ABSG: Checkfree Holdings - Upgrading To Strong Buy From Buy (1 of 2)
(First Call 06/24 07:50:44)
07:40am EDT 24-Jun-99 Deutsche Banc Alex. Brown (Marks/Conley/Rolfes 212 469-5
CHECKFREE HOLDINGS - upgrading to strong buy from buy
Analyst: JAMES MARKS, 212/469-5948
Associate: JOHN CONLEY, 212/469-4720 / KRISTEN ROLFES, 212/469-5267
Date: June 24, 1999
Ticker: CKFR Current Rating: STRONG BUY Target Price: $65.00
Price: $28 3/4 Previous Rating: BUY 52 Week Range: $5 3/4 - $69 1/8
Exchange: OTC 12 Month Volume(000's):
733
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Fiscal Year :
JUN
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EPS 1998 1999E 2000E 2001E
QTR. Actual Prior Current Prior Current Prior Current
1Q -0.06 (0.05)A (0.08)
2Q -0.03 0.00A (0.08)
3Q 0.00 0.04A (0.06)
4Q 0.03 0.05 (0.04)
Total FY EPS: -0.07 0.04 (0.25)
P/E: NM NM NM
Rel P/E: NM NM NM
Consensus: 0.04
0.23
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Shares Outstanding (MM): 51 Market Cap ($MM): $1,466
Return On Equity: NM Net Debt To Total Cap: 3.4%
Dividend / Dividend Yield: nil 5 Year EPS Growth: NM
Current Book Value/Share: $3.34 Hedge Clause
Symbol(s):
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KEY POINTS:
_ Another consortium announces payment plans: CheckFree fallsThree banks
announced Wednesday the formation of a new initiative designed to preserve a
role for banks in the electronic bill presentment and payment process. The three
banks-Chase, Wells Fargo, and First Union-are working with Sun and VISA to
develop a platform that would store bill and payment routing information for
consumers and merchants. The news pushed CheckFree's stock down by $8 15/16 to
close at $28 3/4. We believe the market's response is unwarranted and presents
an attractive opportunity to get into CheckFree's stock. We are raising our
recommendation from BUY to STRONG BUY with a 12-month price target of $65.
_ Description of intended service is sparseThe press release by the
consortium and a conference call yielded very little in the way of concrete
details or a description of the planned service. The primary deliverable by Sun
appears to be a directory that will contain information regarding which
financial institution a given consumer is identified with for delivery purposes
and which financial institution a biller is associated with for payment
purposes. This would permit billing and payment instructions to be directed to
financial institutions for distribution to their consumer and corporate
customers online. This would, of course, preserve a critical role for financial
institutions, which are looking increasingly irrelevant in alternative bill
presentment schemas.
_ Banks want to own the post office's mapThis last point is the critical
one in understanding the purpose of this planned consortium. The banks fear
CheckFree, Microsoft, and First Data greatly. They fear the effect that bill
presentment, especially through portals or online brokers, might have on their
existing checking accounts-the lynchpin financial services relationship. They
want to preserve these relationships and want to maintain their hold on the
payment system, control that we believe they have already ceded. An analogy to
help understand their intent here would be to equate online bill presentment and
payment with the existing model, where billers print bills that are delivered
to the post office, which delivers them to customers. Customers then write
checks, deliver them to the post office, which delivers them to the biller,
which delivers them to the bank for payment. The three banks are now proposing
that CheckFree can carry the mailbags and put the mail in the mailbox, but it
will be this new consortium that will sort the mail and own the map showing who
lives in each residence.
_ Actually, a clever place to attack: Good tactics, poor strategyThe
banks are in a tough position concerning bill presentment, with no effective
points of leverage. This is actually a clever tactic. If they could somehow
establish their exchange as the preferred collection point for IP addresses or,
even better, as a collection point to route all online billing correspondence
through financial institutions, they would be in a strong position to control an
important link in the online value-transfer chain for both current OFX/IFX
implementation and potential variants that could emerge with next-generation XML
versions. Unfortunately, the overall strategy is flawed, as it is highly
unlikely that this effort will be successful as no collection of even a dozen
major banks could bring enough online bill-paying consumers to the table to
successfully sway a biller's decision in this regard. CheckFree can. We believe
this new effort is not likely to succeed other than as a centralized bill
collection and dispersal mechanism for the member banks' consumer. The
consortium is unable to provide an end-to-end service that would be paid
directly by the biller and is unlikely to be paid any more for this service than
CheckFree would be willing to pay to an individual bank for providing the same
service to its own customers.
_ Analysis: Not Much to FearAfter reviewing the transcript of the
conference call, we believe that the potential negative impact on CheckFree of
this announcement was less than we had originally feared-and much less than the
market's reaction would indicate. Here's why:
1. This is a vaporware announcement. There is no working software. No
process. No clearly defined purpose or niche. No customer support. There is no
likely demand other than from other FI's that have similar scant leverage. This
is so early, the name has not even been decided upon. Like any vaporware
announcement, it is intended to freeze the market, to keep potential clients
from making a decision. Unlike a vaporware announcement from, say, Microsoft,
however, the participants in this venture do not have enough clout to make the
critical decision-makers-the billers-hold up the process while the software is
developed. The founding banks indicate that their competitive advantage stems
from the banks' ability to "offer to the consumer trust, privacy, safety, and
security." This is more of a fond wish on the part of the banks than the solid
basis of an enduring competitive advantage. In the other major electronic
consumer payment system-the credit card system-trust, privacy, safety, and
security have been outsourced to nonbank providers including VISA, MasterCard,
American Express, and First Data and we don't hear consumers squealing, except,
of course, about the garbage fees and high interest rates imposed by their
financial institutions. Meanwhile, the largest merchants sued the bank-owned
consortium providers to roll back the discount fees being paid on offline debit
cards, fees that the banks pursued aggressively by switching from online to
offline debit. These are the "trusted relationships" the banks are going to
exploit to generate this niche?
2. This is highly redundant. Any type of online bill presentment service
is going to have to have a similar directory at its core. Why would billers
choose this consortium to provide this service alone when they can go to
CheckFree and get this service PLUS customer service, full transaction audit
trails, access to 90% of online bill payment customers, integrated bill and
payment delivery, the option of self-service software or hosted service, and
links from the consumer back to the biller's web site. In other words, why put
this together a la carte when end-to-end service is available?
3. Born of fear, consortia are doomed to fail. We maintain that banks
would be much better off pursuing their individual self-interest by working
aggressively to exploit the new opportunities that will be generated by
CheckFree and TransPoint in electronic bill presentment and payment rather than
wasting time and energy in banding together for the good of the industry. IBM
and 16 major regional banks pursued a similar strategy through the formation of
Integrion, which ended up outsourcing bill payment to CheckFree. Other groups of
banks have announced similar intentions, only to fade away into the background.
Some would point to VISA and the ATM networks as consortia that did work. We
would suggest that VISA's success was the result of one strong executive and a
last-minute agreement by desperate card-issuing banks with little choice and no
private third-party option. The ATM systems warred for years under individual
and regional bank ownership until it finally became apparent to enough bankers
that they needed to be fully interoperable and adopted common standards. Again,
there was no private, specialist, third-party alternative.
4. The open standards issue is a straw man. The banks in their release and
conference call stressed their commitment to open standards and
interoperability. This is a moot point, as CheckFree's system is open to any
bank that wants to participate and any biller that wants to participate using
commonly defined messaging standards and protocols. We believe that banks should
be especially careful about using the nuclear warhead of "open standards" as we
still do not believe many bankers understand how vulnerable they are to having
the heart of their franchise-exclusive access to customer financial
information-torn out by the OFX/IFX "open standards" and the commoditization it
can potentially produce. Flying the open standard today leaves them more
vulnerable to similar attacks in the near future as OFX/IFX is more widely
adapted.
5. It flies in the face of thirty years of financial disaggregation. The
lesson learned over and over again in financial services in the last three
decades is that technological advances produce disaggregation, the triumph of
the product or technology specialist vs. the generalist bank. Look at mortgage
banking, credit cards, merchant card processing, credit card processing, credit
analysis, bank core processing, database marketing. The winners in all these
fields are the specialists and the banks that use the specialist rather than
banks that persist on their own course. This is no different.
6. Electronic bill payment and presentment is not easy to set up.
Integrion had IBM, 16 banks, and over $100 million. It wanted to deliver bill
payment services itself. It ended up outsourcing to CheckFree and taking an
equity position. Microsoft and First Data have considerable financial and
technological resource, but it has taken MSFDC/TransPoint over two years just to
reach the starting gate. There is still much, much more to fear for CheckFree
holders from TransPoint than there is from this new announcement.
7. Overcoming CheckFree's leadership position is an uphill fight against
network economics. As CheckFree continues to add online bill paying consumers
and presentment-enabled billers, its value and competitive position continues to
climb at a steeper pace than that of competitors with less mass, even if the
competitor is adding consumers and billers at a similar rate. This means that
any such potential competitor has to be willing to spend massively to make up
ground. With another 6-12 months to continue to pad its lead (and at a pace that
we believe will accelerate over the next year), we don't see a new competitor
making much of a dent. We believe the unstated premise of this announcement was
to use the initial directory service as a bulkhead and then expand throughout
the online bill payment and presentment process. We believe this is a longshot
for the reasons outlined above.
First Call Corporation - all rights reserved. 617/345-2500
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