I admit it; technology sometimes scares me. My wife programs the VCR (we're still years away from digital video recorders such as TiVo (NASDAQ:TIVO)), my year-old son is far more accomplished with the stereo remote control, and I still have a fondness for Microsoft (NASDAQ:MSFT) DOS, even though this newfangled Windows thing seems to be catching on. Still, even I manage to pay many of my bills online.
The behind-the-scenes company enabling this wonderful innovation, electronic-billing pioneer CheckFree (NASDAQ:CKFR), moved sharply higher yesterday after announcing a multiyear contract extension with Wachovia (NYSE:WB). Under the agreement, Wachovia's entire retail and small-business customer base will transition to CheckFree's electronic billing and payment processing platform. As the nation's fourth-largest bank, Wachovia and its business represent a considerable opportunity, even for a market leader such as CheckFree, which handles online-billing transactions for Bank of America (NYSE:BAC), Yahoo! (NASDAQ:YHOO), and more than 1,200 other organizations.
The company, which has been up and running since 1981, finally achieved its first period of GAAP profitability last quarter, a breakthrough that Rich Smith predicted back in January. Fiscal third-quarter earnings swung to a $7.7 million gain ($0.08 per share) from a $7.8 million loss the year before, on total revenues of $155.2 million. More importantly, free cash flow topped $100 million through the first three fiscal quarters and is expected to outpace by double digits the $133.5 million churned out last year.
Last quarter, CheckFree processed more than $150 million in electronic transactions from a customer base 13 million strong. Both metrics should continue to experience steady growth, provided no large-scale banking trends away from outsourcing in favor of in-house solutions emerge. Currently, traditional and Internet-based banks are a major ally. They encourage the use of online bill-paying services, fully aware that once customers go to the trouble of signing up, they are not likely to take their business to a competing bank.
Once more consumers discover that billing transactions can be placed securely and reliably over the Internet without the hassle of stamps, envelopes, and late fees, CheckFree's volume will swell. With the necessary infrastructure already in place, operational leverage should ensure that much of this growth is translated into higher earnings going forward. CheckFree's enviable position comes at a premium, however, and any missteps along the way could be costly.
Fool contributor Nathan Slaughter's former co-worker's friend's wife once worked for Wachovia, but he owns none of the companies mentioned.
