Pete's closing remarks and Q&A transcription. I did this quickly so forgive spelling and other errors. Main points I got:
1) Checkfree is not standing still. We'll continue to see enhancements to their services being rolled out. Competitors are busy trying to emulate Checkfree's model (Metavante) or just trying to get something that works at all onto the market (Spectrum). No comments on PEcom.
2) Web pay is a bigger deal than I thought. They're hoping that will break the ease-of-use barrier. I haven't seen it but when my part of BofA converts I'll make a report.
3) There's no adoption "knee" in sight. More like a plateau. This is going to take some time. They'll be able to present 8-10 bills to an average consumer soon which is way above the 4 they talk about as a driver. I suspect the ease-of-use/conversion is a big deal.
4) They said nothing about their person-to-person money transfer services comparable to what PayPal does. Is this field just too crowded to spend a lot of money on? They have pay-anyone already, but it just doesn't seem as sexy.
5) Checkfree is ready to use it's cash to make sure it has a stake in emerging electronic payment trends. I'm' dreaming about aggregation services (Yodlee?), or a stake in (or deal with) PayPal.
Pete Kight: Tough times benefit the toughest competitors. They favor market leaders, and we are both. Tight short-term economic conditions accelerate the weeding out of market players that don't have what it takes to compete over the long term. While our top-line growth will feel the pressure of the economy, the scale and optimized efficiency we've created are delivering their rewards. We fully expect to continue to meet our bottom line guidance while continuing forward with planned investments and other strategic programs for fiscal 02 to extend our long-term competetive advantage. Other companies that are smaller, or less efficient, or less innovative than Checkfree will not have this luxury. And as the economy strengthens, their competetive position relative to us will reflect that fact. We remain optimistic about mainstream adoption of our electronic billing and payment services and about new business initiatives that are under development. We are optimistic about the long-term competetive prospects of each of our divisions. And we remain very optimistic about Checkfree's ability to deliver strong long-term shareholder value.
David Schwar?, Josen Marchen?: A couple questions. Setting aside the adoption issues, in particular as it relates to the economy right now, any color that you can provide on utilization? It seems like, we're running a number of quarters sequentially now where when you look at revenue per subscriber or number of transactions per subscriber per month, there really hasn't been that much material uptick, even in the face of increased promotion and sequential subscriber growth. Any color on what you think ultimately is going to drive the utilization (ignoring the whole subscriber growth issue)?
Pete Sinisgalli: We've said over the last couple of quarters that at least for the forseeable future we should expect to see transaction growth in line with subscriber growth. I mentioned during my comments, subscriber growth for the quarter was about 7% sequentially while transactions growth was about 4% sequentially. But because of the difference in processing days in one quarter vs the other we had some inconsistency. If you equate those to have both quarters on the same metric you have about 6% transaction growth in the first fiscal quarter compared with about 7% subscriber growth. So those metrics have and, we believe, will continue to grow at about the same rate. That doesn't answer entirely your question about utilization.
David: Maybe I can rephrase it. What I'm really trying to get a handle on is when the number of bills that a subscriber pays per month starts to materially tick upward.
Pete Kight: There are really two issues. As I said earlier we have about a hundred different project under way right now with different partners. If you take it down to the base line there are two major issues we are focused on relative to consumer usage as you're describing, which is when people are going to get excited and jump on, moving all their transactions online. The first is what we call web pay, our 3.2 user interface. The cold hard fact of the matter is, as cool as we think electronic bill payment is, and as well as it works, it's still too hard for consumers to enroll and use for all of their payments. It's just clunky. It's not really technically hard, it's clunky, it's just actually a pain in the butt. With web pay it is a lot easier. It's intuitive, it's fast, and it does everything the consumers want it to do. That's why you hear us for the last two quarters giving you the update on just when the majority of the financial institutions are implementing the web pay capabilities. Also a part of that same web pay initiative is the fact that we can send all of the bills from the billers that we work with, including those bills that we do with screen capture or screen scraping technologies. Today probably the best example is when Bank of America goes up on web pay the average Banks of America customer will be able to receive somwhere between 4 and 6 of the 14 primary bills that the average BofA household gets. So we're starting to move into, with the launch of BofA, what we think is the mainstream product set for consumers to actually move into the excitement level of using the services.
34:37 Jeff Baker, WR Hambrecht & Co: Can you give us a short update on the competetive landscape out there? More specifically, I know Metavante has been pretty vocal about how they're now getting pretty close to break even, there's Princeton Ecom that's private, as well as Spectrum.
Pete Kight: We don't have any new update on Spectrum. They're still not in the market. They're supposed to moving toward actually being able to transact live bills, but that's to the best of our knowledge as a switch. That means they'll be able to route or switch bill transactions between the three primary participating banks that are in beta test today. That's what we see happening there and don't have any new vision on new bills or what new infrastructure is going to come from other than, as you mentioned, coming from other parts of the market place.
Metavante is clearly on a path to ... they obviously like our strategy ... they're clearly on a path to mirror our strategy by making a bunch of acquisitions to try to pull together much of the pieces that we have in place on an integrated basis. They've acquired a bill scanning and interface company. They've acquired a BSP, a very small BSP company to move into the billing space. As you know we were both at a conference yesterday where Checkfree spoke and Metavante spoke and it's very clear that they're following along a very similar strategic path to us. We expect to continue to see them in the market place. That is really the only competitor that we see on a consistent basis.
There's other small competitors that we see at the billers now and then or at some of the small banks, but I would say Metavante is the only company that we see on a consistent basis. Again, they seem to be following a very similar path to ours. The pricing in similar. The future services that the propose to provide, as they pull these pieces together and work to stitch them together to look like our fully integrated product, is a similar set. We expect to be with a whole new set of services by the time they get to market including providing a number of additional payment capabilities. But they're here to stay and they're going to compete.
37:20 Jeff Baker: Is there any push to bring all the billers together at one table and share billers with each other to help drive adoption in the space?
Again, interoperability, the ability to be able to interface with different service systems is one of the key issues behind the whole standards process. The biggest issue is just exactly how you can assure quality through the whole transaction end to end. As you know we, probably to the point of pain, make everybody aware that we set the quality standard in this industry with the 4.6 Sigma quality level program. That is very very significant to us. It's significant to our clients, both on the financial institution side and on the biller side. And what we are at work on is how do we assure that we can maintain that kind of quality level throughout this transaction system. And that to us is the most important thing for consumer adoption because as people move more and more toward such things as email and more and more toward things like electronic billing and payment even as email and electronic bills start to utilize the same networks the level of quality and the ability for unquestioned security, for end to end support, has got to be paramount. That's the primary issue in interoperability.
38:57 Ed McCabe, Merril Lynch: Just wanted to touch base, given what's going on with the billers as a result of the economy, what the expectations are for the number of ebills you anticipate the consumer getting by the end of the calendar year and the fiscal year.
Pete Sinisgalli: As we said in the last call we had with folks, we said that we expect by about the end of this calendar year we'll be in the 8-10 range including all of our bill content (distributed bills as well as our scraped bills). And we still have an expectation that by the end of our fiscal year, the June quarter, we'll be a couple of bills higher than that, maybe more so for the average consumer. Again to bring it back to the first question, I think it's Forrestor whose research has backed up our own internal research, that the pain point on the consumer desktop is 4 bills. When consumers can more 4 bills off their desktop and onto an electronic platform that's a level of interest that causes them to move. Likewise, when consumers have to go to 4 different biller direct sites to see and pay 4 different bills that's the pain point at which they say they'd be willing to move to a site where they'd be able to get them all delivered in one place. So we are very hard at work to make sure that we meeting that move for consumers as they move into that pain point.
Pete Kight: Just to elaborate on my earlier comment, that to be able to access all of Checkfree's bill content, the CSP has to be utilizing Checkfree's full functionality with web pay. By the end of this calendar year US Bank, USPS, all of BofA, and others will have that full functionality. Their customers should be able to receive 8+ bills electronically.
Ed McCabe: Where are you now, at about 5-8?
Pete Kight: Depending on the CSP, 5+. Yeah, 5-8, 8 at the most.
Ed McCabe: As far as the electronic rate goes, obviously you guys have made tremendous progress there and part of that is due to the consolidation of 4 platforms down to 2 primarily. I think the long term target was 65-70% and it gets tougher as you move up there. Is that still the target range or is there more headroom there than we initially thought?
Pete Kight: We think there's more head room. You do run into a very difficult diminishing returns point as you move into really small billers. There is technology available. A big part of the electronic payment systems that we're working on now includes interfacing through email systems is to be able to reach, and enroll almost with a push-button basis, billers as small as those generating bills off of Quick Books and Great Plains. So we think that there's more head room but there's definitely, in terms of the percentage numbers that we report somewhere north of 70%, there's a diminishing return point where it gets tough to add the extra percentage points.
42:20 Michael Hodes, Goldman Sachs: A couple quick questions. Just on the subscriber front, you guys are indicating that part of the slower growth is due to the purging of inactive accounts. I was wondering if you could give us a quantification. I know around Y2K you were a little more explicity about the number of purged accounts. Could you give us a sense of what's sitting inactive? Secondarily, you spent some time profiling marketing initiatives and the roll out at BofA. I was hoping you'd give us an update on how much of the marketing budget's been spent there. And then lastly I was hoping you could detail perhaps a little more explicitly some of the expense initiatives. It sounds like there isn't a lot of head count cuts. Maybe you could give us a better quantification and run down.
Pete Sinisgalli: We don't provide any specifics either by bank or generaly regarding our active and inactive rates. We're not going to be able to provide that to you now. But suffice it to say we are keeping a very close eye on that. We're working with most of the big CSPs to take advantage of the inactive consumers and activate them. As Pete [Kight] mentioned in his comments, all the banks realize, BofA has been the most vocal about it, that active online bill payers are 4-5 times more profitable than those that just use online banking. The banks marketing departments and operations departments realize that and are incented to go after those inactive and activate them. So we're doing a lot of work with our major CSP partners to move as many inactive customers to the active stage. We do anticipate in Q2 that the guidance of 6-8% reflects what we expect in terms of net new additions and purges.
In terms of marketing initiatives specifically for BofA, BofA may be willing to acknowledge how much of their marketing budget they've spend so far. I think they look at this as a competetive advantage for them, so I don't think they are in a position to to disclose how much has been spent so far. But you may remember that 25 million was planned to be spent in the first year, with at least 20 million in the second year. We've not yet moved into the second year so there's certainly plenty of additional marketing dollars to be invested in this space. I covered some of the very near term programs we've already gotton to work with them for the December quarter.
Finally on the expense initiative, you've heard all three of us speaking this afternoon and we're very focused on managing costs very aggressively to be able to meet our shareholder's expectations for earnings per share while at the same time not shortchanging opportunities for the long term advancement of Checkfree. We think we've struck a relatively aggressive balance there throughout Checkfree reviewing any new hires, not just additions, but replacements as well to ensure that that position is absolutely necessary to our long term success. As you probably note, a little north of 50% of our expenses are people costs so our ability to aggressively manage the number of people and ancilliary expenses for those people aggressively should allow us to manage costs aggressively. And we think we're on the right path. We're pleased with the balance we've struck in Q1, and the path we're on for Q2 and expect that will allow us to meet our goals for the full year.
46:01 Henry McVey, Morgan Stanley: A couple questions. One is what percentage in the electronic commerce was related to transaction vs subscription. Is it around 15-16% this quarter? Can you help us understand that?
David Mangum (CFO): That was about the same percentage, 17, that it was last quarter.
Henry McVey: The other thing I wanted to know was did you go through the ?err amounts? this quarter or are you still receiving paymens from the BofAs and the FirstDatas?
David Mangum (CFO): First Data and Microsoft are still within the minimums as you would expect. For BofA for the September quarter our revenue reflects them still being inside the minimums.
Henry McVey: Pete mentioned in passing that we're on track to meet the BofA this quarter but then he said by the way we'll be dismantling it in the March quarter and fully disfunctional by June. Are you sticking to your guns that it's this quarter or are you pushing it out?
Pete Kight: I'm sorry what I was communicating there. That was always our plan. When you convert off a platform you need to have that platform in operation for a period of time after that. What I was trying to convey with the two part comment is the full cost savings from the decommission of the BofA California platform is in the June quarter. We will have migrated by the end of this quarter, transitioned in the March quarter and full savings in the June quarter.
Henry McVey: Did you give guidance on the number of billers in the next quarter? I may have missed it.
Pete Kight: No we did not.
47:45 Henry McVey: Can you explain to me, you kind of danced around the numbers, 48 million for two months, 19 million for September, I'm trying to better understand what the true run-rate was.
Pete Kight: We know this is a topic of interest to most folks and we're trying to be a little more explicit on transaction numbers. Let me give you some specific numbers, I'll do it quickly. Those of you with a calculator can keep these handy.
trans days
Apr 01: 21 21
May 01: 23 22
Jun 01: 22 21 64 days in Q4
Jul 01: 23.5 21
Aug 01: 24+ 23
Sep 01: 21+ 19 63 days in Q1
We process, as you can see by the match, a little over a million transactions per processing day. So if you have a chance and pull up those numbers you'll see pretty quickly that our subscriber growth and our transaction growth equated to the number of processing days in a quarter or a month work out to grow at about the same rate. I hope the numbers I just provided will allow anyone who wishes to do the math to confirm that.
49:34 Craig Peckham, Jefferies & Co: I'm looking at the balance sheet and you've got almost $250M in cash and long-term investments and it sounds like we're sticking to our goals for capital expenditures. Could you spend a little time, given those as a back drop, what your thoughts are on the mix between acquisitions, cap ex, and stock repurchases. Do you think about what to do with the funds that you have available and given that you're expecting to be cash flow positive for the year.
Pete Kight: I'll let everybody put in a little bit there because I've divided up those responsibilities. I'll lead with acquisitions and tell you that there's a reason we want to stay really strong on the bottom line. And that is we think there's going to be opportunities to move forward with emerging critical areas we think will be important to taking this whole area of electronic commerce. In each of the three divisions we're in we think there's going to be some good opportunities in the next 12-18 months so we are keeping our powder dry and we're keeping it preserved to be able to use it going forward.
Pete Sinisgalli: The only thing I'd add to that is we don't have any programs in place at the moment to do a stock repurchase program, although we do think the stock is undervalued at the current time. That's one of the reasons why having a significant cash balance in place for acquisitions is important to us. We would not want to do an acquisition with today's currency value. We are well positioned to evaluate opportunities as they come our way and we'll take advantage of the strong balance sheet we have if they present themselves.
Pete Kight: Have we answered Dave's side of the question? (laughing). Again, I'd like to thank everybody for taking the time ... |
