Salomon Smith Barney Special Report
Apologies if previously posted
CKFR: Once again profits evaporate.
Salomon Smith Barney
Friday, June 18, 1999
--SUMMARY:--CheckFree Holdings Corporation--Electronic Commerce
* CKFR expects to spend as much as $80 million more in FY2000 than
previously budgeted.
* $50 million of the $80 million will be expensed in FY2000.
* Our previous FY2000 EPS estimate of $0.24 in now a loss of ($0.31/share).
* The new costs are evidence of the company's commitment to it portal
distribution strategy.
* The strategy adds significant new risks to the business model. We
reiterate our 3H rating and $20 price target.
--EARNINGS PER SHARE--------------------------------------------------------
FYE 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year
Actual 06/98 EPS $(0.06)A $(0.03)A $0.00A $0.03A $(0.05)A
Previous 06/99 EPS $(0.05)A $0.00A $0.04A $0.04E $0.04E
Current 06/99 EPS $(0.05)A $0.00A $0.04A $0.04E $0.04E
Previous 06/00 EPS $0.04E $0.05E $0.07E $0.08E $0.24E
Current 06/00 EPS $(0.10)E $(0.10)E $(0.06)E $(0.05)E $(0.31)E
Previous 06/01 EPS $N/A $N/A $N/A $N/A $N/A
Current 06/01 EPS $N/A $N/A $N/A $N/A $N/A
Footnotes:
--FUNDAMENTALS--------------------------------------------------------------
Current Rank........:3H Prior:No Change Price (6/17/99).....:$38.37
P/E Ratio 06/99.....:959.2x Target Price..:$20.00 Prior:No Change
P/E Ratio 06/00.....:N/Ax Proj.5yr EPS Grth...:45.0%
Return on Eqty 98...:N/A% Book Value/Shr(99)..:3.46
LT Debt-to-Capital(a)3.7% Dividend............:$N/A
Revenue (99)........:251.8mil Yield...............:N/A%
Shares Outstanding..:55.0mil Convertible.........:No
Mkt. Capitalization.:2110.3mil Hedge Clause(s).....:
Comments............:(a) Data as of the most recently reported quarter.
Comments............:
--OPINION:------------------------------------------------------------------
On 6/16 Checkfree Holdings Corp. hosted a conference call to elaborate on
its recent shift to an Internet portal distribution strategy for its
Internet billing service. Based on information provided during the call
and subsequent conversations with the company, we are revising our FY2000
estimates. For the full year we are raising our revenue estimates from
$327 million to $339 million. The increase reflects the estimated
contribution from bill paying subscribers acquired via the company's
portal relationships.
To bolster the company's capabilities and to support its new initiatives,
CKFR expects to incur approximately $50 million in new expenses not
previously budgeted. As a result, we are lowering EPS estimates for the
period from $0.24/share to ($0.31/share). Note, our new estimates do not
factor in the company's pending equity offering. Our model is available
upon request.
We currently rate CKFR a 3H with a $20 price target. Although we
continue to believe that consumers will adopt Internet banking and bill
payment and that CKFR is well positioned to capitalize on this
opportunity, we think that the company's new portal distribution strategy
introduces significant new risks into its business model. We cannot
recommend the stock at current valuations and would suggest that
investors who have enjoyed the run in the company's stock take their
profits.
1. CKFR and INTU have amicably settled a lawsuit regarding CKFR's right
to broadly market its services to Internet portals. Freed by the settle
ment, CKFR has aggressively pursued portal and Internet Service Provider
distribution deals in addition to the one previously announced deal with
a large Internet portal (we believe the agreement is with Yahoo!). The
company indicated it is holding significant discussions with a number of
large players. According to the company, if it signs these partners (and
we suspect that they have already entered into at least one new
agreement), the total reach of its portal and financial distribution
partners will extend to 100 million consumers.
2. The company believes that once consumers have tried Internet bill
payment, they will become long-term users of the service. Consequently,
CKFR intends to offer portal visitors a free trial period to test the
service. The trial period would extend at least through several payment
cycles. The company did not elaborate upon the mechanics of the free
offer, although it expects the marketing initiative to cost approximately
$10-$15 million over the next 12 months. The company expect to earn
approximately $50/year per portal subscriber after the trial period.
Assuming an average three month trial period and a cost of $2.5/month to
provide service, it would mean that if 2 million portal visitors test
drive the service it will cost CKFR approximately $13.3 million.
As of March 1999, the company reported 2.8 million subscribers. Our
previous model, which did not include any portal subscribers, projected
3.7 million by the end of 2000. On the call, the CEO stated that they
are building out the infrastructure to handle 5 million subscribers
within 12 months. The 2.2 million new subscribers (5-2.8) will be
comprised of 900,000 from banks (3.7-28), and 1.3 million from portals.
Our model assumes that 50% of trial users will adopt the for pay service.
3. Recently Yahoo! has considered buying CKFR. However, if CKFR has or
is about to sign additional portal deals, we believe, that an acquisition
is unlikely.
4. CKFR has signed 50 large billers representing 500 million bills
/month. The company's goal is to double the number of billers who can
distribute interactive digital bills by the end of 2000. To achieve this
goal, the company expects to invest $10-$15 million to enable these
billers. The need to absorb the cost reflect the fact that Internet
Billing is still not a major strategic initiative for many billers and
also, the intensely competitive environment for bill presentment
solutions.
5. CKFR has long argued that consumers want to pay their bills at a bank
Web site. Only banks offer real-time account balance information and
complete transaction histories. Obviously, without bank cooperation,
portal distribution does not satisfy either requirement. CKFR has turned
to portal distribution out of necessity because the majority of banks
have been reluctant to offer and market a quality Internet banking/bill
payment product.
For obvious reasons, CKFR's most sophisticated bank customers are
displeased with CKFR's portal distribution strategy. On the other hand,
the company claims that a number of its less advanced bank clients are
eager to leverage the portal infrastructure to offer a quick to market
Internet banking solution. It's not clear to what extent CKFR's
strategy will permanently disjoint its relationships with large banks.
However as long as CKFR offers the only credible Internet bill payment
platform, it doesn't much matter how they feel.
6. The company plans to invest an additional $50-$60 million over the
next 12 months to beef up the quality and reliability of its service.
Between $10-$15 million of the investment will be expensed in FY2000.
This is the third quarter in a row that the company started the quarter
claiming to have budgeted for the appropriate amount of infrastructure
only to extend the roll out period or increase the budget at the end of
the quarter.
7. The company announced on the call that it will spend an additional
$10-$15 million to extend its payment platform to enable it to handle a
variety of additional Internet related transaction services. We believe
that this may be a significant market opportunity for CKFR, but at this
point, we have too little information to comment on the near term upside
this new initiative may offer.
8. The company has filed to sell 3.8 million shares (2.425 million shares
sold by the company, 450,000 shares sold as a result of an exercise of wa
rrants by existing Integrion members, and the remainder by management).
Although the CEO maintains that CKFR's prospects have never been
brighter, he is selling 657,000 shares or 9% of his holdings. Note,
Integrion members hold 2.55 million warrants exercisable at $21.00 and
that stock purchased as a result of an exercise are restricted for 12
months.
In 1999, the company repurchased 4.7 million shares at an average price
of $6.60. If the company sells 2.425 million shares at yesterday's
closing price of $38, the company will have netted $78 million.
According to the company, despite the higher level of investment now
planned for FY2000, it will continue to be EBITDA positive throughout
2000. Consequently, it estimates that it will sock away the $100 million
proceeds from the sale of the stock.
9. We have heard recently that the company is making a significant
EFFORT to sell its remaining software businesses. Although still
attractive assets, the software businesses are atrophying and potential
buyers are balking at CKFR's asking price. At 3x FY2000 revenues, the
software unit is worth $132 million.
Conclusion: Although we believe that CKFR's portal distribution strategy
is intriguing, it is too early to tell whether it will unleash the pent
up consumer demand for Internet Billing that the Company claims exists.
We have three concerns:
First, to attract portal visitors; CKFR will offer a free trail period.
On the Internet, once consumers have sampled a free offering they have
been reluctant to pay up for it at a latter date.
Second, we are concerned that the portal partnership will alienate the
company's many bank partners. It's an opportunity for TransPoint!
Third, the company expects to incur an additional $50 million in expenses
over the next 12 months. Once again pushing out the day to
profitability. This is a situation that Internet users are increasingly
less tolerant of. |
