The text of Mr. Simpson's original writeup follows:
• • •
Higher One Holdings plans on offering 16.3 million shares
(assuming over-allotments are exercised) at a range of $15-$17.
Insiders are selling a lot of stock in this deal, 12.5 million
shares. Goldman is leading the deal, UBS, Piper, Raymond James,
William Blair and JMP are co-managing. Post-ipo ONE will have 56
million shares outstanding for a market cap of $896 million on a
pricing of $16. Ipo proceeds will be utilized to pay down debt and
for general corporate purposes.
Lightyear Capital will own 23% of ONE post-ipo.
'We are a leading provider of technology and payment services
to the higher education industry.'
The company deals in financial aid disbursement
technology/services as well as student banking. Another technology
ipo geared towards shifting a historical paper based process
(financial aid checks) into an outsourced streamlined electronic
process. In reality though, ONE is an on-campus banking system
disguised as a student loan processing operation.
Essentially ONE takes over the financial aid disbursement process
from higher education institutions. Instead of issuing paper
checks, ONE electronically deposits monies into student accounts.
In addition, for students ONE offers an FDIC insured banking
account complete with debit ATM cards and the usual banking
services. This is actually the key to the business model, called
ONE links their disbursement payments electronically to students
with their banking service (OneAccount) in an attempt to gain
student accounts. This linkage is the key to ONE's revenues.
Students receiving disbursements via ONE tend to open OneAccounts
as the payments are electronically deposited into these checking
accounts. Essentially a captive student 'audience'.
***ONE derives the bulk of their revenues from fees on their
student OneAccount checking accounts. Fees generated include
interchange fees from use of debit cards; ATM fees; non-sufficient
fund fees and other assorted fees. College students as a
demographic tend to run up more banking fees per capita than other
ONE also offers payment transaction services allowing higher
education institutions to utilize ONE's software themselves. Again,
ONE charges fees for transaction over this software payment
platform and in turn, again uses these transactions as a selling
point for their student OneAccount banking accounts.
Student banking revenues accounted for 80% of revenues for the
first quarter of 2010, while revenue from the higher education
institutions themselves accounted for less than 10% of revenue.
**Pretty sneaky business model here. The banks for years continue
to spend a lot of time and effort in order to gain college student
financial accounts (banking/debit/credit etc). ONE sells their
student loan outsourcing service on the cheap to higher education
institutions (a loss leader), to gain banking access to students
receiving financial aid. Those student accounts end up driving
revenues, not the disbursement processing/outsourcing service. ONE
is a quasi bank disguised as a student loan processor.
This approach has enabled ONE to gain 1.2 million banking customers
over the past five or so years. Note that ONE does not hold banking
assets, they contract with Bancorp Bank (
) on that end. They gain the accounts for Bancorp via their
processing service and then collect the fees generated from that
account. Bancorp's compensation is the investment returns on the
deposits. Essentially they serve as deposit assets on Bancorp's
balance sheet that they can then lend against.
ONE does not originate or manage student loans. They contract with
higher education institutions to streamline/outsource the student
loan disbursement process at that higher education campus, with the
ultimate goal being to utilize this process to gain student banking
customers. There were a few student loan originator ipos earlier in
the previous decade including First Marblehead (
). Each does loan processing, however their core business models
have been to originate student loans and/or service or securitize
those loans. Two different business models: ONE integrates the
student loan process of specific higher education institutions as a
driver for their student banking services, FMD/NNI originate and
service and/or securitize student loans.
As of 3/10 there were 402 campuses serving 2.7 million students
that had purchased ONE's 'OneDisburse' outsource service and 293
campuses serving 2.2 million students that had contracted for one
of more of ONE's software products. In addition ONE had 1.2 million
No single campus accounts for more than 4% of revenues. To date ONE
has penetrated 14% of potential higher education campuses, leaving
plenty of room for potential growth.
97% retention rate since 2003 among higher education clients. This
is not surprising as ONE is a nice value proposition for the higher
education clients. ONE takes the student loan disbursement process
off of the client's hands for a relative pittance as the key for
ONE is the banking access to students receiving financial aid.
- In 2009, ONE acquired higher education payment processing company
CashNet for $27 million.
- The big risk here is the legislative interest in reducing banking
related fees. We recently saw a pretty significant sell-off in
) on pending legislation that would create limits on debit card
interchange fees. ONE uses Mastercard to process their OneAccount
- ONE believes no other competitor offers the full range of
services that ONE offers. Others that offer payment software
products and services include Sallie Mae, Nelnet, and TouchNet.
$.50 per share in cash post-ipo, no debt.
Revenues have increased nicely annually as ONE has grown student
2nd quarter (6/30) is lowest revenue quarter annually. Fewer
student loan disbursements are made in this quarter, resulting in
less transaction fees generated from student banking accounts.
- Numbers are pro-forma assuming a full year of Cashnet. Revenues
of $92 million. Gross margins of 61%. Again, ONE is a quasi bank
without the actual assets. Instead they make money off the
transactions involving those assets/accounts without having the
actual accounts on their books. Operating expense ratio of 38%,
operating margins of 23%. Net margins of 15%. Earnings per share of
- ONE had a monster first quarter of 2010. They continue to add new
accounts as they add more higher ed institutions. Also, they tend
to increase banking account penetration among student populations
in existing higher ed clients. They've been doing a fantastic job
of selling their products and banking accounts. Based on first
quarter (and adjusting for 2nd quarter seasonality), total revenues
should grow 40% to $155 million.
Gross margins look to be about the same, however there should be a
slight operating margin improvement in the back half of 2010. At
61% gross margins and 24% operating margins, net margins would be
16%. Earnings per share of $0.45. On a pricing of $15, ONE would
trade 33 X's 2010 earnings.
- The PE looks a tad aggressive here for the current ipo climate.
Factor in the potential reining in of interchange fees and on the
surface it appears the range here will need to come in on pricing.
However, ONE is trending as strongly as any ipo we've seen the past
few years. The first quarter was, by far, the best in company
history even if you fold out the revenues from their 11/09
acquisition. The key here is ONE's success in turning financial aid
disbursements to students into banking accounts from those
students. If this trend continues as it has the past two quarters,
ONE could be putting up blowout revenue/earnings numbers in the
back 1/2 of 2010 and into 2011. My estimates could turn out to be a
bit low for 2010. Even if they are on par, it would mean ONE would
be on track for another large EPS gain in 2010 as they continue to
add banking accounts. This is a very good looking financial
services ipo, coming public at a multiple that looks a bit pricey.
Hopefully the market will agree and discount this one from $15-$17.
As it is, I like this one in range mid-term plus and would be
thrilled to be able to get it below range. Definite recommend in
Will Accounting Magic Rescue Banks Again?