The Federal Reserve's effort to boost the economy by slashing interest rates is driving down float income at the bill payment provider Online Resources Corp.
Though most bill payment providers are pushing faster settlement, and some even offer same-day payment capabilities, many transactions still take a few days to complete, a delay that generates float income.
This income is typically very predictable, but the Fed's cuts in the interest rates in recent months have exceeded the range built in to Online Resources' income models, and last week the Chantilly, Va., technology vendor reduced its 2008 guidance, trimming anticipated float income by $2.5 million. This is expected to be partially offset by a gain of $1 million in transaction revenue; the full-year revenue projection now is $154.5 million to $164.5 million.
"We face a moderate headwind in 2008 with the unexpectedly sharp decline in interest earnings on payment float," Matthew P. Lawlor, Online Resources' chairman and chief executive, said during a conference call last week to discuss its fourth-quarter results and full-year 2008 earnings.
Cathy Graham, Online Resources' chief financial officer, said the company can normall "manage the impact of changing interest rate environments in our business without changes to our performance expectations," but "the unprecedented 150 basis points in total cuts that occurred in December and January was unexpected."
In September the Fed's Open Market Committee cut 50 basis points from both the federal funds and discount rates. This was factored in to Online Resources' earlier guidance. But in December, the committee cut another 25 basis points. This was followed in January by two rapid-fire cuts, first of 75 basis points and then of another 50 basis points.
Ms. Graham stressed that float is a small portion of the company's revenue, and was shrinking anyway as bill payments settle faster. Eventually interest income will become "immaterial to revenue."
Jeff Yabuki, Fiserv Inc.'s president and chief executive, said in a conference call Feb. 6 that the Brookfield, Wis., technology vendor faces the same issue.
"Given the significant declines in interest rates over the last several months …float-based interest income has been negatively" affected by five to six cents per share, he said. Though his company should benefit from lower interest on floating-rate debt, "that will not offset the float income deficit," he said.
Tim Oliver, the chief financial officer at Metavante Technologies Inc., said the rate cuts have reduced float revenue for in-transit bill payments processed by the Milwaukee company. However, he said, the impact is not material and is far outweighed by the benefit of lower interest rates on the $1.75 billion of debt it took on when it was spun off last year by Marshall & Ilsley Corp. "We cheer for lower interest rates," he said.
Edward Woods, a senior analyst at the research firm Celent LLC, said that as bill payments settle faster and float income's significance erodes "it underscores the need to get more efficient and look for more value-added options."
In the fourth quarter, Online Resources' revenue grew 30% from the year earlier, to $38.1 million. Net income was $600,000 compared with a loss of $2.7 million. Full-year revenue was up 47%, to $135.1 million, and the net loss grew 123%, to $8.9 million.
Matthew McCormack, an analyst at Friedman, Billings, Ramsey & Co. Inc., wrote in a research note that "the fundamentals of this business remain strong" and "we do not believe it is fair [to expect] the company to have assumed the Fed would cut short-term interest rates by such an unprecedented amount."
