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Payments facilitator and online banking software provider Online Resources (Nasdaq: ORCC) is scheduled to report Q2 2006 earnings Monday afternoon. Want to know what Wall Street expects to see? Read on. Want to know what really matters? Read on a bit more.
What analysts say:
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Buy, sell, or waffle? Six analysts follow Online Resources. Of these, four rate it a buy and two a hold. No one says sell.
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Revenues. Wall Street will be looking for a 21% jump in revenues. The target is $17.7 million.
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Earnings. Profits, however, are predicted to be flat year over year, at $0.07 per share.
What management says:
Other news pales against the background of Online Resources' recent announcement that it has closed on its cash purchase of bill-pay company Princeton eCom for $180 million. eCom brings with it a client base of 1,400 banks and 1,600 client billers, dwarfing the size of Online Resources' existing pool of 850 client financial institutions. The parties did not clarify whether any overlap exists among these clients.
According to the presentation Online Resources gave when the acquisition was announced, the firm projects 21% revenue growth and a 25% EBITDA (earnings before interest, taxes, depreciation, and amortization -- you know, all the bad stuff) margin for itself for fiscal 2006. eCom, in contrast, was said to be growing at 28% and earning a 12% EBITDA margin. Its revenue run rate of $39 million means that, with a purchase price of $180 million, Online Resources paid 4.6 times sales for eCom -- a significant premium to the 3.6 times sales (again, the run rate) that Online Resources' own stock fetches. For the record, CEO Matt Lawlor acknowledged that his firm was paying a "full price" for eCom, chalking that up in part to a "very heated bidding competition" among the several companies interested in buying eCom.
Online Resources justifies the premium in part by pointing to eCom's faster growth in sales, and in part by noting that eCom only recently became profitable. If the company follows the same track that Online Resources did when it became profitable a few years ago, eCom's profits could rise rapidly over the next few years, accruing to the benefit of Online Resources' shareholders. Indeed, Online Resources targets as much as a 35% EBITDA margin for the combined company by the end of next year, and as much as a 40% EBITDA margin thereafter.
What management does:
The below table doesn't tell us much about where this new, combined company might be heading, profits-wise. But it does show what Online Resources management has accomplished on its own. Specifically, it has gradually improved each of its rolling gross, operating, and net margins over the last 18 months. (As for the big bump in the net in the last two rolling quarterly periods, pay it no mind; it's due to a one-time tax credit taken in the December quarter.)
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Margins %
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12/04
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3/05
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6/05
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9/05
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12/05
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3/06
|
|
Gross
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57.3
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58.7
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58.8
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58.9
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59.5
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58.2
|
|
Op.
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9.2
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12.5
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12.3
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11.7
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13.1
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10.4
|
|
Net
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9.3
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12.5
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12.5
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12.6
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37.5
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34.2
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All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.
One Fool says:
Online Resources promised to give further details on the acquisition and its expectations for the combined company after the deal closed. I'd expect to see those details in Monday's report and the subsequent conference call.
Other things to look for: To fund the acquisition, Online Resources took out a $85 million loan and privately placed $75 million worth of convertible preferred stock. That's actually more debt than the firm needed to do the deal, however, since it had $56 million in the bank when the acquisition was first announced. So look for cash reserves to shrink but not disappear, for the previously clean balance sheet to become loaded down with long-term debt, and for the diluted share count to explode as all those preferred shares get counted as potential future common shares.
Competitors:
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CheckFree (Nasdaq: CKFR)
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Corillian (Nasdaq: CORI)
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Digital Insight (Nasdaq: DGIN)
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Fiserv (Nasdaq: FISV)
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Marshall & Ilsley (NYSE: MI)
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S1 (Nasdaq: SONE)
Want to learn more about Online Resources? You're in luck; we've been following it for a while:
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Fool contributor
Rich Smith
owns shares of Corillian, but no shares in any other company mentioned.
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