CheckFree F2Q07 (Qtr End 12/31/06) Earnings Call Transcript

TRANSCRIPT SPONSOR

CheckFree Corporation (CKFR)
F2Q07 Earnings Call
January 30, 2007 5:00 pm ET

Executives

Dave Mangum - EVP and CFO
Pete Kight - Chairman and CEO

Analysts

Craig Peckham - Jefferies & Company
Bryan Keane - Prudential Securities
Tien-tsin Huang - JP Morgan
Liz Grausam - Goldman Sachs
Glenn Greene - ThinkEquity
Andrew Jeffrey - SunTrust Robinson Humphrey
Greg Smith - Merrill Lynch
Wayne Johnson - Raymond James & Associates
Nik Fisken - Stephens, Inc.
Kartik Mehta - Midwest Research
Tim Willi - A. G. Edwards

Presentation

Operator

Good afternoon, ladies and gentlemen, and welcome to CheckFree Second Quarter Earnings Release Conference Call. At this time, all participants have been placed on a listen-only mode and we will open the floor for your questions and comments following your presentation.

It is now my pleasure to turn the floor over to your host, Dave Mangum. Sir, the floor is yours.

Dave Mangum

Thank you. Good afternoon and thanks for joining us. With me today on the call is our Chairman and Chief Executive Officer, Pete Kight. Before we start, please note that some of the statements we will make today will not be historical, but rather forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect management's intentions, plans, beliefs, expectations, or projections of the future. However, CheckFree's actual results may differ from these current expectations. Forward-looking statement involve various risks and uncertainties including those inherent in our business, and others that we detail from time to time in our publicly filed reports and press releases, including the press release issued earlier today and furnished on Form 8-K, our Form 10-Q for the quarter ended September 30, 2006, filed November 8, 2006, and our Form 10-K for the fiscal year ended June 30, 2006, filed September 8, 2006, particularly the section titled, “Business Risk Factors”.

Please also note and in accordance with the Sarbanes-Oxley Act of 2002, and Securities and Exchange Commission requirements, CheckFree publicly discloses all financial results using Generally Accepted Accounting Principles or GAAP. However, in today’s call, we will also discuss our non-GAAP performance measures of underlying net income, underlying earnings per share and free cash flow.

Our underlying numbers in free cash flow are reconciled to their appropriate GAAP equivalents in our press release and the accompanying attachments, which were distributed at 4 o’clock today. The materials are also available in the Investor Center Section of our website at www.checkfreecorp.com.

For the second quarter, CheckFree's consolidated revenue was $237.2 million, reflecting 11% growth over the second quarter last year. GAAP net income for the quarter was $35.3 million or $0.39 per share, and underlying net income was $41.8 million or$0.46 per share. Free cash flow for the quarter was $48 million.

Now, I would like to turn the call over to Pete Kight. Pete?

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Pete Kight

Thanks, Dave. Within our Electronic Commerce Division, our consumer service provider transaction growth rates were in line with our expectations. Although non-consumer service provider transactions, the non-bank transactions fell short, we continued to see solid operational performance from both investment services and software.

For our most recent quarter, in the Electronic Commerce Division we reported 7% growth in transactions processed for our CSP or banking channel. We had a 7% decline in transactions processed for the lower priced non-CSP transactions.

The 7% CSP-based transaction growth is in line with our expectations. Within this banking unit, overall, our execution has continued to create opportunities for us to gain market share in the US retail banking marketplace. Added to Citizens from last quarter is the multi-year contract this quarter with BB&T, the nation's 11th largest financial holding company.

As another incremental step in transforming the electronic billing and payment market towards higher efficiency out of this unit, starting this past Q2 and into the current Q3, we expect to discontinue screen scraping e-Bills for most of the key billers on what we call our scrape roster.

Two important changes are taking place in the market that led to this change. One is the need to increase the security of financial transactions, such as this, scraping or imaging from a real screen is simply not effectively securable. The other is that the major billers, who have held out from opening up their direct connections to CheckFree are beginning to move, and thus we think the original rationale for using this scraping to make the bills available is diminishing.

One such customer who made the move in this quarter is American Express, one of the largest and most sophisticated billers worldwide, who recently signed with CheckFree for distribution of their bills through our network infrastructure. Utilizing CheckFree e-Bill Distribution, American Express will provide millions of consumer card members with access to an enhanced e-Bill experience. Beginning this summer, American Express cardholders, who receive an e-Bill at their bank or other chosen financial service provider, will gain the ability to manage their bills and payment online, schedule automatic payments, turn off paper bills, ultimately to create a convenient and customized billing and payment experience.

In the Walk-In Bill Payment space, our move to drive to the consumer fee-based model is building. The pipeline for increased retail agent penetration is substantially larger than anytime in the past, and thus we expect to see greater increases in consumer fee paid transaction, as this pipeline comes online.

We are designing the business to increase efficiency in the large chain models. Our CheckFree paid link technology eliminates the freestanding terminals that we used previously in the outlets by interfacing directly with existing in-store point-of-sale systems. It’s an example of designing the system to work with these larger chains.

During the quarter, we signed a multi-year agreement to provide Walk-In Bill Payment services to Wal-Mart and expanded our relationship with three other large retail chains. These are pretty straightforward examples of our increasing reach in this space. I believe these relationships with large retailers will significantly increase our ability to serve all our biller clients, who want the best distribution network possible for these walk-in customers.

The challenge for us is to improve the speed of implementation and execution in bringing new business both agent and biller to market. As this backlog comes online, we will see improved growth. We just need to keep driving improvement in the process.

Emergency bill paying, the last-minute higher fee payments, primarily transacted via telephone IVR, has great profitability. There is opportunity to grow this business both through extended development and increased market share. As I have noted in the past, I think this is a unique and actually fairly small niche overall compared to our other payment markets. We'll grow this business, but we also will put parameters around its growth by extending speedy payment through our core electronic billing and payment services.

We're interested in the big picture of transforming this marketplace by improving efficiency over time, and this is a niche area, where we think consumer efficiency is going to cost less over time.

The companion to that strategy is our biller-direct channel, which continues to service well, but will continue to have large swings and volume gains and losses. The channel is a part of our biller service model. It helps us create positive and increasingly profitable relationships with major billers and helps us serve consumers in a longer life cycle process. We obviously like consumers to have the ability to move from a biller-direct payment to receiving that bill and settling all their payments in a consolidated consumer banking relationship. So, again our primary focus here is on the total biller relationship and ultimately the effective delivery of the electronic statement.

Moving on to Investment Services, we reported more than 2.6 million accounts on our system, which represents a 24% increase year-over-year. During the quarter, we experienced a marked increase in portfolios on our system. The largest factor in this quarterly growth in portfolios was the addition of a significant number of accounts from the implementation of a large regional broker dealer that we previously signed. We saw continued traction with our APL platform with new sales and renewals continuing on target, as we continue to build out the new EPL platform.

In the Software Division, we reported license sales that exceeded our expectations during the second quarter, led by our global treasury channel. Of course earlier this month, we announced agreement to acquire Carreker Corporation, that’s a Dallas-based payment transaction company that, we think, will compliment the work currently underway in our Software Division.

Payments remain a central differentiating element in the banking industry and a primary driver of bank profitability, also an area of intense increased complexity and challenge for the banking industry, as they face the need to move to and manage the infrastructure to handle digital systems that will carry them forward. With this acquisition, CheckFree intends to drive electronic automation throughout the entire payments process, serving banks with increased efficiencies and enabling them to effectively manage the complex convergence of digital -- as digital overtakes paper in the back office payments processing.

As this transformation progresses, scale, efficiency, and profitability will rise for the banks that have the right technology in place. This internal need of the bank is pretty well recognized already, but increasingly from outside, corporate customers are challenging their financial institutions to provide a more integrated end-to-end array of payments origination, information management, clearing, and dispute resolution solutions. Our analysis is that Carreker will bring a strong array of proven assets, skills, and expertise that combine with CheckFree, will enable us to lead these critical stages of evolution in payments. And we think this a global opportunity.’

We'll continue to work through the necessary approvals for the acquisition and we'll limit further discussion until the acquisition is final.

Now, I'll hand it back over to Dave, who will give you some color on the Q2 financial results and a look-ahead at the third quarter, Dave?

Dave Mangum

Thanks, Pete. I'll review additional highlights from our performance in the second quarter and then our expectations for the third quarter and the full year.

For EC, non-CSP revenue per transaction increased from $0.48 to $0.54 in the second quarter, driven by revenue per transaction increases in walk-in and telephone bill payments and the expected loss of low-priced biller-direct transactions from our financial services customer.

Our Software business posted another strong quarter, driven by better than expected license sales in our global treasury product line, which resulted in a higher than expected margin in the Software segment. This drove much of the overall performance in total company revenue and earnings for the quarter.

In CheckFree Investment Services, we saw a spike in portfolio growth due to the successful migration of a new customer on to our APL platform in the quarter. But consulting revenue was lower than in the first quarter, resulting in sequentially flat revenue for the second quarter.

We generated $48 million of free cash flow in the December 2006 quarter and we utilized $50 million to repurchase nearly 1.3 million shares at an average price of about $39. Through December 31, 2006, we have now utilized $150 million in fiscal 2007 to repurchase more than 3.9 million shares at an average price of about $38 per share.

Our long-term high availability data center strategy remains on track. We purchased equipment, building materials, and the other services of about $4.2 million in the quarter, and a second parcel of land for possible future expansion. As of the initial land purchase in the first quarter, our bank syndicate purchased the land on our behalf, and hence the land purchase itself is not reflected on a cash flow statement.

For the remainder of the fiscal year, we expect to spend about $30 million of additional capital on this data center strategy. These capital costs are reflected as capital expenditures, offset by financing cost reimbursements in our free cash flow calculations.

Turning now to the third quarter, we anticipate total company revenue in the range of 241 to $246 million and earnings per share of 39 to $0.41 on a GAAP basis and 47 to $0.49 on another underlying basis. We are projecting sequential transaction growth from the CSP channel of 5 to 7% and between negative 2 and 0% in our non-CSP transactions. We expect a modest increase in revenue per transaction in non-CSP transactions. We expect the two categories then to net to about 3 to 5% sequential transaction growth for the quarter.

In Software, after our strong performance in Q2, we expect a modest sequential revenue decline in the third quarter, with operating margins remaining relatively consistent. Within Investment Services, we expect portfolios and portfolio-based revenue to continue to grow at about the current pace. We expect to maintain consistent margins.

For fiscal 2007, we expect earnings per share of $1.58 to $1.62 on a GAAP basis and of $1.90 to $1.94 on an underlying basis and free cash flow in the range of 190 to $195 million. For our CSP channel for FY 2007, we still anticipate nearly 25% annual transaction growth overall, resulting from transaction growth of 25 to 30% from our CSP channel in general and lower growth at our largest customer.

For our other bill payment channels, we expect transactions to modestly decline for fiscal 2007. That performance is driven by declines in biller-direct and walk-in bill payment transactions and transaction growth in telephone bill payment.

In total, we are expecting overall transaction growth to be between 15 and 20% for the year.

Earlier this month, we announced our agreement to acquire Carreker Corporation for approximately $206 million. Pending approval by regulators and Carreker's shareholders, we expect to close the deal on or around March 31, 2007. We are expecting Carreker's balance sheet to include about $30 million of cash and investments at closing. We plan to fund the acquisition with a composition of existing cash and debt from our revolving line of credit.

Accounting rules, primarily EITF 04-11 associated with business combinations and in particular those relating to the valuation of deferred revenue assumed in the acquisition of a software company, will require us to discount the value of deferred revenue on Carreker's closing balance sheet, significantly reducing the revenue we will record from Carreker during the first year of the acquisition. As a result, and as we noted when we announced the acquisition, we expect the transaction to be modestly dilutive to underlying earnings per share in the current fiscal year and in fiscal 2008 and dilutive to GAAP earnings per share in each of 2007 and 2008. As the transaction closes and we solidify our purchase accounting, we will provide you with more specific financial details.

Now, I will turn it back to Pete for some closing comments. Pete?

Pete Kight

Overall, Q2 was what I describe as a good quarter. Our Software business continues to execute very well. You've heard me previously note that if we could find a great opportunity to give software the ability to have a bigger impact on CheckFree's growth, we would act upon it and now we have. Carreker and CheckFree's global treasury unit when combined, I think are going to create an unmatched opportunity to develop market-defining leadership in managing the critical evolution from paper to digital management within the banking industry back office infrastructure.

In regard to this back office payments infrastructure, the banking industry is really in a perfect storm of accelerating decline in check volume, that, nonetheless, has to continue to be managed, rapidly increasing volume and complexity in digital transaction management, and escalating risk in managing this process' demand for speed, accuracy, and increased regulatory requirements are all hitting at the same time. We will wait until the transaction closes to talk more specifics, but clearly I like the opportunity here.

In Electronic Commerce, we had a good quarter for bank-based CSP transaction growth, in line with our expectations. We continue to gain a greater understanding of consumer behavior and how that affect consumer uptake and we are cycling this back in to our product planning and development, and that’s true on the electronic billing side as well.

With the American Express dome moving into CheckFree distribution, we gain an important step in this process. American Express is a very sophisticated global biller. They research, analyze, and understand their customers at a very detailed level. I think we will learn a lot, as we work with them on this project.

Understanding the consumer is critical to the next evolution in consumer adoption. There is opportunity to make a significant difference in consumer uptake, if we can better align these electronic transaction services with those key consumer interest that will trigger uptake. We are going to stay focused on that.

The non-CSP transaction business remains a valuable underpinning of our Electronic Commerce strategy. It isn’t going to grow as fast in the near-term, as bank-based transaction business, and while its contribution is steady, its transaction volume will continue to fluctuate, but that will smooth out over time, as we bring more of the merchant backlog to market. Building out this large retail chain strategy takes time, but balancing out the broad local presence we have through the existing smaller merchants with the ubiquity of these large retailers, is going to prove very valuable.

Investment Services continues to gain ground with clients using our traditional APL technology platform, and for that reason, as I noted previously, we have increased our investment in that platform, based on its continued growth and the needs of our clients. We will continue to carry both the cost of APL and the investment in development of the new EPL platform. The growth and the evolution of the managed accounts market continues to reinforce that we are making the right bets here on our investment in the new platform.

The second half of the fiscal year will continue to require the right balance of investment and execution on our part. We have plenty of opportunity in our markets, in some cases, I think potentially transformational opportunity. We have risks. We don’t keep moving, leading our markets in execution and innovation. So, you will see us continue to drive hard.

That concludes the prepared remarks. Operator, we can open up for questions.

Question-and-Answer Session

Operator

Thank you, ladies and gentlemen. The floor is now open for questions. (Operator Instructions) Our first question comes from Craig Peckham. Sir, your line is live, please state your affiliation.

Craig Peckham - Jefferies & Company

I am at Jefferies & Company. Good afternoon. I guess a two-part question, a bit on the expense side. Dave, you are expecting, I think to see a bit of step-up in the second quarter in some marketing spend around the e-commerce division. Did that happen, and if so, the extent to which that did influence the margins?

Dave Mangum

Yeah, Craig, we talked about maybe as much as a penny of stepped up marketing expenses. We felt just short of that penny, but they did indeed step-up, which you see when you look at the face of the income statement if you are looking at, say, sales and marketing expenses, where you see those tick-up or even you see expenses, obviously they are all ticked up.

Craig Peckham - Jefferies & Company

Right.

Dave Mangum

We see a combination of investment management.

Craig Peckham - Jefferies & Company

Now, what’s the number 3, how do pronounce its name?

Dave Mangum

A combination of…

Craig Peckham - Jefferies & Company

Come again.

Dave Mangum

Expense management and -- operator, excuse me, operator?

Operator

Yeah, I am here.

Dave Mangum

We can hear you on the other line. So, I am going to go ahead, Craig, and finish your answer to your question. You see a combination of targeted investment expense we talked about and indeed the uptick in direct marketing that we talked about last quarter, just a little shy of the penny of full in expense, and then across the board, sort of more tactical expense management in general, as we execute through the year.

Pete Kight

Operator, are you…

Operator

Okay. Our next question is coming from Bryan Keane. Sir, your line is live.

Bryan Keane - Prudential Securities

Yeah, hi. A very solid growth on the CSP channel, it grew back up to 7%, and I think that’s on the high-end of your 5% to 7% guidance. I guess I just wanted to see, was seasonality as big of a play there, as you guys thought, and did that extra marketing spend help that transaction growth. That’s question one. And the question two is, when do we expect AMEX to hit and Wal-Mart to hit both on for AMEX on the e-Bills and then Wal-Mart on the walk-in bill pay?

Pete Kight

Yeah, so, this is Pete. The -- so, I want to make sure I use the word -- when you use the word seasonality based on our -- for better understanding of calendarization of the quarters and how it works. But indeed, the analysis that we did following the Q4 experience is proving out so far to be very accurate, and that is, this quarter and next quarter, based on the way the calendar is balanced with live payment dates, in the way quarters open and end, this quarter or next quarter should be the higher transaction growth quarters, and all things being equal, then Q4, Q1 are the lower growth quarters. And so, that's what you see. Q2, which we just announced, is a high growth quarter. We believe the next quarter will be the same, we would expect Q4 to be lower for the overall number and in fact that appears to be case. And underlying that, there wasn’t any really significant changes in marketing spend. So it does appear to be that calendarization of the quarters and -- yeah, it does appear so far to be consistent with our analysis.

Dave Mangum

Yes, maybe to add a little more color to that, Bryan, remember the marketing spend really falls into two buckets in Q2. One is our traditional marketing that we've done year-in-year-out, quarter-in-quarter-out with our bank partners. The second is really as much as anything else, test marketing of concepts and survey information related to how we ramp up or increase the activity of consumers in using the service. That isn't going to bear immediate returns in terms of volume. It’s going to bear long-term returns. So, I would tell you that, frankly none of the Q2 performance you see in the 7% CSP category has to do with sort of the new marketing work we started doing in the quarter. The other part of your question I think related to the calenderization, Pete said on, in terms of the AMEX question and I think your Wal-Mart was part two. Wal-Mart begins -- the signing really just happened and so the implementation, which is quite phased, really starts in early summer and expands over the course of '08 and beyond we hope. American Express is actually is on a roughly the same kind of timeframe. So, lots of things in the future from those two, but again sort of measured and really beginning to rollout in the early summer.

Bryan Keane - Prudential Securities

And are those going to move the needle in terms of AMEX sounds pretty big to me, I assume that, that could move especially sequentially, kind of similar to how a big bank moves to CSP channel?

Dave Mangum

Well, I think we believe -- I’ll wait until future conversation, strategically, Pete, you might like to talk about AMEX and amplify the comments a little.

Pete Kight

Sure, Dave. So, over time, AMEX, I mean AMEX is one of the -- not the largest biller in the world. Although, that's probably changing with China and India mobile phone companies, but AMEX is an extremely big global biller, so there is no question we're exited about it from that standpoint, but I am as exited about the fact that they are one of the lead players that had tested with us but not opened up the link until they felt the market really required it. And I love to see this guys being proactive and now coming to market obviously and working with us. I think we will learn a lot in working with them on how their customers want to be served. I think they will be very aggressive in providing the bill that’s not just static but interactive that they can serve and self-serve through, but I think there is lot of opportunity there. It will certainly build over time, but like all these implementations, it will be a ramp, it won't be sudden.

Bryan Keane - Prudential Securities

Okay, thanks for the help.

Dave Mangum

Thanks, Bryan.

Operator

Our next question is coming from Tien-tsin Huang. Sir, your line is live.

Tien-tsin Huang - JP Morgan

Thanks, lot of difficulty, my name is disrupting the call, after all these years, right?

Dave Mangum

Right.

Tien-tsin Huang - JP Morgan

The question on Software, have you changed your Software expectations relative to what you said at the beginning of the year, because it seemed as though this is the case, given the overall performance in the quarter, but you didn't change the full year guidance, am I reading that right?

Dave Mangum

You are reading that right. Our goals for Software -- our budget for Software has not changed. Some of the timing has changed and the shift may be from Q3 into Q2 in terms of how we saw the year shaping, but our overall goals have not changed at all.

Tien-tsin Huang - JP Morgan

Okay, very good. And then, how did walk-in bill payments, I guess, revenue and transaction performed relative to the plan, can you give us a little bit more detail there?

Dave Mangum

Yeah, I'd be happy to. They both missed what we thought was going to happen for the quarter. It's a modest miss in the overall scheme of total CheckFree Tien-tsin, but in terms of volume, it dropped a little fast than we expected. The good news and sort of linking directly to the strategy for the platform that Pete was describing earlier is actually price went up in the set of transactions. So the revenue decline was really quite modest -- the revenue difference between what we had forecasted and what we actually reported was quite modest, and that really reflects this ongoing transition from this biller paid transactions to the consumer fee paid transactions, both authorized from the biller, as well as just a pure non-contracted consumer fee paid transaction. So, the strategy is working. It's in its early stages of working, I guess is what I have described, and you can't see it based on the volume drop, but it links directly to the market comments, Pete was making earlier.

Tien-tsin Huang - JP Morgan

Okay. Any change intra-quarter in the walk-in bill payment side and also any thoughts on potentially supplementing growth with new products like prepaid debit or even money transfer?

Dave Mangum

No change on the intra-quarter and I think it's probably early to talk about other products. We're pretty focused on executing the platform strategy and the chain strategy, Pete described earlier.

Pete Kight

Yeah. We're -- there is certainly analysis going on out there, but we are very focused on making sure we execute well on the business in front of this before we do anything else.

Tien-tsin Huang - JP Morgan

Okay. If I can sneak in one more, I guess the pricing, or revenue per transaction in the CSP area, $0.46, I think it's almost 45.5. That was down $0.02 sequential. Any surprises there?

Dave Mangum

No, Tien-tsin, no surprises there. I mean, I continue to think you'll see $0.01, maybe $0.02, the occasional flat quarter as well, if you look out to the March quarter, you may be modeling flat, and you shouldn't be surprised to see any of those outcomes

Tien-tsin Huang - JP Morgan

So the SunTrust and I guess BB&T, that's not -- BB&T is not in the numbers yet, when will that kick in?

Dave Mangum

BB&T best case is very end of this year. And it's already incorporated in everything. We've talked about, in fact, it's been incorporated in everything we talked about for some time.

Tien-tsin Huang - JP Morgan

Very good. Thank you.

Operator

Our next question comes from Liz Grausam. Ma'am, your line is live.

Liz Grausam - Goldman Sachs

Can you just talk a little bit about the pipeline, you’re saying that a lot of business, it sounds like in both walk-in bill pay front and also within the CSP channel? Can you kind of describe what the pipeline looks like going forward and if we’re going to see additional signings of fairly major retailers and some more regional banks?

Pete Kight

Sure, this is Pete. So probably the furthest I can go is to say, yes. I think we'll sign additional retailers. And yes, I think we'll sign additional banks. I started this year saying that I think that there is a recognized value difference in retail banking channel and that I thought we've gained market share and I think that will continue to play out through the year.

Liz Grausam - Goldman Sachs

And on the large retail front, how does the pricing look like on those transactions relative to what we are seeing in the non-CSP channel right now?

Dave Mangum

The pricing on the large retailers? Yeah, the way to think about that is the retailers of the distribution network for the product, and as we are signing these, you can think of this as sort of pay anyone service for the non-contracted transitions. We will still be delivering and processing the contracted transactions, both consumer prepaid and biller paid. But it’s the broader distribution network for these consumer prepaid transaction is the right way to think about it. So, there isn’t necessarily pricing to the retailer per say. There is pricing through the retailer up to the consumer and that’s consistent with where we've been on the authorized business as well as the non-contracted.

Liz Grausam - Goldman Sachs

Great. And then just lastly, on the Investment Services business, your margin continues to outperform at least my expectation in that business. Can you kind of give us a sense with the dual rollout of EPL and also maintaining APL, should we continue to see year-over-year improvement in that operating margin or are we going to kind of stabilize from here?

Dave Mangum

Well, I think the investments you are seeing, Liz, are designed toward much greater operating margins when you get out past the migration point, which is still a couple of years away in terms of its full implement and the full view of the migration process. What you see is sort of incremental margin progress and I think you should expect to see that as we head into '08. But, the key to this is, we begin some limited work with customers on EPL this summer, as you know, but migrations really don’t kick in until later in '08. So, we're always away from a full return to a higher level margin in sort of the region for our overall investment.

Liz Grausam - Goldman Sachs

Great, thank you.

Dave Mangum

Thank you.

Operator

The next question comes from Glenn Greene. Sir, your line is live.

Glenn Greene - ThinkEquity

Good afternoon guys, couple of questions. First on the Investment Services, you had the conversion of the big, I guess, a regional brokerage firm and your revenue was relatively flattish sequentially. I guess there is some mix and moving parts here. But can you talk about whether you've got the full benefit of that conversion during this quarter?

Dave Mangum

Yeah, I'd be happy to, Glenn. There really is a two-part answer to your question. At a very high level, we saw very solid portfolio-based revenue growth in CIS, offset almost dollar-for-dollar by a swing in services. Remember services -- I tend to call it lumpy from quarter-to-quarter. We have more professional services with the IDS acquisition and Investment Services than we ever had before. So, services went down a bit, portfolio growth and portfolio account-based revenue went up. You are asking directly about the customer we migrated. That customer have been paying us minimum revenues for the last few quarters. So, the revenue was already in the model. There is a little bit of a tick up above minimums, as they come on live with the full account of portfolios, but the quarter holds within it the full quarter of their revenue.

Glenn Greene - ThinkEquity

Okay.

Dave Mangum

And before that, we had them at minimums, which had been, frankly, not too far behind that full quarter.

Glenn Greene - ThinkEquity

Okay. And then on the walk-in side, transaction growth obviously weaker than you thought, are we getting close to kind of a bottoming in the transaction. Where I am going with this is, obviously the revenue per transaction looks great, but your volume has been struggling, but are we going to close to kind of a bottom here in terms of the transaction accounts?

Dave Mangum

I think if you wash in all of '07 in your question, I believe the answer to that question is, yes. What I reported earlier in the call was, we expect that category of non-CSP based to be modestly down year-over-year, obviously versus 2006, some of that is biller-direct, some of that is walk-in. As we tee up the large chains that we described earlier, as we go into '08 and beyond, yeah, I think fiscal ’07 represents bottom. I wouldn’t pin that on any one quarter within fiscal ’07. We are working our way through the execution and the strategy that Pete described earlier.

Glenn Greene - ThinkEquity

And then just finally, if I can get one more, in the last couple of quarters you have talked about the bank marketing had slowed. Have you seen -- give just an update on sort of what you are seeing in terms of the bank appetite to be spending and promoting the bill pay?

Dave Mangum

Yeah. I think part of the key to thinking about that is, bank marketing had slowed in general in some of the broad-based campaigns we have seen over the years. There are plans in place to do some of that over the course of fiscal -- calendar 2008, excuse me, Glenn. Beyond that, numbers of banks running campaigns, we continue to run the cooperative campaigns for the bank. But the broader-based campaigns, you will have to wait and see through 2008.

Glenn Greene - ThinkEquity

Okay. Thanks a lot.

Operator

Our next question comes from the Andrew Jeffrey. Sir, your line is live.

Andrew Jeffrey - SunTrust Robinson Humphrey

Hi, good afternoon, Robinson Humphrey. Pete, you made some comments that sound tactical to me around marketing and this is really sort of an elaboration on Craig’s question. A little bit of a lift, we saw it on the P&L, just shy of a penny, and hopefully that allows you to continue to drive 20 to 25% CSP, annual CSP transaction growth. But from a more strategic perspective, you have got some big bank customers that are highly penetrated, and then by all accounts hundreds of thousands of smaller banks, for penetration is much lower. Are we at the right level of sales and marketing to see CheckFree sustain this kind of transactions growth over time or is there a strategic shift in the way you are going to have approach the market in order to drive both the next level of penetration of the big banks and really drive down market?

Pete Kight

Okay. So, two components to your question. One is, we really only have one bank that I would say is anywhere near significantly penetrated and they are less than half way towards what -- where I think this market begins to slowdown. The rest of the -- even the big banks have a long way to go. So, I would have to differ in the characterization that even at our largest client that, it's necessarily at a market maturity in terms of penetration point. There isn't anything that and any information we get that tells us there is a lessening of a number of consumers that are interested in queue to move on to the online platform and that’s true with the biggest customer. Clearly, there is a long way to go with rest of the markets. So, I don’t view the larger banks as being anywhere near saturation point. It's certainly true that there is pretty big demarcation line when you get down below a certain sized bank, the bank's strategy changes from one where they want to drive penetration to one where they are happy to have matching services to their big competitors. And so, that’s a difference that we track pretty carefully. We would love to see a change in that. And so I think it’s a fair question that you’re asking, that we ask ourselves, are we spending enough in margin and sales to sell in the right place? And in that, the thing you heard me talk about is, that’s part of the component. That is one of the constituents, which are the bank themselves. Then there is the billers, where we're substantially underpenetrated and where there is lot of opportunity, we clearly are focusing on trying to understand about what it is we need to do to drive the billers to catch up to the bank penetration and we are clearly focusing significantly more than we have over the last several years in what really makes the consumer tick. Why are some consumers coming on faster than others, what's changing in the way consumers are coming on today versus how they came on three, four years ago, to what are the triggers that really appealed to them, because they’re -- in terms of adding some strategic to sort of a tactical sounding issue of doing this analysis, there is a difference between what consumers tell us their level of interest is in their actions. That's what I am referring to when I say, there is an opportunity to make a significant change here, if we can better align what consumers want out of these services. But based on this difference between what they say their level of interest is, what they say they want, and what they're actually doing.

Andrew Jeffrey - SunTrust Robinson Humphrey

Okay. And one follow-up, if I may, look at AMEX, can we think about that as the first in the series dominos to fall, obviously a household name, a big biller. You feel like you cracked the code or is it going to be more, it is going to be lumpy and harder to predict in terms of adding new billers?

Pete Kight

Well, I think American Express is a significant move. I think the market will notice it.

Andrew Jeffrey - SunTrust Robinson Humphrey

Thanks a lot.

Pete Kight

Thank you.

Operator

Our next question comes from Greg Smith. Sir, your line is live.

Greg Smith - Merrill Lynch

Yeah, hi, was there any change in the BoA relationships in the quarter, there's obviously been some talk about them bringing the user interface work in-house essentially.

Dave Mangum

No, change in the BoA relationship in the quarter.

Greg Smith - Merrill Lynch

Do you anticipate that happening at all?

Dave Mangum

Greg, at the end of the day, as we talked about repeatedly relative to large banks, you should expect every large bank around to look at in-house, yes, but in-house directly to look at user interfaces, et cetera. Some of that's negotiation. Some of that is real and we will work on that, as it evolves, but I am not going to answer a direct question about any of the one large banks.

Greg Smith - Merrill Lynch

Okay. And then, this new deal with Wal-Mart on the walk-in bill payment side, does MoneyGram currently provide some of the functionality to Wal-Mart, is there any crossover or overlap in any way shape or form there?

Pete Kight

No, that's my understanding. Of course, MoneyGram has a money transfer relationship with Wal-Mart. I believe in a -- in some form MoneyGram has some payment relationships, but it isn't an issue that's significant enough that it's entered into anything we really care about. We signed a deal with Wal-Mart, where we are the bill pay supplier in the walk-in business. And we are happy to provide that and are happy to have MoneyGram's. money transfer customers have two reasons to come in, to pay their bills and to use MoneyGram for money transfer and that works for us.

Greg Smith - Merrill Lynch

Sure, okay, and then lastly, just an update on your thinking about potential competition from people putting bill payments in credit and debit cards and associations potentially lowering interchange fee to try to make that more attractive for billers, what are your thoughts?

Pete Kight

Sure, I mean at the end of the day, just to make sure that, that issue stays grounded, that has always been a offer that's been out there. Credit cards companies have opportunities, various occasions to exchange, interchange rates, and -- but different markets have different views of how consistent and long-term those kinds of -- whether that's a long-term fundamental cost issue they can bake in and whether it's a bate and switch kind of approach. There is no question there is a very high level of tension between billers and the credit card interchange concept. Billers don't pay interchange to have bills pay today, and as we know, because we are the largest provider of these services relationships to the billers that they are exceedingly focused on not wanting interchange to be introduced. They take it and pay it where they have to. They spend a lot of resource trying to figure out how to keep it limited. And overall, over a fairly extended period of time, that's been a fairly consistent percentage of bill payments that are made.

You certainly raised a good point in that, in particular, as I noted before, there is the potential with MasterCard now being a for-profit public company, and Visa, in the not too distance future, being in the same position. They all quit acting like a single monopoly. There are all actually competing against each other and I expect to see different things happen in the marketplace. But over the long run, it definitely is an advantage to be competing against a for-profit public company than it is for private monopoly. So, I like that position. But at the end of the day, the underpinning logic here is, if you use a credit card, somebody is lending the consumer the money to make that payment to the biller, and that is never going to be free. You can do whatever it is you want to do to try to reduce the cost, but it's never going to be free to lend the money to make a payment, and then get paid back anywhere from 15 to 45 days later. So there is always going to be an inherent cost in using the credit card. The debit card is simply a physical tool to access the DDA, I don't have an observation on the debit card having a real life outside of electronic banking in terms of our long-term business. Credit card is definitely something that we can continue to watch, so I said before, we would love to do a better job of getting banks to pick up on offering credit card as an integrated option on electronic banking site. We have a lot of interest in talking about it, looking at it. As I have mentioned, we have invested in the technology and we'll improve our ability to offer that service, but thus far our clients haven't viewed it to be critical enough need to want to implement that integration.

Greg Smith - Merrill Lynch

Thank you.

Dave Mangum

Thanks, Greg

Operator

Our next question comes from Wayne Johnson. Sir, your line is live.

Wayne Johnson - Raymond James & Associates

Oh, yes, good afternoon. Raymond James. On the American Express contract win, did American Express have a biller-direct services provider relationship prior to this new agreement with CheckFree? And if they did, does that service contract -- is that still in place?

Pete Kight

No, American Express, we haven't ever provided services to American Express’s biller-direct sites.

Wayne Johnson - Raymond James & Associates

Right, but I guess my question is, will American Express maintain that biller-direct side in addition to CheckFree's services?

Pete Kight

Sure, I would love to have talked about of that, but didn’t even try.

Wayne Johnson - Raymond James & Associates

Right.

Pete Kight

Obviously, if they can get a consumer to go there, that’s their preference, but their move today is really recognition, that they think they are at a pretty high saturation level, getting people to come to that single sight and that they now want to provide the service value of being able to deliver the bill to the consumers’ chosen site.

Wayne Johnson - Raymond James & Associates

Right, okay, that’s helpful. And can you just remind me, out of the top 400 billers, how many of those billers have you guys signed up, like how many numerically are left to go?

Pete Kight

So, while Dave looks for that number, I got to remind you that everybody who purports to be in this business, uses different math. What we euphemistically refer to inside CheckFree is prodigy math, because I think the Prodigy online service was the first one to invent all new math, because those 400 primary billers represent thousands and thousands of consumer brands.

Wayne Johnson - Raymond James & Associates

Correct.

Pete Kight

That’s how some people count it, but the number of billers that we have among the top several hundred signed actually deliver bill.

Dave Mangum

Yeah, we have in terms of signings, out of the top-500 semi notes, we have roughly 300 or so of the top-500, about 325.

Wayne Johnson - Raymond James & Associates

Okay.

Dave Mangum

And again, the primarily holdouts have been, first and foremost, the major credit card issuers, and then right behind that the mobile carriers.

Wayne Johnson - Raymond James & Associates

Okay.

Dave Mangum

Those are companies that have the most active daily change to the bill, which gives them much more leverage in convincing consumers to come to their direct website.

Wayne Johnson - Raymond James & Associates

Got you. And one quick follow-up on the Investment Services for the EPL, the finished date, what’s the expected finished date for that?

Pete Kight

Man, I don’t know, if you can find that -- on that stuff.

Dave Mangum

I was joking, so I don’t know if you could pay finished state, migration begin over the course of ’08, that’s certainly going to last into ’09, and it becomes a go-forward platform. So I think the way to think about this goes back to Liz’s question on margins, as we get deep into that migration process, you will see us return toward one platform margins, but finished state is an illusive state.

Wayne Johnson - Raymond James & Associates

Well, I guess, let me rephrase that if the customers are going to be migrated to EPL during fiscal ’08, when do you think that most of the product development is going to be complete, you think that’s done now or is that done in two quarters or what you guys think?

Pete Kight

Right, so the reason for the joke is that EPL will be released to the market in stages, as we put tiers of service out and in the first tier with the limited numbers of services, we have clients that only need those limited number services, so they will begin to move older. And then in the second phase, an additional layer of services, an additional layer of customers that need only that layer or will convert over, so it's an ongoing progression and of course it's built on a technology that will never be done, because we will continue to modify and add additional layers. So, I think the key to your question is, what do we project to be the target date for effective retirement of the old platform? And -- but that’s actually affected by how many new customers we continue to put on APL. I would tell you that a year ago I would have told you that, as of today, our expected retirement for APL would be around two years from now. Now, I would tell you, that’s moving out at least a year, because we are literally signing as many new customers and putting them on APL platform today, as we ever have. And quite frankly, that’s a bit of a surprise to me, because that’s fairly extraordinary in announcement of a new platform, but based on the continued advancement of the APL platform, again, as I noted we've had increased our investment in, because it’s kind of healthy enough growth and we have got healthy enough market with demanding customers that -- and we are agreed with them. We need to increase our investment and keep that innovation moving forward. So, I would say the retirement of the APL is at least three years out.

Wayne Johnson - Raymond James & Associates

It sounds like a high-quality problem. And one last question, out of the 325 billers that you guys are providing services to, what do you think the average penetration of bill payment is per biller? Like how many of those -- what percentage of those bills are paid electronically versus paper?

Pete Kight

So, that’s a good question that I’ll agree to take up for next quarter's call. I would tell you that what we've tracked is with the number of billers, electronic payment is starting to approach double-digits or was crossed over into double-digits. And in terms of outside, they are fairly old standing order, old ACH things, and things like that. Now, our level of services are starting to approach and some moved into double-digits and that is the point at which we always predicted that billers would start moving on the second evolution of, okay, now we have enough mass that we can begin to start to use this two or more effectively. We can start to gain significantly by getting people to turnoff the delivery of there paper bill.

But we spend a lot of time right now in what I would describe as a very early phase of this next stage of evolution, and that is, let's get the bill turned off, let’s get these billings inside these organizations to get to book some nice recognizable economic gain, all we we’ve been through them thus far is the cost. And now they get to start turning off paper for a meaningful number of people. They get to show an economic gain, let's bring the marketing people in so they begin to use this electronic interactive interface with the consumer. I think we are very early into that second phase of evolution.

Wayne Johnson - Raymond James & Associates

Terrific. Thanks very much

Dave Mangum

Thanks, Wayne

Operator

Our next question comes from Nik Fisken. Sir, your line is live.

Nik Fisken - Stephens, Inc.

Hey, good afternoon, this is Nik Fisken from Stephens. On the BB&T contracts, specifically, can you give us some details why you wanted, what exactly they are going to buy from you, and what kind of adoption levels they have?

Dave Mangum

Nik, we tend stay away from commenting specifically on any one biller. It was obviously competitive win and it's consistent with our market share gain goals for the year. You will probably know enough from other outside sources. No, it's not a hugely penetrated bank, and we are frankly just pleased to have added another top major bank to our roster.

Nik Fisken - Stephens, Inc.

And in best case the conversion happened at the end of this year -- fiscal year?

Dave Mangum

That’s correct.

Nik Fisken - Stephens, Inc.

And then, what's -- what was the initial response to -- that you guys thought when you saw Intuit buying Digital Insight. And what does this larger company mean for you guys? Are you guys starting to work more closely with Digital Insight?

Pete Kight

So, I was surprised that Intuit decided to go into electronic banking. We obviously are pretty close to digital insight. I have regular conversations with [Jeff], we have valued relationship, one I think can get bigger and Jeff and I have talked about strategic level relationships in the past. I have lot of respect for both organizations but I'll admit to be in surprise that Intuit decided -- they want to go into electronic banking, that's fairly far a field from anything that Steve Bennett has done thus far. I don't immediately disagree with some of the logic of the strategy, it's just a bigger gamble than I would have thought Intuit was prepared to make. But, the fact is that the small banks have their own -- smaller banks have their challenges in terms of why the penetration isn't higher, but they are clearly in that same observation I have that is I don't think you can stop US consumer, household marketplace from stopping short of 60% penetration if you went out and actively tried. They're going to move off of paper and move online for managing their finances and bill-pay and bill-delivery and self-service involvement is going to be a part of it. So, I clearly understand that Intuit was their intense focus on small business has great expectations for increasing penetration in small business. And they have pretty long history working hard consumer interfaces. From my view point is if Intuit can materially accelerate digital insights penetration they will do so both in banking and bill pay and that's great for every body. I will certainly be at the table to try to get more than our fair share of it. And we are definitely intrigued by the possibility, but overall however it plays, if Intuit's successful and I clearly believe it's going to be great for the market.

Nik Fisken - Stephens, Inc.

And lastly, why do we get surprised on the minus 7 growth in non-CSP?

Dave Mangum

Why do we get surprised?

Nik Fisken - Stephens, Inc.

Yes.

Dave Mangum

Why, I think it really can stand at walk-in business more than anything else, Nik growth was slower than we expected there, and it's almost that simple. This inner play that we talked about before between moving from a biller-paid transaction to a consumer-paid, sort of biller by biller, chain by chain, agent by agent level is little more difficult to predict then I might want and we were little surprised to that end.

Nik Fisken - Stephens, Inc.

Okay, thanks.

Dave Mangum

Thank you, Nik.

Operator

Our next question comes from Kartik Mehta, your line is live.

Kartik Mehta - Midwest Research

Thank you, Pete you talked about, on e-Billers standpoint or billers standpoint, credit card companies being their biggest holders, I am just trying to understand would AMEX saying yes. What convinced them to come over and may be that could provide inside some inside into what other credit card companies are thinking or not thinking?

Pete Kight

Okay, so let me be careful to point out that I definitely can't speak for American Express, so there's some phrase of the opinions expressed in the following or not those of whatever, they are not American Express. But clearly our evaluation is that a number of credit card companies over the past three years have built an interface to us, tested it and said okay, we're ready to go. And we're now not going to like this up until we need to, and we ask what those need to mean? And their response was, when we think we have gotten just about everybody to come to the website, who's going to come to the website, we believe there is a point in future at which that will pretty much reaches its end. And clearly we believe that a significant portion of the rest of markets going to need to be reached to a distribution and more of that point we will turn it on. And I believe that that's the process that American Express is going through, they are very close to their customer needs; they do more research then anybody else. That I know in that area and in my belief, but not speaking for them, my belief is, their analysis showed them that a significant portion of their customers now preferred to have the bills sent to them at the consumer's chosen address not American Expresses'.

Kartik Mehta - Midwest Research

So in you opinion Pete, do you believe that's the same type of thought process that mobile telephone companies are going through?

Pete Kight

Yes. I do although, I don't know the -- I don't know those companies well as I know the credit card companies, and credit card companies are financial service institutions, I know that market better. I am increasing my knowledge in the mobile carrier side for number of reasons, obviously, we announced the launch of a mobile payment platform for banks electronic billing to payment. I am learning more about them, but I couldn't speak as, I don’t really know as much about how they are analyzing customer needs and when they think that saturation point is there, although, we have movement in that market as well.

Kartik Mehta - Midwest Research

And a last question just on your Wal-Mart relationship, would you provide that in all Wal-Mart stores, and will it be the same type of service that is provided at other retailers through your walk-up bill payment service?

Pete Kight

So it's going to be a service that is offered by Wal-Mart and we're in the backend. So it's going to be a Wal-Mart station its run by, it's a business, it is run by a Wal-Mart business owner. And so with Wal-Mart we'll provide service, we're the back-end infrastructure and they pay us fee for that. This business has an SKU inside Wal-Mart and this product is like anything else, happens to be one with a really high margin on it as well. It is going to be rolled out to the stores that Wal-Mart believes it should be rolled out to. So no, it isn't a guarantee that they are going to roll it out to all stores. But it is our expectation that overtime they will roll out to all the stores that they think are market fit.

Kartik Mehta - Midwest Research

Thank you very much.

Operator

Our next question comes from Tim Willi. Sir your line is live.

Tim Willi - A. G. Edwards

Thank you, good afternoon. Just a question on the Carreker deal, David or Pete, could you just may be I know you won't give guidance on the impact of the deal, but could you may be just talk about your thoughts around the course of action to integrate and make this an accretive acquisition for you. I think obviously Carreker was not making a lot of money at the time. So I am sure you have some plans on how to correct that, I am just trying to get a feel for the complementary products and technologies are, and how you expect to improve that performance going forward?

Pete Kight

Sure, it’s an understandable question. No question, we spend a lot of time on it. We will spend a lot more time on it, and as I have said, I am very positive about opportunity and about what it is they plan on doing. But I really can't begin down that path of answering the question until we close the deals up. I'll be happy to do that after we close the deal.

Tim Willi - A. G. Edwards

Okay. And then a follow-up question, David, on some metrics. I know it's not simple way to calculate it, because there are a lot of moving parts. But, in terms of looking at the components of the transaction metrics, you gave revenue, and expense, and they get into sort of like a profit per transaction in e-commerce. Could you give us any feel sort of as we do modeling on revenue and expenses, what the profit per transaction trend should look like? I know with a couple of acquisitions have been moving down over the last couple of years, would that continue, would you expect to see profit per transaction begin to stabilize, what are your thoughts there?

Dave Mangum

I think I would look at it in a different way and I don’t want to invent a new metric on the phone. I think the thing to track is revenue per transaction and the direction it takes for each of our two broad categories and then keep your eye on the operating margins both for this segment and for total CheckFree. As we've discussed before over the long-term, there isn’t a lot of big margin expansion opportunities in CheckFree, operating in the mid 20s, as we are, is right what we're targeted as a financial services outsource provider. So, keep your eye on those couple, you saw modest margin expansion in this quarter sequentially. We don’t manage it from quarter-to-quarter, we manage it year-over-year. From that perspective, you will see a little bit more margin expansion, as you go deeper in the year, given the way the year ramps, given our expectations. But, all in, I will keep an eye on those couple of things, but just keep in mind that overall for CheckFree, we don’t see an awful lot of margin expansion opportunity given the nature of our business.

Tim Willi - A. G. Edwards

Ok. Thank you.

Dave Mangum

Thank you.

Pete Kight

And operator, we are out of time. I want to take this opportunity to thank everybody for giving us this much time in evening, early afternoon, and look forward to speaking with you next quarter. Thank you.

Operator

Thank you, ladies and gentleman. This does conclude today's teleconference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your presentation.

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