CheckFree Corp.’s profits more than quadrupled in its fiscal first quarter, which ended Sept. 30, but executives warned that it expected uneven results for the rest of the year.
The Atlanta provider of electronic bill payment and presentment services said some guaranteed payment contracts are expiring, the company has lost some customers, others are moving to lower pricing levels, and a switch in the way it will process payments for one of its customers will cost it some float income.
As a result of all this, the quarterly reports for the rest of the fiscal year “are going to be lumpy,” Pete Kight, CheckFree’s chairman and chief executive officer, said on a conference call with analysts Tuesday evening.
One factor is the anticipated switch this quarter by a large customer, which CheckFree would not name, from a “good funds model,” to a “risk-based model.” The shift will reduce CheckFree’s float income.
Under the good funds model, CheckFree withdraws cash from a consumer’s bank account as soon as a bill payment is initiated, then holds on to the funds until the payment settles. (The settlement process can take several days.)
Under the risk model, CheckFree debits the consumer’s account and credits the biller simultaneously. Bill payments often settle the same day they are initiated or the next day, but CheckFree assumes the risk for the transaction if the funds are not available in the customer’s account.
“The vast majority” of CheckFree’s customers now use the risk model, Mr. Kight said. “This is exactly where we want the industry to go.”
David E. Mangum, CheckFree’s chief financial officer, said that as a result of the shift by the large customer, float revenue would drop modestly this quarter and more substantially next quarter, though he would not say by how much.
“This one customer is large enough that you guys would notice it,” he told analysts. “That’s why we call it out.”
Mr. Kight said that the faster payments that come with the risk model have improved customers’ bill-payment experience and are worth losing some float revenue. “We built the model that way. The end user doesn’t want the money taken out of the account before the bill is paid.”
CheckFree said its net income grew 325%, to $26.4 million, or 28 cents a share, as revenue climbed 21%, to $215.8 million. “Underlying earnings” were 46 cents a share, which topped the average estimate of analysts by 7 cents.
For this quarter, CheckFree expects underlying earnings of 40 to 42 cents a share, just above the average estimate of 39 cents, but it expects revenue to slip to between $210 million and $215 million.
CheckFree inherited two contracts with minimum volume guarantees in its 2000 purchase of Transpoint LLC, a electronic bill-payment joint venture of Microsoft Corp., First Data Corp., and Citigroup Inc. One contract, with First Data, expired in August; Mr. Mangum said a second one, with Microsoft, will expire next quarter.
He also said that CheckFree will lose two large customers this quarter. National City Corp. of Cleveland, which processed 2.5 million transactions a quarter through CheckFree, is moving that business to Metavante Corp., the technology subsidiary of the Milwaukee banking company Marshall & Ilsley Corp. A credit card company, which executives did not identify, that processes 5 million remittance payments a quarter through CheckFree, is taking that business in-house.
Mr. Mangum said the lost revenue from the two Transpoint contracts, and the loss of the two other customers, are more important than the reduced float income from the major customer’s model switch.
Software licensing sales were higher than anticipated in the first quarter, as several major sales closed earlier than expected. As a result, sales will probably slow this quarter, though CheckFree said they should remain higher than they have been in the past.
Mr. Mangum said CheckFree had delayed some spending, such as the purchase of a disaster recovery system, but expenses will rise this year as the company catches up on that spending.
Gregory Smith, an analyst at Merrill Lynch Global Securities, noted that CheckFree did not raise its full-year guidance, despite the strong first quarter.
“We see many moving pieces to track for the remainder of the year, complicating the story,” and the difficulty in predicting results could keep the shares from rising, Mr. Smith wrote in a note to clients Wednesday. He has a “neutral” rating on the stock.
But John Kraft, an analyst at D.A. Davidson & Co. who rates CheckFree a “buy,” reiterated his confidence in the company in a note published Wednesday.
“CheckFree will get through these issues, which mainly relate to the end of guaranteed revenues payments,” Mr. Kraft wrote.
