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Online Resources Corporation (ORCC)

Q4 2008 Earnings Call

February 26, 2009 5:00 pm ET

Executives

Matthew P. Lawlor - Chairman and Chief Executive Officer

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

Raymond T. Crosier - President and Chief Operating Officer

Beth Halloran - Sr. Director, Corporate Communications

Analysts

(Derek Klein - Unknown Firm)

Robert Napoli - Piper Jaffray

Glenn Greene - Oppenheimer & Co.

Wayne Johnson - Raymond James

Brett Huff - Stephens Inc.

John Kraft - D. A. Davidson & Co.

Thomas McCrohan - Janney Montgomery Scott

Presentation

Operator

Good afternoon. My name is Marlene Sharon, and I will be your conference operator today. (Operator Instructions). And now it gives me great pleasure to turn the call over to Ms. Beth Halloran.

Beth Halloran

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

Before we get started, I want to invite you to view our press release in the press room of our website at orcc.com. In addition, we will be referring to several slides that are also available with the press release labeled, “Fourth Quarter Earnings Call Slides.” For those of you joining us online, we have incorporated these slides in our webcast, which is available in the Investors Section of our website.

But first, as is 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 that are forward-looking and involve risks and uncertainties detailed in filings made by the company with the Securities and Exchange Commission. I’ll provide a more detailed review of the Safe Harbor provisions at the end of this call.

Matthew P. Lawlor

Welcome everyone. Our call today will cover two topics. First, we’ll review fourth quarter results. In a nutshell, our fourth quarter cash flow and earnings increased nicely over the third quarter of 2008 and we had excellent new client sales. Transaction growth moderated somewhat, however, causing lower than expected revenue. Second, as we typically do each fourth quarter, we will take a long term look at performance and set some new three-year financial objectives.

I’ll now turn the call over to Cathy to report on our financial results.

Catherine A. Graham

Good afternoon everyone. Today, I’d like to comment on our fourth quarter and full year 2008 financial results as well as our already issued guidance for the first quarter and full year 2009. Fourth quarter and full year results with the exception of net GAAP net income were below our expectations, due to lower than anticipated transaction volumes and payment, average payment amounts, during the 2008 holiday season. Ray will give you more details on this in a moment.

GAAP net income for the quarter and year exceeded our expectations because of derivative mark-to-market adjustments that benefited the interest expense line. Although revenue was lower than expected in the fourth quarter, we were still able to generate a substantial increase in cash flow and earnings over the prior quarter. This reflected the permanent and temporary cost control measures we implemented to offset increased revenue uncertainty in the current market environment. Ray will tell you more about these measures as well.

Additionally, we met our goal of achieving the 26% EBITDA margin in the fourth quarter, and we stand by our goal of improving that to at least 28% by the fourth quarter of 2009. On a full year basis, revenue increased by 12% due to year-over-year adoption and transaction growth, and to a full year’s revenue from our ITS acquisition. Although, full year EBITDA and free cash flow and core net income were flat with 2007 results, both would have been more than $5 million higher if interest rates had stayed at 2007 levels.

We strengthened our balance sheet during the fourth quarter, increasing unrestricted cash, equivalents, and short-term investments by $6.4 million to $24 million. This was after repaying another $3.2 million in principal on our senior debt, reducing its balance to $75.4 million.

As you can see from Slide 1, in 2008, we generated $5 million in free cash flow after bank debt service. We expect free cash flow to increase to $8 million in 2009, even after a $6 million increase in scheduled principal repayment. Continuing to look forward, we are not changing our previously issued guidance for either the first quarter or full year 2009. We are comfortable with our current cost structure and confident we can respond to changing market conditions. And while we have already taken action to ensure the continuing health of our business and bottom line, we still have additional levers that can be pulled if necessary. We anticipate continuing to generate cash and increasing our cash balances and still keep pace with product development, maintaining infrastructure, servicing debt and making scheduled repayments.

That said, we need to recognize that uncertainty has increased in the current environment. This combined with the unusual fourth and early first quarter transaction slowness we experienced would suggest conservatism. This is particularly applicable to revenue where we have more limited influence over sales cycles and consumer behavior patterns. We believe that revenue could be at the lower end of our guidance ranges, particularly in the first quarter where we have not had the time to see how some of our upside opportunities play out.

Read the rest of this transcript for free on seekingalpha.com