newtockfr
(M/Atlanta, GA)
Sep 8 1998
2:40PM EDT
....slightly more cautious I think, but also offering the highest target price. Interesting point about Yahoo as a source of financial services (see PART II following), I think it also validates CKFR's choice for anonymity in the marketplace. Let their financial results tell the story, I don't care if the banks have "checkfree inside" stamped on every brochure. Seems to me, CKFR could never catch up on brand recognition and too expensive to get in the consumer's head as some on this thread might suggest (IMO).
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We reiterate our buy on CKFR as we remain optimistic on the long term prospects of the electronic banking market an CKFR's position therein. CheckFree is the only electronic billing vendor that can claim strong distribution capabilities, an in-market electronic bill presentment solution and blue chip roster of clients. While the merits of a "first mover" advantage are debatable, there is little question regarding the merits of a "fast mover" advantage and CKFR has moved quickly and decisively to secure its market position in the emerging electronic commerce sector. Our $35 target price is calculated using a discounted cash flow approach, 2002 EPS of $2.07, a 20% discount rate and a P/E of 30.
Highlights of Analyst Meeting
Wells Fargo and AT&T echo CKFR's view of electronic commerce. Among the presenters at the meeting were representatives of Wells Fargo (WFC/$294.88/Market Performer) and AT&T (T/$53.25/Market Performer), both key clients for CKFR. The vision articulated by these companies echoed that of CKFR in that there will be many distribution channels on the Internet but the most likely scenario is that consumer will designate one point where they will financial information consolidated. This consolidation point is apt to be a financial institution as there is a long standing trust relationship between individuals and their banks(though CKFR is prepared and able to service other consolidation points as chosen by individuals). Importantly, each stated little help would be required in publishing electronic bills (AT&T is already doing so at its web site). here the value add resides is in the underlying infrastructure supporting the messaging environment, including signaling when bills have been posted, received, opened, paid and most importantly customer support. This sounds like the same issues we've heard about in Internet EDI. The reality is that financial institutions are not prepared or capable of handling customer support and have not invested in the technology to provide the underlying messaging environment to support electronic billing. In fact, we expect financial services companies to develop on-line business models similar to the web portals by leveraging the frequency with which individuals will be returning to the bank's web site to receive, view and pay their bills (probably at least once a week). Wells Fargo's on line users already are returning to the site 4.5 times a month.
Banks will be rolling out web-based services aggressively over the next 12 months. CKFR expects eight of its ten largest clients to be aggressive promoting web-based banking services by June 1999, and that 75% of its clients will have web-based banking solutions in place at that time. The key issue to CKFR's success will be not only the timing of the roll outs but also the underlying strategy behind the roll outs. On this latter point we are still somewhat perplexed. Leading institutions such as Wells and Citicorp (not a CKFR client other than in supporting Quicken users) recognize the power of the Internet as a distribution channel and are positioning their offerings accordingly (the on-line banking services is generally free though there may be an additional charge for bill payment). We believe the institutions that recognize this will prove to be CKFR's best clients; unfortunately, the early indications are that few are embracing this concept.
newtockfr
(M/Atlanta, GA)
Sep 8 1998
2:41PM EDT
... still there is hope as other financial services companies embrace the Web. We believe banks will ultimately come around as other financial services companies begin to offer on-line banking services. CKFR is positioned to benefit from this trend as well as it already provides services to Merrill Lynch, Charles Schwab (SCH/$30.56/BUY) and E-Trade, and is aggressively pursuing this market. Moreover, as the idea of a server based electronic wallet becomes a reality we expect other parties such as the Web portals to vie for the role of the consumers' on line financial services destination. Under this scenario we expect CKFR to follow Intuit (INTU: $23.28; Market Performer) as it carves a niche as the preferred on-line financial services content provider (INTU owns 19.9% of CKFR shares). Interestingly, in a recent customer survey cited by CKFR, Yahoo ranked third as an on-line choice for financial services behind banks and nonbank financial services companies.
Distribution is the name of the game. When all is said and done in the on-line world, distribution is the most critical element and CKFR owns the distribution. It possesses electronic banking and billing relationships with 40 of the top 50 banks in the US and 25 of the top 100 billers (including the largest AT&T and 8 of the top 10) representing 56% of the telecommunications bills sent in the US.. It serves the electronic billing gateway for the Integrion banks and is in a joint venture with Visa for providing on-line payment of electronic bills.
Fiscal 1999 Expectations
Management reiterated the guidance provided in their last conference call with investors. We do not believe the near-term transition will have a long-term negative impact on CKFR's prospects. We expect subscriber growth to be in the 4-6% range for the first half of FY99 and 6-7% in second half of the fiscal year and we believe the recent events give lower visibility to CKFR's results for the next 6 months. We anticipate investors will look for an indication that CKFR's business model has regained its footing and evidence that Web-banking initiative have been successful at driving subscriber growth higher. We believe the aforementioned catalysts of bill presentment and proliferation of Web-banking will enable CKFR to regain market momentum. Ultimately, long term investors will be rewarded as the risk/reward ratio tilts heavily in favor of buyers of CKFR shares.
Investment Thesis
Leverage in core bill payment business - we believe the market "pause" will push back CKFR's ability to leverage its infrastructure to allow about 50% of incremental revenue from its financial transaction processing business to fall to the bottom line to late calendar 1999.
Drivers of future growth will be web-banking and bill presentment - The "pause" in banks marketing home banking offerings(i.e., the transition to Web-based offerings) has been somewhat more abrupt and severe than we had originally anticipated, however, we believe the silver lining in the cloud is this is a long-term favorable trend for CKFR as we believe adoption rates in Web-banking offerings should exceed PC-based programs. Additionally, CKFR indicated its pipeline of billers remains very strong and we look for them to regain momentum in this are on top of the AT&T agreement. We expect them to sign two additional major billers over the next several months and to have agreements with 50 of the top 100 billers by year end.
EOM |
