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Online Resources Corporation (ORCC)

Q2 2009 Earnings Call

August 6, 2009 5:00 pm ET

Executives

Beth Halloran – Senior Director, Corporate Communications

Matthew P. Lawlor – Chairman & Chief Executive Officer

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

Raymond T. Crosier – President & Chief Operating Officer

Analysts

John Kraft – D. A. Davidson & Company

Robert Napoli – Piper Jaffray

Wayne Johnson – Raymond James

Brett Huff – Stephens Incorporated

Doug Campbell – Spirit Capital

Glenn Greene – Oppenheimer & Company

Presentation

Operator

Please stand by we are about to begin. Greetings ladies and gentlemen and welcome to the Online Resources Second Quarter 2009 Earnings Results Conference Call. Please note that this call is being recorded. At this time I would now like to turn the call over to Online Resources' Senior Director of Corporate Communication, Beth Halloran. Ms. Halloran, please go ahead.

Beth Halloran

Thank you to everyone who has joined us today on our conference call for second quarter 2009 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 and in the Investors section of our website at orcc.com. But first 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.

Now to you, Matt.

Matthew P. Lawlor

Thanks to everyone for participating in our call today. We will cover three topics. First, we’ll discuss our second quarter financial results. We grew adjusted EBITDA and core earnings substantially over the prior year exceeding consensus estimates and revenue was inline with guidance. Cathy will provide more detail and update our guidance for the third quarter and full year. Second, we will discuss quarterly operating fundamentals, we made excellent progress in new client signings, but transaction growth slowed especially in our eCommerce product lines that are more sensitive to the economy. Ray will elaborate further in his operating report. Finally, as is our usual practice at mid-year I will discuss our prospects and strategy for the reminder of the year and into 2010.

Catherine A. Graham

Good afternoon everyone. For the second quarter, our earnings metrics were all above or equal to the high end of the guidance ranges we previously provided, while revenue was inline with guidance. Both adjusted EBITDA and core net income per share grew nicely over the prior year period. Adjusted EBITDA grew to $9.3 million, up 26% over the second quarter of 2008. And EBITDA margin expanded to 25% from 20%. Core net income per share also grew by 33% to $0.08 per share. We continue to move towards positive GAAP earnings as our net loss available to common stockholders decreased almost 50% from the same quarter of 2008, to $0.06 per share. This reflects the growth in our EBITDA and core earnings, but also lower interest expense and continuing declines in the amortization of acquired intangibles.

Revenue for the second quarter grew 2% over the same quarter of the prior year. The relatively low growth was primarily the result of sharp interest rate declines during the past 12 months and the impact of economic deterioration on our transaction volume and average payment amounts.

On a sequential basis revenue was down as we had forecasted. You will recall that we normally see a seasonal decline in biller transactions during the second quarter, as well as lower banking payments growth. Additionally, we did not have a recurrence of various one-time professional service revenue items recognized in the first quarter. Strong earnings growth on a modest revenue increase is the result of expense control measures we implemented in response to the uncertainties of current economic conditions. We have been layering in expense controls since early 2008 reflecting a conscious decision to focus on earnings measures during this period rather than on less controllable revenue growth.

We took the difficult step about six months ago of reducing compensation and benefits along with trimming some position. This resulted in immediate savings, while we continue to address more sustainable cost control initiatives. There are two primary categories of fundamental adjustments to our operating cost structure. First, the strategic spending we did after the Princeton acquisition plateaued in mid-2008. You will recall that we invested heavily in new products to exploit our unique network of billers and banks. We also increased our organizational cost forming three separate market focused divisions. We can now grow and expand margins without significant additional expenditures in these areas.

Second, we have made significant strides in streamlining and leveraging our infrastructure. The percent of electronic payments made in network, where we have little marginal cost has more than doubled since we acquired Princeton. We have also consolidated our data center operations, centralized purchasing, installed low-cost Voice-over-IP and automated or streamlined key systems and processes to reduce costs and improve agility. So, while we maybe take an unwelcome, but unavoidable hiatus from strong revenue growth, we expect that our efforts to lower costs will provide sustainable benefits in this and future years. We will continue to manage our expenses to match revenue growth and look forward to even more leveraging our business model when the economic headwinds we currently face begin to turn and revenue growth rates move back towards a more normal range.

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