Before getting into the news of revenue growth, profits growth, free cash flow, and all the other goodies that integrated Internet banking software Online Resources (NASDAQ:ORCC) provided investors with last week, let's first address the elephant in the living room.

Hello, Mr. Elephant -- Online Resources' 32% increase in diluted shares outstanding since Q2 2004. Remember that I warned you about this one back in April: "Finally, speaking of options, Fools should be on the lookout for a massive increase in shares outstanding appearing in next quarter's report. Those won't, however, be from stock options. For the most part, share dilution over the next three months will result from a 4.4 million-share offering that was completed subsequent to end-of-Q1."

Key in on that "for the most part" part. Because as it turned out, Online Resources' share count actually increased by 6.5 million diluted shares over the past year. Let's break those down:

  • 1 million shares were issued in December, to acquire Incurrent.
  • 4.4 million shares were issued in the follow-on offering .
  • 0.7 million shares were issued to fill an "over-allotment" option on that offering.
  • 0.2 million shares were issued as part of the purchase price for acquiring IDS.

That makes for a grand total of 6.3 million shares accounted for as not-necessarily-bad stock dilution, with the share count increased by an additional 200,000 shares as a result of already-issued stock options coming "into the money."

Now, on to the good news. Year-to-date, Online Resources has grown its revenues 48% over the year-ago period through a combination of organic growth and acquisitions. Those revenues translated into a 161% increase in net income over the comparable period last year. By virtue of all the stock dilution, that then became a 125% increase in earnings per diluted share -- to $0.18 in the first half of 2005.

Annualize that number to get the company's likely run rate for the year, and Online Resources should be able to hit at least the lower end of its updated guidance of $0.36 to $0.39 per diluted share for fiscal 2005.

The company did not provide a cash flow statement in its earnings release (shame, shame). However, management did mention its free cash flow (for the second quarter only) in its conference call, putting it at $1.5 million. We'll have to wait for the firm to issue its 10-Q to see what the total is for 1H 2005, but for Q2 2005 alone, this represents a 67% increase over the company's FCF number for Q2 2004. This is even better even than the 48% net income growth for Q2 that Online Resources clocked against the year-ago quarter.

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Fool contributor Rich Smith does not own shares of Online Resources.