Hi all,
I've been lurking but very tied up with year-end. I hope everyone had a Happy and Healthy New Year and Holiday season.
I don't know if the following has anything to do with our weakness this AM but if it does, there's little to worry about long term, IMVHO. Let's not forget this guys affiliation. I would comment on many points he makes that I think are WAY off base, but I'll let you take you own reads.
CKFR: Revised Estimates; Yahoo! BillPay Traffic Slower Than Expected Part 1
06:22am EST 7-Jan-00 Salomon Smith Barney (ZANDI 212-816-5780) CKFR YHOO
--SUMMARY:--CheckFree Holdings Corporation--Internet--E-Commerce
*Traffic to Yahoo! Bill Pay from Sept.-Nov. 99 was slower than we had
expected despite the incentive of a 3-month free trial to new customers.
Obviously, it is too early to throw in the towel on Yahoo! Bill Pay, but
given the history of wildfire adoption of "Killer Apps" on the Internet,
this ain't no "Killer App".
*The company's acquisition of BlueGill Technologies enhances CKFR's ability
to offer its customers a more complete solution, however, we expect it to
be dilutive to fiscal 2000 earnings by $(0.10) before amortization, we have
adjusted our estimates to reflect the dilution.
*We have revised our EPS estimates for fiscal 2000 (ending June 2000) to a
loss of $(0.44) from $(0.36). We are also publishing a new 12-month target
price of $40, up from our previous target price of $20.
--EARNINGS PER SHARE--------------------------------------------------------
FYE 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year
Actual 06/99 EPS $(0.05)A $0.00A $0.04A $0.05A $0.04A
Previous 06/00 EPS $(0.10)E $(0.11)E $(0.09)E $(0.08)E $(0.36)E
Current 06/00 EPS $(0.08)A $(0.11)E $(0.13)E $(0.12)E $(0.44)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
Previous 06/02 EPS $N/A $N/A $N/A $N/A $N/A
Current 06/02 EPS $N/A $N/A $N/A $N/A $N/A
Footnotes:
--FUNDAMENTALS--------------------------------------------------------------
Current Rank........:3H Prior:No Change Price (1/6/2000)....:$85.63
P/E Ratio 06/00.....:N/Ax Target Price..:$40.00 Prior:20.00
P/E Ratio 06/01.....:N/Ax Proj.5yr EPS Grth...:45.0%
Return on Eqty 99...:N/A% Book Value/Shr(00)..:4.29
LT Debt-to-Capital(a)10.0% Dividend............:$N/A
Revenue (00)........:339.51mil Yield...............:N/A%
Shares Outstanding..:55.0mil Convertible.........:No
Mkt. Capitalization.:4709.6mil Hedge Clause(s).....:
Comments............:(a) Data as of the most recently reported quarter.
Comments............:
--OPINION-------------------------------------------------------------------
Prompted by recent developments at the company, we have reviewed our
model for CheckFree (CKFR) and are publishing revised EPS estimates for
fiscal 2000 (ending June 2000). Reflecting the negative earnings impact
of the BlueGill acquisition, a negative spread on the recent convert
issue, and a Yahoo! (1H, $368.19, Baker) related adjustment, we are
lowering our FY 2000 EPS estimate from ($0.36)/share to ($0.44)/share.
Previous EPS: ($0.36)
Impact of BlueGill: ($0.10)
Negative Spread: ($0.01)
Yahoo! adjustment: 0.03
=======
New EPS estimate*: ($0.44)
* Estimates exclude amortization of BlueGill acquisition related expenses.
As we discuss below, Yahoo! Bill Pay is off to a slower start than
expected. As a result, we are lowering our estimates specific to the
agreement with Yahoo!. This has a curious impact on earnings; since
consumers are offered a free three month trial, the slow start means
lower than expected expenses.
Throughout 1999, we stubbornly stuck to our $20 price target. During the
period, we believe that CKFR has continued to solidly its leadership in
the online bill pay industry. Based on this and the fact that we remain
convinced that online bill pay will ultimately become widely used, we are
raising our 12-month price target to $40/share.
Early Traffic to Yahoo! Bill Pay Slower than Expected
On January 6, 1999, CKFR announced that it was teaming up with Yahoo! to
offer Yahoo! Bill Pay, an online bill payment and presentment service, to
Yahoo!'s 105 million (worldwide) users. (CKFR's partnership with Yahoo!
was largely motivated by frustration at the slow adoption of Internet
banking.) Much of the extraordinary 1999 performance of CKFR's stock
reflects the market's optimism about the potential of Yahoo! Bill Pay and
other portal deals.
On September 8, 1999, Yahoo! launched Yahoo! Bill Pay. Both Yahoo! and
CKFR claim to be pleased with customer response to the new service,
however, neither firm has released any hard data. To get a handle on
what is actually going on, at our request, Media Metrix measured Unique
Visitors from Sept 99 - Nov. 99 to the following URL's: BILLS.YAHOO.COM,
BILL.SECURE.YAHOO.COM, BILLS.SECURE.YAHOO.NET, and
HELP.YAHOO.COM/HELP/FIN/BILLS. (Note, we were unable to obtain
segregated data for just the secure sites since the number of Unique
Visitors to the sites were too small to be measured separately by Media
Metrix.)
While the Unique Visitors measure is not guaranteed to be 100% accurate,
and from the data we cannot infer number of customers actually using the
service, we believe that it offers a fair estimate of the order of
magnitude of user interest in the service. Which, as it turns out, is
less than we had hoped.
September '99 October `99 November `99
Unique Unique Unique
Yahoo! Bill Reach % Visitors Reach % Visitors Reach % Visitors
Pay sites 0.2 107,000 0.1 48,000* 0.2 117,000
* Note the sequential decline from Sept.
Of course, it's too early to tell whether Yahoo! Bill Pay will be a big
success. The bill presentment feature (referred to as Yahoo! E-Bills)
was not even available until 12/13/99. The only conclusion we feel
comfortable making at this point is that consumers' aren't clamoring to
pay their bills online at a generic portal. It's a service that will
have to be marketed. And the question is, when will Yahoo! (or CKFR)
turn up the marketing volume? If Yahoo! doesn't turn up the dial and the
big banks continue to go slow on the information super highway, what will
be the catalyst for a further upward move in CKFR's already rich price?
Acquisition of BlueGill Technologies
On December 21, CKFR announced the acquisition of BlueGill Technologies,
a software development company that targets the Internet bill presentment
market, in a stock deal worth approximately $250 million (3.2 million
shares). The acquisition is dilutive to earnings, BlueGill is expected
to contribute $5 million to CKFR's topline over the remainder of fiscal
2000 and reduce earnings by $0.10 before amortization charges. The deal
is expected to close in early calendar 2000. We have reduced fiscal 3Q00
and 4Q00 by $(0.05) each to reflect the dilution.
BlueGill enhances CKFR ability to move large billers to enable bill
presentment to its customer. CKFR believes, and we concur, that the more
digital bills available to consumers the faster consumers will adoption
online bill payment.
In addition to technology, BlueGill brings to CKFR a number of
significant partnerships with industry-leading software vendors (IBM,
Xerox, and EDS), technology companies, (TransPoint, M&I Data Systems),
financial institutions (Chase, Citibank, BankOne) as well as 16 biller
service bureaus.
Step-by-step, CKFR has expanded its presence in the Internet bill payment
and presentment market to offer its portal and large financial customers,
a robust, flexible, and scaleable end-to-end solution.
Other Recent Events
On November 29, CKFR completed the offering of $150 million (plus $22.5
million over-allotment) 6.5% convertible subordinated notes, maturing in
12/1/06. The notes are convertible at $73.20 per share or 13.6612 shares
per bond and are callable on or after 12/1/02. If converted, the maximum
number of shares issued to holders of the convertible bond will be
2,356,557. We estimate a negative carry on the bonds of approximately
100bp and have adjusted earnings to reflect this additional
expense.
Competitive Environment
There have been a number of new entrants into an emerging sector of the
online bill payment and presentment markets known as bill management.
Companies such as CyberBills, PayTrust, and PayMyBills have created a lot
of excitement recently with many sophisticated investors feeling that
these companies offer compelling business models.
CyberBills, based in Santa Clara, California, has been financed by
Intuit, Vertex Management Inc., Dotcom Ventures L.P., Kiwi Management
Company Ltd., TDF Management, Pte Ltd, Greenfield Technology Ventures and
Online Ventures.
Paytrust, based in Princeton, New Jersey, has been financed by American
Express, AT&T Ventures, GE Capital, Goldman Sachs, SOFTBANK Venture
Capital, Spectrum Equity Investors, and Thomas Weisel Partners.
PayMyBills, based in Pasadena, California, is financed by idealab! and
IDEALAB Capital Partners, an independent venture fund which includes
investors such as Moore Capital Management, Ben Rosen (Chairman of Compaq
Computer), Sun America, Union Bank of California, The Times Mirror
Corporation, The State of Michigan, The State of California (via Grove
Street Capital), and Sumitomo Corporation.
Valuation
CKFR's stock has been on a tear, the stock has nearly quadrupled from its
six-month low of $23.88 in August. We are introducing a new 12-month
target price for CKFR. We arrive at our target price by assuming that
one-third of 110 million domestic household are paying their bills
electronically in 2004 and CKFR is able to garner 50% of this market
share, or 18.3 million households. Assuming $3.75 of monthly transaction
revenue per household, we arrive at $825 million in annual revenue in
2004. Applying net margins of 20% (or 1.6 times those of First Data
Corp, (FDC,2M,$48.25) the largest credit card transaction processor), a
terminal multiple of 20, and a discount rate of 20%, we arrive at a
12-month target price of $40 for CKFR shares.
Electronic Commerce
Assumptions
a. U.S. Households (horizon) 2004 110,000,000
b. Household Penetration 33% 36,663,000 =a*b
c. CKFR's market share (households)* 50% 18,331,500 =b*c
d. Annual gross revenue ($/mth) $3.75 $824,917,500 =c*d*12
e. Net Margin (1.6*FDC's net mgn) 20% $165,602,188 =d*e
f. Valuation in 2004 (multiple) 20 $3,312,043,763 =e*f
g. 12 Month Valuation (disc. rate) 20% $1,916,691,992 =f/(1+g)^3
Software + Investment Services
Tax-affected 2000 Earnings $10,012,000
Valuation (earnings multiple) 30 $300,374,251
CKFR Valuation $2,217,066,244
Shares outstanding 56,098,000
Target Price $40
* assumes a 60% CAGR 2000-2004
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