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Online Resources Corporation (ORCC)

Q3 2008 Earnings Call Transcript

October 29, 2008, 5:00 pm ET

Executives

Beth Halloran – Senior Director, Corporate Communications

Matt Lawlor – Chairman and CEO

Cathy Graham – EVP, CFO and Treasurer

Ray Crosier – President and COO

Analysts

Glenn Greene – Oppenheimer

Bob Napoli – Piper Jaffray

Wayne Johnson – Raymond James

Brett Huff – Stephens Inc.

Doug Campbell – Spirit Capital

David Parker – Merrill Lynch

Presentation

Operator

Good evening, my name is Trishana and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Online Resources third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions)

Thank you. Ms. Beth Halloran, Deputy Director of Corporate Communications, you may begin your conference.

Beth Halloran

Thank you to everyone who has joined us today on our conference call for third quarter 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 and some exhibits that we will refer to during the call labeled “Third Quarter 2008 Earnings Call Slides.” You can see these in the Press Room and in the Investors section of our web site at orcc.com. 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.

Now to you, Matt.

Matt Lawlor

Welcome everyone. Our call today will cover three topics. First, we delivered results in the range of our financial products for the third quarter. Despite still lower interest rates and prior year client losses, revenue grew at double digits. Earnings were slightly down, as expected, but would have been increased very substantially if normalized to reflect an apples-to-apples comparison to the prior year.

Second, our operating fundamentals continue to trend up nicely on a seasonal basis. Billpay transaction growth was strong, particularly for our eCommerce business line. We also signed a number of major new clients and renewed our largest client to a multi-year contract. The lift from these signings and new product sales further validates the strategic benefit of the acquisitions made over the past four years.

Finally, we will report on steps taken to preserve our financial and operating standing in a weakened economy. Our first line of defense rests with a durable, well-diversified client base, which appreciates the advantages of an expanding online and electronic payment channel. At the same time, we have taken the initiative to further control our costs in order to drive higher earnings and cash flow.

With that, I’d like to turn the call over to Cathy to report on our financial results.

Cathy Graham

Good afternoon everyone. Today I’d like to take you through our third quarter financial results, review our guidance for the remainder of the year, and make a few comments regarding our current expectations for 2009.

For the third quarter, all of our revenue and earnings metrics were within the guidance ranges we provided. Revenue grew 11% over the same quarter of the prior year. A full quarter of revenue from our ITS acquisition offset most, but not all, of the revenue lost to steep interest rate declines and previously announced large client departures. Fundamentally, however, seasonally-appropriate transaction growth was the key driver of continuing client revenue.

EBITDA showed a slight increase, and core net income showed a slight decrease, compared to the third quarter of 2007. These trends were due almost entirely to interest rate and client departure impacts. If the only change to third quarter 2008 had been that interest rates remained consistent with the prior year period, EBITDA would have shown 20% year-over-year growth. If you then adjusted the 2007 period for client departures, year-over-year EBITDA growth would have been 50%.

These same factors impacted core net income per share for the quarter. With constant interest rates, core EPS would have increased 13% year-over-year. And without departed clients, that growth rate would have increased to 80%. We reported a net loss available to common stockholders in the third quarter compared to the net income we reported in the 2007 period. In addition to absorbing interest rate and departed client impacts, this quarter’s comparison suffered from the fact that the comparable period contained approximately $2.2 million in non-cash accounting and valuation benefits that offset interest expense.

Looking at the balance sheet, we maintained unrestricted cash, equivalents and short term investments totaling $17.6 million at September 30. During the quarter, we generated $4.1 million in cash flow available for debt reduction, and used this to repay $3.2 million in principal on our senior secured debt, reducing its balance to $78 million. We will continue to make quarterly payments on this debt on an accelerating schedule, through its maturity in early 2012.

Turning to guidance for the remainder of the year, we have provided you with our expectations for the fourth quarter and full year 2008. Given year-to-date results and interest rates that continue to decline, we have narrowed our guidance to the low end of our current range for the full year. For fourth quarter, the midpoint of our revenue guidance represents only slight growth, both year-over-year and sequentially. Though we anticipate continuing transaction increases, including a normal seasonal uptick, we are planning for further interest rate cuts and continuing longer sales cycles.

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