CheckFree Corp. said its second consecutive quarter of profitability according to generally accepted accounting principles validated its vision of electronic bill presentment driving online bill payment adoption.
“I don’t think there’s anything to stop the momentum of all the banks gearing up to compete in this marketplace” of online banking, Pete Kight, CheckFree’s chief executive, said in an analyst conference call Tuesday.
The Norcross, Ga., company reported net income of $11.4 million for its fiscal fourth quarter, which ended June 30, versus a net loss of $17 million for the same period last year. Revenue rose 11% from a year earlier, to $160 million.
However, CheckFree’s stock fell Wednesday amid concern that the market for bill presentment was stagnant.
After spending many quarters in the red, CheckFree posted GAAP profits of $7.7 million in its fiscal third quarter.
CheckFree, a major advocate of consolidated bill payment, says the delivery of electronic invoices, is the key to growth in online bill payment. In its fiscal fourth quarter it delivered 25.9 million e-bills, 15% more than it did in the previous quarter.
“Sequential growth in the 15% to 20% range is strong performance,” David Mangum, the chief financial officer, said in a phone interview Tuesday.
Still, the e-bill delivery growth rate has been slowing; this was the first quarter in at least a year that the growth rate dipped below 20%. The rate was 22% in its fiscal third quarter of this year and 31% in the fourth fiscal quarter of 2003.
During the conference call, Mr. Mangum said the growth slowdown was caused, in part, by the fact that CheckFree’s software sales are usually low in the summer.
However, Beth Robertson, a senior analyst at TowerGroup, a Needham, Mass., financial services consulting unit of MasterCard International, said the growth might also be slowing down because “they haven’t brought in a lot of new billers recently,” to begin delivering invoices in electronic format.
Alenka Grealish, who manages the banking group at the Boston market research firm Celent Communications LLC, said the issue might be even bigger. CheckFree has already signed up the companies most eager to deliver bills electronically, and now it must court the banks and billers that were reluctant to be early adopters, she said.
“You get your big hits early,” Ms. Grealish said. “Now they’re going after the smaller volumes, or the harder-to-bring-on billers.”
On July 30 CheckFree announced its first international joint venture, with BACS Ltd. of London. The venture will deliver e-bills to customers of HSBC Holdings PLC and Lloyds TSB Group PLC.
Also last month, Wachovia Corp. agreed to fully outsource its electronic billing and payment services to CheckFree.
Ms. Grealish said CheckFree’s e-bills are “a molehill” compared the mountain of paper bills still available to electronify. “You can basically build this molehill. The possibilities are endless.”
Besides expanding its e-billing operations, CheckFree is moving into a different side of the bill-payment market. It said its entry into the walk-in bill payment business, through its June 22 acquisition of American Payment Systems Inc. of Wallingford, Conn., will allow it to provide services to consumers that do not write checks or pay bills online.
Mr. Mangum said the acquisition contributed $1 million to revenue but was neutral to earnings for the quarter. He also said it gave his company a new set of customer relationships. Because many people who use walk-in bill payment sites are unbanked, CheckFree may have been unable to reach this segment before, the company said.
“About 20% of the U.S. population does not have a strong relationship with a financial institution,” Mr. Mangum said.
Ms. Grealish said the acquisition could help CheckFree build revenue beyond its core business of processing electronic payments. “They realized that the world is still paper, and maybe they still need to get some of their revenues from paper.”
According to Ms. Robertson, only about 1% or fewer of all bill payments nationwide are walk-in cash payments. However, some industries, such as utility companies, typically receive a higher volume of cash payments, she said; that percentage could range from 10% to 35%. Also, not all walk-in customers are unbanked, so CheckFree might be able to promote its online banking services to APS’ customers, she said.
But there are challenges in serving this group, Ms. Robertson said. Walk-in customers may not hold any loyalty to a specific company or office location, and the banking industry is courting the unbanked through products such as checking accounts that require no minimum balance, she said.
Ms. Robertson suggested a potentially bigger benefit from the APS acquisition: the relationships with the billers that use APS. Having these new relationships, and even being able to offer a walk-in service to its existing biller customers, gives CheckFree a way to expand even though the growth in e-bill deliveries is slowing, she said.
“There’s a lot of benefit to having close ties to individual organizations,” Ms. Robertson said.
