Checkfree Holding Corp. has sharply reduced its earnings expectations, citing reduced interest by banks in home banking as they focus on the year- 2000 problem, mergers, and other issues.

The company, which provides electronic bill paying to more than two million consumers, said it expects to earn only 12 to 16 cents per share in fiscal 1999, which will end next June 30. The company lost 6 cents a share in the fiscal year just ended, but analysts' consensus estimate for the next one had been 32 cents, according to First Call.

Checkfree said revenues for the 1999 fiscal year will be $245 million to $250 million, about $20 million less than had been predicted.

The announcement was made after trading closed last Tuesday, and the next day Checkfree's stock fell $9.8125 to close at $13.9375. By late Friday it was down to $12.75, for a 46% drop in market capitalization, to $739 million, since the announcement.

Peter Kight, chairman and chief executive, said banks are paring back their marketing of home banking as they grapple with mergers, year-2000 technology upgrades, and conversions to Internet-based systems.

"I clearly did not anticipate well enough the effect of the merger consolidations that took place among several of our key banks," said Mr. Kight, who owns 12% of its stock.

The company said it expects subscriptions to home banking services to grow at annual rates of 4% in the current quarter and 5% in the October- December quarter. It had previously forecast 8% rates for both and still higher for the first half of calendar 1999.

Despite the glum news, many financial analysts were optimistic about Checkfree, noting that its customers include 40 of the nation's largest 50 banks; other analysts were more reserved.

A Lehman Brothers report raised questions about the demand for home banking services by customers.

Though one-third of the nation's 90 million U.S households are connected to the Internet, only four million bank on-line. If demand were stronger banks would step up their marketing, the report said.

Checkfree's problems, it added, are exacerbated by its increasingly unpopular pricing structure for processing payments.

Banks essentially transmit large, batch-based electronic payment files to Checkfree, which uses the information to pay consumer bills to the appropriate vendor. Banks are charged a relationship-based fee of between $3 and $4 per month per customer.

Banks are more interested in pursuing a lower price based on volume, the Lehman report said.

Gary Craft, analyst at BancAmerica Robertson Stephens Inc., agreed: "We continue to believe that the market is starting to move toward transaction- based pricing and away from relationship pricing, which Checkfree currently enjoys."

He said KeyCorp and First Union Corp. have instituted measures that divert certain transactions, such as "on-us" transactions, from Checkfree to more "optimal settlement and disbursement processers."

Mr. Craft downgraded the stock to "market perform" from "long-term attractive" six months ago.

Paul Ayres, vice president at Cleveland-based KeyCorp, confirmed that KeyCorp modified its home banking system for cost reductions and faster settlement of payments.

"There's no sense in sending it to Checkfree and having them turn around and send it back to us," Mr. Ayres said. "We can do it a lot faster."

The bank, whose customers initiate about 100,000 monthly transactions, modified its system from Intelidata Technologies Corp., and separates as many as 8% of its transactions from the payments file that would otherwise be processed by Checkfree.

KeyCorp officials said its modification has reduced error rates in home banking transactions. From 45% to 50% of the electronically initiated transactions that Checkfree sends to billers arrive as paper checks-without the bill stub.

The biller's only recourse is to issue a dunning notice when it cannot recognize a customer's home banking payment,-a reconcilement problem for Checkfree and a nightmare for banks who must contend with irate customers.

"I think Checkfree would be very supportive of this approach," Mr. Ayres said. "Fundamentally, they need to see home banking and bill payment be successful, and it is only going to be successful when you can work on the error rate and improve the percentage of completed electronic payments."

Mr. Kight said, "Some midlevel people at banks think that Checkfree should have a different pricing structure, but it is significantly more complex than that." Banks are asking the company to integrate electronic bill presentment, customer care, and audit tracking services, all of which add to costs, he said.

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