Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Online Resources Corporation (NASDAQ:ORCC)

Q2 2008 Earnings Call

July 29, 2008 4:15 pm ET

Executives

Beth Halloran - Sr. Director, Corporate Communications

Matthew P. Lawlor - Chairman of the Board, Chief Executive Officer

Raymond T. Crosier - President, Chief Operating Officer

Catherine A. Graham - Executive Vice President, Chief Financial Officer

Analysts

Bob Napoli - Piper Jaffray

Wayne Johnson - Raymond James

John Kraft - D. A. Davidson & Co

Brett Huff - Stephens Inc.

Joshua Jabs – Roth Capital

Matt McCormick - FBR Capital Markets

David Parker- Merrill Lynch

Operator

Welcome everyone to the Online Resources second quarter conference call. (Operator Instructions) Miss Halloran you may begin your conference.

Beth Halloran

Thank you to everyone who has joined us in our conference call for second quarter 2008 results. Shortly Matt Lawlor, Chairman and CEO, Ray Crosier, President and COO and Cathy Graham, Executive Vice President, 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 pressroom and in the investors section of our website at orcc.com.

First, as if our practice, I would 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 and is forward-looking and involves risks and uncertainties detailed in filings made by the company at the Securities and Exchange Commission. I will provide a more detailed review of the Safe Harbor provisions at the end of this call.

Matthew Lawlor

We did a good job of managing our business to the bottom line this quarter despite being light on our revenue target. Quarter earnings per share were in line with the mid-point of our guidance: the year-over-year comparison is down, but we would have been up very substantially without large departing clients. In addition several large clients renewed in the quarter and no single large clients are at risk of departure this year.

Revenue growth was healthy, up 16% for the quarter and 22% for the first half of 2008. More importantly, the key drivers of our business model, expanding client distribution and consumer usage were seasonally strong for continuing clients.

On the flip side, our second quarter revenue growth was modestly less than planned. Low interest rates affected us more than anticipated. We also struggled in the quarter with volatility in consumer paid payments primarily among ITS clients acquired last August. It is increasingly clear that we will come in at the low end of our 2008 guidance.

That said we see increasing demand for our web based financial and payment services. It was a great quarter for new client sales and renewals. Later in the call we’ll outline some of the ways our clients, both financial institutions and commercial firms, are using the web to their advantage in this stage of the economics cycle.

I will turn now to Cathy for the details of our financial report and for updated guidance.

Catherine Graham

This afternoon I am going to review our second quarter 2008 financial results as well as provide you with third quarter and updated full year 208 guidance. For the second quarter core net income was within the guidance range we previously provided. Net loss available to common stock holders, EBITDA and revenue, however, were all slightly below our guidance. I’ll talk more about this later.

Revenue for the second quarter grew 16% over the same quarter of the prior year. New revenue from our ITF acquisition largely offset revenue loss to interest rate decline and previously announced large client departures, though obviously at lower margins. Fundamentally however, seasonally appropriate transaction growth was the key driver of continuing client revenue.

On a sequential basis second quarter revenue was down as we had expected, reflecting the two final announced client departures in April. We now look forward to returning to more normal and easier to track sequential quarterly revenue growth rates. After adjusting for the departed clients at their typical business line margins, our key earnings measure showed strong year-over-year growth. Second quarter EBITDA would have increased by $1.9 million and core earnings per share would have increased by $0.04 over reported numbers. These increases would have been even higher had interest rates declines not reduced our float revenue by $1.6 million between the two periods.

While our underlying business continued to perform well, posted results for the quarter were a little shy of what we had anticipated. For revenue, though we had built reduced interest rates into our expectations for the quarter, actual returns on our short-term high credit quality investments came in somewhat lower than predicted. Additionally, we saw seasonal transaction and payment size declines in our consumer paid products that were steeper than what we had forecasted. This was primarily among the accounts receivable management clients from our August 2007 ITS acquisition. As this is our first year with this market segment, we are still getting our arms around the seasonality and transaction patterns in this business.

These impacts to revenue flow through to our earnings measures and particularly to EBITDA where reduced float interest revenue creates a dollar for dollar reduction. For our other earnings measures, core net income, and net income available to common stock holders, the impact of lower float interest revenue is partially offset by the positive effect the declining interest rates have on our senior debt service. They also benefit from lower depreciation related to the efforts we have made to manage our discretionary capital spending and to the small tax benefit we recognized in the quarter.

We generated $2.8 million in cash flow for the quarter and used this and other cash on hand to make the first principle repayment on our senior secured debt. We repaid $3.2 million in debt during the quarter, reducing our outstanding debt to $81.2 million. We will continue to make quarterly payments on this debt on an accelerating schedule through its maturity in early 2012.

Our unrestricted cash equivalents and short-term investments totaled $18.6 million at June 30, up from 13.65 million at March 31. We have also returned to a lower, more normal accounts receivable balance as we have now worked through the delays in follow up efforts that occurred during the implementation of our new accounting system.

Turning to guidance for the remainder of the year: We have provided you with our expectations for the third quarter of 2008 as well as updated our guidance ranges for the full year. In our business, results for the rest of the year are much more visible by the time we reach the end of the second quarter. At this point, the payment transaction trends for most of our products are fairly predictable and anticipated new client launches or departures have already been scheduled.

Due in part to first half results, low interest rates and delays in implementing clients on our new hosted internet banking and collections products, where we are just starting to gain experience, we now believe that we will come in at the low end of our current guidance for full year 2008. To reflect some conservatism we are therefore repositioning our full year 2008 guidance ranges for all metrics generally around the low end of our current expectations.

The mid-point of our new guidance ranges represents 14% annual top line growth and 24% annual core earnings growth. We would expect these growth rates to increase as we move into 2009 and get passed the impacts that large client departures have on our period-to-period comparisons.

For third quarter the midpoint of our revenue guidance range represents fairly normal year-over-year and seasonally appropriate sequential growth rates moderated by the fact that we had two of our large departing clients, our last two, on the system for one month of the past quarter.

Third quarter EBITDA is expected to grow at 9% year-over-year and 20% sequentially. This shows good progress towards meeting our continuing expectation of exiting 2008 at a 26% EBITDA margin or better. Additionally, though third quarter core earnings per share is expected to be lower than last year, the mid point of our guidance range reflects 25% sequential growth.

In summary, we had a good second quarter, but not what we had hoped for. We were able to manage our business to keep earnings on track, despite feeling the impact of interest rates and seasonal volatility on a small portion of our revenue in EBITDA, but despite the challenges of this quarter our fundamental business drivers remain healthy with seasonally appropriate transaction growth and good new client findings. This leaves us optimistic for our ability to generate growth and continuing margin expansion going forward.

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

Raymond Crosier

From an execution standpoint we had a good quarter across the enterprise. We delivered on our operating priorities, while at the same time making solid progress on longer-term strategic goals. It was an especially strong quarter for sales, renewals, and implementation, so let me start there.

Beginning with e-commerce as announced yesterday three of the top ten card issuers in the country have selected us for our web based collection product coupled with payment processing services. That brings us to having relationships with 11 of the top 20 card issuers. In addition to these card issuer sales, we opened up a new channel with the signings of DolEx, a subsidiary of Global Payments, Ace Cash Express, and Check N Go. These money transfer providers are using our unique biller endpoint network to expand their reach to billers for walk up and expedited payments for consumers who use them to pay bills at over 3.500 retail locations nationwide.

Turning now to e-commerce renewals, we had a banner quarter. Multi year contract extent ions were secured on three of our largest biller clients who combined account for over $6 million in annual revenues.

Finally on the e-commerce implementation side, two of the three new top ten card-issuing clients went live and the most recent sale is on schedule for a late August launch.

Turning to the banking side, it was an equally good quarter. In this area of our business the largest financial institutions typically look to us for best of breed payment services. As you move down in size and on through the community bank and credit union market, FI’s are looking for us to provide a full suite of services where we become a one-stop shop for all their web channel needs.

Hands down we believe we have the most comprehensive set of fully integrated web based services to meet the needs of this market.

Let’s look first at the national banking market. On the sales front we had two significant wins. The first was a $16 billion asset institution for payment services. The second was

$9 billion National Penn Bank shares who contracted for a full suite of services. Both are expected to go live in the fourth quarter.

On the renewal front we extended a top 15 remittance only client for three more years and on the implementation front we launched $8 billion NB Financial a full-service suite sale, spell that any way you’d like it.

Now looking at the community banking and credit union market, sales highlights include Cline Bank, a $1.5 billion institution full suite sale for both retail and business banking services. Travis Federal Credit Union, one of California’s largest credit unions serving over 150,000 members, also a full suite sale and San Antonio Federal Credit Union, a $2.5 billion top forty credit union which shares our account opening software. Community Bank renewals included a top 20 client for five years.

Finally, on the community banking implementation front, not only did we go live with 1.5 billion, 100,000 member provident credit union, but we also seamlessly launched expedited payments to over 500 ASP clients, a service which allows consumers to make last minute same day payment for a fee.

Turning now to the operating data attached to the press release, looking at the chart you’ll see some new information for the very first time. We have introduced a continuing client’s metrics to give you better visibility of our underlying fundamentals after adjusting for previously announced large client departures. This will allow you to make apples-to-apples as growth comparison in sequential and year-over-year periods. By the way, we absolutely intend to make this information obsolete in the near future as we hold onto our large clients making this an unnecessary metric to track and that’s dropping it from the chart all together.

You can see that user adoption and transaction growth rates were typical for a second quarter, with the caveat that we still need to better understand the seasonality of transactions in our recently acquired ITS client base. 2Q sequential growth was generally in the low single-digits, where it normally is, and year-over-year growth was strong in the 20% to 25% range where it normally is.

While looking ahead I see two major challenges. The first is implementations. With the relative newness of both the web based collections and a highly customizable banking services, some have just taken darn too much time. Some of that is our problem, some of it may be the clients, but it matters not whose at fault. We need to improve and improve we will. The good news is that we have already learned a lot from the early implementations and the timelines are getting dramatically shorter. Two of the three aforementioned top card issuers went live within 30-days of contract signing and the last two customizable banking sales were launched roughly 4-months faster than the first ones. So we’re making progress with more to come.

The second challenge is a tricky one, but one I know we can meet. We’re having to manage the business to the bottom line in a pretty tough economic environment. On the one hand we need to pare back expenses to match the current size of the business. On the other, we need to be careful in making the necessary trade offs that we don’t jeopardize the future. Given all the new products in the pipeline and our current competitive position, it would be a shame to hurt our long-term prospects for the sake of short-term results; having said that, I’m confident that we can find the proper balance and deliver both.

In summary, from an execution perspective, I was fairly pleased with the quarter. We were focused on the right things. In closing a business, retaining and growing existing relationships and getting new services launched more quickly and we did so without taking our eyes off the bottom line.

Matthew Lawlor

That completes our second quarter report. In summary, it was a mixed quarter, as we hit our earnings target, but fell short of our revenue goal. Behind the numbers, however, are strong fundamentals and I am encourage by our progress.

Let’s zoom out for a moment to take the macro view of our business. We are all acutely aware of today’s economic headlines and there’s no question that the banking industry is smarting. We are all feeling some pain either directly or indirectly. However, as a provider of web based financial technology, I remain bullish on our business. The silver lining is that our clients are recognizing some of the cost benefits as well as the revenue on our opportunities that the online channel has to offer, particularly in today’s economic environment.

Last quarter I touched off the drivers of web profitability for our clients. First the web deepens existing customer relationships; second the web reduces the cost of delivery; and third the web can efficiently expand sales. This quarter I wanted to follow up with some clear-cut examples of how our clients are using the web channel to their benefit today. I’ll start with our e-commerce business.

Client Miami Dade County Water and Sewer recently decided to encourage customers to shut off their paper statements in favor of electronic ones. In addition to the electronic statements, they implemented our online enrollment payment service for repeat customers. In under a year, they have sharply reduced the number of paper statements mailed out each month and have increased their electronic payment rate by 7% reducing both incoming and outgoing delivery costs.

Also an e-commerce client, Georges Plant Telecommunications recently implemented an emailed bill presentment and payment solutions offered by Online Resources and our partner Striata. This innovative service allows electronic delivery of monthly bills directly to the consumers email inbox. It also allows customers to immediately and securely pay their bill through their email with a single click. Within the first six months a robust 15% of consumers, customers of Plant Telecommunications opted to replace paper with electronic bills, saving the company approximately $2.00 per bill on a fully cosseted basis; now 20% of customers pay their bill in full within 72 hours of receiving them online, which also improves plants payments cycle and cash flow.

Another e-commerce client is Royal Bank of Scotland or RBS, which had been taking advantage of the internet channel by using a web based collections tool; by enabling consumers to resolve their debt in a private non-confrontational manner, RBS has been able to reduce charge-offs by approximately 12%. Among all of its collections methods RBS ranked our web based at highest in cost efficiency and debtor comfort level.

Turning to the banking side of our business, many clients have been actively seeking to more efficiently expand sales. Client East Hampton Saving Bank implemented our online account opening service less than a year ago. Of the accounts that have been since opened online, approximately 60% were opened by existing customers bringing in additional deposits with a favorable shift towards non-interest paying accounts.

A credit union statute has turned up the key in their online channel by completely redesigning the web site and then marketing it aggressively. Their goal is to increase sales, particularly to young adults and to deepen existing customer relationships that would be member relationships. To supplement their marketing efforts FESCUE recently participated in two of our bill pay marketing campaigns. Since last fall they have raised their bill pay adoption rate by over 15%.

Long time client First Command Bank provides services to members of the military and their families who are located all over the world. With only one physical presence in Texas, first command relies heavily on the web channels. Since last year the bank expanded their credit card marketing programs beyond direct mail by working in concert with online resources to incorporate in session and call center messaging. Of all their marketing channels, the online cross-selling efforts had the highest rate of success. In addition, average cost per acceptance rate was half that of direct mail.

Also on the banking side of our business, New England based partner COCC which provides data processing services to Community Bank and Credit Unions, made a terrific announcement just a couple of weeks ago. COCC announced that by year-end 2008 they expect 95% of the checks they process will be imaged, many of which are presented online to customers who use Online Resources internet banking.

Finally, one of our large bank clients, the $65 billion M & T bank recently launched onbank.com, a web based direct bank giving them a national footprint to gather relatively low net cost deposits to supplement their strong regional branch system. We support M&T with a remittance bill payment services as well as our eCommerce payment services to their commercial clients. As I said before, our banking and commercial clients get it. In a softening economy sales service is a sure bet for lowering the cost of delivery and fast.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Bob Napoli - Piper Jaffray.

Bob Napoli - Piper Jaffray

I am trying to understand on the change, the revenue versus your expectations. On the interest expense side, what changed there? Did you have less float outstanding because the fed really didn’t cut rates any further so you knew what the rates were, was there less float?

Catherine Graham

There was slightly less float, but actually what we found was that while the feds did not cut rates any further on our actual earnings, so the rates we were actually earning on our investments, the spread from fed rates and LIBOR got bigger.

Bob Napoli - Piper Jaffray

Okay and then maybe more importantly on the ITS, I mean obviously when you did due diligence you looked at quarterly numbers and when you were putting together your plan from last year and just looking at some of the user numbers under the eCommerce you know some of the declines, the user numbers rebound from 800,000 to 8,000 under eCommerce, the account presentation. That’ some pretty significant declines in some of those metrics and I’m just trying to understand that and what was different this year versus last year for ITS.

Catherine Graham

Let me break that down for you because first of all on the decline in the eCommerce numbers, that really had nothing to do with ITS. That has to do with the departure of Sertigy, which was one of the last two large remaining clients that we had previously disclosed and they left our platform in April. So, that’s why you see that number go down.

On the accounts receivable management claims which are what we largely got out of the ITS acquisition, what we saw was in the first quarter of the year, we knew that in these consumer paid payments there is seasonality, we’ve seen it before, but we didn’t have this market segment before. We had anticipated that they would go up in the first quarter, but not up as far as they did and then we anticipated that they would come down in the second quarter and into the third, but they came down a little more sharply and these payments actually leverage into revenue.

There is a lot of revenue sensitivity, because they’re very high value, these are where there’s a large fee associated with them, so even a small amount of change in the payment numbers or for that matter in the size of the payment since some of these have tiered pricing, a relatively small change in the number of transactions and the size of the transactions can have a reasonable impact on revenue.

Bob Napoli - Piper Jaffray

Do you have an organic revenue growth number for the quarter?

Catherine Graham

Yes our organic revenue growth number for the quarter was around 12%, I you look at this year over last year. Our expectation is that that can improve. What we have seen is that, as I think all of us mentioned, we have had some fairly strong group of sales, however a lot of those have been in new products for us and so some of those implementations have taken longer than we expected, so revenue that we expected to have in these periods and in the third and fourth quarter we probably won’t have. So, as those get implemented we expect that rate to come back up again.

Operator

Your next question comes from Wayne Johnson - Raymond James.

Wayne Johnson - Raymond James

Cathy you mentioned I think for the third quarter for EBITDA year-over-year growth of 9%, but on an apples-to-apples basis excluding the two clients that deconverted in April in the second quarter, what would that growth be on an organic basis?

Catherine Graham

I’ll have to get back to you on that one Wayne, I don’t have a number off my head, but it would be substantially higher.

Wayne Johnson - Raymond James

So would you say mid-teens, I’d like a range, just a rough range, kind of mid-teens?

Catherine Graham

Maybe, but tell you what let me get back to you on that one.

Wayne Johnson - Raymond James

Okay I look forward to that. Then on the first quarter conference call I asked a question about implementation rate and cycles and I guess my question is, you have some real big wins from the new card-issuing guys as it relates to the web based collections and that’s terrific. Did that take resources away from other online banking and bill pay and other type of enablement customers that you were looking to board?

Raymond Crosier

Wayne, this is Ray. Those business segments here at online are segregated so the folks that support the eCommerce implementations are different from those that support the banking, so we’ve got two teams, absolutely laser like focused on getting these clients live. I mean we’ve had several quarters in a row now where we’ve had significant sales and as I mentioned in my comments, the time frames have gotten dramatically shorter here most recently, but as you well know based on your model by the time you get to the middle of the year, if you’re just implementing in the third quarter you’re not going to affect 2008 to any great degree. You’re really going to see all that benefit in 2009, but —.

Wayne Johnson - Raymond James

Well can you give us a sense then of how many clients you’re looking to enable in the second half of the year and what that may mean both near and longer term?

Raymond Crosier

I don’t have an exact number of how many are in our implementation pipeline, I do know that the larger suite sales in the banking area, we got two more done here just this past month and in June and the first half of July we’ve probably got another two or three to go there and a fairly shown pipeline. Would that the pipeline continues to deliver in Q3, which we suspect it will, those are likely to come on at the very end of 2008 and the beginning of 2009.

The eCommerce side we’ve got, I think we’ve really got our arms around this now where we may not have had it two quarters ago, I think we’ve really go the focus of get things on and get them live certainly within the next 60-days so that we can have some impact in ’08, but again most of those are 2009 benefits that we’ll see.

Wayne Johnson - Raymond James

Okay, understood. Just one last question on ITS, in the third quarter to date are those volumes tracking within your expectations at this point with your new guidance?

Catherine Graham

The answer is yes.

Wayne Johnson - Raymond James

Okay and on the expedited bill payment, what are you guys expectations for 2008 for that service. Do you have lots of new outlets, what kind of ramp are you guys predicting?

Raymond Crosier

As a new product we don’t usually put a lot of almost anything into our expectations there, we just never know how quickly it will get it up and to what extend the product will take off or slowly ramp so we’ve been quite conservative in those numbers. Having said that we’re seeing some pretty good up tick in the first 2 ½ months of the product; we expect that trend will continue, so hopefully again it will be a 2009 play rather than a 2008. There is one other thing we need to do to help that along though and that is we need to continue to withstand our biller endpoint network while we’ve got some 200 laser billers, the kinds you would expect, mortgage, credit card, utilities etc… that we can deliver same day payments to. We really need to continue to expand that out, chicken and egg if you will, the more you have the more you’ll get kind of thing.

Catherine Graham

Wayne I’m going to jump in and answer the question that you asked previously as the hamsters have been cranking away back here. If we have not lost the departing clients that we’ve previously disclosed in the interim period, which actually are four of them between the second quarter of last year and the second quarter of this year, EBITDA growth would have been approximately 27% plus or minus a percentage point and that would have been about $0.03 to core earnings in this period.

Wayne Johnson - Raymond James

Okay and you said that EBITDA would have been 27% margin for the second quarter?

Catherine Graham

No EBITDA growth. You were looking at [interposing].

Wayne Johnson - Raymond James

EBITDA growth yes okay.

Operator

Your next question comes from John Kraft with D. A. Davidson & Co.

John Kraft - D. A. Davidson & Co

Back to the ITS side, you are calling it accounts receivable management and I’m sort of thinking that’s collections and I guess, correct me if I’m wrong, I would think that that business would be doing fairly well in this sort of environment. Aren’t there some cyclical opportunities that you’ve got there?

Raymond Crosier

It is collections on behalf of our armed clients and again, we like this business, it’s growing, but seasonally in the second quarter it declines. For example, you’re going to pay your utility bill in the first quarter and the utility bill might be large and then as it gets warmer utility bills might go down; so collections and last minute kinds of payments that are done by us, both in ITS and outside of ITS, this isn’t just ITS, that’s what affected the quarter. It wasn’t just collections.

With respect to our web based collections product our service that’s being launched, that of course is outside ITS and we’re really getting going with some of the bigger clients there. I’m not sure if that answers your question. We are bullish in terms of the soft economy and in terms of last minute payments as well as collections.

John Kraft - D. A. Davidson & Co

I guess I understand the seasonality that makes sense. I sort of had been hoping for maybe the cyclical trends to kind of overpower the seasonal trends and maybe there’s just a delay or I guess it is possible that ITS is losing share. Do you have any comments there?

Raymond Crosier

We do, we felt the same way, but in our forecast and in our guidance we figured there would be some seasonality. We’ve never been through a second quarter with ITS and it jus ended up being a mix of a lot of different things. If it were a simple silver bullet we’d let you know. So we’re feeling very comfortable with the trends in the business, with the yearly trends in the business and in fact built into our yearly guidance is again, as Cathy referred to before, consumer paid volume was higher than expected than the first quarter, lower than expected in the second quarter, but there’s almost a wash. They have really little to no impact on the full year forecast that we’ve made.

John Kraft - D. A. Davidson & Co

Changing directions specific to the bill pay in the banking transactions group, Jack Henry BBCd the losses there that specifically affected that market or that segment I thought were in Q3 and Q4 of last year, but it sounds like there was some lag into Q1 as well?

Raymond Crosier

The corporate network income, John in the remittance only they disappeared at the end of March. So frankly dependent, we realized that we’re confusing investors with all these cross trends. We apologize for that, but that’s where we are and you get under the covers. I think you’ll agree that the fundamentals look very, very good outside of all this year-over-year stuff and the sequential changes in the continuing client.

John Kraft - D. A. Davidson & Co

So Q3 will be the first quarter of clean metrics for every single one of these lost clients?

Catherine Graham

Actually it’s a little more confusing than that. We actually had the final two large client departures on our systems for the month of April, so we had them in the second quarter, we will not have them in the third quarter, but we’ll still be comparing to a prior year that has some differential in it.

Raymond Crosier

Remember Jack Henry left us in the end of third quarter beginning of fourth quarter.

John Kraft - D. A. Davidson & Co

I was thinking of sequential stuff.

Catherine Graham

The sequential stuff you will see, the third quarter to the fourth quarter will be absolutely clean. The second to the third will be a little easier.

Raymond Crosier

And by the way, the normal slides are posted on the web site for those of you who would like to see the sequential and year-over-year transaction growth.

John Kraft - D. A. Davidson & Co

One last question on DolEx, obviously a pretty intriguing deal that you guys are working here. Can you talk a little bit about who their current vendor is and how you expect to pick up some share in their walk up built there?

Raymond Crosier

Well we’re not picking up all the walk up business, what we’re picking up is those billers where we are the unique endpoint deliverer of those, so new ones added to their midst, it may be a more cost effective route for some other billers that we have on our biller endpoint network and the third boogie there is expedite it: consumers can actually walk in and say expedite it. Anecdotally it is very interesting. Can you believe that people walk into those locations and pay their American Express bill? They do, they do.

John Kraft - D. A. Davidson & Co

Is there a way to kind of judge or gauge the percent of the transactions moving through there that are with billers that you guys have direct links to?

Raymond Crosier

We can’t tell at this moment because there alive within the quarter, so as we’re watching the transactions ramps we’ll probably get a better feel for that, so a quarter or two down the road we can probably talk more about it.

I think what’s more interesting about it is it’s a whole new segment. So, I guess when you add up all of our clients we’re up to almost 10,000 retail locations; I just talked about three. It’s a whole market segment that’s outside of anything we’ve done before and here’s our opportunity to deliver our normal services: high quality bill payments and expedited payments through a channel that we’ve never touched before.

Operator

Your next question comes from Brett Huff - Stephens Inc.

Brett Huff - Stephens Inc.

Ray you were talking about various implementations that you all have done recently or expect in ’08. Can you just run through the big ones that are done and the big ones that you expect in ’08 so that we get a better sense of how those will contribute to ’09?

Raymond Crosier

Well in our full service suite sales we announce the NV as having gone live. There is another one whose name we have never used, so it’s very roughly a $4 or $500 million asset insufficient. They just went live on June 24. Provident went live probably a couple of weeks prior to that, so that ones done. We’ve got three other suite sales that have recently come in and probably three or four more that we’ve got in late stages that we hope to sign, so weighted let’s just say three of those will come. With any luck we’ll get those done within six months. The ones we currently have probably within three and the ones we don’t have in the six timeframes.

On the eCommerce side it’s almost the identical story. We’ve got some in the pipeline. We’ve talked about the, some of them have been announced in press releases, certainly the new web based collection ones just coming up now.

Again, we’re tickled to see, the first one took a long time, it went live in second quarter; the second one we signed it and got it live in 30-days; the third one came in just a week ago, it’s going up the last week of August, so I think we’ve got our arms around those and again pipeline is very, very strong. To the extent that we can get those closed early in Q3 I think we’ve got a shot of getting some of those live.

Matthew Lawlor

On those three credit card issuers, one that I’m thinking of we got live pretty rapidly. We’re very proud of the team up in Princeton for being able to do that. It was just 30 days between signing and implementation, but frankly it was just the one part of the issuer. The issuers part of a much larger banking institution and we will be deploying our collections beyond that particular segment that is now live and so there is a considerable amount of upside there and in essence there’s multiple implementation for some of these bigger clients.

Raymond Crosier

That’s right multiple portfolios behind that one client.

Brett Huff - Stephens Inc

Last quarter there was some purging by some of the big banks. Was there any of that going on this quarter or was that sort of truly a one time or a kind of perfect storm situation?

Raymond Crosier

I wouldn’t call it a one timer, all our clients, as well they should, and they’re managing to their bottom line just like we are. It is sharply down for the first quarter. There is none of that in the way it existed in the first quarter where in that sense it was a perfect storm. We had one client that went in and vigorously looked through some of the dormant accounts. Now ironically it turns out that we’re all looking at these dormant accounts, we and our clients and we now have an aggressive program to reawake those dormant end users and we’re starting to use it as an opportunity to increase adoption.

Bottom line we didn’t have much of that in the second quarter versus the first quarter and it’s kind of reached normalcy shall we say.

Brett Huff - Stephens Inc

Can you give us a little bit more detail on ITS, visa vie the revenue that was actually contributed last quarter/this quarter?

Catherine Graham

We don’t talk about that business segment and frankly it’s a little difficult at this point because it’s embedded in the eCommerce division so we no longer report it separately even internally.’

Brett Huff - Stephens Inc

The G&A run rate was better than we expected. Maybe we modeled it too high, but is there any reason that that should change sequentially?

Catherine Graham

No not for the remainder of the year I wouldn’t see it changing.

Brett Huff - Stephens Inc

Any change in sales cycles behavior?

Raymond Crosier

I wouldn’t say any change. That was a question last quarter and I said they were holding steady. Maybe they’ve gotten just a hair longer, but what’s a hair, I mean I’m talking about a month.

We analyze the pipeline quite extensively and it actually grew from Q1 to Q2, overall across the company 26%. Some of that may be a lag across March to April or something like that, but candidly I don’t think we’re seeing anything slow down.

Operator

Your next question comes from Joshua Jabs - Roth Capital.

Joshua Jabs – Roth Capital

Cathy can you repeat the revenue impact from the lower interest rates on the float?

Catherine Graham

Sure for what period do you want this?

Joshua Jabs – Roth Capital

For Q2.

Catherine Graham

About 300,000.

Joshua Jabs – Roth Capital

The partridge analysis toward the end of the last year had a big impact over the first couple of quarters of this year. Can you give us some additional color on what exposure there is in the remaining customer base and what the customer concentration looks like?

Matthew Lawlor

It looks pretty good. We really just put a stake in the ground through the balance of the year and we don’t see anybody coming off the platform in that time frame. We are quite optimistic over the following six months, but not ready to put the stake in the ground just yet there. We’ve got a couple of contracts that are being negotiated now and hopefully they get into fruition and we were feeling good about saying it. No clients are at risk for the next 12 months instead of the next two quarters.

We’re getting nice renewals and we feel pretty positive about that.

Ray you wanted to add something?

Raymond Crosier

In the concentration I still believe that we don’t have a single client that’s any higher than 35 of our revenue at this point in time.

Matthew Lawlor

About 2 ½ is the maximum.

Joshua Jabs – Roth Capital

Ray, I understand that the revenue contribution from the new products is likely an ’09 event, but have you looked at when you would expect to be able to release some metrics to help us get maybe an early gauge off?

Matthew Lawlor

We are betting strategically that new products can really be a driver for us. If we can’t give you some visibility in the third quarter we will in the fourth quarter. A lot of it gets tied into our budgeting. We appreciate your interest. Our interest is there too, but look it’s tough enough forecasting in this environment; for us to get ahead of ourselves would be the wrong thing to do.

We feel really good about our customizable internet banking software. That is doing great. We feel really good about the collections and the collections by the way, it’s a new product. We used to do very customizable, almost professional services like collections, now it’s ASP. Completely new product and more simplified, easier to launch and so forth.

Business banking is looking really good. Expedited payments are looking really good. The biller stuff that we’re doing, that expansion of the network, a number of big lock boxes signings there. We don’t mean to obfuscate, we’re just trying to be conservative here and not raise expectations, but perhaps we can give you a little bit more visibility in the third quarter so you can begin to look into 2009.

We will have something to say for sure in the fourth quarter.

Joshua Jabs – Roth Capital

It looks like you are able to manage your expenses on the lower revenue. I know on the last call there was some discussion about going back and looking at the cost structure during Q2. Did you get a chance to get all the way through that and can you quantify some of the changes that you are in the process of implementing?

Raymond Crosier

We did obviously, as we are starting to see the quarter unfold we did the right thing and that is we started managing our business for the numbers that we thought we were seeing. We really put those cost savings in three areas. I would say first we aren’t hiring as rapidly as our budgeted head count called for; however we are still growing our employee base, so we’re not going backwards. Second we took advantage of the fact that we had two extremely large expiring vendor contracts and that gave us the opportunity to consolidate the volumes from Legacy online and the volumes from two new acquisitions, Princeton and IPS. Then when we put those volumes together we were able to garner more favorable rates on a go-forward basis; there was significant savings in those two line items. And the third is we cut back on our discretionary capital spending. I think that’s just good fiscal responsibility. We take a look at where we are, we match our spending to the current size of the business and we move on.

Joshua Jabs – Roth Capital

Is there maybe like an annualized dollar figure that goes along with at least maybe number one and number three there?

Raymond Crosier

One and three, actually I could probably give you all three of them. There is probably five that’s a million three and this ones probably another couple, probably in the million five range, per year.

Operator

Your next question comes from Matt McCormick - FBR Capital Markets.

Matt McCormick - FBR Capital Markets

In terms of the lower guidance for the year, could you quantify or possibly give us an order of magnitude what the specific factors are, how much of an impact float is versus ITS versus the delay to ramp up the clients, versus the lost clients?

Catherine Graham

Absolutely, if you look to where the guidance that we have in May, we were sitting at revenue of $159.5 million and really the mid point of where we are right now is about $164.5. About $1 million of that is additional interest income float revenue that we’re not anticipating, because the spread between sort of the yield curve and what we’re actually earning has widened. About $2.5 million of that is on implementation of new sales, which are really delays on implementation of the new product that we are still getting experience on how to shorten those curves and about $1.5 million of the revenue piece is related to us being what I hope is a little conservative on those consumers paid volumes. If you translate that same thing to EBITDA we started May at $38 million and we’re working our way to $34.5 and in that case it’s about $1 million in float, $1.5 million on the new sales implementation delays and $1 million on the consumer paid volume.

o always remember the float is really dollar per dollar revenue to EBITDA and the other two are basically on what we would consider to be a reasonable incremental margin.

Matt McCormick - FBR Capital Markets

Matt, I guess big picture in terms of the overall economic environment it looks like the transaction volumes have been pretty strong. Can you talk about how susceptible the business model is to lower consumer activity or have you found that the demographic using your services are just more apt to use them in this type of environment?

Matthew Lawlor

We’re very sensitive to this and well we should be. We’re not seeing any fundamental changes in our underlying business and maybe it’s because first with our clients, the billers and the banks out there, we’re basically an operating expense, we’re not a capital expense and they’re pushing on the channel as outlined in my prior remarks using the [inaudible] so we’re seeing ingraftedness [ph] from biller clients and we’re seeing ingraftedness [ph] from our banking and credit union clients.

At the consumer level, clearly there are segments here that we don’t have our hands completely around. This whole seasonality of IPS we didn’t have our hands completely around. We knew it was going down, we just didn’t know where. But, overall I said back in, we haven’t seen in past economic cycles changes in bill paying patterns. Remember, we’re almost 20 years old here. We’ve been through some cycles. This isn’t completely new to us and we don’t see changes in banking based bill payments. Maybe they’re smaller, but I don’t see us being that open in that area.

Now in the last minute payment area, again some lack of predictability, but you’d think that last minute payments would go up with consumers being stretched and paying their bills at the last minute that collections might go up, so on balance we’re neutral, but I’d love to be more certain and I think we’re absolutely foolish if we don’t remain on our toes, keep on top of this, help out our clients. This is a chance for us to build market share, earn their trust and if the cycles down and we suffer for it, so be it. We’re around for a long time to come because we’ve been true to our mission.

Operator

Your last question comes from David Parker - Merrill Lynch.

David Parker- Merrill Lynch

Some banks are considering the idea of incorporating debit and credit cards into their online bill payment systems. Can you just update us on your status for that type of product and are you seeing any demand for that type of product?

Matthew Lawlor

Not really. We do hear it from some of our clients and we’re prepared to do it, there are partnerships, there are other ways for us to do this outside of partnerships, but we haven’t seen a big surge of demand for that.

Stepping back most community banks and credit unions don’t issue credit cards. They might have signature debit cards, there is some interest, but they aren’t big credit card issuers, so you wouldn’t think that there would be a big surge in demand from the community banks.

We do hear it from some of our bigger financial institutions, but even there, there are questions, while they love the interchange rate, there are questions on the quality and the serviceability sometimes of credit cards, or signature debit based payments.

We haven’t heard a big loud demand from our clients at all, but we do every once in awhile hear about it and we’re prepared to implement it if it ends up being something we need to do.

David Parker- Merrill Lynch

If you make that decision it sounds like you would do it through a partnership rather than developing your own technology?

Matthew Lawlor

It could go either way; it really depends on where we are with our development staff, what other priorities are and what kinds of relationships. There are multiple places to be able to do this. There are various partners. We just haven’t seen the demand yet there so we haven’t really spend a lot of time on it. We’re spending the time on things like expedited payments, which immediately drop to the bottom line. It’s a known service that seems to be pretty well received so far and that’s where the banks want us to spend time.

David Parker- Merrill Lynch

From a high level, Matt, can you just address the competitive landscape. Any changes you might have seen or is it just kind of status quo over the last few months?

Matthew Lawlor

I think its status quo, to give a lot of respect to Pfizer. We see that they are doing a pretty good job at assimilating check free; they’re making progress. We do hear from some of our smaller clients on the check free option. That’s not to say that we don’t have some very, very strong relationships there in the contracts and we’re not seeing any change in the loyalty of those clients on digital insight which had its integration with Intuit, it’s still a fine company. They are dealing with launching a new product in the third/fourth quarter and it’s too soon to say whether that’s something that we should be all over or not. We do have a capability already to say, which does what they want to do, but we have great respect for Intuit and what they can do and we’ll have to see.

Bottom line we don’t see any big changes because of M&A. If there is anything that I do want to communicate about, it is that the underlying tenant that we have had for the last year is that we are in fact advantaged I this environment, not disadvantaged because of the integrations and the loss of focus and the diffusion that you get when somebody dedicated to the web channel gets acquired by somebody who is much more diversified with multiple objectives. We’re seeing that reflected in the big increase in the sales that we’ve had, I think across the board in eCommerce as well as banking. It’s our ability to focus on both the scale and the agility and the ability to be closer to our clients and focus on this challenge. It gives us a huge advantage and I think you’re seeing it show up in the sales.

Matthew Lawlor

With that I would like to thank everyone for participating in our call. I will now turn it over to Beth for 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 forecasted growth and online resources customer base, increases in the transactions being processed by customers and growth in 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 other similar words that signify forward-looking statements.

I encourage you to review Online Resources detailed periodic filings with the Securities and Exchange Commission for a full disclosure of risks and uncertainties.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Online Resources Corporation Q2 2008 Earnings Call Transcript
This Transcript
All Transcripts