CheckFree Reports Fiscal 2007 Second Quarter Results
31 January 2007
CheckFree Corporation (Nasdaq: CKFR) today announced second quarter revenue of $237.2 million, representing 11 percent growth over the same period last year. The Company's Generally Accepted Accounting Principles (GAAP) net income for the quarter was $35.3 million, or $0.39 per share, and underlying net income was $41.8 million, or $0.46 per share. Free cash flow was $48.0 million for the second quarter as outlined in Attachment A.
GAAP Results: Net income for the second quarter of fiscal 2007 was $35.3 million, compared to net income of $33.8 million for the same quarter last year. Earnings per share were $0.39 for the second quarter of fiscal 2007, compared to earnings per share of $0.36 for the second quarter of last year. Net cash provided by operating activities was $58.9 million for the second quarter of fiscal 2007, compared to $56.8 million for the same period last year.
Underlying Results: Underlying net income for the second quarter was $41.8 million, compared to $41.0 million for the same quarter of last year. Underlying earnings per share were $0.46 for the second quarter of fiscal 2007, compared to $0.44 per share for the second quarter of last year. Underlying net income and earnings per share for the second quarter of fiscal 2007 exclude the amortization of acquisition-related intangible assets and the SFAS 123( R ) impact of stock options issued prior to July 1, 2004, all net of related income tax benefits. Underlying net income and earnings per share for the second quarter of fiscal 2006 include the historical results of discontinued operations, which resulted from a business that was divested in the third quarter of fiscal 2006; and exclude the amortization of acquisition- related intangible assets and the SFAS 123( R ) impact of stock options issued prior to July 1, 2004; net of related income tax effects from each of the foregoing. A reconciliation of CheckFree's quarterly and annual underlying results to its GAAP results is included in Attachment A.
"CheckFree's Electronic Commerce business reported solid growth in core, bank-based transactions during the quarter, while the smaller base of non-bank transactions were behind our expectations," said Pete Kight, CheckFree Chairman and Chief Executive Officer. "Our Software business showed better- than-expected results and our Investment Services business performed as expected during the quarter, with accounts under management increasing nicely. The second half of our fiscal year will be all about balancing execution with investment in longer term growth initiatives."
Second Quarter Highlights
During the second quarter of fiscal 2007, the Company reported that the Electronic Commerce Division processed 322.0 million transactions. Consumer Service Provider (CSP) transactions at banks, credit unions and other financial institutions increased 7 percent sequentially and non-CSP transactions declined 7 percent, reflecting an overall sequential transaction growth rate of 3 percent. During the second quarter, the Company delivered 54.9 million electronic bills, a 6 percent sequential quarterly increase.
The CheckFree Software Division reported results that exceeded expectations, with strong license sales in its global treasury products. The CheckFree Investment Services Division reported more than 2.6 million portfolios under management, compared to 2.1 million in the second quarter of fiscal 2006, representing a 24 percent year-over-year increase. Refer to Attachment B for details on the financial performance of CheckFree's divisions in the second quarter of fiscal 2007, and Attachment C for electronic billing and payment metrics.
The Company also announced that it repurchased nearly 1.3 million shares of its common stock for approximately $50 million during the second quarter of fiscal 2007.
Financial Outlook for the Third Quarter
"For the third quarter of the fiscal year, we expect revenue between $241 million and $246 million, with GAAP earnings per share in the range of $0.39 to $0.41, which equates to underlying earnings per share in the range of $0.47 to $0.49," said David Mangum, CheckFree Chief Financial Officer.
"In Electronic Commerce, we expect sequential transaction growth of 5 to 7 percent in our CSP channel, and non-CSP transaction volumes to be flat or decline by as much as 2 percent," Mangum continued. "We expect revenue performance in our Software Division to experience a modest sequential decline from the second quarter, and portfolio growth in Investment Services to be consistent with historical rates in the third quarter."
"Our full-year expectations for earnings per share remain $1.58 to $1.62 on a GAAP basis and $1.90 to $1.94 on an underlying basis," he said. "And we continue to expect free cash flow in the range of $190 million to $195 million for fiscal 2007."
"Our full-year expectations do not include any impact from the acquisition of Carreker, which we announced on January 2, 2007," said Mangum. "We provided high-level financial expectations when we announced the acquisition, and expect to provide more specific information after the deal closes, which is expected to occur on or about March 31, 2007."
The difference between GAAP and underlying earnings expectations for the third quarter of fiscal 2007 is due to expected acquisition-related intangible amortization expenses, the SFAS 123( R ) impact of stock options issued prior to July 1, 2004, and the related income tax benefits from each of the foregoing.
Conference Call on the Internet
CheckFree will broadcast its conference call at 5 p.m. EST today to review financial results for the second quarter and its expectations for the third quarter and for fiscal 2007. Participants should dial 1-877-232-1067 any time after 4:45 p.m. EST and ask for the CheckFree conference call. The live conference call will be accessible through the Investor Center section of the CheckFree website at http://www.checkfreecorp.com. A digital replay of the call will be available on the CheckFree website after 7 p.m. EST.
About CheckFree (http://www.checkfreecorp.com)
Founded in 1981, CheckFree Corporation (Nasdaq: CKFR) provides financial electronic commerce services and products to organizations around the world. CheckFree Electronic Commerce solutions enable thousands of financial services providers and billers to offer the convenience of receiving and paying household bills online, via phone or in person through retail outlets. CheckFree Investment Services provides a broad range of investment management solutions and outsourced services to hundreds of financial services organizations, which manage about $1.7 trillion in assets. CheckFree Software develops, markets and supports payment processing solutions that are used by financial institutions to process more than two-thirds of the 14 billion Automated Clearing House transactions in the United States, and supports reconciliation, exception management, risk management, transaction process management, corporate actions processing, and compliance within thousands of organizations worldwide.
Certain of the Company's statements in this press release are not purely historical, and as such are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These include statements regarding management's intentions, plans, beliefs, expectations or projections of the future, and include statements regarding the Company's proposed acquisition of Carreker, as well as the Company's forecasts and expectations of, revenue for the third quarter of fiscal 2007, earnings per share for the third quarter of fiscal 2007 and for fiscal 2007, sequential transaction growth and the general performance of the Company's divisions in the third quarter of fiscal 2007, and free cash flow for fiscal 2007 as a whole (paragraphs 4, 8, 9, 10, 11 and 12). Forward-looking statements involve risks and uncertainties, including without limitation, the various risks inherent in the Company's business, and other risks and uncertainties detailed from time to time in the Company's periodic reports filed with the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K for the year ended June 30, 2006 (filed September 8, 2006) and Form 10-Q for the quarter ended September 30, 2006 (filed November 8, 2006). Further, with respect to the proposed acquisition of Carreker, although the Company and Carreker have signed an agreement for a subsidiary of the Company to merge with and into Carreker, there is no assurance that they will complete the proposed merger. The merger agreement will terminate if the companies do not receive necessary approval of Carreker's stockholders or government approvals or if either Carreker or the Company fail to satisfy other conditions to closing. One or more of these factors have affected, and could in the future affect the Company's business and financial results in future periods, and could cause actual results to differ materially from plans and projections. There can be no assurance that the forward-looking statements made in this press release will prove to be accurate, and issuance of such forward-looking statements should not be regarded as a representation by the Company, or any other person, that the objectives and plans of the Company will be achieved. All forward-looking statements made in this press release are based on information presently available to management, and the Company assumes no obligation to update any forward-looking statements.
CHECKFREE CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Operations
(Unaudited)
(In thousands, except per share data)
Three Months Ended Six Months Ended
December 31, December 31,
2006 2005 2006 2005
Revenues:
Processing and servicing $200,775 $185,716 $396,253 $370,356
License fees 12,321 7,822 21,395 15,380
Maintenance fees 11,924 9,966 23,454 19,629
Professional fees 12,140 10,340 24,677 22,172 `
Total revenues 237,160 213,844 465,779 427,537
Expenses:
Cost of processing,
servicing and support 93,910 81,507 186,759 161,675
Research and development 26,323 23,770 53,061 46,827
Sales and marketing 24,270 20,742 45,545 39,164
General and
administrative 17,429 16,292 35,178 32,559
Depreciation and
amortization 21,307 19,927 43,112 55,399
Total expenses 183,239 162,238 363,655 335,624
Income from continuing
operations 53,921 51,606 102,124 91,913
Equity in net loss of joint
venture (464) (807) (922) (1,474)
Interest income, net 2,696 2,916 5,990 5,372
Income from continuing
operations before income
taxes 56,153 53,715 107,192 95,811
Income tax expense 20,876 20,345 40,698 36,460
Income from continuing
operations 35,277 33,370 66,494 59,351
Income from discontinued
operations before income
taxes - 646 - 1,254
Income tax expense on
discontinued operations - 251 - 483
Income from discontinued
operations - 395 - 771
Net income $35,277 $33,765 $66,494 $60,122
Basic income per share:
Income per share from
continuing operations $0.40 $0.37 $0.75 $0.65
Income per share from
discontinued operations $- $- $- $0.01
Total basic income per
share $0.40 $0.37 $0.75 $0.66
Weighted average number of
shares 87,976 90,820 88,969 90,699
Diluted income per share:
Income per share from
continuing operations $0.39 $0.36 $0.73 $0.64
Income per share from
discontinued operations $- $- $- $0.01
Total diluted income per
share $0.39 $0.36 $0.73 $0.65
Weighted average number of
shares 90,624 93,589 91,612 93,203
CHECKFREE CORPORATION AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(Unaudited)
(In thousands)
December 31, June 30,
2006 2006
Current assets:
Cash, cash equivalents and
investments $260,153 $317,613
Settlement assets 130,513 107,128
Accounts receivable, net 167,340 146,605
Prepaid expenses and other
assets 37,324 39,810
Deferred income taxes 6,779 7,311
Total current assets 602,109 618,467
Property and equipment, net 115,280 100,217
Capitalized software and intangible
assets, net 886,055 906,767
Investments 70,267 78,559
Other noncurrent assets 9,433 8,779
Deferred income taxes 47,347 45,240
Total assets $1,730,491 $1,758,029
Current liabilities:
Accounts payable, accrued
liabilities and other $86,131 $92,100
Settlement obligations 127,209 103,732
Deferred revenue 50,473 40,301
Total current liabilities 263,813 236,133
Accrued rent and other 4,321 3,844
Deferred income taxes 1,408 2,964
Deferred revenue 3,708 3,021
Capital leases and long-term
obligations, less current portion 42,404 28,432
Total stockholders' equity 1,414,837 1,483,635
Total liabilities and
stockholders' equity $1,730,491 $1,758,029
Attachment A
Calculation of Free Cash Flow
(Unaudited)
(In thousands)
Three Months Ended Six Months Ended
December 31, December 31,
2006 2005 2006 2005
Net cash provided by operating
activities $58,918 $56,787 $106,482 $100,262
Excluding: Net change in
settlement accounts (1,166) (2,646) (92) 2,262
Less: Capital expenditures (13,436) (16,476) (25,535) (23,642)
Plus: Data center reimbursements 3,664 - 4,190 -
Free cash flow $47,980 $37,665 $85,045 $78,882
Additional Information:
Cash (used in)/provided by
investing activities $(43,018) $(9,307) $15,565 $(8,065)
Cash (used in)/provided by
financing activities $(45,136) $8,124 $(142,183) $13,314
Use of Non-GAAP Financial Information
We supplement our reporting of cash flow information determined in
accordance with Generally Accepted Accounting Principles in the United
States of America ("GAAP") by using "free cash flow" in this earnings
release as a measure to evaluate our liquidity. We define free cash flow
as net cash provided by operating activities, exclusive of the net
change in settlement accounts and less capital expenditures, plus data
center reimbursements. We believe free cash flow provides useful
information to management and investors in understanding our financial
results and assessing our prospects for future performance. We also use
free cash flow as a factor in determining long-term incentive
compensation for senior management.
We exclude the net change in settlement accounts from free cash flow
because we believe this facilitates management's and investors' ability
to analyze operating cash flow trends. In connection with our walk-in
payment business, our consolidated balance sheet reflects settlement
assets and settlement obligations. The settlement assets represent
payment receipts in transit to us from agents, and the settlement
obligations represent scheduled but unpaid payments due to billers.
Balances in settlement accounts fluctuate daily based on deposit timing
and payment transaction volume. These timing differences are not
reflective of our liquidity, and thus, we exclude the net change in
settlement accounts from free cash flow.
As a technology company, we make significant capital expenditures in
order to update our technology and to remain competitive. Our free cash
flow reflects the amount of cash we generated that remains, after we
have met those operational needs, for the evaluation and execution of
strategic initiatives such as acquisitions, stock and/or debt
repurchases and other investing and financing activities, including
servicing additional debt obligations. During the fourth quarter of
fiscal 2006, we entered into a credit facility to finance the
construction of data centers. Amounts we spend to construct these data
centers are included in our capital expenditures, but will be fully
reimbursed by the credit facility. The reimbursements from the credit
facility are added to our free cash flow measure because these
expenditures do not impact our overall liquidity. The data center
reimbursements line represents a change to our definition of free cash
flow as of the quarter ended June 30, 2006.
Free cash flow does not solely represent residual cash flow
available for discretionary expenditures, as certain of our non-
discretionary obligations are also funded out of free cash flow. These
consist primarily of payments on capital leases and other long-term
commitments, if any, as reflected in the table entitled "Contractual
Obligations" in the "Liquidity and Capital Resources" section of
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" contained in our Annual Report on Form 10-K for the
fiscal year ended June 30, 2006, which we filed with the Securities and
Exchange Commission on September 8, 2006.
The Company's free cash flow should be considered in addition to,
and not as a substitute for, net cash provided by operating activities
or any other amount determined in accordance with GAAP. Further,
CheckFree's measure of free cash flow may not be comparable to similarly
titled measures reported by other companies.
Attachment A (continued)
Reconciliation of GAAP Net Income to Underlying Net Income and Earnings
Per Share
(Unaudited)
(In thousands, except per share data)
Three Months Ended Six Months Ended
December 31, December 31,
2006 2005 2006 2005
Total revenues - GAAP $237,160 $213,844 $465,779 $427,537
Impact of discontinued operations
(1) - 2,096 - 4,160
Total revenues - underlying $237,160 $215,940 $465,779 $431,697
Net income from continuing
operations per GAAP $35,277 $33,370 $66,494 $59,351
Impact of discontinued operations
(1) - 395 - 771
Net income per GAAP 35,277 33,765 66,494 60,122
Amortization of acquisition-
related intangible assets 10,156 9,655 21,123 35,197
SFAS 123(R) - Stock options issued
before July 1, 2004 319 1,242 1,023 2,598
Tax benefit of underlying
adjustments (3,998) (3,642) (8,476) (13,751)
Underlying net income $41,754 $41,020 $80,164 $84,166
GAAP and underlying basic weighted
average shares outstanding 87,976 90,820 88,969 90,699
GAAP and underlying impact of
dilutive options and warrants 2,648 2,769 2,643 2,504
GAAP and underlying diluted
weighted average shares
outstanding 90,624 93,589 91,612 93,203
GAAP basic earnings per share $0.40 $0.37 $0.75 $0.66
GAAP diluted earnings per share $0.39 $0.36 $0.73 $0.65
Underlying basic earnings per
share $0.47 $0.45 $0.90 $0.93
Underlying diluted earnings per
share $0.46 $0.44 $0.88 $0.90
(1) See Reconciliation of GAAP Results to Underlying Results by Segment,
page 9, note (2)
Use of Non-GAAP Financial Information
We supplement our reporting of total revenues, income (loss) from
operations, net income (loss) and earnings (loss) per share information
determined in accordance with GAAP by using "underlying revenue,"
"underlying income (loss) from operations," "underlying net income
(loss)" and "underlying earnings (loss) per share" in this earnings
release. Management believes that certain non-cash adjustments to
revenues or expenses enhance our evaluation of our performance, and are
not pertinent to day-to-day operational decision making in the business.
Therefore, we exclude these items from GAAP revenue, income (loss) from
operations, net income (loss) and earnings (loss) per share in
calculating underlying revenue, underlying income (loss) from
operations, underlying net income (loss) and underlying earnings (loss)
per share.
Examples of such non-cash charges may include, but not be limited to,
intangible asset amortization expense and in-process research and
development costs associated with acquisitions, charges associated with
the impairment of intangible assets, the impact of discontinued
operations, charges resulting from warrants issued to third parties, and
charges associated with reorganization activities, all offset by the
cumulative tax impact of these charges. We exclude these items in order
to more clearly focus on the factors we believe are pertinent to the
daily management of our operations, and our management uses underlying
results to evaluate the impact of operational business decisions. We
regularly report underlying results to our Chairman and Chief Executive
Officer, our chief operating decision maker, who uses this information
in allocating resources to our various business units. Additionally, as
we reward our management for their decisions that increase revenues and
decrease controllable costs, we use underlying revenues and underlying
income (loss) from operations as factors in determining short-term
incentive compensation for management, and use underlying revenues,
underlying net income (loss) and underlying earnings (loss) per share as
factors in determining long-term incentive compensation for management.
Because we utilize underlying financial results in the management of
our business and to determine incentive compensation for management, we
believe this supplemental information is useful to investors for their
independent evaluation and understanding of the performance of our
management and our core business performance. Our underlying revenues,
underlying income (loss) from operations, underlying net income (loss)
and underlying earnings (loss) per share should be considered in
addition to, and not as a substitute for, revenues, income (loss) from
operations, net income (loss) or earnings (loss) per share or any other
amount determined in accordance with GAAP. Our measures of underlying
revenues, underlying income (loss) from operations, underlying net
income (loss) and underlying earnings (loss) per share reflect
management's judgment of particular items, and may not be comparable to
similarly titled measures reported by other companies.
Attachment A (continued)
CHECKFREE CORPORATION AND SUBSIDIARIES
Supplemental Underlying Consolidated Condensed Statements of Operations
(Unaudited)
(In thousands, except per share data)
Three Months Ended Six Months Ended
December 31, December 31,
2006 2005 2006 2005
Revenues:
Processing and servicing $200,775 $187,700 $396,253 $374,324
License fees 12,321 7,822 21,395 15,380
Maintenance fees 11,924 9,974 23,454 19,644
Other 12,140 10,444 24,677 22,349
Total revenues 237,160 215,940 465,779 431,697
Expenses:
Cost of processing, servicing
and support 93,832 81,275 186,510 161,202
Research and development 26,229 23,975 52,760 47,190
Sales and marketing 24,215 20,745 45,369 39,117
General and administrative 17,337 16,322 34,881 32,614
Depreciation and amortization 11,151 10,474 21,989 20,612
Total expenses 172,764 152,791 341,509 300,735
Income from operations 64,396 63,149 124,270 130,962
Equity in net loss of joint
venture (464) (807) (922) (1,474)
Interest income, net 2,696 2,916 5,990 5,372
Income before income taxes 66,628 65,258 129,338 134,860
Income tax expense 24,874 24,238 49,174 50,694
Net income $41,754 $41,020 $80,164 $84,166
Basic income per share:
Net income $0.47 $0.45 $0.90 $0.93
Weighted average number of shares 87,976 90,820 88,969 90,699
Diluted income per share:
Net income $0.46 $0.44 $0.88 $0.90
Weighted average number of shares 90,624 93,589 91,612 93,203
Attachment B
Reconciliation of GAAP Results to Underlying Results by Segment
(Unaudited)
(In thousands)
Three Months Ended Six Months Ended
December 31, December 31,
2006 2005 2006 2005
Electronic Commerce:
Total revenues - GAAP and
underlying $176,413 $163,298 $347,442 $326,749
Operating income - GAAP $52,258 $55,817 $101,799 $99,730
Amortization of acquisition-
related intangible assets 8,867 7,352 18,494 30,927
SFAS 123( R ) - Stock options
issued before July 1, 2004 (1) 232 901 744 1,886
Underlying operating income $61,357 $64,070 $121,037 $132,543
Investment Services:
Total revenues - GAAP $29,637 $26,352 $59,259 $50,709
Impact of discontinued operations
(2) - 2,096 - 4,160
Total revenues - underlying $29,637 $28,448 $59,259 $54,869
Operating income - GAAP $5,194 $3,630 $10,166 $6,968
Amortization of acquisition-
related intangible assets 484 648 968 961
SFAS 123( R ) - Stock options
issued before July 1, 2004 (1) 33 128 105 267
Impact of discontinued operations
(2) - 646 - 1,254
Underlying operating income $5,711 $5,052 $11,239 $9,450
Software:
Total revenues - GAAP and
underlying $31,110 $24,194 $59,078 $50,079
Operating income - GAAP $6,696 $1,598 $12,163 $5,049
Amortization of acquisition-
related intangible assets 805 1,655 1,661 3,309
SFAS 123( R ) - Stock options
issued before July 1, 2004 (1) 14 55 45 115
Underlying operating income $7,515 $3,308 $13,869 $8,473
Corporate:
Operating loss - GAAP $(10,227) $(9,439) $(22,004) $(19,834)
SFAS 123( R ) - Stock options
issued before July 1, 2004 (1) 40 158 129 330
Underlying operating loss $(10,187) $(9,281) $(21,875) $(19,504)
(1) At the beginning of fiscal 2005, we implemented a new long-term
incentive compensation philosophy, which significantly reduced overall
participation and focused on restricted stock with limited stock options.
As a result, we recorded the cost of restricted stock throughout fiscal
2005 in both underlying and GAAP results. In fiscal 2006, we have adopted
SFAS 123( R ), and are consequently recording all long-term incentive
grants, both restricted stock and options, as an expense to both
underlying and GAAP results. The adjustment from GAAP to underlying
operating results in the table above reflects the SFAS 123( R ) charge
associated with options granted prior to July 1, 2004 under our previous
compensation philosophy, which were originally accounted for utilizing
APB 25.
(2) In the third quarter ended March 31, 2006, the divestiture of our M-
Solutions business, a component of our Investment Services segment,
created a unique situation for our presentation of underlying results
versus GAAP results. SFAS 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," requires us to report the results of operations
from the disposed business, including any gain or loss on the sale, as an
income statement item separately captioned "earnings from discontinued
operations" on our GAAP basis unaudited condensed Statements of
Operations. This treatment is required for all periods presented, not
just the period in which the sale took place. In contrast, for purposes
of our underlying results, we have excluded the gain on disposition in
the current periods, and included the results of the M-Solutions business
for the periods of time that we owned the business and for all of the
prior periods presented.
Attachment C
Electronic Billing and Payment Metrics
(in millions, except revenue/transaction and percentages)
Quarter Ended
12/31/2006 09/30/2006 06/30/2006 03/31/2006 12/31/2005
Transactions
CSP:
Revenue $116.80 $114.20 $111.80 $113.80 $120.50
Revenue /
Transaction $0.46 $0.48 $0.49 $0.52 $0.60
Transactions 251.50 235.70 227.50 217.30 199.90
Sequential
Quarterly
Growth 7% 4% 5% 9% 5%
Non-CSP:
Revenue $38.30 $36.20 $34.40 $36.00 $24.40
Revenue /
Transaction $0.54 $0.48 $0.46 $0.47 $0.34
Transactions 70.50 76.00 74.70 76.00 70.80
Sequential
Quarterly
Growth -7% 2% -2% 7% -6%
Total:
Revenue $155.10 $150.40 $146.20 $149.80 $144.90
Transactions 322.00 311.70 302.20 293.30 270.70
Sequential
Quarterly
Growth 3% 3% 3% 8% 2%
e-Bill Delivery
Revenue $8.70 $8.50 $8.00 $7.40 $7.20
Revenue / e-Bill $0.16 $0.16 $0.16 $0.16 $0.16
e-Bills Delivered 54.90 51.80 50.00 46.70 45.20
Sequential
Quarterly
Growth 6% 3% 7% 3% 6%
Other EC Revenue(1) $12.60 $12.10 $12.30 $12.20 $11.20
Other Performance Metrics
Active Full Service
Subscribers(2) 11.10 10.50 10.00 9.70 9.00
(1) Other revenue includes Health and Fitness, Professional Services and
Stored Value Products.
(2) "Active" refers to subscribers who have viewed or paid a bill in
the last 90 days at a Consumer Service Provider that outsources
essentially all of its electronic billing and payment (EBP) functions
to CheckFree.
Source: prnewswire
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