Congratulations, Ma and Pa investor. You're about to become the proud recipients of a bouncing baby earnings report from CheckFree (NASDAQ:CKFR). The online bill-pay facilitator reports fiscal Q4 and full-year earnings results tomorrow.

What analysts say:

  • Buy, sell, or waffle? Nineteen analysts follow CheckFree. Eleven rate the stock a buy, seven a hold, and just one a sell.
  • Revenues. Wall Street will be looking for a 13% jump in revenues in tomorrow's news. The target is $230.1 million.
  • Earnings. Profits, however, are only expected to rise 5% to $0.41 per share.

What management says:
CheckFree divides its business into three main units: electronic commerce, software, and investment services, with e-commerce drawing revenues roughly three times as hefty as the other two combined and earning more than twice their profits per dollar of revenue. Last quarter, CEO Pete Kight declared that each of these units "executed well." Going over each unit's performance, Kight noted that (1) e-commerce transaction volume increased 8% from the previous quarter and delivered 3% more e-bills; (2) software had "one of its strongest contract sales quarters ever;" and (3) investment services grew its number of accounts under management by 22% year over year.

Regarding what we'll see tomorrow, note that the profits per share number cited above is of the "pro forma" variety. Under generally accepted accounting principles, CheckFree expects to see $0.30 to $0.33 per share.

What management does:
CheckFree's gross margins contracted a bit last quarter, as cost pressures restricted revenue growth to 20% while the cost of providing services rose 26%. The good news is that the firm responded by improving its efficiency and cutting its cost of operations by 8%. Result: Operating and net margins continue to soar.

Margins %

12/04

3/05

6/05

9/05

12/05

3/06

Gross

59.6

59.9

60.8

62.0

62.5

61.8

Op.

7.3

8.5

9.3

12.8

16.2

18.6

Net

5.7

6.5

6.2

8.4

10.6

12.7
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:
CheckFree continues to ride the tide of a very favorable market trend: the movement of consumers generally, and bank customers in particular, to paying their bills online. Recognizing the trend, Mr. Market has bid up the price of CheckFree shares by 32% over the last year, while the S&P 500 rose only 4%.

Stock traders apparently think the price increase is overdone and have sold about 11% of CheckFree's float "short." And as much as I think their pessimism is similarly exaggerated, in principle I believe their thinking is right. CheckFree sells for a price-to-free cash flow multiple of 23 and a P/E of 38, which far exceeds its projected rate of profits growth (18%). Meanwhile, return on equity stands below its peers at 7%. Thus, as good as the company is, the stock looks pricey to me.

Competitors:

  • Bottomline Technologies (NASDAQ:EPAY)
  • Online Resources (NASDAQ:ORCC)

Customers:

  • Corillian (NASDAQ:CORI)
  • Digital Insight (NASDAQ:DGIN)
  • Fiserv (NASDAQ:FISV)
  • S1 (NASDAQ:SONE)

Fool contributor Rich Smith likes online bill paying so much that "he bought the company." He owns shares of Corillian. Unfortunately, his refusal to pay bills by snail mail has earned him the ire of the USPS. Read why in "My Postman Hates Me ". The Fool has an ironclad disclosure policy.