. Number one, just looking at the expenses, you had outperformed our model in some, and in some place most than others. Any comments on how the ramp in some of the employees that you, I think, had planned to hire is going and how that might impact the run rate for the second half either in any of your expense lines?

Steve Pellizzer

Yes. So we’ve been talking for the last several quarters about the fact that we are planning to hire in support of what we see as the revenue opportunity. We want to make sure we right-size the organization. We were very successful in this most recent quarter. At the end of the first quarter, we had about 510 employees. At the end of the second quarter, we had approximately 568. So we did a good job and you see that reflected to some degree in the expense line. And that’s also why when you look at expenses for the remainder of the year from a guidance perspective, yes we are right guiding higher in Q3 and Q4 because we are continuing to hire through the remainder of the year.

Brett Huff – Stephens Inc.

Okay. And then the second question is a little bit broader, just on competition, and I guess, your position in the market vis-à-vis the (inaudible) split, the (inaudible) split that’s about to happen. Any thoughts on that or any changes in behavior, or opportunities that you could, at least, broadly quantify?

Bill McKiernan

Yes. I don’t think, Brett, that changes our behavior at all. We do focus virtually exclusively on the eCommerce market. Paymentech has an excellent reputation in that eCommerce market, but are more broadly spread than we are. And we because we focus on eCommerce, we focus on those specific requirements of merchants in that space. And so we look at things like global acquiring, and fraud prevention and management, and PCI compliance. And I think our offering for the eCommerce market is richer than anyone else can offer, including Paymentech. Although I have great respect for what Paymentech has accomplished in the market.

Brett Huff – Stephens Inc.

Okay. That’s all I needed. Thank you.

Bill McKiernan

Thanks, Brett.

Operator

Your next question is from John Maietta with Needham & Company.

John Maietta – Needham & Co.

Hi, guys. Thanks very much. Sorry for the background noise here, but, Bill, I was wondering if you could (inaudible) the opportunity in China was (inaudible) there are other opportunities beyond that? It seems like you could just be scratching the surface there. And a second question, follow up would be, could you potentially support that wallet functionality here in the US or would that be a competitive offering with your existing offerings, and therefore, would not make sense to do that?

Bill McKiernan

Well, let me ask you – answer the last question first. So I think that wallet technology is most relevant in a market where credit cards are not as prevalent as they are in western countries. In China, and you find in each country, they’ve got sort of payment histories and different ways they buy things. COD is still very popular in China, for example. And so what we do when we look at each country is we try to support the payment preferences that we find in that region. So I wouldn’t expect the wallet capability, the wallet functionality as it’s implemented in China to be that relevant in the West.

In terms of the growth opportunity, clearly, China is a big opportunity. It’s a big market. A lot of our customers want to be more active there, but China is one very large market in a very large region of the world. And we’re still looking at expanding into markets like South Korea and Taiwan, and countries like that, so. I’m hoping that our initial foray into China will allow us to expand more broadly throughout Asia.

John Maietta – Needham & Co.

Got it. Thanks very much.

Operator

Your next question is from Colin Gillis with Canaccord.

Colin Gillis – Canaccord

Hey, guys. You had a great success with the market acquiring finally that (inaudible) what’s driving that?

Bill McKiernan

Well, I think it’s a number of things. I think our offering is getting stronger. We’re continuing to add more functionality there. We’ll do that. We’ve got a road map that has a lot more features that we are looking to add over the next 12 months or so. I think our sales force is getting more confident. I think the market is maturing to some extent where they recognize that working with a vendor that focuses on eCommerce and brings a lot of capabilities to bear their relevance for the eCommerce merchant. I think that’s helping us. So I don’t think there’s any one single thing. I think we’re just getting better at what it is that we do.

Colin Gillis – Canaccord

Bill, amongst these new customers that are (inaudible) as well or are they coming from a different customer base?

Bill McKiernan

For the most part, Colin, they’re new relationships to CyberSource.

Colin Gillis – Canaccord

And then, are we seeing any (inaudible) on the average dollar signs for transactions, sort of according to that consumer trade down theory?

Bill McKiernan

No. I don’t think we are. I think from our perspective, it’s been sort of maintaining it though.

Colin Gillis – Canaccord

And I just need – from the modeling angle, would you say any of the EPS upside in this quarter was due to some of the stagger hiring where you might have a full expenses (inaudible)?

Steve Pellizzer

Well, yes. I mean we have a successful quarter. And some of those positions were filled early on. And some of them were filled later. So you’ll see the full impact of that in the next quarter. That’s true.

Colin Gillis – Canaccord

Okay. Great. Thank you.

Bill McKiernan

Thanks, Colin.

Operator

Your next question is from Gary Prestopino with Barrington Research.

Gary Prestopino – Barrington Research

Hey, Bill and Steve. How are you doing?

Bill McKiernan

Hi, Gary. Good.

Steve Pellizzer

Hi, Gary.

Gary Prestopino – Barrington Research

A couple of questions, number one, in Europe, if – do you have to get an acquiring sponsor bank in every country that you want to acquire or can you just use one in the UK for the whole continent.

Bill McKiernan

Well, you need a sponsor who has licenses, basically, in the countries where you want to do business. And the partners that we identify going into the whole process were ones that sort of have a Pan European presence and the licenses to be able to acquiring throughout the region. So we didn’t want to go and create sponsorship agreements country by country.

Gary Prestopino – Barrington Research

Was your plan B to roll acquiring out to one select country at a time or just go kind of wherever these licenses are?

Bill McKiernan

No. Our bias would be to write the business wherever we find it. Now obviously, our presence is strongest in the UK. And then we’re getting stronger in France and Germany as well. So those will probably be the markets we focus on initially.

Gary Prestopino – Barrington Research

Okay. And then, I would assume that this purge by the reseller, these merchants, the majority of those were Authorize.Net merchants?

Bill McKiernan

They’re all Authorize.Net. Yes.

Gary Prestopino – Barrington Research

All Authorize.Net. Okay. And then, the last question is, it looks like – based on my numbers, it looks like that your dollar volume per transaction processed keeps creeping up. And it was up sequentially and up year-over-year. I mean, intuitively with A.Net, one would expect that that would go down. Am I correct on that assumption? Or what’s driving that?

Steve Pellizzer

Well, I’m not sure how you’re calculating it because when you look at our transaction volumes, they include more than just authorizations and settlements. They include fraud transactions, and –

Gary Prestopino – Barrington Research

Okay. That’s fine. That answers the question. Thanks, Steve. That’s all I have.

Operator

Your next question is from David Parker with Merrill Lynch.

David Parker – Merrill Lynch

Good afternoon, everyone. Just on –

Bill McKiernan

Hi, Dave. Welcome to the call.

David Parker – Merrill Lynch

Thank you. Just looking at the CapEx line. You said that you – some of the expenditures were shifted out from the second quarter to the third quarter. What was that – what projects were that – was that related to? And then also, as you build up this Northern Ireland center, how is that going to impact CapEx going forward?

Bill McKiernan

So in terms of the cap expense, most of the expense is just with regard to adding finance to support increased volume, predominantly, the volume expectations for the fourth quarter with the Holiday season. With regard to the Ireland office, that’s for the most part a development office. So there won’t be a lot of capital expenditure requirements in opening that office.

David Parker – Merrill Lynch

Okay. Is that included in the $10 million to $11 million that you’re forecasting for this year?

Bill McKiernan

Yes, it is.

David Parker – Merrill Lynch

Okay. And then on the small business market, have you seen any – you talked about the reseller cleaning up their account portfolio base. Have you seen any increase in small businesses going out of business, or filing for bankruptcy, or any losses from that perspective?

Steve Pellizzer

Well I mean looking at the small business segment of the market, I mean, other than that clean up that represented the majority of the churn that we talked about, where bankruptcies impact CyberSource is really where we take risk in the transaction, which is where we’re acting as the merchant acquirer. And we haven’t seen much in terms of changes in – with regard to the level of bankruptcies that we’ve seen. It’s pretty much been sort of consistent with what we’ve seen in the past.

David Parker – Merrill Lynch

Okay. And then finally, just – it’s sounds and it looks like you’re not seeing much of an impact from the macro headwind just because of the strength of eCommerce in general. Looking at your forecast for transactions, you have them sequentially flat to just modestly up where last year, you did see some – I think 6% or 7% sequential growth. Is there any impact in that or you’re just being conservative with your guidance before you can add?

Bill McKiernan

Yes. I think it’s probably more the latter conservatism given the current economic environment. When you look at what we saw, obviously in Q2, we saw some strong transaction volumes. And we haven’t seen anything to date in July to suggest that that’s not going to continue through the third quarter. So it’s really more of, I think, just being conservative in terms of the view given the current economic outlook.

David Parker – Merrill Lynch

Great. Thank you guys.

Bill McKiernan

All right. Thank you.

Operator

Your next question is from Gil Luria with Wedbush.

Gil Luria – Wedbush

Thank you. Let me get back for a second to the reseller cleaning up their list. If I remember correctly, this is something Authorize.Net has had in the past. This reseller does this periodically. So it’s not an unusual thing that it happened. Is that right?

Steve Pellizzer

I don’t think so. I mean I think actually, that this particular reseller, the clean up extended beyond just looking at the last year. I think they did a more extensive clean up than maybe what they’ve done in the past, if in fact they have done it annually.

Gil Luria – Wedbush

And then, in terms of quantifying it then, the monthly rate is about $10 for these small merchants. So shall we just extrapolate that $10, 12 months, 8,700 merchants. So about $1 million run rate that we should take out offset by the cost of supporting them, sending them bills, et cetera?

Steve Pellizzer

Yes. I mean that’s a fair way to look at it.

Gil Luria – Wedbush

And then the billing aggregate, have you had any other of these billing aggregates? Is it in your pipeline? Is there a potential for you to have another step as you did in the third quarter last year?

Steve Pellizzer

Well I mean we’re always talking to new prospects, some very large prospects. We don’t have anybody that’s – we’re talking to in the billing aggregation space necessarily. So today it’s predominantly the one account we signed last year.

Gil Luria – Wedbush

Got it. Thank you.

Steve Pellizzer

Thank you.

Operator

Your next question is from Robert Dodd with Morgan Keegan.

Michael Shepherd – Morgan Keegan

Good afternoon, guys. This is Michael Shepherd on for Robert. Just two questions for you. One, I guess, to follow up, I guess, from the last question, are there any 10% customers in the quarter now? And two, can you give us any color on the contract re-pricing, particularly, in the non-acquiring business. Thank you.

Steve Pellizzer

Yes. We do not have any 10% merchants. And then with regard to pricing, for the most part, the contracts that we have with our merchants are Evergreen. So they automatically renew. And they include sort of tiered pricing. So that the more volume they process in a given month, the less they pay for transactions. Inherent in the price agreement is the discounts for volume. So we don’t see a lot of renegotiations when contracts come due. For the most part, the merchant just continues to process business as usual.

Michael Shepherd – Morgan Keegan

All right. Thank you guys.

Operator

Your next question is from Leonard Decroso [ph] from Junior Montgomery [ph].

Leonard Decroso – Junior Montgomery

Hi. Good afternoon. With regard to the $1.7 million in Belfast, that for the first year, that’s a year kind of starting now or are you talking about a year, meaning from now to the end of this year?

Steve Pellizzer

No. For the $1.7 million that is a year starting when we actually open the facility, which is likely to be in sort of the August, September time frame.

Leonard Decroso – Junior Montgomery

Okay. And is that – and I also remember that in the press release that the first year you were going to try and bring on about 20 people there. Is that $1.7 million just for those 20 people or is that also for any other sort of associated items that will be involved in opening such an office?

Steve Pellizzer

Yes. The $1.7 million isn’t necessarily specific to head count. I think it’s broader in terms of how we can use it. But what key is – in the press release, if you recall, I mentioned the fact that it’s going to be mutual to our internal plans for the first year. And that’s just the accounting for those grants because you can offset – once you get the grant, anytime you can offset that against your expense so that it’s mutual to the plan.

Leonard Decroso – Junior Montgomery

Okay. And then just kind of a housekeeping item, adding 26,000 customers gross for the quarter, now it looks like it was about 1,000 net. So I might be doing that (inaudible) right it’s really 25,000 customers churn probably associated with the A.Net portfolio trimming.

Steve Pellizzer

We did see significant churn. And again a lot of that is coming from the one clean up that the one reseller did during the quarter.

Leonard Decroso – Junior Montgomery

All right. Okay. And I guess my last question is, I know that you all have relationships with some emerging team of players like Bill Me later and PayPal, and the like, and Emporio recently. Is this an area where you’re trying to gain additional fraction by going after others? Or these through just one off with regard to this types of relationships?

Bill McKiernan

No question. Those are very important to the core value proposition, which is that CyberSource serves as this payment hub, and our merchants are connecting to us, and we enable them to accept all different kinds of payment. Whether that’s emerging payment types like the ones you mentioned, or payments in China, or India, or Germany, or wherever.

Leonard Decroso – Junior Montgomery

Okay. Great. Thank you.

Operator

Your next question is from Nick Farwell with the Arbor Group.

Nick Farwell – Arbor Group

Good afternoon. Can you hear me?

Bill McKiernan

Loud and clear, Nick.

Nick Farwell – Arbor Group

Oh great. I appreciate it. I just want to follow up on some questions that were asked earlier. And that is the purge. I believe this is the second time you’ve had one of the A.Net resellers purge their account base. Do you expect us to be a likely vent over the next, say, several quarters? And if so, what is precipitating this, do you think?

Steve Pellizzer

Yes. This is actually – it’s not the second. This is the first purge by a reseller within A.Net. So it is not something naturally occurring. The CyberSource side, we have a reseller that typically in the second quarter does the similar exercise. I don’t think this is unusual. I think what happens is this resellers, especially after the end of the counter year, do their own housekeeping. In this case, I think this particular reseller hasn’t done their housekeeping for awhile. So I think that is way you see the magnitude that it was because I think it is more than just an annual exercise that they performed during this most recent quarter.

Nick Farwell – Arbor Group

Do you think that’s likely you’re going to have, given the account base you have with A.Net, additional, what do I call, purges over the next foreseeable future or is this a one off event?

Steve Pellizzer

Yes. I look at this as a one off event. There maybe some clean up exercises, but I think those particular partners won’t (inaudible) the magnitude of this particular one. So I don’t think we’ll necessarily see the impact to this customer account.

Nick Farwell – Arbor Group

Okay. And to follow up on Bill’s comment earlier about a sponsor, a bank sponsor in Europe, which may or may not be disclosed if that situation is finalized over the next couple of months, is it fair to assume that the same situation would occur in Asia? And if in fact that’s your next focus not knowing the banking community in Asia, is it fair to say there are one or two or perhaps five things that might have the reach that the bank’s, like the five or six in Europe the have that reach that might be – meet the criteria you’re seeking, but would also have that same reach in Asia? I would include that, obviously, China trough India, and of course thinking of Australia.

Bill McKiernan

Yes. I think that’s right, Nick. We would look for a bank with a global footprint that could offer sponsorships to us in most of the key markets in Asia. We don’t want to have to go around and get individual sponsorships in each country.

Nick Farwell – Arbor Group

Is it again, being cognizant perhaps of some of the names that might be available in Europe, they also have footprints in Asia. Is part of that criteria for the selection of the European banks sponsor there as you put a footprint or presence in Asia?

Bill McKiernan

Oh no, not necessarily. They can be viewed as independent markets to us. And banks have different strengths regionally. So in Asia we’ll go and talk to banks that we think have particular strengths in Asia.

Nick Farwell – Arbor Group

Okay. And then to clarify, a question was asked earlier to Steve, specifically about (inaudible) quarter versus first quarter. And perhaps there’s been some lag in hiring. I noticed that the sales and marketing – the other two (inaudible) lines were pretty much in line, at least with my projection. And again using mine as a template only, the sales and marketing was somewhat less than I’d anticipated sequentially, the growth was less than I anticipated sequentially. And therefore, obviously, with the rise in revenues as the percent of overall volume, it was somewhat lower that I’ve anticipated. Is that purely a lag in hiring, in head count, if you will? Or are there other factors that played there?

Steve Pellizzer

Yes. There are other factors. The largest expense line in the sales and marketing line are actually the referral in reseller’s commissions that authorized (inaudible) case to their reseller base.