After 23 years, electronic-payment processor CheckFree (NASDAQ:CKFR) finally secured its first year of net profitability (by GAAP standards) three months ago, highlighted by fourth-quarter net income that swung from a $17 million loss to an $11.4 million gain. Yesterday, the company shot out of the fiscal 2005 gate, posting first-quarter earnings of $0.07 cents ($6.2 million) -- reversing a $0.07-cent loss from the prior year -- on revenues that spiked 26% to $178 million.
Shares of the Atlanta-based company are moving sharply higher on the news, up nearly 9%, recouping losses from late last week that followed a much-anticipated update from Bank of America (NYSE:BAC) -- CheckFree's largest customer. On Thursday, the bank reported a 10% increase in online bill-payment volume, but the number of active users increased only 8% sequentially to 4.8 million, slightly below targets.
Fortunately, companywide growth metrics were a little more robust. The electronic commerce division processed 205.8 million transactions and delivered 29.6 million e-bills -- increases of 25% and 14%, respectively, over the prior quarter -- driving a 27% gain in processing and servicing revenues to $158.8 million. In the past year, electronic transactions (including walk-in bill payments at retail locations) have grown 62%, and the number of e-bills delivered has more than doubled.
To generate transactions, CheckFree needs subscribers, and to enroll subscribers, more outlets such as Yahoo (NASDAQ:YHOO) and Wachovia (NYSE:WB) (which recently returned to CheckFree after defecting last year) need to be added. The number of organizations that have outsourced online transactions to CheckFree -- which are referred to as electronic billing and payment distribution points -- grew 38% last fiscal year to 1,300 and currently stands at more than 1,400.
CheckFree also provides portfolio management services and software to financial institutions, and both of those divisions reported solid double-digit revenue growth for the quarter. Electronic commerce, though, which represents three-fourths of total revenues, posted a 30% improvement, helped by transaction growth, which surged 25%, triple the average growth rate from the past four quarters.
The firm's first-quarter results surpassed both street expectations, as well as internal forecasts, and the momentum is expected to continue. The company reaffirmed full-year guidance of $0.39 to $0.45, a quadrupling of the $0.11 earned last year. Underlying earnings, which exclude acquisition-related amortization and other one-time items, are projected to rise from $1.05 to between $1.26-$1.30.
CheckFree is the dominant force in an emerging and quickly growing industry, with a clean balance sheet, accelerating growth, and ample free cash flow. Furthermore, the company has little large-scale competition (though providers could always turn to in-house solutions). Pricing pressure remains a concern, though, and lucrative guaranteed-minimum contracts with Microsoft (NASDAQ:MSFT) and First Data (NYSE:FDC) will expire within the next two years. All things considered, CheckFree has a promising story but may not be the best choice for cautious investors.
Fool contributor Nathan Slaughter, despite his fear of technology, enjoys paying bills online without stamps, envelopes, or the fear of late fees.
