SEGMENT INFORMATION
The following table sets forth revenue and operating income (loss) by industry segment for the periods noted (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
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2002 2003 2002 2003
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(IN THOUSANDS)
REVENUE:
Electronic Commerce...................... $ 89,773 $ 104,521 $ 260,240 $ 299,337
Investment Services...................... 20,014 20,439 59,111 60,907
Software................................. 14,799 16,341 43,248 46,797
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Total revenue..................... $ 124,586 $ 141,301 $ 362,599 $ 407,041
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OPERATING INCOME (LOSS):
Electronic Commerce...................... $ 9,390 $ 31,881 $ 16,444 $ 83,419
Investment Services...................... 6,882 5,642 17,717 16,269
Software................................. 2,539 5,116 3,229 12,139
Corporate................................ (7,984) (8,344) (27,359) (24,450)
Purchase accounting amortization......... (90,293) (45,990) (304,721) (138,304)
Impairment of intangible assets ......... -- -- (155,072) --
Reorganization charge.................... (15,871) -- (15,871) --
Impact of warrants....................... -- -- -- 644
------------ ------------ ------------ ------------
Total operating loss.............. $ (95,337) $ (11,695) $ (465,633) $ (50,283)
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ELECTRONIC COMMERCE. Revenue in our Electronic Commerce business increased by $14.7 million, or 16%, from $89.8 million for the three months ended March 31, 2002, to $104.5 million for the three months ended March 31, 2003. Revenue increased by $39.1 million, or 15%, from $260.2 million for the nine months ended March 31, 2002, to $299.3 million for the nine months ended March 31, 2003. The increase in revenue over both periods of time is driven primarily by an increase in transaction volume.
At the end of our 2002 fiscal year, we introduced a series of transaction-based metrics designed to help investors better understand trends in our revenue base. We offer two levels of electronic billing and payment services to our customers. Customers that utilize our Full Service offering outsource all, or a portion of, their electronic billing and payment process to us. For instance, a Full Service customer might not use a CheckFree hosted user interface, but still use our full array of services, including payment processing, payment warehouse, claims processing, e-bill, on-line proof of payment, customer care, and other aspects of our service. Also, while a Full Service customer might build its own payment warehouse, we maintain a customer record and payment history within our payment warehouse to support the Full Service customer's servicing needs. Customers in the Full Service category may contract to pay us either on a per-subscriber basis, a per-transaction basis, or a combination of both. Customers that utilize our Payment Services offering receive a limited subset of our electronic billing and payment services. Additionally, within the Payment Services offering, we provide services to billers for electronic bill delivery and hosting services, as well as other payment services such as account balance transfer.
A third category of revenue we simply refer to as Other Electronic Commerce. Other Electronic Commerce includes our Health and Fitness business and other ancillary revenue sources, such as CSP and biller implementation and consulting services. The following table provides a historical trend of revenue, underlying transaction metrics, and subscriber metrics where appropriate, for the Electronic Commerce business:
THREE MONTHS ENDED
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12/31/01 3/31/02 6/30/02 9/30/02 12/31/02 3/31/03
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(In millions)
FULL SERVICE RELATIONSHIPS
Revenue ......................................................... $ 67.2 $ 71.1 $ 74.1 $ 71.6 $ 75.1 $ 81.5
Active subscribers............................................... 2.7 2.9 3.1 3.2 3.5 3.9
Transactions processed........................................... 60.9 65.5 69.0 67.2 74.9 80.3
PAYMENT SERVICE RELATIONSHIPS
Revenue ......................................................... $ 10.2 $ 10.3 $ 10.7 $ 14.7 $ 13.9 $ 12.8
Transactions processed........................................... 15.5 16.9 18.9 29.5 30.1 31.6
OTHER ELECTRONIC COMMERCE
Revenue ......................................................... $ 8.2 $ 8.3 $ 9.8 $ 9.7 $ 9.2 $ 10.3
Non-cash warrant impact on revenue .............................. -- -- $ (2.7) $ 0.6 -- --
TOTALS
Electronic Commerce revenue...................................... $ 85.6 $ 89.7 $ 91.9 $ 96.6 $ 98.2 $104.6
Transactions processed .......................................... 76.4 82.4 87.9 96.7 105.0 111.9
We experienced generally steady growth in Full Service revenue, active subscribers, and transactions processed until the September 30, 2002 quarter. During the quarter ended September 30, 2002, one of our larger customers, Wells Fargo, converted from a Full Service relationship to a Payment Service relationship. Approximately 300,000 active subscribers and their related transactions switched categories. Although Payment Service transactions generate less revenue per transaction, because we provide less service, the cost per transaction is less as well. While the shift of a customer to Payment Service from Full Service will reduce revenue, we do not expect such a shift to have a significant impact on our operating margin over time. Although Bank of America accounts for over one third of our active Full Service subscribers, growth in active subscribers and transactions processed are the result of broad growth throughout the channel. CSP customer pricing in this category can be based on transactions processed, the number of subscribers, or a combination of both. Additionally, in order to share the benefits associated with scale efficiencies, pricing is tiered in nature, whereby a customer exceeding predetermined volumes is eligible for a lower price on a going forward basis. In addition, the mix of customers utilizing transaction versus subscriber based pricing will have an impact on revenue per transaction. In the latter half of the quarter ended December 31, 2002, Bank of America reached a pricing tier discount level, and we expect them to reach a second pricing tier discount early in the quarter ended June 30, 2003. Our pricing with Bank of America is based on active subscribers. In addition, as previously described, we anticipate reductions in subscribers and/or transactions from Full Service customers Wachovia and Bank One over the remainder of this fiscal year and fiscal 2004, which will result in lower revenue from these customers.
We experienced moderate growth in revenue and transactions processed in the Payment Service category until the quarter ended September 30, 2002. As previously mentioned, Wells Fargo converted from a Full Service relationship to a Payment Service relationship, which caused the significant increase in revenue and transactions in this category. We had anticipated that Chase, another large customer already included in the Payment Services category, would begin moving transactions to a competitor in order to meet contractually guaranteed minimum transaction levels with that competitor. This shift did not take place as quickly as expected, but by December 31, 2002, Chase's non-PFM volume was moved off our system. Additionally, as previously mentioned, we started to see the anticipated drop in transactions processed from Wells Fargo in the quarter ended March 31, 2003, as they also are required to meet guaranteed minimum transaction levels with a competitor. We expect further reductions from Wells Fargo over the remainder of the fiscal year and fiscal 2004, which will result in lower revenue from that customer. We also report revenue and transactions from electronic bills delivered in the Payment Services category. We delivered over 8.8 million bills in the quarter ended March 31, 2003, an increase of 184% from the quarter ended March 31, 2002, and an increase of 30% sequentially over the 6.7 million bills delivered in the quarter ended December 31, 2002. Because the average revenue we receive from a presented bill is much lower than the revenue from a bill payment transaction, changes in the mix in transactions between bills presented and bills paid will result in variability in the underlying revenue per transaction in this category. Additionally, we report miscellaneous payment-only transactions from complementary products such as our account balance transfer business in this
category. Revenue in our balance transfer business is interest sensitive, whereby we share inherent float from the product with our customers. Fluctuations in prevailing interest rates will also have an impact on the average revenue per transaction we will receive and, as a result, the drop in interest rates over the past year has had a dampening effect on our revenue and revenue per transaction during fiscal 2003.
Our Other Electronic Commerce revenue includes our Health and Fitness product, which grew modestly, and other non-transaction related services such as implementation and consulting, which increased on a quarter over quarter basis. During the quarter ended June 30, 2002, we recorded a non-cash charge of $2.7 million against Electronic Commerce revenue associated with the probable vesting of warrants we issued to a third party. In the quarter ended September 30, 2002, the warrants actually vested. On the date of vesting, however, the fair value of our stock was lower than when we calculated the initial charge. As a result, a true-up of the value of the warrants resulted in a credit to revenue of $0.6 million in the quarter ended September 30, 2002.
Operating income in our Electronic Commerce business, net of purchase accounting amortization, intangible asset impairment charges, and the impact of warrants, has improved from $9.4 million for the three months ended March 31, 2002, to $31.9 million for the three months ended March 31, 2003, and from $16.4 million for the nine months ended March 31, 2002, to $83.4 million for the nine months ended March 31, 2003. Our ratio of electronic payments to total payments continues to improve, from approximately 70% as of March 31, 2002, to over 74% as of March 31, 2003. Electronic payments carry a significantly lower variable cost per unit than paper payments and are far less likely to result in a costly customer care inquiry or claim. The full underlying impact of improved efficiency and quality, however, is not fully explained by a change in electronic rate. Throughout fiscal 2002, we supported two additional payment-processing platforms over and above our Genesis platform. We paid Bank of America to run the legacy Bank of America platform through March 2002, as we migrated consumers onto our more efficient Genesis platform, and cleared outstanding customer care claims initiated on the Bank of America platform. By March 31, 2002, we eliminated this redundant payment platform and were able to close our San Francisco customer care facility in April 2002 and our Houston customer care facility by June 2002. In addition, we had been operating a legacy Austin payment processing platform. When all but a few CSPs had migrated onto Genesis by June 2002, we were able to close our Austin facility as well. In March 2002, we announced a corporate- wide reorganization that resulted in a reduction in workforce, over and above the associates impacted by office closings and platform consolidation. In total, we have eliminated between $7.0 million and $8.0 million of quarterly costs starting in the quarter ended June 30, 2002. Finally, we continue to emphasize quality improvement, which we expect to result in further reduction in cost per transaction as we leverage the fixed costs already invested in our Electronic Commerce business. Our focus in Electronic Commerce in fiscal 2003 continues to be toward improved profitability through programs designed to:
- drive increased consumer adoption and activation among our
partners;
- improve product design and usability;
- improve overall customer satisfaction; and
- reduce variable costs per transaction.
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