CheckFree falls on Intuit suit, analysts' concerns(from ZD)
thanks benny
By Eric C. Fleming
March 4, 1999 1:51pm
ZDII
Shares of CheckFree Holdings Corp. (Nasdaq: CKFR) plunged Thursday after a series of downgrades from brokerages on concerns about a lawsuit from Intuit, valuation and rising short-term costs.
CheckFree fell 5 1/16 to 30 7/16, or 14 percent. Earlier, Lehman Brothers cut the company to "neutral" from "outperform" and J.C. Bradford lowered his opinion to "buy" from "strong buy." Lehman has a 12-month target at $15 a share.
"We cut them for three reasons: valuation, the lawsuit and a potential rise in inquiry rates," said Heather Bellini, an analyst at Lehman Brothers.
CheckFree is seen as overvalued because it's not in control of its growth rate, since it indirectly handles clients for banks that select its transaction services, said Bellini. She said the stock should trade at a discount compared to companies such as E*Trade Group Inc. (Nasdaq: EGRP) that handle their own customers and have a direct control over their growth.
On Wednesday, Intuit Inc. (Nasdaq: INTU) filed a lawsuit against the company for breach of a 1998 contract. Intuit is alleging that CheckFree has violated a bill presentment agreement with Intuit. Intuit has a 19 percent stake in CheckFree.
Lehman expects the Intuit lawsuit will be settled, but the information about the suit has been one-sided from Intuit. No one has seen the agreement in question, but the timeline goes something like this: In April, CheckFree entered an exclusive agreement with Intuit and then CheckFree made a similar deal with Yahoo! Inc. (Nasdaq: YHOO). Intuit and CheckFree ironed that wrinkle out, making Yahoo! the sole exception to its arrangement. Then CheckFree went out and pitched to the other portals, said Bellini.
"Pete Kight's (CheckFree CEO) a smart man - he asked: what's it going to cost me to break my deal with Intuit?" said Bellini. If CheckFree honors its agreement with Intuit, it won't be able to go after other deals until 2000. By then, competitors could block them out of the market.
The third stumbling block, according to Lehman, is inquiry rates: the rate of calls placed to customer service reps. CheckFree had a rate of 0.5 percent for the 125 million transactions it processed in 1998, totaling about 625,000 calls at about $25 a call. That cost CheckFree about $15.6 million before taxes.
CheckFree's inquiry rate could jump to as high as 2 percent in the near-term as more people begin using electronic bill payment services - significantly increasing the cost of doing business. "This issue makes us wonder just how scalable this technology platform is," Bellini said.
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