Online Resources Corporation (ORCC)
Q2 2008 Earnings Call
July 29, 2008 4:15 pm ET
Beth Halloran - Sr. Director, Corporate Communications
Matthew P. Lawlor - Chairman of the Board, Chief Executive Officer
Raymond T. Crosier - President, Chief Operating Officer
Catherine A. Graham - Executive Vice President, Chief Financial Officer
Bob Napoli - Piper Jaffray
Wayne Johnson - Raymond James
John Kraft - D. A. Davidson & Co
Brett Huff - Stephens Inc.
Joshua Jabs – Roth Capital
Matt McCormick - FBR Capital Markets
David Parker- Merrill Lynch
Welcome everyone to the Online Resources second quarter conference call. (Operator Instructions) Miss Halloran you may begin your conference.
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Before we get started, I want to invite you to view our press release in the pressroom and in the investors section of our website at orcc.com.
First, as if 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 and is forward-looking and involves risks and uncertainties detailed in filings made by the company at the Securities and Exchange Commission. I will provide a more detailed review of the Safe Harbor provisions at the end of this call.
We did a good job of managing our business to the bottom line this quarter despite being light on our revenue target. Quarter earnings per share were in line with the mid-point of our guidance: the year-over-year comparison is down, but we would have been up very substantially without large departing clients. In addition several large clients renewed in the quarter and no single large clients are at risk of departure this year.
Revenue growth was healthy, up 16% for the quarter and 22% for the first half of 2008. More importantly, the key drivers of our business model, expanding client distribution and consumer usage were seasonally strong for continuing clients.
On the flip side, our second quarter revenue growth was modestly less than planned. Low interest rates affected us more than anticipated. We also struggled in the quarter with volatility in consumer paid payments primarily among ITS clients acquired last August. It is increasingly clear that we will come in at the low end of our 2008 guidance.
That said we see increasing demand for our web based financial and payment services. It was a great quarter for new client sales and renewals. Later in the call we’ll outline some of the ways our clients, both financial institutions and commercial firms, are using the web to their advantage in this stage of the economics cycle.
I will turn now to Cathy for the details of our financial report and for updated guidance.
This afternoon I am going to review our second quarter 2008 financial results as well as provide you with third quarter and updated full year 208 guidance. For the second quarter core net income was within the guidance range we previously provided. Net loss available to common stock holders, EBITDA and revenue, however, were all slightly below our guidance. I’ll talk more about this later.
Revenue for the second quarter grew 16% over the same quarter of the prior year. New revenue from our ITF acquisition largely offset revenue loss to interest rate decline and previously announced large client departures, though obviously at lower margins. Fundamentally however, seasonally appropriate transaction growth was the key driver of continuing client revenue.
On a sequential basis second quarter revenue was down as we had expected, reflecting the two final announced client departures in April. We now look forward to returning to more normal and easier to track sequential quarterly revenue growth rates. After adjusting for the departed clients at their typical business line margins, our key earnings measure showed strong year-over-year growth. Second quarter EBITDA would have increased by $1.9 million and core earnings per share would have increased by $0.04 over reported numbers. These increases would have been even higher had interest rates declines not reduced our float revenue by $1.6 million between the two periods.
While our underlying business continued to perform well, posted results for the quarter were a little shy of what we had anticipated. For revenue, though we had built reduced interest rates into our expectations for the quarter, actual returns on our short-term high credit quality investments came in somewhat lower than predicted. Additionally, we saw seasonal transaction and payment size declines in our consumer paid products that were steeper than what we had forecasted. This was primarily among the accounts receivable management clients from our August 2007 ITS acquisition. As this is our first year with this market segment, we are still getting our arms around the seasonality and transaction patterns in this business.
These impacts to revenue flow through to our earnings measures and particularly to EBITDA where reduced float interest revenue creates a dollar for dollar reduction. For our other earnings measures, core net income, and net income available to common stock holders, the impact of lower float interest revenue is partially offset by the positive effect the declining interest rates have on our senior debt service. They also benefit from lower depreciation related to the efforts we have made to manage our discretionary capital spending and to the small tax benefit we recognized in the quarter.