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ONE > SEC Filings for ONE > Form 10-Q on 8-Nov-2012All Recent SEC Filings

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Form 10-Q for HIGHER ONE HOLDINGS, INC.


8-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The information contained in this section should be read in conjunction with our audited consolidated financial statements and related notes as included in our annual report on Form 10-K for the year ended December 31, 2011 and information contained elsewhere in such annual report on Form 10-K and in this quarterly report on Form 10-Q. The discussion contains forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995) involving risks, uncertainties and assumptions that could cause our results to differ materially from expectations. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," "should" and similar expressions are intended to identify forward-looking statements. Factors that might cause these differences include those described under "Risk Factors" and elsewhere in the annual report on Form 10-K and in this quarterly report on Form 10-Q. The forward-looking statements included in this quarterly report on Form 10-Q are made only as of the date of this report. We do not undertake any obligation to update or supplement any forward-looking statements to reflect subsequent events or circumstances, except as required by law. We cannot assure you that projected results or events will be achieved or will occur.

Overview

We believe that based on market share and the number of campuses employing our products, we are a leading provider of technology, payment services and data analytics to the higher education industry. We believe that none of our competitors can match our ability to provide solutions for higher education institutions' financial services needs, including compliance monitoring, and, consequently, that we provide the most comprehensive suite of disbursement, payment and data analytic solutions specifically designed for higher education institutions and their students. We also provide campus communities with convenient, cost-competitive and student-oriented banking services, which include extensive user-friendly features.

On August 7, 2012 Higher One completed the acquisition of substantially all of the assets of Campus Labs, LLC, a data analytics company focused on higher education. Campus Labs helps school administrators collect campus-wide data and provide comprehensive assessments critical to supporting institutional outcomes. Additionally, Campus Labs helps schools better understand factors for student success and offers tools for institutions to benchmark against peer institutions, provide course evaluations, analyze strategic plan alignment, and assist with the accreditation process. Campus Labs' technology allows schools to aggregate previously unstructured, static information into dynamic assessment data with full reporting functionality in a centralized platform.

Our products and services for our higher education institution clients include our OneDisburse® Refund Management® funds disbursement service, our CASHNet® suite of payment transaction products and services and our Campus Labs® suite of data analytics products. Through our bank partners, we offer our OneAccount service to the students of our higher education institution clients, which includes an FDIC-insured checking account, a OneCard, which is a debit MasterCard® ATM card, and other retail banking services.

As of September 30, 2012, more than 600 campuses, serving more than 4.5 million students, had purchased the OneDisburse service. We service approximately 2.1 million OneAccounts as of September 30, 2012. As of September 30, 2012 more than 1,300 campuses, serving more than 10.8 million students had purchased at least one of our OneDisburse, CASHNet or Campus Labs products or services.

During the three months ended September 30, 2012, the amount of disbursements which we delivered to individuals that had selected the OneAccount as their preferred method of receiving a refund from their higher education institution was slightly lower than it was compared to the three months ended September 30, 2011. At the same time, the total amount of disbursements we processed on behalf of our OneDisburse higher education institution clients increased. The increase in total disbursements which we processed was a result of new higher education institution clients during the three months ended September 30, 2012, compared to September 30, 2011. This increase offset a decline in both the average size and unique number of individuals for which we processed a disbursement for higher education institution that were OneDisburse clients both last year and the current year. During the three months ended September 30, 2012, the ratio of individuals selecting to receive a disbursement for their higher education institution to a OneAccount was lower than the comparative time period. We believe that a portion of this ratio decrease will lead to longer and deeper customer relationships with the individuals that do choose the OneAccount as their preferred method of receiving a disbursement; however, the impact of that longer and deeper customer relationship period has not yet had a material impact on our financial results. During the three months ended September 30, 2012, we announced plans to introduce a new version of the OneAccount, OneAccount Edge, which will launch later this year and which includes one fee of $4.95 per month. The account eliminates fees for PIN activity, overdraft or non-sufficient funds, inactivity and other service charges normally associated with traditional checking accounts and does not include a minimum deposit requirement.

Our revenue fluctuates over the course of the year as a result of seasonal factors related to the academic year. A large proportion of our revenue is either directly or indirectly dependent on academic financial aid received by students and in turn the number of students enrolled at our higher education institution clients. Higher education institution clients typically disburse financial aid refunds to students at the start of each academic term. Distribution of financial aid disbursements through our OneDisburse service (1) indirectly generates revenue through deposits of financial aid into OneAccounts, which generates account revenue, and (2) directly generates revenue through our higher education institution clients' use of the OneDisburse service, which generates higher education institution revenue.


  Results of Operations for the Three Months Ended September 30, 2011 and 2012

The following table summarizes key components of our results of operations for
the periods indicated, both in dollars and as a percentage of total revenue:
                                                    Three Months Ended
                                                      September 30,
                                                       (Unaudited)
                                                                           2011 % of        2012 % of
                   2011            2012          $ Change     % Change      Revenue          Revenue
                              (in thousands)
Account
revenue          $  35,800       $  35,660       $    (140 )     (0.4) %          74.4 %           69.6 %
Payment
transaction
revenue              6,603           8,342           1,739        26.3 %          13.7 %           16.3 %
Higher
education
institution
revenue              4,595           5,946           1,351        29.4 %           9.5 %           11.6 %
Other revenue        1,142           1,279             137        12.0 %           2.4 %            2.5 %
Total revenue       48,140          51,227           3,087         6.4 %         100.0 %          100.0 %
Cost of
revenue             19,630          21,838           2,208        11.2 %          40.8 %           42.6 %
Gross margin        28,510          29,389             879         3.1 %          59.2 %           57.4 %
General and
administrative       9,415          11,902           2,487        26.4 %          19.6 %           23.2 %
Product
development          1,158           1,380             222        19.2 %           2.3 %            2.7 %
Merger and
acquisition
related expenses         -           1,042           1,042       100.0 %             - %            2.0 %
Sales and
marketing            4,698           3,182          (1,516 )    (32.3) %           9.8 %            6.2 %
Income from
operations          13,239          11,883          (1,356 )    (10.2) %          27.5 %           23.2 %
Interest
income                  15              23               8        53.3 %             - %              - %
Interest
expense                (66 )          (185 )          (119 )     180.3 %         (0.1) %          (0.4) %
Other income             -              77              77       100.0 %             - %            0.2 %
Net income
before income
taxes               13,188          11,798          (1,390 )    (10.5) %          27.4 %           23.0 %
Income tax
expense              4,720           4,480            (240 )     (5.1) %           9.8 %            8.7 %
Net income       $   8,468       $   7,318       $  (1,150 )    (13.6) %          17.6 %           14.3 %

Three Months Ended September 30, 2012 Compared to the Three Months Ended September 30, 2011

Revenue

Account revenue
Account revenue remained in-line with the prior year amount while the number of OneAccounts grew by approximately 3.4%. Our revenue per average OneAccount has decreased slightly from the prior year as a result of several factors, including certain changes we made to our fee schedule over the last twelve months which reduced certain service fees assessed to our OneAccounts and a slightly lower average disbursement received by individuals during the three months ended September 30, 2012 compared to the three months ended September 30, 2011. An increase in OneAccounts due to students choosing the OneAccount at higher education institutions that became clients after September 30, 2011 offset a decrease in the number of OneAccounts at higher education institutions that were clients prior to September 30, 2011. The decrease in the number of OneAccounts at higher education institutions that were clients as of and prior to September 30, 2011 is attributed to two factors. Beginning in June 2012, we made changes whereby we close small balance, inactive accounts in a shorter time period than our prior practice. We also experienced a decrease in the ratio of students at our higher education institution clients who open a OneAccount relative to all students for whom we processed a disbursement during the three months ended September 30, 2012 compared to the prior year period, which resulted in both fewer new OneAccounts for new higher education institution clients as well as existing higher education institution clients.

Payment Transaction Revenue
The majority of the increase in payment transaction revenue was due to new higher education institution clients that began utilizing the CASHNet payment module, ePayment, after September 30, 2011. The remainder of the increase was due to an increase in payments processed at higher education institutions that were clients prior to September 30, 2011 and as a result of payments made to us in connection with our new fully serviced tuition payment plans that we offer to students on behalf of client institutions.

Higher Education Institution Revenue
The increase in higher education institution revenue was primarily due to our acquisition of Campus Labs in August 2012. The Campus Labs product suite contributed approximately $1.0 million in revenue to our higher education institution revenue during the three months ended September 30, 2012. The remainder of the increase is primarily related to subscription revenue for our CASHNet suite of payment products as a result of sales of the CASHNet suite of payment products to new higher education institution clients over the course of the last twelve months.


Cost of Revenue

We generally expect cost of revenue to increase proportionally with our revenue as many of these costs are variable and associated with either the number of OneAccounts or the dollar volume of transactions processed through our CASHNet payment module. During the three months ended September 30, 2012, our cost of revenue increased at a higher rate than revenue, which resulted in a lower gross margin compared to the three months ended September 30, 2011. A portion of our amortization expense related to our acquisition of Campus Labs is included within cost of revenue increase, which contributed to approximately $153 of the increase in cost of revenue this period. Our data processing costs increased compared to the three months ended September 30, 2011 as a result of an increase in our number of OneAccounts which exceeded the growth in overall transaction volume.

General and Administrative Expense

While we generally expect general and administrative expenses to increase at a slower rate than revenue, such expenses increased at a higher rate than our revenue growth during the three months ended September 30, 2012. Consistent with the trend through June 30, 2012, the increase in general and administrative expenses was driven primarily by an increase in facilities and occupancy costs, including depreciation, as a result of our corporate headquarters being placed in service as of December 31, 2011, personnel related costs and telecommunications costs. In addition, during the three months ended September 30, 2012, we experienced higher professional fees that the three months ended September 30, 2011. Our professional fees increase or decrease from time to time depending on specific business activities. We also experienced an increase in general and administrative expenses as a result of additional personnel from our acquisition of Campus Labs.

Product Development Expense

The increase in product development expense was primarily due to increases in personnel costs related to our acquisition of Campus Labs.

Merger and Acquisition Related Expenses

Our merger and acquisition related expenses during the three months ended September 30, 2012 related to our acquisition of Campus Labs in August 2012. These expenses include professional fees associated with the acquisition and related audit, a fair value adjustment to the contingent consideration component of the purchase price and certain employee related costs related to a bonus to be paid to employees previously employed by Camps Labs following a specified time period of employment by Higher One. We will continue to record fair value adjustments to the contingent consideration liability as necessary until the payment of all amounts due under the agreement. The employee related costs will continue to generate expense through the six-month anniversary of the acquisition date.

Sales and Marketing Expense

The decrease in sales and marketing expense was primarily due to a decrease of $2.3 million in non-cash, stock-based sales acquisition expense related to the vesting of certain shares issued in connection with the acquisition of EduCard,
LLC. The vesting time period related to the acquisition of EduCard, LLC expired at December 31, 2011 and therefore there are no subsequent additional associated expenses. The decrease in non-cash stock-based sales acquisition expense was partially offset by increases in marketing efforts support business growth, including incentives we provided to our customers to increase the amount of direct deposits we receive into the OneAccounts of our customers.

Interest Expense

The increase in interest expense was primarily due an increase in outstanding borrowings under our Credit Facility, as defined below in "Liquidity and Capital Resources", in connection with our acquisition of Campus Labs. We borrowed $30.0 million under our Credit Facility, which was outstanding for the period after our acquisition of Campus Labs.

Income Tax Expense

The decrease in income tax expense was primarily due a decrease in our net income before income taxes. The effective tax rates for the three months ended September 30, 2011 and 2012 were 35.8% and 38.0%, respectively. Our effective rate is expected to be between 37% and 39% for the 2012 fiscal year.


  Results of Operations for the Nine Months Ended September 30, 2011 and 2012

The following table summarizes key components of our results of operations for
the periods indicated, both in dollars and as a percentage of total revenue:

                                                      Nine Months Ended
                                                        September 30,
                                                         (Unaudited)
                                                                              2011 % of        2012 % of
                     2011            2012         $ Change      % Change       Revenue          Revenue
                               (In thousands)
Account revenue   $  105,500      $  112,803      $   7,303           6.9 %          78.4 %           76.3 %
Payment
transaction
revenue               13,988          17,843          3,855          27.6 %          10.4 %           12.1 %
Higher
education
institution
revenue               12,696          14,597          1,901          15.0 %           9.4 %            9.9 %
Other revenue          2,406           2,678            272          11.3 %           1.8 %            1.7 %
Total revenue        134,590         147,921         13,331           9.9 %         100.0 %          100.0 %
Cost of revenue       50,486          60,303          9,817          19.4 %          37.5 %           40.8 %
Gross margin          84,104          87,618          3,514           4.2 %          62.5 %           59.2 %
General and
administrative        28,202          34,205          6,003          21.3 %          21.0 %           23.1 %
Product
development            2,838           3,371            533          18.8 %           2.1 %            2.3 %
Merger and
acquisition
related expenses           -           1,042          1,042         100.0 %             - %            0.7 %
Sales and
marketing             16,863           8,995         (7,868 )      (46.7) %          12.5 %            6.1 %
Income from
operations            36,201          40,005          3,804          10.5 %          26.9 %           27.0 %
Interest income           51              87             36          70.6 %             - %            0.1 %
Interest
expense                 (196 )          (402 )         (206 )       105.1 %         (0.1) %          (0.3) %
Other income           1,500             232         (1,268 )      (84.5) %           1.1 %            0.2 %
Net income
before income
taxes                 37,556          39,922          2,366           6.3 %          27.9 %           27.0 %
Income tax
expense               13,292          15,164          1,872          14.1 %           9.9 %           10.3 %
Net income        $   24,264      $   24,758      $     494           2.0 %          18.0 %           16.7 %

Nine Months Ended September 30, 2012 Compared to the Nine Months Ended September 30, 2011

Revenue

Account revenue
The increase in account revenue was primarily due to a net increase of 3.4%, or 68 thousand, in the number of OneAccounts from September 30, 2011 to September 30, 2012. An increase in OneAccounts due to students choosing the OneAccount at higher education institutions that became clients after September 30, 2011 offset a decrease in the number of OneAccounts at higher education institutions that were clients prior to September 30, 2011. The decrease in the number of OneAccounts at higher education institutions that were clients as of and prior to September 30, 2011 is attributed to two factors. Beginning in June 2012, we made changes whereby we close small balance, inactive accounts in a shorter time period than our prior practice. We also experienced a decrease in the ratio of students at our higher education institution clients who open a OneAccount relative to all students for whom we processed a disbursement during the three months ended September 30, 2012 compared to the prior year period, which resulted in both fewer new OneAccounts for new higher education institution clients as well as existing higher education institution clients. Our revenue per average OneAccount has decreased slightly from the prior year as a result of several factors, including certain changes we made to our fee schedule over the last twelve months which reduced certain service fees assessed to our OneAccounts and a slightly lower average disbursement received by individuals during the three months ended September 30, 2012 compared to the three months ended September 30, 2011.

Payment Transaction Revenue
The increase in payment transaction revenue was due both to the inclusion of new higher education institution clients that began utilizing the CASHNet payment module, ePayment, after September 30, 2011 and also an increase in payments processed at higher education institutions that were clients prior to September 30, 2011. In particular, there were a number of schools that started utilizing ePayment during the fall semester of 2011 that now have a full nine months of utilization during the nine months ended September 30, 2012.

Higher Education Institution Revenue
The increase in higher education institution revenue was primarily due to our acquisition of Campus Labs in August 2012. The Campus Labs product suite contributed approximately $1.0 million in revenue to our higher education institution revenue during the nine months ended September 30, 2012. The remainder of the increase is primarily related to subscription revenue for our CASHNet suite of payment products as a result of sales of the CASHNet suite of payment products to new higher education institution clients over the course of the last twelve months.


Cost of Revenue

We generally expect cost of revenue to increase proportionally with our revenue as many of these costs are variable and associated with either the number of OneAccounts or the dollar volume of transactions processed through our CASHNet payment module. During the nine months ended September 30, 2012, our cost of revenue increased at a higher rate than revenue, which resulted in a lower gross margin compared to the nine months ended September 30, 2011. Consistent with the six months ended June 30, 2012, during the nine months ended September 30, 2012, our data processing costs and our provision for operational loss both increased at higher rates than our revenue growth. The year over year increase in our provision for operational losses was lower through as of the nine months ended September 30, 2012 compared to the six months ended June 30, 2012. The increase in data processing costs is due to the increase in our number of OneAccounts exceeding the growth in overall transaction volume.

General and Administrative Expense

While we generally expect general and administrative expenses to increase at a slower rate than revenue, such expenses continued to increase at a slightly higher rate than our revenue growth during the nine months ended September 30, 2012. The increase in general and administrative expenses was driven primarily by an increase in facilities and occupancy costs, including depreciation, as a result of our corporate headquarters being placed in service as of December 31, 2011, personnel related costs, professional fees and telecommunications costs. Our professional fees increase or decrease from time to time depending on specific business activities. We also experienced an increase in general and administrative expenses as a result of additional personnel from our acquisition of Campus Labs.

Product Development Expense

The increase in product development expense was primarily due to increases in personnel costs, due both to additional personnel hired in connection with our acquisition of Campus Labs and also in part to support the transition from an outsourced hosted platform for certain of our services to an internally hosted platform.

Sales and Marketing Expense

The decrease in sales and marketing expense was primarily due to a decrease of $9.2 million in non-cash, stock-based sales acquisition expense related to the vesting of certain shares issued in connection with the acquisition of EduCard,
LLC. The vesting time period related to the acquisition of EduCard, LLC expired at December 31, 2011 and therefore there are no subsequent additional associated expenses. The decrease in non-cash stock-based sales acquisition expense was partially offset by increases in marketing efforts and higher employee compensation costs to support business growth, including incentives we provided to our customers to increase the amount of direct deposits we receive into the OneAccounts of our customers.

Interest Expense

The increase in interest expense was primarily due to an increase in outstanding borrowings under our Credit Facility, as defined below in "Liquidity and Capital Resources", in connection with our acquisition of Campus Labs. We borrowed $30.0 million under our Credit Facility, which was outstanding for the period after our acquisition of Campus Labs.

Other Income

We recorded $1.5 million of other income during the nine months ended September 30, 2011 as a result of the settlement agreement reached with the former stockholders of IDC.

Income Tax Expense

The increase in income tax expense was primarily due to the increase in net income before taxes as well as a non-taxable gain of $1.5 million recorded in the prior year. The effective tax rates for the nine months ended September 30, 2011 and 2012 were 35.4% and 38.0%, respectively. The non-taxable gain we recorded during the nine months ended September 30, 2011 resulted in a decrease of approximately 1.5 percentage points of our effective tax rate for that time period. Our effective rate is expected to be between 37% and 39% for the 2012 fiscal year.

Liquidity and Capital Resources

Sources of Liquidity

Our primary sources of liquidity are cash flows from operations, borrowings under our Credit Facility and New Credit Facility, as defined below, and available-for-sale investments. As of September 30, 2012, we had $27.0 million in cash and cash equivalents, $0.2 million in available-for-sale investments and $20.0 million in borrowing capacity available under our Credit Facility. Our primary liquidity requirements are for working capital, capital expenditures, product development expenses and general corporate needs. Also, to the extent we consider it appropriate, we utilize our liquidity to purchase shares of our outstanding equity securities pursuant to our share repurchase program authorized by our board of directors. As of September 30, 2012, we had working capital of $23.0 million.


Senior Secured Revolving Credit Facility

Higher One, Inc. established a senior secured revolving credit facility dated as of December 31, 2010, which we refer to as the Credit Facility. As of September 30, 2012, $30.0 million in borrowings were outstanding under the Credit Facility and $20.0 million remained available to us under the Credit Facility.

On October 16, 2012, HOI terminated the Credit Facility and entered into a new five-year senior secured revolving credit facility in an amount of $200.0 million, or the New Credit Facility. All amounts outstanding under the Credit Facility were repaid in full using borrowings available under the New Credit . . .

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