CyberSource Q3 2007 Earnings Call Transcript

| About: CyberSource Corp. (CYBS)
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CyberSource Corp. (CYBS) Q3 2007 Earnings Call October 18, 2007 4:30 PM ET

Executives

Steve Pellizzer - Chief Financial Officer

Katrina Rymill - Director of Investor Relations

Bill McKiernan - Chairman and Chief Executive Officer

Analysts

Glenn Green - CIBC World Market

Colin Gillis - Canaccord

Barry Prestopino - Barrington Research

Gil Luria - Wedbush

Andrew Jeffrey - Suntrust Robinson Humphrey

Franco Turrinelli - William Blair & Company

Tom McCrohan - Janney Montgomery Scott

Jason Luther - Raymond James

Robert Dodd - Morgan Keegan

Terry Babe - Think Equity Partners

John Mata - Needham and Company

David Scharf - JMP Securities

Chip Cruz - Greenville Capital

Sam Chase - Stephens Management

Operator

Good afternoon. My name is Chris, and I will be yourconference facilitator today. At this time, I would like to welcome everyone tothe CyberSource Third Quarter Earnings Teleconference. All lines have beenplaced on mute to prevent any background noise. After the speakers' remarks,there will be a question and answer period (Operator Instructions).

Thank you. I would now like to turn the call over to Mr. StevePellizzer, Chief Financial Officer. Sir, you may begin.

Steve Pellizzer

Thanks, Chris, and welcome to CyberSource's Third Quarterconference call. I want to take this opportunity to introduce Katrina Rymill,our new Director of Investor Relations, who will be taking over as thededicated point of contact for analysts and investors.

Bruce Frymire, who has been serving in this capacity, willnow focus his efforts entirely on CyberSource's Public Relations. I'd like tothank Bruce for his efforts with Investor Relations over the past several yearsand I would also like to take this opportunity to welcome Katrina.

So now, let me turn it over to Katrina.

Katrina Rymill

Thanks, Steve. During this call, we will discuss ourfinancial results for the Third Quarter of 2007. If you have not received thepress release summarizing our Third Quarter results, it's available atwww.cybersource.com. These prepared remarks will run for approximately 20minutes and then we'll open up the call for Q&A.

And before we start, I need to alert you to our Safe Harbor provisions. During the course ofthis teleconference, we will make certain forward-looking statements regardingour business and results of operations.

Statements made today that are not purely historical, areforward-looking statements, within the meaning of Section 27A of the SecuritiesAct of 1933 and Section 21E of the Securities Exchange Act of 1934, includingwithout limitation, statements regarding the Company's expectations,objectives, anticipations, plans, hopes, beliefs, intentions, or strategiesregarding the future.

Such forward-looking statements include, those relating toboth the merchant acquiring business, gaining customer attraction across thevariety of industries and market segments, momentum outside of the U.S., BidPay benefiting from ourpartnership that could provide more marketing muscle.

Financial guidance including, without limitation, thoseregarding revenue, transaction volume, gross profit, operating expenses, netincome, earnings per share, deferred tax assets and cash balance, strength ofthe Company’s financial performance in the Third Quarter, transactions withdomestic and international customers, highlighting the value that the companybrings to global eCommerce market.

We wish to caution you that such statements are justbeliefs or predictions, and that actual results might differ materially fromthose projected in any or all of the forward-looking statements. Thesestatements are also subject to risks and uncertainties, including, but notlimited to the following.

Changes in customer requirements; potential financialrisks relating to the Company's global acquiring business; changes in generaleconomic conditions and e-commerce in particular; changes in legal requirementsand litigation arising from time to time; unforeseen technical difficultiesrelating to the Internet in general or our technology in particular; potentialsystem failures, including, without limitation, disruptions intentionallycaused by third parties; and the intense competition in our industry and theneed for rapid technological change associated with such competition.

Further, CyberSource's past financial business operationsand stock performance are not necessarily indicative of CyberSource's futureperformance. Listeners are referred to the documents filed by CyberSource withthe SEC, specifically Form 10-K filed on March 13, 2007, covering the one-yearperiod ended December 31, 2006, and our quarterly reports filed on Form 10-Qfrom time to time, all of which include these and certain other important riskfactors.

Lastly, with respect to the Authorize.Net acquisition,because shareholder approval is still pending, we will not discuss thetransaction in detail during today's call. For information regarding thisacquisition, please refer to the registration statement on Form S-4, filed withthe SEC on September 17th 2007, which contains a definitivejoint proxy statement perspective in connection with the proposed merger.

And now, let me introduce Bill McKiernan, Chairman andCEO.

Bill McKiernan

Thanks Katrina and let me also welcome you to the team. Weare delighted to have you. Good afternoon everyone and thank you all forjoining us. It's a pleasure to welcome you to our Third Quarter 2007 earningscall. In the quarter, we achieved new milestones from a customer, product andfinancial perspective. We generated record revenue of $26.5 million during thequarter, a 53% increase over the same period last year, and a 16% sequentialincrease.

As with last quarter, our growth was driven primarily byour transaction processing and merchant acquiring offerings. Transactionrevenue represented 94% of our total revenue for the quarter and grew 57% overlast year.

During the quarter, we processed a record 287 milliontransactions, a 41% increase over last year and up 7% sequentially. Weprocessed an average of 3.1 million transactions per day during the quarterversus an average of $2.2 million a year ago. The value of the transactions weprocessed was approximately $11.9 billion, up 40% over the same quarter lastyear.

CyberSource's global acquiring business generatedapproximately $12 million of revenue in the quarter, up 105% over the sameperiod last year. We added approximately 150 new acquiring customers during thequarter and now service over 1800 global acquiring customers. Merchant acquiringservices continue to be a major driver of growth for CyberSource and nowrepresent about 45% of our total revenue.

CyberSource's Third Quarter net income on a GAAP basis was$347,000 or $0.01 EPS, a 21% increase compared to 286,000 or $0.01 EPS in the ThirdQuarter of 2006. Because these results include significant non-cash charges,such as stock option compensation and non-cash tax expenses, we also providenon-GAAP financial metrics. Steve will provide a more detailed explanation ofGAAP versus non-GAAP in a moment and we also reconcile GAAP and non-GAAPmetrics in the press release.

This quarter non-GAAP net income was $3.5 million or $0.09per share, a 57% increase compared to $2.2 million or $0.06 per share in thesame period last year. This quarter's results include, approximately $800,000in losses, attributable to BigPay or $0.02 per share.

We continue to gain customer attraction across a varietyof industries and market segments. This quarter, we added approximately 2,000new customers, bringing our installed base of customers to about 22,000. Newcustomers added this quarter include, BeachCamera, Diane von Furstenburg,Magellan Navigation, Perry Ellis, Silversea Cruises, Tibco Software andUnderwriters Laboratories.

Existing customers that added new services or renewedagreements during the quarter include, Cornell University, Holland-AmericaWestours, Intel Corporation, JC Penny and Kodak Imaging Network.

We continue to see significant business momentum outsidethe U.S. CyberSource now enables customers to offer more than 25 differentpayment types, and in this quarter we processed transactions in over 65different currencies.

CyberSource's European operations, contributed a record55.1 million transactions this quarter, an increase of 62% over the same periodlast year and approximately 19% of our total transaction volume. Our Europeanbusiness represents about 10% of revenue.

Our strategy is to expand globally by helping merchantsadapt to local payment and risk requirements around the world, and vertically,by deepening our solutions for specific high growth industries. An example ofthis vertical approach is our recent enhancements design for the airlineindustry.

This quarter, we launched an airline specific payment anda risk solution. We are building on our growing experience in this market as wenow have more than a dozen airlines as customers. We recently announced thatJet Airways of India is using CyberSource Decision Manager and is the firstairline in India to implement an automated onlinefraud management solution.

CyberSource Decision Manager evaluates transactions inreal time and based on a rules model, customized by Jet Airways andCyberSource, the airline is able to automate the process of determining whetherthe online ticket purchase should be accepted, rejected or reviewed. JetAirways selected CyberSource's Decision Manager based on the product's provenflexibility, reliability and CyberSource's reputation in the payment and riskmanagement areas.

Another international win this quarter was with a major U.S. clothing retailer that isexpanding its online store to Europe. CyberSource will be providing core gateway processing,acquiring services and managed risk services to this customer.

This is CyberSource's first European customer for managedrisk. CyberSource's managed risk solution is an outsourced risk service, wherewe work with customers to not only define their risk management goals anddesign and implement solutions, but we also manage their order acceptance processes.

During the quarter, we announced a partnership with NetSuite,a major vendor of ERP, CRM and other applications. NetSuite has integratedsupport for CyberSource's global payment acceptance services, risk managementsolutions and payment security services, giving NetSuite customers a strong setof integrated payment tools.

As merchants develop advanced eCommerce websites, usingthese applications, integration with these technology partners is important toCyberSource in order to provide a built-in payment solution for customers.

BidPay made progress this quarter. BidPay has acquiredapproximately 483,000 customers since its launch in June of 2006, up from410,000 at the end of the Second Quarter. 55,000 sellers have registered withthe company, up from 49,000 at the end of the Second Quarter. BidPay exited thequarter linked to over 500,000 E-Bay listings.

At the end of quarter, BidPay launched the BidPay API,which allows third party auction services providers and individual sellers tooffer BidPay as a payment option inside their checkout pages.

While we are pleased with the progress BidPay has made,especially on the product side, we believe BidPay could benefit from apartnership that could provide more marketing muscle, and therefore, we are currentlyin discussions with potential partners. Now, I'll ask Steve Pellizzer toprovide more details on the financials.

Steve Pellizzer

Thanks, Bill. As Bill mentioned, our Third Quarter revenuewas $26.5 million, $2.7 million higher than our guidance of $23.8 million.Transaction processing revenue was $25 million, $2.6 million higher than ourguidance of $22.4 million. Included in transaction processing revenue, wasapproximately $120,000 generated by BidPay.

The over performance in transaction processing revenue wasin part, from gateway services of the 287 million transactions that weprocessed, exceeded our prior guidance for the Third Quarter of 270 million to275 million, and also from a new customer that had signed earlier in the yearfor gateway and domestic merchant acquiring services.

Revenue generated from this customer during the quarterwas approximately 11% of total revenue. In addition, global acquiring revenueincreased to $12 million during the quarter, a 31% increase from the SecondQuarter and now represents approximately 45% of our total revenue.

It is important to note that our global acquiring revenuemay also include fees generated from gateway services, as it is becoming morecommon to quote the customer a bundled price for services provided.

Enterprise software revenue was $700,000,$100,000 higher than our guidance of $600,000, while processional servicesrevenue was $900,000 also $100,000 higher than our guidance of $800,000.

Overall, approximately 55% of our total revenue growthcompared to the Third Quarter of 2006 was generated from new customers, whilethe remaining 45% was generated from existing customers.

During the quarter, we added approximately 2,000 newcustomers on a growth basis, compared to 1600 new customers in the ThirdQuarter of last year and we added approximately 1400 customers on a net basis,compared to 1200 net new customers in the Third Quarter last year.

Our gross profit on a GAAP basis of $11.5 million was $1million higher than our guidance of $10.5 million.

Operating expenses on a GAAP basis for the Third Quarterwere $11.8 million compared to guidance of $12.4 million.

As we noted during our July conference call, included inoperating expenses on a GAAP basis, is approximately $900,000 in integrationcosts related to our acquisition of Authorize.Net.

GAAP net income for the Third Quarter was $300,000,compared to guidance of a net loss of $800,000 and fully diluted earnings pershare on a GAAP basis, was $0.01 higher than prior guidance of a loss per shareof $0.02.

Non-GAAP net income was $3.5 million or $0.09 per share,higher than guidance of $2.2 million or $0.06 per share.

Our cash and short-term investment balance increased to$60.1 million. The company used approximately $4.7 million to repurchase390,400 shares of its common stock during the First Quarter.

The company also generated approximately $1 million incash from employee stock option exercises. Cash flow from operating activitieswas $5.2 million during the three months ended September 30th, compared to $3.4million during the same period last year.

In addition, our DSO was 37 days, below our internaltarget of 50 days.

Capital spending for the Third Quarter was $2.7 million,higher than prior guidance of $1 million to $1.5 million expected for the lastsix months of 2007. The increased capital spending was due to the addition ofhigh end server capacity in anticipation of increased transaction volumes,processed in the Third Quarter and expected increased volumes in the FourthQuarter.

Now, I will give you some detailed guidance with regard toour expected future performance.

In light of SEC fair disclosure, this forecast which ismade in good faith and is based on all the market information we have availabletoday, will be the only numbers that the company will comment on, going forwardor until updated by the company. We also assume no duty to update these numbersat any time.

Given our acquisition of Authorize.Net is still pendingshareholder approval and has not yet closed, the guidance that I am about toprovide is for CyberSource on a stand-alone basis.

Upon receiving shareholder approval from both CyberSourceand Authorize.Net shareholders, we will schedule a follow-up conference call,after the closing of the transaction to review Fourth Quarter guidance on acombined basis.

We expect revenue in the Fourth Quarter to be $31.5million. We expect transaction and support revenue to be $30.4 million, whichincludes $1 million expected to be generated from BidPay. We expectprofessional services revenue to be $700,000 and enterprise software revenue tobe $400,000.

We currently estimate transaction volume in the FourthQuarter to be between $340 and $345 million. We expect gross profit to be $13.2million during the Fourth Quarter. We expect total operating expenses for the FourthQuarter to be approximately $11.3 million.

We expect our non-GAAP net income, our non-GAAP tax rateto be approximately 4%.

Currently we expect to record net income in accordancewith GAAP in the Fourth Quarter of $1.7 million and earnings per share of $0.04,based on a weighted average share count of 38 million shares.

We expect non-GAAP net income for the Fourth Quarter to be$4.7 million and non-GAAP earnings per share to be $0.12 cents on a weightedaverage share count of 38 million shares.

Capital spending for the Fourth Quarter is expected to bebetween $500,000 and $1 million. Based on the updated guidance for the FourthQuarter, we are increasing our guidance for revenue for 2007.

We expect total revenue for 2007 to be $103.1 million. Netincome in accordance with GAAP for 2007 is expected to be approximately $2.9million or $0.08 per share on a weighted average share count of 38 millionshares.

Keep in mind that included in 2007 net income was,approximately $900,000 of integration consulting costs during the Third Quarterthat hadn't been included in the guidance we provided earlier in the year.

Non-GAAP net income for 2007 is expected to be $13.6million or $0.36 per share based on a weighted average share count of 38million shares.

Our guidance for the Fourth Quarter in 2007 does not takeinto account any further reductions in our evaluation allowance against othertax assets, which could result in a tax benefit during the period of thereduction. We will continue to evaluate whether a further reduction isappropriate.

I will now return the call to Bill for his concludingremarks.

Bill McKiernan

Thanks, Steve. So this has been a great quarter forCyberSource, with significant progress across the business, resulting in verystrong financial performance. Our attraction with both domestic andinternational customers highlights the value we are bringing to the globaleCommerce market.

Finally, we are very excited about our pending acquisitionof Authorize.Net. Last month proxy statements were sent to stockholders of bothcompanies, and stockholder meetings are scheduled to take place on October 23rdin Mountain View for CyberSource, and on October 25th in Marlboro,Massachusetts for Authorize.Net.

Shortly after the closing, we will provide revisedguidance on our expected Q4 results, which will include the combined results ofboth CyberSource and Authorize.Net.

So with that, operator, we'd be happy to take anyquestions.

Question-and-AnswerSession

Operator

(Operator Instructions) And your first question is fromGlenn Greene with CIBC World Market.

Glenn Greene - CIBCWorld Market

Thank you. Good afternoon, guys, a nice quarter.

Bill McKiernan

Thank you, Glenn.

Steve Pellizzer

Thanks Glenn.

Glenn Greene - CIBCWorld Market

I just want to get a clarification on the BidPaysituation. You read the press release, it says that you are looking atstrategic alternatives and you talked about pursuing partnerships. Can you justhelp us a little bit with what the real thinking is here? Where you are planningon going?

Steve Pellizzer

Yeah, Glenn, I don't want to say too much about it becausewe are in discussions right now, but I think it's apparent that while BidPayhas done a lot on the product side, we feel like creating a partnership with alarger company that can provide some additional marketing muscle, would allowus to get to critical mass more quickly with that business, and so that is ourintent.

Glenn Greene - CIBCWorld Market

So we should not read into this that you're looking tosell the company?

Steve Pellizzer

You know, I think we are approaching the discussions withan open mind.

Glenn Greene - CIBCWorld Market

Okay. That's fair. Then the transaction growthacceleration was about 6.6%. A large part of that was this big new customerthat ramped, is that fair, Steve?

Steve Pellizzer

Yeah, that's correct.

Glenn Greene - CIBCWorld Market

And do you have a sense what the transaction growth wouldhave looked like without that customer?

Steve Pellizzer

I think, we still would have thought for a similar growth thatwe have seen in previous quarters.

Glenn Greene - CIBCWorld Market

Couple of percents, sequentially?

Steve Pellizzer

Correct. Obviously, this customer had a significant impactfrom both the revenue and volume perspective. The volumes were strong across theBoard so…

Glenn Greene - CIBCWorld Market

Okay and then the acquiring revenue grew even quicker thanit's been growing, especially growing off of a bigger base. That explains yourrevenue per transaction left as well, but anything that came about in thequarter? Any disproportionately large customers or anything like that, since it’sclearly a pretty big acceleration sequentially in the acquiring revenue.

Steve Pellizzer

Well, there's one customer that we mentioned, both thegateway and acquiring customer.

Glenn Greene - CIBCWorld Market

Okay.

Steve Pellizzer

So that contributed to both the increase in volume that wesaw, as well as the increase in acquiring revenue.

Glenn Greene - CIBCWorld Market

Okay. I'll leave it at that and open it up for otherpeople. Thank you.

Steve Pellizzer

Thanks, Glenn.

Operator

Your next question is from Colin Gillis with Canaccord.

Colin Gillis -Canaccord

Good afternoon, everyone.

Steve Pellizzer

Hi! Colin.

Colin Gillis -Canaccord

Great results.

Steve Pellizzer

Thank you.

Colin Gillis -Canaccord

So Bill, just looking at the acquiring additions, that hasbeen running around that 150 number, looking out into 2008, on a standaloneCyberSource basis, is that the right number to be thinking about?

Bill McKiernan

Yeah. Colin, as we have talked about on previous calls,not all customers are created equal, and so I think one of the things that wefeel particularly good about this quarter is the quality of some of thecustomers that we signed during the course of the quarter.

150 is good, but we also got a pretty strong attach rates,particularly in the mid market, where we signed about 25 acquiring customers inthe mid market segment, which is a good strong number for us.

Colin Gillis -Canaccord

Yeah. I guess, actually this quarter definitely proves thepoint that not every customer is equal.

Bill McKiernan

Correct.

Colin Gillis -Canaccord

On the U.K. side, that business continues to do well, anythoughts in terms of what you need to do from a leadership angle there?

Bill McKiernan

Yeah. Actually, one of the things that we talked aboutthroughout the year is our desire to be able to offer merchant acquiringoutside the U.S, and really, the biggest thing required to do that is to have afinancial sponsor that would allow us to offer merchant accounts in Europe.

Both Scott Cruickshank, our COO and Mike Walsh, our SVP ofSales have been over in Europe meeting with potential financial institutionsthat would act as our sponsor over there and we feel good about thosediscussions and we would like to be able to offer that in 2008.

We think that would be a big driver for even furtheracceleration of our revenue outside the U.S, because keep in mind while theU.K. business has been growing nicely, they're doing it in a gateway onlyoffering.

So by layering on top of their existing offering, gatewayonly in fraud, by layering on top of those offerings, merchant accounts, wethink that is a powerful combination, just as it has been in the U.S.

Colin Gillis -Canaccord

Are you thinking about ramping senior management 26:56 or do you want tomanage that process out of Mountain View?

Bill McKiernan

No, it would be managed through our U.K. leadership team.We feel good about that team. We've got Scott and Mike here, just helping ongetting the sponsorship agreement in place.

Colin Gillis -Canaccord

And just one quick one for Steve, headcount addition fromthe quarter?

Steve Pellizzer

Yeah, we added about eight. So the total at the end of thequarter was about 293.

Colin Gillis -Canaccord

Great, thank you.

Steve Pellizzer

Thanks, Colin.

Operator

Your next question is from Barry Prestopino withBarrington Research.

Barry Prestopino - BarringtonResearch

Can you hear me?

Bill McKiernan

Hi, Barry.

Barry Prestopino - BarringtonResearch

How are you?

Bill McKiernan

Good.

Barry Prestopino - BarringtonResearch

Bill, can you comment, a couple of conference calls ago,you said you were building gateways into Latin and South America. Have youcompleted that now and are you getting any business out of those regions of theworld?

Bill McKiernan

Yeah. We've got one into Brazil now that handles thebiggest single market down in that area and that was really driven by customerdemand. We had some customers who wanted to penetrate that market so we builtthat. That is operational.

I think we've talked about our connection to CitibankIndia. We've got OmniPay into Ireland and so those are probably the three biggestinternational gateways that we've rolled out this year.

Barry Prestopino - BarringtonResearch

Okay. What are you doing in China, anything at this point?

Bill McKiernan

Yeah. So China is another big opportunity. And thereagain, we're finding that our customers are driving us to accelerate ourefforts there. We've got at least one customer who's a major global sponsor ofthe Olympics.

So they want to be up and running in time for the Olympicsnext year in Beijing. So we expect that we'll absolutely have some connectionsin place in early ‘08 to support the Chinese market.

Barry Prestopino - BarringtonResearch

Are you like with Citibank India, are you going in therewith a bank as a channel partner?

Bill McKiernan

Well, it varies. In China, it's not a financialinstitution per se, but it's a company that we believe has the rightconnections into the various banks. China is more of a debit-oriented society,not unlike some European countries like Germany and so it's really requiredthat we connect into a whole bunch of banks in order to support those debitproducts.

Barry Prestopino - BarringtonResearch

Thank you.

Operator

Your next question is from Gil Luria with Wedbush.

Gil Luria - Wedbush

Thank you. Good afternoon.

Bill McKiernan

Hi, Gil.

Gil Luria - Wedbush

Hopefully you can provide us a little bit more detail onthis very large customer. Is this a new customer? The numbers that you aretalking about, that’s probably a million transactions just from that customerat the least.

How did you get this customer? Is it through a reseller?Is this the same one? Is it the same customer that you were talking about goinginto Europe would you? Could you provide a little bit more detail?

Bill McKiernan

What we can tell you is the customer's industry. They area billing aggregator. They're customer that we signed earlier in the year. Wejust saw a dramatic increase in their volume here in the Third Quarter.

I can’t provide too much more in the way of the specifics,because we've got legal requirements with our customers that we can’t share toomuch information.

Gil Luria - Wedbush

Can you say when during the quarter did that increasestart or when did that acceleration happened?

Bill McKiernan

Yeah, the acceleration happened really in early August.

Gil Luria - Wedbush

Okay. BidPay, did you say what the revenue was for BidPayin the quarter?

Bill McKiernan

Yes, it was approximately $120,000.

Gil Luria - Wedbush

Thank you very much.

Bill McKiernan

Thanks Gil.

Operator

Your next question is from Andrew Jeffrey with RobinsonHumphrey.

Andrew Jeffrey - RobinsonHumphrey

Hi, good afternoon.

Bill McKiernan

Hi, Andrew.

Andrew Jeffrey - RobinsonHumphrey

Bill, I’m sorry. I just want to make sure I understand anddrill down on this billing aggregator. Did I hear you right? You said it was11% of total revenues in the quarter.

Bill McKiernan

That’s correct.

Andrew Jeffrey - RobinsonHumphrey

Okay. So Steve, is it safe to assume that the pricing onthis customer is higher than your blended revenue per transaction because it’san acquiring customer as well as a gateway customer?

Bill McKiernan

From a revenue perspective, yes.

Andrew Jeffrey - RobinsonHumphrey

Okay, alright. So any, directionally how much higher than that$8.7 revenue per transaction, reported this quarter.

Bill McKiernan

Well, if you go back to the acquiring model, where we arecharging a percentage of the value of the transaction, a typical merchant thatmay be processing a $100 order, we are typically charging them $2.50, so theyare about, in recording about $0.50 of gross profit.

Andrew Jeffrey - RobinsonHumphrey

Okay.

Bill McKiernan

So in this case, they are 11% from a revenue perspective. Froma gross profit perspective, obviously it is much lower than that.

Andrew Jeffrey - RobinsonHumphrey

Right. Now, I understand. Okay, that’s helpful, than you. Then,when you look at the competitive environment currently with respect to thepipeline and new business adds, this is obviously a disproportionate customer. Canwe expect that you might be adding similar customers of this magnitude, morebullish on that when you combine with Authorize.Net or is this truly a one-offevent?

Steve Pellizzer

Well, I think, we certainly want to expand our penetrationof the market with our acquiring offering and we’ve been working hard to moveup market. I don't think we have any other deals in the pipeline that are quiteas comparable in the near-term.

But certainly, we've got discussions going on with somevery large merchants, where we think our acquiring offering is prettycompelling, and as I mentioned earlier, our attach rates in the mid marketsegment this quarter were very strong.

Andrew Jeffrey - RobinsonHumphrey

Okay. Then finally, with regard to just the expense andoverhead, investments, it looks like maybe you didn't spend quite as much onpersonnel infrastructure this quarter as you might have anticipated. Is that atiming issue? Does that get pushed into the Fourth Quarter? How does that fitwith some of the expense savings you plan to gain from Authorize.Net?

Bill McKiernan

Yes, from a hiring perspective, we didn't come in asplanned. Although, as I mentioned in the last call, our hiring to the most partwas really front end loaded this last year. We do have some hiring that westill want to do in Q4, some replacement positions and some new hire positions.

So it still continues to be a focus area. My expectation inQ4 tends to be a difficult quarter for hiring, but my hope is we can fill someof these positions before the end of the year.

Andrew Jeffrey - RobinsonHumphrey

Great, thanks a lot.

Bill McKiernan

Thank you.

Operator

Your next question is from Franco Turrinelli with WilliamBlair & Company.

Franco Turrinelli - WilliamBlair & Company

Hi, Steve, real simple question. Do you have the processedvolume in the acquiring business?

Bill McKiernan

We have had the dollar volume, but we mentioned thatalready…

Franco Turrinelli - WilliamBlair & Company

Well, you gave us the total, right, which is $11.9 billionfor all transactions as well as you just had the acquiring revenue?

Bill McKiernan

I do not.

Franco Turrinelli - WilliamBlair & Company

Okay. Thanks.

Bill McKiernan

Thanks Franco.

Operator

And your next question is from Tom McCrohan with JanneyMontgomery.

Tom McCrohan - JanneyMontgomery

Hi, guys.

Bill McKiernan

Hi, Tom.

Tom McCrohan - JanneyMontgomery

How soon after the, assuming you got the approval at theshareholder meeting next week, how soon after that should we expect thatconference call with the updated guidance for the full year?

Bill McKiernan

Assuming that we get shareholder approval, we are lookingto close the acquisition on November 1st. So it would be shortly thereafterthat we would issue a press release and schedule the call.

Tom McCrohan - JanneyMontgomery

Okay. Surely there are other things and not to nail youdown on a day and I know you've got a lot of moving parts here, but I wouldthink that's the following week or by the end of the month?

Steve Pellizzer

It’s probably the second week, somewhere between the 7thand 15th something in that time frame.

Tom McCrohan - JanneyMontgomery

Okay. Cool. Thank you. And in case of BidPay, you gave usthe operating loss for the quarter. Was that for a total operating loss or wasthat the gross profit loss?

Steve Pellizzer

No, $800,000 is the total operating loss.

Tom McCrohan - JanneyMontgomery

Total operating loss, okay, and you still expect that BidPaywill, although the trend and the quarterly trend has been on the revenue sidedown, you still expect it to be $1 million in revenues in Q4?

Steve Pellizzer

That's correct.

Tom McCrohan - JanneyMontgomery

What would drive that ramp up in Q3 to Q4?

Steve Pellizzer

Yeah, we talked in the previous call back in July aboutsome of the third party integrations that we're building or have built in Q3.So that's what's driving some of the growth that we are expecting in the FourthQuarter.

Tom McCrohan - JanneyMontgomery

Okay. Thank you, guys.

Steve Pellizzer

Alright, thank you.

Operator

Your next question is from Wayne Johnson with RaymondJames.

Jason Luther - RaymondJames

Good afternoon. Jason Luther in for Wayne, how are you?

Bill McKiernan

Hi, Jason.

Jason Luther - RaymondJames

First question; the operating income or loss from BidPay (inaudible)expecting for 2007, are we still expecting to break even in December?

Steve Pellizzer

For Q4, we are expecting about a $200,000 loss.

Jason Luther - RaymondJames

Okay.

Steve Pellizzer

We are still looking at what the ramp's going to be, goinginto 2008.

Jason Luther - RaymondJames

Okay. That's helpful. On that Fourth Quarter guidance, isthere anything in particular pulling that down, it was a little lower than youwere hoping for?

Steve Pellizzer

In terms of EPS?

Jason Luther - RaymondJames

Correct.

Steve Pellizzer

We did see a stronger Q3 than we originally guided to orexpected and so there is some added investment in Q4 just in anticipation ofthe growth that we are expecting in 08. There is also some additional hiring inQ4 with regard to impending acquisition with Authorize.Net.

So there were some key positions, for instance on theCyberSource side that we were looking for fill, one of which is Katrina'sposition as the director of I.R., that we are looking to fill early next yearand accelerate that position, given the magnitude of the companies for a postcombination.

Jason Luther - RaymondJames

Excellent, thank you. One final question, did foreignexchange favorably impact the quarter and if so, by how much?

Steve Pellizzer

I don't think it was that big of a change versus priorquarters. Obviously, the U.K. Pound and Euro is very strong versus the dollar,but I don't think there was really a significant change versus Q3.

Jason Luther - RaymondJames

Okay. That was all. Thank you.

Steve Pellizzer

Alright, thanks.

Operator

Your next question is from Robert Dodd with Morgan Keegan.

Robert Dodd - MorganKeegan

Hi, guys, several questions, a couple of short ones andthen a couple of longer ones, if I can fit them in. You mentioned expanding theairline products that talked about gateway (inaudible). Just to clarify, areyou considering getting into the acquiring business for airlines or stayingaway from that?

Bill McKiernan

No, we're not considering that Robert, but it’s reallyjust a gateway and fraud management only offering.

Robert Dodd - MorganKeegan

Okay. Good. On the billing aggregator side, this largecustomer, I know you can only say so much, but with an acceleration in Q3, isthere any risk that this was a one-time blip with consumers getting squeezedand paying utility bills and mortgage bills and things like that on theircredit cards, and that was going to, well, hopefully if the consumer doesn'tget bankrupted, we'll see a shift to a more normal consumer bill pay patternand maybe some of these transactions go away?

Bill McKiernan

Well, I'm not an economist, but I don't think with thisparticular merchant that there is that risk. Obviously, there is a risk anytimeyou have a major customer, but I don't think there is any seasonality oranything particularly tied to consumer spending in this case.

Robert Dodd - MorganKeegan

Okay. On the BidPay side, I have put you on the spot again.Can you give us the gross profit, loss or profit in the quarter and then justclarify a position for, as you said you expect a loss in Q4 and you are stilllooking into 08. If I remember right, previously you said if there wasn'tbreakeven by the end of the year, you'd be shutting it down. Can you justclarify the position there and the gross profit?

Steve Pellizzer

Yeah, I can clarify on the gross profit. We're expected tobe about 50k to the negative in Q4 and then I'll let Bill comment on…

Bill McKiernan

Yeah, on the second question Robert, so we are indiscussions now with a potential, well, a number of potential partners and so Ithink we'll hold any further comment until those discussions are concluded.

Robert Dodd - MorganKeegan

Okay. Then one final question if I can? On the Europeanside, a big acceleration in transactions, Q-2 to Q-3, a very good performancethere, is there anything you've done on the sales side or to add to that or isthat just selling out with product set, and are you doing anything forward onthe, you know, to expand your sales capabilities over there?

Bill McKiernan

Yeah. We are investing in the U.K. with some additional headcount.We think that remains a great opportunity for us. We're delighted by the growthwe're seeing over there. Especially Robert, in light of the fact that theydon't have the ability to sell merchant accounts today and yet their growthrates are comparable with the U.S. growth rates where we areoffering merchant accounts. So we are really looking forward to the day in 2008when we are offering merchant accounts through that U.K. operation.

Robert Dodd - MorganKeegan

Okay. Thanks.

Operator

Your next question is from Terry Babe with Think EquityPartners.

Terry Babe - ThinkEquity Partners

Good afternoon, guys. Nice quarter.

Bill McKiernan

Hi, Terry.

Steve Pellizzer

Hi, Terry.

Terry Babe - ThinkEquity Partners

So if you exclude the large customer benefit in thequarter, did you see any noticeable trend sequentially as the months progressed?

Steve Pellizzer

Sequentially?

Terry Babe - ThinkEquity Partners

Yeah, on a monthly basis during 3Q in terms of volume ortransaction growth?

Steve Pellizzer

I don’t think we saw anything that’s abnormal. Obviously,it’s a recurring revenue model. It’s little bit early to be seeing the pick upwith regard to the holiday season. Typically, we don't see that pick up untilthe November time frame, but I don't think there was really anything abnormalin terms of trends month-to-month.

Terry Babe - ThinkEquity Partners

Okay. So you’ve seen any economic sensitivity to cheervolumes or transactions?

Steve Pellizzer

No. I don’t -- if you are alluding to consumer spendingand implications to what we're seeing, I don’t think we are seeing anythingabnormal at this point.

Terry Babe - ThinkEquity Partners

Okay, great. And then can you discuss the benefits thatyou're seeing from the switch to the global, the new global platform in thisquarter?

Steve Pellizzer

Yeah. I think it's two-fold, really. First, on thefinancial side, the pricing we have in the global deal is better forCyberSource than under the old model. We are not fully taking advantage of thathave yet. We probably won't see the full advantage of that till the FirstQuarter of next year, but we captured quite a bit of it, probably the majorityof it at this point.

Then the second advantage to the global paymentsconnection is on functionality and we are pleased with what we have gottenthere in terms of (inaudible) for our customers and things like that that areeCommerce centric features that we can now offer to our customers.

Terry Babe - ThinkEquity Partners

Okay, it's helpful. Then two questions on BidPay. Can youelaborate on the types of partnerships you are currently exploring and thensecondly does that factor into your Q-4 outlook that you'll receive any of thebenefits, potentially from those partnerships?

Steve Pellizzer

I don't think it factors into the Q-4 outlook. In terms ofcolor on who we're talking to, I want to be careful what I say, but clearly, wethink that from a product standpoint BidPay has come a long way. We think thereis a huge opportunity in this person-to-person payment space for a truecompetitor to PayPal, and we see that validated all the time.

We just heard from one significant eBay merchant who isactually not supporting PayPal any more and going with BidPay, and we launchedthe BidPay API. We've got about 45 to 50 direct merchants who have alreadyimplemented that BidPay API’s, we are very happy with that.

We are still working on getting your attraction with thethird party auction services providers. We have one that should be comingonline any day. Almost any minute and we've got two or three more that withsome luck might come online this quarter and certainly have committed verballyto implementing BidPay at some point.

So we feel good about that. What I think we could use issome additional marketing muscle for BidPay, and so when we think aboutpotential partners, we think about companies who could provide that additionalmarketing muscle.

Terry Babe - ThinkEquity Partners

Okay. Thank you very much.

Steve Pellizzer

Thanks, Terry.

Operator

Your next question is from John Mata (ph) with Needham &Company.

John Mata - Needham & Company

Hey, Bill, hey, Steve.

Steve Pellizzer

Hi, John.

John Mata - Needham & Company

Just a piggyback off the previous question with regard tothe EPS outlook for Q-4, historically you guys have taken the conservativeapproach to the guidance that you provide. Is it fair to say that you approachthe Q-4 outlook with that same tact?

Steve Pellizzer

Yeah. I didn't change my methodology in terms of lookingat Q4. It's a little bit stranger situation just with the upcoming, expectedupcoming combination with Authorize.Net. We wanted to just provide a view, so youcan kind of, how we look at the standalone company anyway.

John Mata - Needham & Company

Got you. Thanks very much.

Steve Pellizzer

Thank you.

Operator

Your next question is from David Scharf with JMPSecurities.

David Scharf - JMPSecurities

You know what, everything has been answered now. Thankyou.

Bill McKiernan

Thanks, David.

Operator

Your next question is from Chip Cruz with GreenvilleCapital.

Chip Cruz - Greenville Capital

Nice quarter, Bill, Steve.

Bill McKiernan

Thank you.

Chip Cruz - Greenville Capital

Can you talk a little bit more about third partyagreements? How many, as far as BidPay is concerned, how many you have lined upso far and where you think you'll be when you exit the year?

Steve Pellizzer

Yes. So, we've got one that has integrated the API andreally is imminent and should be live literally any day. There are two or threeothers as I mentioned, that are potentials for Q4 and have verbally agreed thatthey want to implement BidPay.

And it is just a question of exactly when that happens.They are trying to slate it into their own product roadmap schedules. We'vebaked that into, now those assumptions into our guidance for Q4.

Chip Cruz - Greenville Capital

Is it a large ordeal during the holiday season to makethat change for one of these people?

Steve Pellizzer

It is for some, and in one case, the company bought acompetitor, and therefore, became a much bigger player, but in doing that the BidPayintegration got pushed out a bit. So we're subject to those kinds of productroadmap considerations.

Chip Cruz - Greenville Capital

Thank you.

Steve Pellizzer

Thanks, Chip.

Operator

Your next question is from Sam Chase with StephensManagement.

Sam Chase - StephensManagement

Hi Bill, Steve, quick question. First, really goodquarter. I hate to spend more time on BidPay because I know it is such a smallpart of your business, but people tend to focus on it so much on the negativeside. I want to see if I can ask this question one or time in a different way.

Though at least maybe a month ago or so I heard you at aconference say that, if we are not profitable we are going to exit thebusiness. I understand you guys are exploring strategic options or looking forpartnerships, trying to get more marketing behind that, but we are still losingmoney in the Fourth Quarter. Going into next year, if we don't have apartnership, are we going to be in the BidPay business? I guess, it’s a simplequestion?

Steve Pellizzer

Yes. So Sam I think, I want to see how these discussionspan out. I feel really good about folks we are talking too. There is certainlyenthusiasm on the other side for BidPay. Let us see how those discussions panout.

Sam Chase - StephensManagement

But you guys, fair enough, but you guys, if marketingmuscle when its needed, we’re not going to be (inaudible) as CyberSource Authorize,going forward, putting a bunch of capital spent towards this in ‘08 is stillpotential though or no?

Bill McKiernan

No. I think, we've said in the past that we wouldn't spendwhatever we spent $0.06 to $0.08 cents per share in ’07, we wouldn't considerspending that again.

Sam Chase - StephensManagement

Okay. Just wand to make sure, that's still the case. Greatquarter, guys. Thanks.

Bill McKiernan

Thanks, Sam.

Operator

Your next question from Andrew Jeffrey with RobinsonHumphrey.

Andrew Jeffrey - RobinsonHumphrey

Hi, guys. Just a quick follow-up; again, I'm just tryingto get my arms around this new customer, so you don’t mind bearing with me fora second, roughly $2.9 million in revenue, mechanically is it appropriate totake the entire amount of that $2.9 million and back it out of the $12 millionin acquiring revenue for the quarter or how does that break out?

Steve Pellizzer

Yeah, it is difficult to do that again because in many ofthese instances, when we are establishing pricing for a gateway andmerchant-acquiring customer, it is on a combined basis. We're bundling thegateway and the acquiring fees together.

So it's difficult to unravel it from that perspective, butthat certainly is a valid approach just given the fact that the merchantacquiring piece of it from a revenue perspective is more meaningful than thegateway.

Andrew Jeffrey - RobinsonHumphrey

So just schematically then, if I take the entire $2.9million out or some meaningful portion there off, acquiring revenuessequentially look relatively flattish as they did in the Second Quarter, exceptbig customers, anything going on there?

Steve Pellizzer

No. I mean we're -- you know I don't think it's fair totake them out because we are adding new customers all the time.

Andrew Jeffrey - RobinsonHumphrey

No, I understand. It is such a big customer, I was tryingto get a sense of what’s going on in the underlying business, because youcalled it out specifically?

Steve Pellizzer

Yeah.

Andrew Jeffrey - RobinsonHumphrey

But, you would not read anything into that, as far ascompetitive trends or anything is going on in the installed base?

Steve Pellizzer

Not at all, and if you look at the year-over-year growth,it is still very, very healthy.

Andrew Jeffrey -Robinson Humphrey

Right.

Steve Pellizzer

Without that new customer.

Andrew Jeffrey -Robinson Humphrey

Right, okay. That’s helpful. Thanks a lot.

Steve Pellizzer

Thanks Andrew.

Operator

The next question is from Colin Gillis with Canaccord.

Colin Gillis - Canaccord

Hi guys. Just a couple quick things. On that big customer,could you just give us a sense as to, was it the combined platform that youoffered that allowed you to get that win? Is this an example of what you havebeen trying to bring to market?

Steve Pellizzer

No question. No question, Colin. When our sales people goout, they pitch the whole value proposition, from gateway and paymentacceptance to fraud screening and tax calculation and reporting and reconciliationand I think it's not just this one single customer, but also the fact that wesign about 25 or so other mid-tier customers during the quarter for acquiringand I would hope, going forward that we would see some more success.

Colin Gillis - Canaccord

Then what’s the expectations for the December quarter fornew customers? Any change from the historical seasonality or some distractionstied in that? Should that number dip down?

Bill McKiernan

I think typically Q4 tends to be a dip just because mostcustomers sign up in Q3 in anticipation of the holidays, at least those thathave a retail focus. That said, we typically have had a pretty strong Q4, evenfrom a customer add perspective. So we are not expecting anything differentfrom what we’ve seen in the past.

Colin Gillis - Canaccord

Okay, great. Thank you.

Bill McKiernan

Thanks, Colin.

Operator

At this time there are no further questions. Gentlemen, arethere any closing remarks?

Bill McKiernan

No. Thank you, very much operator and thanks to everyonefor joining us.

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