Conference: Part I
newtockfr
(M/Atlanta, GA)
Sep 8 1998
9:17AM EDT
PART I
* We are reiterating our BUY rating and price target of $30 based upon 55x our FY 2000 estimate.
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Banking industry implementing Internet based banking solutions Currently, only three of CKFR's clients offer web-based solutions. However, banks are realizing that to remain competitive and maintain their most profitable customers, they must offer Internet based solutions. Banks are faced with new competition from software technology companies, Internet portals (e.g., AOL, Yahoo), non-bank franchises (e.g., Schwab, Fidelity) and from banks with national reach. In addition to protecting their franchises, Internet banking lowers costs and provides banks with access to 30 million online households.
Eighteen of Checkfree's thirty largest clients plan to offer web-based solutions, with 8 of the top 10 and 75% of the top 75 clients scheduled to have Internet-based banking solutions by June 99. Once this transition period is complete, we expect CheckFree to experience an acceleration in subscriber growth rates from temporarily depressed levels.
Comfortable with our subscriber projections Based on the company's revised subscriber guidance of 4%-5% sequential quarterly growth for the 1st half of FY 99 and 6% for the 2nd half, we project a subscriber base of approximately 3.0 million at the end of FY 99. For FY 2000, we are projecting quarterly subscriber growth rates of between 7% - 8% for a subscriber base of approximately 4.0 million at FY 2000. Consider that 8% was the low end of the company's previous guidance and FY 2000 amounts will be growing off of a temporarily depressed subscriber base. By the beginning of FY 2000, most of the major banks will be offering Internet based solutions and aggressively marketing the service. Accordingly, we are comfortable with our subscriber projections for FY 2000, and believe they could prove conservative.
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ABN Amro: Part II
newtockfr
(M/Atlanta, GA)
Sep 8 1998
9:17AM EDT
Well positioned. One market research firm, Killen Associates, recently forecast that 8 billion bills would be presented electronically by the end of 2000. To put this in perspective, CheckFree will double its number of transactions processed if it captures just 1.5% of these bills. Currently, CheckFree has signed 25 of the top 100 billers for bill presentment, including 2 of the top 10 and 8 of the top 25 billers. Including AT&T, the largest biller in the U.S., CKFR has signed billers representing 56% of all telecom bills, or over 150 million bills per month, and 50% of primary utilities. CheckFree's goal is to sign an additional 40 of the top 100 billers over the next year. By comparison, CheckFree's primary competition in electronic bill presentment, MSFDC, has signed a handful of billers for primarily pilot programs. CheckFree is encouraged regarding its win rate versus MSFDC and believes that the MSFDC business model will evolve over time to look more like the bank centric CheckFree model. We believe that CheckFree has a significant advantage in its vast bank distribution system (i.e., banks representing 85% of demand deposit accounts), which makes it easier for billers to present bills electronically to its customers. We do not anticipate significant revenue from electronic bill presentment until the latter part of 2000, and accordingly have not reflected any revenue for electronic bill presentment within our estimates.
Software and Investment Services performing well CheckFree has two growing and profitable businesses besides Electronic Commerce. For FY 1999, we are estimating revenue from the company's software business of approximately $40 million with operating margins, before corporate overhead, of approximately 45%. The Investment Services business is also exhibiting strong growth. We are projecting a 30% revenue increase for Investment Services to $39 million for FY 1999, with operating margins exceeding 25%, before corporate overhead. We project that Software and Investment Services will contribute on a combined basis approximately $29 million in operating income, before corporate overhead, during FY 99.
We are maintaining estimates and reiterating our BUY rating Based on our conservative subscriber growth projections, we are comfortable with our FY 99 estimate of $0.14 and FY 2000 estimate of $0.55, and believe our FY 2000 estimate could prove conservative. Additionally, we have not reflected any transactions for electronic bill presentment within our estimates. Currently, CKFR trades at 11x our Calendar 1999 EBITDA estimate of $1.00 per share, and 28x our Calendar 1999 EPS estimate of $0.40.
Furthermore, we project net cash and equivalents of approximately $90 million at the end of 1Q and believe that the Software and Investment Services business are worth approximately $250 million on a combined basis. This is based on multiples of 3x FY 99 revenue or 20x estimated FY 99 earnings for the two business units. Accordingly, the company's core Electronic Commerce business is trading at an implied valuation of approximately $310 million or $5 per share or 1.6x estimated calendar 1999 Electronic Commerce revenue. We believe that CKFR is a very compelling investment at these levels as the company is strongly positioned to participate in electronic bill presentment and could experience accelerating subscriber growth in FY 2000. We reiterate our BUY rating.
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