Though revenue growth was strong in CheckFree Corp.'s latest quarter, the Atlanta provider of online bill payment technology failed to meet its earnings forecast and said an expiring contract will hit revenue next year.
Revenue of $203 million in the quarter that ended June 30, the fourth of its fiscal year, was up 27% from a year earlier. Net income rose 4%, to $11.9 million, or 13 cents per share; in May the company predicted 15 to 17 cents.
For the fiscal year, revenue of $757.8 million was up 25%, and net income rose 346%, to $46.8 million. The per-share figure was 50 cents; CheckFree had predicted 51 to 53 cents.
Its core business, processing electronic bill payments, grew slowly in the quarter; it handled 244.9 million transactions, only 4% more than in January-March. Electronic bill delivery increased 11%, to 41 million.
The contract that will expire next year brought in $50.5 million of revenue in the just-ended fiscal year, David E. Mangum, CheckFree's chief financial officer told analysts on a conference call. In the current fiscal year the tail end of the contract will bring in $24 million, including $21 million under a guarantee provision, he said.
John Kraft, an analyst with the investment firm D.A. Davidson & Co. in Great Falls, Mont., said the loss of contractually guaranteed revenue, of which analysts had already been made aware, had spooked some of them.
But the company has "been very up-front with guidance and with client losses and with all of that," Mr. Kraft said. "They characteristically didn't try to bury or hide anything."
Chairman and chief executive Pete Kight said that in the coming quarters he plans to focus more on disaster recovery, which could become an important selling point in the bill-pay market.
CheckFree's primary data center suffered "a significant power outage" June 15, Mr. Kight said. Partly because of investments made over the past year, "we were able to recover same-day," he said, and though no payments were lost, "a small number of payments were processed later than usual."
(Bank of America Corp. and Wachovia Corp., both CheckFree customers, said the outage did not disrupt service for their customers.)
The company plans to invest more in its security and data recovery capabilities to ensure it can rebound from incidents like the June outage, he said.
"I, quite frankly, don't think enough of the industry is talking about" disaster recovery, he said. "I don't think you should be in this business if you can't show you can survive these interruptions."
An event like the terror attack last month on London's public transit system would do far more damage than a blackout and could affect bill payment systems, Mr. Kight said - and "there isn't anything that happened in London that can't easily happen here."
Beth Robertson, a senior analyst at MasterCard International's TowerGroup Inc. research unit in Needham, Mass., said that CheckFree is smart to highlight its disaster recovery capabilities. "That is not always a top-of-mind point in vendor selection," she said, "but it is a very important point."
Mr. Kraft said that the power outage "got some attention at the time," and that it was wise for CheckFree to stress its ability to weather such an incident. "Payments and fraud are in the press a lot now, so it's a hot button with banks," he said. "Reputation is everything in this industry."
Mr. Mangum said CheckFree does not expect an increase in revenue before the end of the current fiscal year, at the earliest, from its contract with Wachovia.
The Charlotte banking company has been switching from a bill-payment service provided by Marshall & Ilsley Corp.'s Metavante Corp. subsidiary.
Doug Caldwell, a Wachovia spokesman, said more than 277,000 customers are using CheckFree's system now but that his company does not expect to convert existing bill-pay customers until next year.
(Wachovia also pushed back the installation of online banking software from Corillian Corp. of Hillsboro, Ore., reducing Corillian's first-quarter revenue.)
Mr. Kight said that CheckFree had been in the running to buy BillMatrix Corp., the last-minute remote bill payment company. It would have complemented CheckFree's walk-in bill payment service, he said.
Fiserv Inc. of Brookfield, Wis., won the bidding; it said last week that it would buy BillMatrix for $350 million. But Ms. Robertson said, "We'll definitely see activity from CheckFree in that whole arena of expedited payments … whether it's an acquisition or internal development of products."
Bruce Cundiff, a research analyst for Javelin Strategy and Research of Pleasanton, Calif., said CheckFree "has been doing a lot of work in lessening the lead time when you pay through a bank site" - because consumers think online payments are faster.
"It is important to consumers that they have this last-minute option," Mr. Cundiff said.
