How Does the Future Look for Higher One?


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Financial-services provider Higher One (NYS: ONE) released earnings for the second quarter of 2011 yesterday after the market closed. I added the company to my Rising Star Portfolio in March, and so far it's been performing well, so let's take a closer look.

Going by quarters, not semesters
Revenue of $35.1 million for the quarter was a 26% increase from the same quarter a year ago. This resulted in earnings-per-share growth of 33% over the same quarter. Management attributed the growth primarily to growth in the number of OneAccounts (the company's student checking-account product), as well as the number of schools contracted.

At the end of the quarter, the number of OneAccounts came to 1.7 million, up from 1.2 million a year ago. This number was slightly down sequentially from last quarter, but that doesn't necessarily imply that growth is slowing. The question was addressed on the earnings call, and management noted that because of the seasonality of financial-aid disbursements, the second quarter is the company's weakest. So we want to focus on year-over-year growth to get a clearer picture.

Follow the money
Management reaffirmed guidance for the year with a revenue range of $180 million to $188 million and raised EPS guidance based on its continued focus on managing expenses while executing on its strategic priorities of signing new clients and increasing adoption at existing clients. SSE (signed school enrollment numbers) continued to rise, with a 31% increase in the company's OneDisburse product and a 10% increase in the CASHNet Suite of products.

Growth in the CASHNet Suite of products has slowed somewhat over the past several quarters, though management doesn't find cause for concern at this point because the SSE count is more closely correlated to OneDisburse revenue versus CASHNet revenue. OneDisburse is the refund-management service the company provides and garners the lion's share of revenues for the company by way of OneAccounts; in fact, OneAccounts generates approximately 82% of overall revenues.

Coming attractions
With all of the recent noise regarding changes to the Durbin amendment and Regulation E, Higher One's banking relationship with The Bancorp (NAS: TBBK) has been an ongoing question as to how the bank will be regarded concerning debit-card fees and interchange. Now that the final list of exempt banks has been put out and The Bancorp is on that list, management is more confident than ever of its relationship and clarity in earnings.

Management is also very excited about the recent launch of OneAccount Premier. This account will add another level of service and pricing structure to the OneAccount family, offer services such as cash flow monitoring systems, an interactive budgeting tool, and even a way for students to measure their own success with a "Financial Fitness Score." The new account should be rolling out slowly over the next few weeks to more consumer channels, and management is very encouraged by its prospects.

Where do we go from here?
Business looks to be moving right along. Short-term concerns regarding financial legislation have been more or less alleviated; however, over the long haul, management will do well to continue coming up with new ways to diversify the company's revenue stream. One weakness the company has right now is that the model is very dependent on account revenues. But with a bright, enthusiastic, founder-led management team in place, it looks like the sky's still the limit for Higher One.

At the time thisarticle was published Stock Advisor analystJason Moserowns no shares of any companies mentioned. The Motley Fool owns shares of Higher One. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy

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