OPAY Official Payments Holdings, Inc. (MM)

Official Payments Holdings, Inc. (Nasdaq: OPAY), a leading provider of electronic payment solutions for the biller direct market, today released results for the quarter ended March 31, 2012.

Results of Operations

Second Quarter Fiscal 2012 Results

For the quarter ended March 31, 2012, Official Payments reported revenues from Continuing Operations of $32.8 million, an 8.4% increase over the same quarter last year. Our loss from Continuing Operations was $1.4 million, or $0.08 per fully diluted share, unchanged from the same quarter last year. Continuing Operations include Payment Solutions, and our VSA operations, which we are winding down. On a standalone basis, our Payment Solutions business reported quarterly revenues of $32.5 million, or an 8.6% increase over the same quarter last year.

Our general, administrative, selling and marketing expenses, which support our Continuing Operations, were $9.5 million, an increase of $2.8 million, or 41%, from the same quarter last year. The prior year quarter included a $1.5 million credit to expense related to the former CEO’s equity awards which were canceled during that period.

Management’s Comments

Alex P. Hart, President and Chief Executive Officer of Official Payments Holdings, Inc. stated, “We are encouraged by our quarterly results, but recognize that it’s only been two in a row. We continue to believe that we’re in a good space and that we have the will to execute on the things that we believe are important to creating a sustainably profitable business.”

Definition and Reconciliation

We use the following non-GAAP financial measures in this press release: Adjusted EBITDA from Continuing Operations and Payment Solutions net revenue. Official Payments’ management believes these measures are useful for evaluating our performance against the performance of peer companies within the electronic payments industry, and that these measures provide investors with additional transparency with respect to financial measures used by management in its financial and operational decision-making. Our management believes that Payment Solutions net revenue provides additional information about our business, as we wind-down our VSA operations. We also use Adjusted EBITDA from Continuing Operations, together with other criteria, in our executive compensation program. Non-GAAP financial measures should not be considered a substitute for the reported results prepared in accordance with generally accepted accounting principles in the United States, or US GAAP. Our definitions used to calculate non-GAAP financial measures may differ from those used by other companies.

Official Payments defines Adjusted EBITDA from Continuing Operations as net loss from our Continuing Operations before interest expense net of interest income, income taxes, depreciation and amortization, restructuring charges and stock-based compensation in both equity and cash.

The following table shows a reconciliation of net loss from Continuing Operations to Adjusted EBITDA from Continuing Operations for the three and six months ended March 31, 2012 and 2011:

    Adjusted EBITDA Three months ended March 31, (in thousands) 2012     2011     Change Net Loss from Continuing Operations $ (1,408 )     $ (1,372 )     $ (36 ) Adjustments: Depreciation/Amortization 1,867 1,806 61 Stock-based compensation 514 (1,434 ) 1,948 Restructuring charge 34 — 34 Taxes — (186 ) 186 Less: Interest income, net   —         19         19   Adjusted EBITDA from Continuing Operations $ 1,007       $ (1,205 )     $ 2,212         Adjusted EBITDA Six months ended March 31, (in thousands) 2012     2011     Change Net Loss from Continuing Operations $ (3,042 )     $ (2,469 )     $ (573 ) Adjustments: Depreciation/Amortization 3,770 3,564 206 Stock-based compensation 981 (846 ) 1,827 Restructuring charge 1,490 — 1,490 Taxes — (186 ) 186 Less: Interest income, net   1         56         55   Adjusted EBITDA from Continuing Operations $ 3,198       $ 7       $ 3,191    

Official Payments defines Payment Solutions net revenue as Payment Solutions gross revenue less discount fees. Discount fees include interchange fees and other processing-related dues, assessments and fees. Payment Solutions gross revenue is defined as revenue from continuing operations less revenue from VSA operations. The following is a reconciliation of Payment Solutions net revenue to revenue from continuing operations for the three and six months ended March 31, 2012 and 2011.

    Net Revenue Three months ended March 31, (in thousands, except percentages)     2012     2011    

Change($)

   

Change(%)

Revenue from continuing operations $ 32,820     $ 30,266     $ 2,554     8.4 % Less: VSA revenue       350       362       (12 )     (3.3 )% Payment Solutions gross revenue 32,470 29,904 2,566 8.6 % Less: Discount fees       20,938       21,884       (946 )     (4.3 )% Payment Solutions net revenue $ 11,532     $ 8,020     $ 3,512       43.8 %       Net Revenue Six months ended March 31, (in thousands, except percentages)     2012     2011    

Change($)

   

Change(%)

Revenue from continuing operations $ 67,657     $ 63,236     $ 4,421     7.0 % Less: VSA revenue       885       855       30       3.5 % Payment Solutions gross revenue 66,772 62,381 4,391 7.0 % Less: Discount fees       43,281       45,292       (2,011 )     (4.4 )% Payment Solutions net revenue $ 23,491     $ 17,089     $ 6,402       37.5 %  

Liquidity

As of March 31, 2012, we had $39.2 million in cash and cash equivalents. Our $39.2 million in cash, cash equivalents and marketable securities includes funds that have settled to us that we have not yet distributed to clients due to the timing of bank transactions of $3.3 million and $4.3 million of accrued discount fees. These items reduce our cash available for company use. Therefore, the cash and cash equivalents available to us at March 31, 2012 are $31.6 million. Using the same calculation, we had $31.7 million available to us at September 30, 2011.

Conference Call

Official Payments will host a conference call Monday, May 7 at 5:00 p.m. Eastern Time to discuss these results. To access the conference call, please dial (888) 566-6141 and provide pass code OPAYQ2. The conference call is also available live via the Internet at www.OPAY.OfficialPayments.com. Participants via the Web will need to provide the pass code OPAYQ2. A replay will be available at 8:00 p.m. Eastern Time on Monday, May 7, 2012 at www.OPAY.OfficialPayments.com or by calling (866) 415-2336. The replay will be available until 11:59 p.m. Eastern Time on May 28, 2012.

About Official Payments Holdings, Inc.

Official Payments Holdings, Inc. (Nasdaq: OPAY) is a leading provider of electronic payment solutions in the biller direct market. Headquartered in Norcross, Georgia, the company provides enhanced electronic payment services that include multiple payment choices, payment channels, and bill payment products and services to more than 3,500 clients in all 50 states and the District of Columbia. Official Payments serves clients in multiple markets including federal, state, and local governments, educational institutions, and utilities. Consumers may pay federal taxes, state and local taxes, property taxes, and other bills such as utilities and college tuition with credit cards, debit cards, electronic checks and alternative payment methods via online, telephone, point of sale and other channels by visiting www.OfficialPayments.com. Corporate information is available at www.OPAY.OfficialPayments.com.

Forward looking statements

Statements made in this press release that are not historical facts are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements relate to future events or Official Payments’ future financial and/or operating performance and generally can be identified as such because the context of the statement includes words such as “may,” “will,” “intends,” “plans,” “believes,” “anticipates,” “expects,” “estimates,” “shows,” “predicts,” “potential,” “continue,” or “opportunity,” the negative of these words or words of similar import. Official Payments undertakes no obligation to update any such forward-looking statements. Each of these statements is made as of the date hereof based only on current information and expectations that are inherently subject to change and involve a number of risks and uncertainties. Actual events or results may differ materially from those projected in any of such statements due to various factors, including, but not limited to: general economic conditions, which affect Official Payments’ financial results in all our markets, which we refer to as “vertical markets”, particularly the federal vertical market, the state and local tax vertical market and the property tax vertical market; effectiveness and performance of our systems, payment processing platforms and operational infrastructure; our ability to grow Payment Solutions revenue while reducing our costs, including processor and interchange related costs; the potential loss of funding by clients, including due to government budget shortfalls or revisions to mandated statutes; the timing, initiation, completion, renewal, extension or early termination of client or partner contracts or projects; our ability to execute on our sales and product strategy and realize revenues from our business development opportunities; the impact of regulatory requirements; and unanticipated claims as a result of project performance, including due to the failure of software providers, processors, vendors, partners, or subcontractors to satisfactorily perform and complete engagements. For a discussion of these and other factors which may cause our actual events or results to differ from those projected, please refer to the periodic reports on Form 10-K and Form 10-Q that we file with the Securities and Exchange Commission.

OFFICIAL PAYMENTS HOLDINGS, INC.

Consolidated Balance Sheets

    (in thousands) March 31, 2012     September 30, 2011 (unaudited) ASSETS: Current assets: Cash and cash equivalents $ 39,210 $ 39,760 Accounts receivable, net 4,601 4,467 Settlements receivable, net 15,130 7,648 Prepaid expenses and other current assets   2,606         2,368   Total current assets 61,547 54,243   Property, equipment and software, net 17,277 18,189 Goodwill 17,521 17,460 Other intangible assets, net 2,334 4,037 Other assets   226         238   Total assets $ 98,905       $ 94,167     LIABILITIES AND SHAREHOLDERS’ EQUITY: Current liabilities: Accounts payable $ 33 $ 1,057 Settlements payable 18,461 9,812 Accrued compensation liabilities 4,580 2,721 Accrued discount fees 4,266 4,900 Other accrued liabilities 2,142 3,703 Accrued restructuring 362 178 Deferred income   406         439   Total current liabilities   30,250         22,801   Other liabilities: Deferred rent 102 1,556 Accrued restructuring   1,056         —   Other liabilities   98         28   Total other liabilities   1,256         1,584   Total liabilities   31,506         24,394     Contingencies and commitments   Shareholders’ equity: Preferred stock, no par value; authorized shares: 4,579;

no shares issued and outstanding

— — Common stock, $0.01 par value, and paid-in capital; shares authorized: 44,260;

shares issued: 20,772 and 20,706; shares outstanding: 16,642 and 16,642

194,412 193,732 Treasury stock—at cost, 4,175 shares (31,383 ) (31,383 ) Accumulated deficit   (95,630 )       (92,576 ) Total shareholders’ equity   67,399         69,773   Total liabilities and shareholders’ equity $ 98,905       $ 94,167    

OFFICIAL PAYMENTS HOLDINGS, INC.

Consolidated Statements of Operations

    Three months ended

March 31,

    Six months ended

March 31,

(in thousands, except per share data) 2012   2011     2012   2011 Revenues $ 32,820     $ 30,266       $ 67,657     $ 63,236       Costs and expenses: Direct costs 22,900 23,332 46,775 48,202 General and administrative 7,309 4,884 16,495 10,809 Selling and marketing 2,152 1,822 3,660 3,372 Depreciation and amortization   1,867       1,806         3,770       3,564   Total costs and expenses   34,228       31,844         70,700       65,947   Loss from continuing operations before other income and income taxes   (1,408 )     (1,578 )       (3,043 )     (2,711 )   Other income: Interest income, net   —       20         1       57   Total other income   —       20         1       57     Loss from continuing operations before income taxes (1,408 ) (1,558 ) (3,042 ) (2,654 ) Income tax benefit   —       (186 )       —       (185 )   Loss from continuing operations (1,408 ) (1,372 ) (3,042 ) (2,469 ) Gain from discontinued operations, net   (3 )     300         (12 )     302     Net loss $ (1,411 )   $ (1,072 )     $ (3,054 )   $ (2,167 )   Loss per share—Basic and diluted: From continuing operations $ (0.08 ) $ (0.08 ) $ (0.18 ) $ (0.14 ) From discontinued operations   —       0.02         —       0.02   Loss per share—Basic and diluted $ (0.08 )   $ (0.06 )     $ (0.18 )   $ (0.12 )   Weighted average common shares used in computing: Basic and diluted loss per share 16,642 16,928 16,642 17,577  

OFFICIAL PAYMENTS HOLDINGS, INC.

Consolidated Statements of Cash Flows

  Six months ended

March 31,

  (in thousands) 2012     2011   CASH FLOWS FROM OPERATING ACTIVITIES:     Net loss $ (3,054 ) $ (2,167 ) Less: Gain from discontinued operations, net   (12 )       302   Loss from continuing operations, net (3,042 ) (2,469 ) Non-cash items included in net loss: Restructuring costs 962

—

Depreciation and amortization 3,770 3,564 Provision for doubtful accounts

—

192 Deferred rent 21 224 Share-based compensation 680 (846 ) Capitalized software impairment loss

—

246 Net effect of changes in assets and liabilities: Accounts receivable, net (135 ) (920 ) Settlement processing assets and obligations, net 1,167 (363 ) Prepaid expenses and other assets (225 ) 171 Accounts payable and accrued liabilities (1,251 ) 290 Income taxes receivable — (22 )

Other long term liabilities

70

—

Deferred income   (33 )       (69 ) Cash (used in) provided by operating activities from continuing operations 1,714 (2 ) Cash used in operating activities from discontinued operations   (12 )       (7 ) Cash (used in) provided by operating activities   1,702         (9 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of available-for-sale securities — (5,998 ) Maturities of available-for-sale securities — 14,576 Maturities of restricted investments — 983 Capitalized internally developed software (1,192 ) (1,496 ) Purchase of equipment and software (35 ) (954 ) ChoicePay acquisition   (61 )       (35 ) Cash provided by investing activities from continuing operations (2,235 ) 7,076 Cash provided by investing activities from discontinued operations   —         309   Cash provided by investing activities   (2,235 )       7,385   CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock — 289 Purchase of company stock — (10,363 ) Capital lease obligations and other financing arrangements   (17 )       (16 ) Cash used in financing activities   (17 )       (10,090 ) Net (decrease) increase in cash and cash equivalents (550 ) (2,714 ) Cash and cash equivalents at beginning of period   39,760         45,757   Cash and cash equivalents at end of period $ 39,210       $ 43,043    

OFFICIAL PAYMENTS HOLDINGS, INC.

Consolidated Statement of Operations—Continuing Operations

        (in thousands)     Payment Solutions   VSA   Total Three months ended March 31, 2012: Revenues     $ 32,470     $ 350     $ 32,820   Costs and expenses: Direct costs 22,539 361 22,900 General and administrative 7,266 43 7,309 Selling and marketing 2,152 — 2,152 Depreciation and amortization       1,867       —       1,867   Total costs and expenses       33,824       404       34,228   (Loss) income from continuing operations before other income and income taxes       (1,354 )     (54 )     (1,408 ) Other income: Interest income, net       —       —       —   Total other income       —       —       —   (Loss) income from continuing operations before taxes (1,354 ) (54 ) (1,408 ) Income tax benefit       —       —       —   (Loss) income from continuing operations     $ (1,354 )   $ (54 )   $ (1,408 )     (in thousands)     Payment Solutions   VSA   Total Three months ended March 31, 2011 Revenues     $ 29,904     $ 362     $ 30,266   Costs and expenses: Direct costs 23,266 66 23,332 General and administrative 4,871 13 4,884 Selling and marketing 1,822 — 1,822 Depreciation and amortization       1,806       —       1,806   Total costs and expenses       31,765       79       31,844   Loss from continuing operations before other income and income taxes       (1,861 )     283       (1,578 ) Other income: Interest income, net       20       —       20   Total other income       20       —       20   Loss from continuing operations before taxes (1,841 ) 283 (1,558 ) Income tax benefit       (186 )     —       (186 ) Loss from continuing operations     $ (1,655 )   $ 283     $ (1,372 )   (in thousands)     Payment Solutions   VSA   Total Six months ended March 31, 2012:         Revenues     $ 66,772     $ 885   $ 67,657   Costs and expenses: Direct costs 46,323 452 46,775 General and administrative 16,322 173 16,495 Selling and marketing 3,660 — 3,660 Depreciation and amortization       3,770       —     3,770   Total costs and expenses       70,075       625     70,700   (Loss) income from continuing operations before other income and income taxes       (3,303 )     260     (3,043 ) Other income: Interest income, net       1       —     1   Total other income       1       —     1   (Loss) income from continuing operations before taxes (3,302 ) 260 (3,042 ) Income tax benefit       —       —     —   (Loss) income from continuing operations     $ (3,302 )   $ 260   $ (3,042 )     (in thousands)     Payment Solutions   VSA   Total Six months ended March 31, 2011: Revenues     $ 62,381     $ 855   $ 63,236   Costs and expenses: Direct costs 48,083 119 48,202 General and administrative 10,809 — 10,809 Selling and marketing 3,372 — 3,372 Depreciation and amortization       3,564       —     3,564   Total costs and expenses       65,828       119     65,947   (Loss) income from continuing operations before other income and income taxes       (3,447 )     736     (2,711 ) Other income: Interest income, net       57       —     57   Total other income       57       —     57   (Loss) income from continuing operations before taxes (3,390 ) 736 (2,654 ) Income tax benefit       (185 )     —     (185 ) (Loss) income from continuing operations     $ (3,205 )   $ 736   $ (2,469 )