CheckFree foresees no check on growth
Norcross-based company pioneered electronic payments
By TOM WALKER
The Atlanta Journal-Constitution
Published on: 02/10/04
All Peter J. "Pete" Kight wanted to do back in 1981 was make it easier for patrons of his health club to pay their annual dues.
He did just that in the basement of his grandmother's house in Worthington, Ohio, a suburb of Columbus. In the process, he pioneered a new enterprise that now enables 12 million consumers to pay bills over the Internet. The company, CheckFree Corp., has become the dominant player in the burgeoning electronic bill payment market.
The company went public in 1995. A year later, Kight moved its headquarters to Norcross after acquiring a local firm that was the banking industry's top provider of electronic funds transfer software. Today CheckFree is one of Georgia's biggest corporations, with a market value of $2.85 billion.
The company's NASA-like command center processes close to 1,000 electronic transactions per minute as money flows back and forth electronically among personal computers, banks and billers.
"We supply the infrastructure for the management of money," explained Kight, 48, chairman and chief executive officer.
While the "checkless society" remains more myth than reality, analysts say that CheckFree is well ahead of the game in the electronic bill payment, or EPB, industry.
"The company has invested heavily in a state-of-the-art EBP infrastructure that can support up to 30 million users," said SunTrust Robinson Humphrey analyst Wayne Johnson. "We believe competitors trying to duplicate CheckFree's efforts face significant barriers of entry."
But one thing Kight's company hasn't done — yet — is replace the paper check.
'They never go back'
CheckFree estimates that U.S. consumers, businesses, governments and other agencies write 45 billion paper checks per year. "No payment system ever disappears, but new ones are added," Kight said.
And that's why EBP is a growth industry.
According to CheckFree, only 10 percent of American banking customers now use electronic payments. That percentage is expected to reach 50 percent by 2007.
"One absolute on the consumer side is that once someone moves to electronic bill payment, they never go back," Kight said. "They know that this is better, quicker and cheaper than paper."
And, given that bills get sent and bills get paid even when the economy slips, CheckFree came through the recent recession in good shape.
"We actually did much better than average, because what we do reduces paper costs for client companies," Kight said.
But the company didn't come through the economic slump completely unscathed. Its stock now trades at $31.77, well below its high of $104 at the end of 1999.
Growth, but not profits
CheckFree's revenue in the fiscal year ended June 30, 2003, was $551.6 million, an annual increase of 12.5 percent. Since 1999, the company has posted average annual sales growth of 18.7 percent, according to Bloomberg News.
But because of charges related to strategic acquisitions in 1999 and 2000, CheckFree did not report a net profit in that period. Its net loss in fiscal 2003 was $52.2 million, or 59 cents per share, down from a loss of $441 million, or $5.04 per share, in 2002.
In its second quarter of fiscal 2004, ended Dec. 31, the company reported a net loss of $1.9 million, or 2 cents per share, on revenue of $149.9 million, vs. a year-earlier loss of $11.2 million, or 13 cents, on revenue of $135.5 million.
According to Kight, growth of free cash flow — money from company operations — is a better measure of CheckFree's financials, and the company generated more than $133 million in 2003 and $37.7 million in the recent second quarter.
David Mangum, executive vice president and chief financial officer, said CheckFree expects to generate $150 million in free cash flow this year.
More important for investors, CheckFree expects to be profitable beginning in the third quarter.
"We project revenue of $134 million to $149 million for the third quarter of 2004 and net earnings per share in the range of 5 cents to 7 cents," Mangum said. "Based on our strong performance through the first two quarters and our outlook for the remainder of the year, we have increased our full-year expectations for earnings per share to 4 cents to 8 cents."
That outlook is based on projected growth of the company's core business: "electronic commerce," or billing and payment on the Internet via more than 1,000 banks, brokerage firms, Internet portals and personal financial management programs. It accounts for 75 percent of total sales.
Banks dragged feet
CheckFree also has a software business and provides software for investment advisers and money managers. It does not engage in financial advice.
"Our biggest competitor is the paper check," Kight said.
CheckFree estimates that it has a 65 percent share of the e-payment market. The company's e-payment competitors are mostly large banks, such as J.P. Morgan Chase, Wells Fargo and Wachovia.
If anything, banks were reluctant to get into electronic payments in the early 1980s, after Kight set up a bill-paying system for his Columbus health club. The companies that did the billing were also skeptical.
As Kight tells it, electronic bill paying didn't take off until it was offered to consumers, then beginning to embrace the personal computer. "They said yes," he noted — after which the banks and billers fell into line.
Looking ahead, Kight sees the business evolving further into billing and payment by e-mail and, probably, by hand-held computers and phones.
Exceeding expectations
CheckFree has been slow to move into the foreign market because, Kight said, U.S. growth prospects are so significant. But the company has dipped its toe into the global waters, acquiring London-based HelioGraph Ltd. in the second quarter.
CheckFree also agreed in that quarter to acquire American Payment Systems, a deal that's expected to close before the end of the fiscal year. APS processes transactions for some 10,000 walk-in check-cashing and bill-paying outlets that serve the astonishing 20 percent of Americans who do not have bank accounts.
"CheckFree continues to exceed expectations based on the strong underlying market growth of EBP," said Piper Jaffray analyst Peter Swanson. "We see no slowdown in the EBP market going forward."
[Since Peter J. Kight began CheckFree in his grandmother's basement, the Norcross-based company has become the major player in the burgeoning electronic bill payment industry. "Our biggest competitor is the paper check," Kight says.]
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