CHECKFREE CORP \GA\ (CKFR)
Quarterly Report (SEC form 10-Q)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
CheckFree was founded in 1981 as an electronic payment processing company and has become a leading provider of financial electronic commerce products and services. Our current business was developed through the expansion of our core electronic payments business and the acquisition of companies operating in similar or complementary businesses.
We operate our business through three independent but inter-related divisions:
- Electronic Commerce;
- Investment Services; and
- Software.
Through our Electronic Commerce division, we enable consumers to receive and pay bills electronically. For the year ended June 30, 2002, we processed approximately 316 million electronic payments and delivered approximately 9.8 million electronic bills. For the quarter ended March 31, 2003, we processed nearly 112 million electronic payments and delivered over 8.8 million electronic bills. As of March 31, 2003, there were over nine million consumers initiating payments via CheckFree-supported technology. The number of transactions we process each year continues to grow. Growth in the number of transactions processed exceeded 36% for the year ended June 30, 2002, and 36% for the quarter ended March 31, 2003, against the same periods in the prior year. The Electronic Commerce division accounted for approximately 72% of our fiscal 2002 revenue and approximately 74% of total revenue for the nine months ended March 31, 2003.
Our Electronic Commerce division's products allow consumers to:
- receive electronic bills through the Internet;
- pay any bill -- whether it arrives over the Internet or
through traditional mail -- to anyone;
- make payments not related to bills -- to anyone; and
- perform customary banking transactions, including balance
inquiries, transfers between accounts and on-line statement
reconciliations.
The majority of consumers using our services access our system through Consumer Service Providers (CSPs). CSPs are companies, such as banks, brokerage firms, Internet portals and content sites, Internet-based banks, Internet financial sites and personal financial management software providers, that use our products to enable consumers to receive and/or pay bills electronically. We have relationships with hundreds of CSPs. Some of our largest CSPs, as determined by type of CSP and number of consumers using our products, are Bank of America, Bank One, Charles Schwab & Co., Merrill Lynch & Co., SunTrust, U.S. Postal Service, Wachovia, Wells Fargo and Yahoo!. This list of our CSPs is not exhaustive and may not fully represent our customer base.
We have developed our own open infrastructure, known as Genesis, to process electronic bills and payments. The Genesis system is accessed by CSPs using various Web-based applications. In March 2001, we introduced our latest application for electronic billing and payments "WebPay for Consumers" (or WebPay 3.2), which added to our core product the ability for consumers to receive and pay e-bills over e-mail and to exchange money with each other using e-mail "invitations" to receive money. WebPay 3.2 helps consumers automate the complete process of viewing and paying bills they can receive bills online and pay those bills online, too. WebPay 3.2 also allows the consumer to "Pay Anyone" electronically from a child in college, to a lawn care or other service provider, to a friend, using the Genesis system. We now have 842 CSPs offering full electronic billing and payment as the number of sites where consumers can both view and pay bills continues to increase.
Through our Investment Services division, we provide a range of outsourced portfolio management services to help more than 250 institutions deliver portfolio management, performance measurement and reporting services to their clients. As of March 31, 2003, our clients used the CheckFree APL Portfolio Accounting System to manage about 1.2 million portfolios totaling more than $500 billion in assets. The Investment Services division accounted for approximately 16% of our fiscal 2002 revenue and approximately 15% of total revenue for the nine-
month period ended March 31, 2003.
Our institutional client base includes investment advisors, brokerage firms, banks and insurance companies. Our fee-based money manager clients are typically sponsors or managers of "wrap" or separately managed accounts, money management products, or traditional money managers, managing investments of institutions and high net worth individuals.
Our portfolio management systems are marketed under the product name APL, and provide the following functions:
- account open and trading capabilities;
- graphical client reporting;
- performance measurement;
- decision support tools;
- account analytics;
- tax lot accounting;
- manager due diligence;
- multiple strategy portfolios;
- straight through processing;
- Depository Trust Corporation interfacing;
- billing functions; and
- system and data security.
In addition to our APL and APL Wrap portfolio management products, our Investment Services division also offers investment performance and reporting products and services. Marketed under the names M-Search and M-Watch, these products are a result of the acquisition of Mobius Group, Inc. in March 1999.
Through our Software division, we deliver software, maintenance, support and professional services to large financial service providers and other companies across a range of industries. The Software division is comprised of three units, each with its own distinct set of software products. The ACH Solutions unit provides software and services that are used to process more than two-thirds of the nation's eight billion Automated Clearing House (ACH) payments. The CheckFree Financial and Compliance Solutions (CFACS) unit enables organizations to handle their reconciliation and compliance requirements. The i-Solutions unit provides software and services that enable end-to-end e-billing and e-statement creation, delivery and payment. The Software division accounted for approximately 12% of our fiscal 2002 revenue and 11% of total revenue for the nine months ended March 31, 2003.
RESULTS OF OPERATIONS
The following table sets forth as percentages of total operating revenues, certain consolidated statements of operations data:
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THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
---------------- ----------------
2002 2003 2002 2003
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Total Revenues: ........................................................ 100.0% 100.0% 100.0% 100.0%
Expenses:
Cost of processing, servicing and support ........................... 53.8% 41.8% 55.9% 43.7%
Research and development ............................................ 10.8% 9.6% 12.0% 9.6%
Sales and marketing ................................................. 10.6% 9.7% 12.0% 10.0%
General and administrative .......................................... 7.7% 6.8% 9.0% 7.0%
Depreciation and amortization ....................................... 80.9% 40.3% 92.4% 42.0%
Impairment of intangible assets ..................................... -- -- 42.8% --
Reorganization Charge ............................................... 12.7% -- 4.4% --
-------- ------ ------ ------
Total expenses ............................................... 176.5% 108.3% 228.4% 112.4%
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Loss from operations ................................................... -76.5% -8.3% -128.4% -12.4%
Interest, net .......................................................... -1.0% -1.1% -0.8% -1.0%
Loss on investments .................................................... -- -0.9% -- -0.8%
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Loss before income taxes and cumulative effect of accounting change ......................................... -77.5% -10.3% -129.2% -14.1%
Income tax benefit ..................................................... -15.4% -4.8% -24.0% -6.2%
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Loss before cumulative effect of accounting
change ............................................................. -62.2% -5.5% -105.2% -7.9%
Cumulative effect of accounting change ................................. -- -- -- -0.7%
-------- ------ ------ ------
Net loss ............................................................... -62.2% -5.5% -105.2% -8.6%
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