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Official Payments Holdings (OPAY)

Q1 2013 Earnings Call

February 05, 2013 5:00 pm ET

Executives

Jack Browne

Alex P. Hart - Chief Executive Officer, President and Director

Jeffrey W. Hodges - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Analysts

Gary F. Prestopino - Barrington Research Associates, Inc., Research Division

Presentation

Operator

Welcome, and thank you for standing by. [Operator Instructions] Today's conference is being recorded. [Operator Instructions] Now I'd like to turn the call over to Jack Browne. You may begin.

Jack Browne

Thank you, and good afternoon. My name is Jack Brown, and I’m the Controller for Official Payments. Welcome to today's call to review our fiscal year 2013 first quarter results. After the market closed today, we issued a press release announcing Official Payments' financial results for the quarter ended December 31, 2012.

A copy of the press release can be found on the Investor Relations section of our website, www.opay.officialpayments.com. We invite investors who wish to speak to management about the company to contact our CFO Jeff Hodges at (770) 325-3102 or by emailing him at Jeff.Hodges@officialpayments.com.

A replay of today's call will be available later this evening on our investor website, www.opay.officialpayments.com, or by calling (888) 397-5639. The telephone replay will be available until 11:59 p.m. Eastern Time, on March 4, 2013.

I want to remind you that various remarks that we may make today on -- may make on today's call about the company’s future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Management's Discussion and Analysis and Risk Factor sections of our most recent annual report on Form 10-K, which is on file with the SEC, and those discussed in the Management's Discussion and Analysis and Risk Factor sections of our quarterly report on Form 10-Q, which we expect to be filed with the SEC later this week.

In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any other subsequent date. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views change. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to today.

In this call, references to Q1 2013, Q1, the quarter or the first quarter, refer to the quarter ended December 31, 2012, and references to fiscal 2013, FY 2013 and the year, refer to the fiscal year ending September 30, 2013.

We use the term client to refer to the various legal entities with whom we contract to provide our payment solutions. The term customers refer to consumers who utilize our payment services to pay amounts due to our clients.

During this call, we will be referring to non-GAAP financial measures that are not prepared in accordance with Generally Accepted Accounting Principles. The 2 non-GAAP financial measures that we will be discussing today are Payment Solutions' net revenue and adjusted EBITDA from Continuing Operations.

During this call, when we use the terms net revenue and adjusted EBITDA, we are referring to Payment Solutions' net revenue and adjusted EBITDA from Continuing Operations. We define the non-GAAP financial measures used in this call and we have presented reconciliations of these non-GAAP financial measures on a historical basis to the most recently directly comparable GAAP measures in the press release that we issued earlier today. That press release was furnished to the SEC earlier today as an exhibit to a current report on Form 8-K. The Form 8-K, including the press release that reconciles the non-GAAP financial measures to the most directly comparable GAAP measures, is available in the Investor Relations section of our website, www.opay.officialpayments.com, under the heading Investor Relations.

Payment Solutions' net revenue is defined as Payment Solutions' gross revenue less related third-party transaction processing costs, which we refer to as discount fees. Discount fees are comprised of interchange fees and other third-party transaction costs we must pay to process transactions.

Adjusted EBITDA from Continuing Operations is defined as net income or loss from our Continuing Operations before interest expense, net of interest income, income taxes, depreciation and amortization, share-based compensation expense and restructuring charges.

With me on the call today are Jeff Hodges, our CFO; and Alex Hart, our President and CEO. I'll now turn the call over to Alex.

Alex P. Hart

Thanks, Jack, and welcome everyone.

We delivered our fifth consecutive quarter of adjusted EBITDA -- excuse me, a positive adjusted EBITDA, with a 7% increase in dollars processed versus the same quarter in fiscal year 2012. We anticipated some first quarter drag on net revenue as a result of our continued focus on platform consolidation, transaction quality and margin improvement, but total transactions and net revenue were lower than we expected. There are 2 primary reasons for the lower-than-expected transaction volume. First is a greater shift to lower margin transactions during the quarter than expected. Second, we didn't generate enough transactions from new clients to offset the effect of client losses in prior years. However, average transaction sizes continue to climb, and we suspect that the impending 2013 income tax increases caused some customers to defer some payments in the calendar 2013 to increase the deduction value of those payments versus higher tax rates. It's too soon to know how many payments were deferred into our second fiscal quarter. But January IRS payments were at record levels for us, so we remain optimistic about the rest of income tax season and the year as a whole.

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