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CheckFree Corporation (CKFR)

Q3 2007 Earnings Call

April 24, 2007 5:00 pm ET

Executives

Pete Kight - Chairman & O

Dave Mangum - CFO

Analysts

Julio Quinteros - Goldman Sachs

Andrew Jeffrey - SunTrust Robinson Humphrey

Tien-tsin Huang - J.P. Morgan

John Kraft - D.A. Davidson

Nik Fisken – Stephens, Inc.

Wayne Johnson - Raymond James & Associates

David Parker

Daniel Perlin - Wachovia Securities

Presentation

Operator

Good afternoon, ladies and gentlemen, and welcome to the CheckFree Q3 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode. And we will open the floor your questions and comments following the presentation.

It is now my pleasure to turn the floor over to your host, David 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 be not 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 statements 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 a Form 8-K.

Our Form 10-Q for the quarter ended December 31, 2006, filed February 8, 2007, 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 "Risk Factors." Please note that 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 on Attachments A and B in our press release, which were distributed today at 4:00 p.m. Please reference Attachments A and B of our press release for additional reconciliation details. These materials are also are available in the Investor Center section of our website at Checkfreecorp.com.

For the quarter ended March 31, on a GAAP basis, our consolidated revenue was $230.2 million. GAAP net income for the quarter was $30 million, or $0.33 per share. During the quarter, we recorded an $11 million charge reducing revenue for the fair value of $1 million performance-based warrants earned by a customer under the terms of their agreement.

Excluding the impact of these warrants, our underlying revenue was $241.2 million, reflecting 6% growth over the third quarter last year. Underlying net income for the quarter was $44 million, or $0.49 per share. Free cash flow for the quarter was $57.5 million.

And now I would like to turn the call over to Pete Kight. Pete?

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Pete Kight

Okay, and thanks. During this quarter, we saw expected increases in core bank-based consumer service provider transactions, and continued to see good core increases in accounts under management within investment services. However, our software business fell short in sales execution within the Software Division, so that's where I'll begin the discussion.

In the Software Division, contract sales in the quarter were lower than expected. The under performance was due to missed or delayed software license sales, with a smaller miss domestically, and larger miss in our international operations. I describe it as a mix of execution following off in the midst of the Carreker acquisition and some weakness in our international unit that we've already taken steps to address. However, we won't be able to prevent this under performance from affecting the Company's previously stated full-year expectations, on which Dave will have additional color in a few minutes.

The Software Division's going to benefit from the integration of the Carreker products and the increase in scale. Carreker provides us with a suite of software products that will fill in the biggest gaps in providing banks with a cost efficient and faster capability to optimize the payments channel.

The banking industry now has enough new electronic payment and settlement products that the back end complexity is becoming problematic for corporate customers. Corporate banking needs a solution for this convergence of payment types within the existing bank back end infrastructure.

We aren't going to sell as many point products going forward without solving this complexity, and that's exactly what CheckFree and Carreker's existing and upcoming product set are going to do. We think we can provide a cost effective solution that is better than anyone.

Integrating this product set, we can deliver a pragmatic and logical approach to payments convergence that leverages a financial institution's, the existing significant core processing investments, rather than reinventing or replacing those systems. We'll have a systematic enterprise wide approach that is cost justified and can be deployed in less time and with less integration and customization. We've closed the deal earlier this month, and we're hard at work in getting to market and getting our focus back on execution in Software.

Moving now on to Electronic Commerce. During the third quarter, our Electronic Commerce Division processed $340.9 million transactions, representing overall 6% sequential quarterly growth. Of the total transactions processed for the quarter, $269.6 million were CSP-based transactions, which represents a 7% quarterly increase within our banking customer base, and a $71.2 million non-CSP transaction flow, which represents a 1% quarterly increase.

We met our quarterly expectations on CSP, or bank-based transactions growth, and continue on track to meet the full-year expectations for this metric, as well. On the sales side, we saw fewer sales than expected for some new non-transaction products. As we previously discussed, we expect to incorporate most of these types of products into our Internet banking technology platform, post closing of the Corillian acquisition.

We plan to expand the Corillian Internet banking platform to include an increasingly flexible and higher value integrated online banking services set. We currently expect the acquisition to close during the fourth quarter, pending required regulatory and Corillian shareholder approval.

As a heads up for future segment reporting purposes, the Carreker acquisition will also have an impact on our Electronic Commerce Division as the revenue enhancement, or what we call RevE, portion of Carreker will report into the Electronic Commerce Division going forward. RevE, which represents about 30% of Carreker, is a consulting and services line of business that provides significant profitability enhancement to retail banking operations. We intend to build upon this platform and expect to substantially expand RevE as we make it a part of our EC banking business.

Before I move on, I also want to comment on a recent announcement we made in response to queries we received about a large bank client considering in-sourcing portions of our end-to-end electronic billing and payment service. That competitive dynamic is well known in this market, and we've talked about it for quite a while.

We've increasingly added flexibility and enhanced value within our systems so we can be competitive to win and to manage our costs at service level shift, whether in-house or vertically. We've also, however, been consistent at the same time in noting that we do not disclose our client banks proprietary plans or information. If we have a material event to disclose, we'll, of course, do so.

Turning to Investment Services. In our Investment Services Division, the accounts on our system stood at more than $2.6 million through the end of the third quarter. This represents good growth in our core accounts. Our account total was affected by the expected migration of some high volume, low-priced reporting only accounts from one specific client, but overall this represents a healthy quarter for managed account growth. We continue on track with our multi-year investment in CheckFree EPL, the next generation account management platform.

Our Q3 results, along with the work we'll undertake during Q4 to ensure successful integration of our closed and pending acquisitions, are the key components to our updated full-year expectations.

For more on that, we'll go back to Dave, who will provide detail on the quarter's financial results and a look ahead to Q4 and the year. Dave?

Dave Mangum

Thanks, Pete. I'll describe our performance in the third quarter, discuss the manner in which we will report revenue for software acquisitions, and review fourth quarter and full-year financial expectations, both with and without Carreker. For the third quarter, transaction growth remained on track in Electronic Commerce with CSP quarterly transaction growth of more than 7%. Revenue per transaction declined by $0.01 to $0.45. Our non-CSP transactions grew by 1%. Revenue per non-CSP transaction increased to $0.56, driven by higher priced phone payment transactions.

Within Software, both license and related professional services revenue declined in the quarter. Lower than expected sales resulted in a drop in the division operating margin to the mid-teens. We generated $57.5 million of free cash flow in the third quarter. Given the pending acquisitions of Carreker and Corillian, we did not repurchase any shares in the quarter.

During the quarter, as well, one of our bank customers achieved $5 million active electronic bill pay users, resulting in the vesting of $1 million warrants to purchase CheckFree stock at a stock price of $32.50 per share.

We determined the fair value of the warrants at the vesting date to be approximately $11 million. Accounting rules, chiefly EITF 96-18 and EITF 01-09, require us to recognize the charge as a non-cash reduction to GAAP revenue in Q3. We have excluded this non-cash charge from our reported underlying revenue.

Turning now to software acquisition reporting. As I mentioned during our January conference call, accounting rules associated with 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 on a GAAP basis during the first year of the acquisition.

As a result, for the fourth quarter of fiscal 2007, we expect to reduce our GAAP revenue and operating profit by approximately $12 million. This reduction has no impact on cash flow. After discussing approaches for clearly reporting the revenue results of the Carreker acquisition with a number of experienced software industry investors, we believe the industry preference is for us to add this revenue back to our underlying financial results.

This approach is consistent with software industry reporting practices, and we believe it will provide more clarity to investors as to the core financial performance and cash flow characteristics of the acquired company. We will, of course, reconcile our GAAP and underlying revenue in all of our reporting. We expect to follow the same approach for Corillian.

Now for core CheckFree for fiscal 2007, excluding the impact of Carreker. We now expect lower sales in our Software Division and limited new product sales in electronic commerce. We also now expect the migration of two new bank customers to be delayed into early fiscal 2008.

As a result, we now expect underlying EPS of $1.86 to $1.88, GAAP EPS of $1.46 to $1.48, and free cash flow of about $190 million. Again, these expectations exclude Carreker.

In Electronic Commerce, for our CSP transactions, we continue to anticipate nearly 25% annual growth overall resulting from transaction growth of 25% to 30% from our broad CSP channel, and a lower growth rate from our largest customer. For our other bill payment channels, we continue to expect transactions to modestly decline for fiscal 2007. In total, we continue to expect overall transaction growth in the mid-teens.

Turning more specifically to the fourth quarter. In line with our models for cyclical transaction growth patterns, we are projecting sequential transaction growth from the CSP channel of 1% to 3%, and a negative 3% to negative 1% change in non-CSP transactions for a combined total transaction growth of 0% to 2%.

In Software, we expect a solid fourth quarter for license revenue, but we do not expect sales to be as strong as our previous expectations. Within Investment Services, we expect consistent portfolio growth and relatively strong consulting revenue in the fourth quarter.

Overall, we expect total company revenues in the range of $245 to $250 million on both a GAAP and underlying basis for the fourth quarter. We expect underlying earnings per share in the range of $0.48 to $0.50, and GAAP earnings per share in the range of $0.40 to $0.42, all of this before the addition of Carreker.

So for Carreker in the fourth quarter, we expect underlying revenue of $24 million to $26 million, in dilution of $0.02 to $0.03 per share on an underlying basis. Nearly $0.02 of this Q4 dilution comes from interest expense on our revolving line of credit, which we expect to pay off in the fourth quarter, and interest income foregone.

Based on our current purchase accounting estimates, which we will true up for fiscal yearend reporting, we expect Carreker to add between $12 and $14 million of GAAP revenue, and be about $0.14 to $0.15 dilutive to earnings per share on a GAAP basis.

In total then, including Carreker, we expect underlying revenue of $269 million to $276 million, and underlying earnings per share of $0.45 to $0.48 in the fourth quarter. On a GAAP basis, including Carreker, we expect revenue of $257 to $264 million, and earnings per share of $0.25 to $0.28.

For the full year, then, including Carreker, we expect earnings per share of $1.83 to $1.86 on an underlying basis, and EPS of $1.31 to $1.34 on a GAAP basis, and free cash flow of about $185 million. None of these expectations include any impact from the Corillian acquisition.

Now I'll turn it back to Pete for some closing comments. Pete?

Pete Kight

So while the company executed well on most core business lines, I am obviously not pleased that we missed our sales targets in Software and new product sales in Electronic Commerce. We've already taken aggressive action on both fronts.

In Software, we've reorganized our international sales management and brought in highly experienced international software sales leadership. The Carreker acquisition significantly strengthens the breadth of our global payments product line and adds proven sales capabilities in the U.K., Australia and Europe.

Based on the early reception we're receiving from the banking industry on our proposed combined line of software and technology tools, and consulting capabilities, we're positive on our outlook going forward. That said, we have to improve sales execution in a sure timely delivery of our expanded product line.

In our Electronic Commerce Division, the new product sales are a disappointment. Those products will be better aligned as part of the expected Corillian platform integration. Our forward focus is on vertically integrating electronic banking transaction services with full service Internet banking and using this platform to expand direct profitability for retail financial services clients.

We will continue to utilize our technology and development resources to both lower our operating costs and build extended services capabilities to provide our financial service clients with a broader platform from which to build consumer profits. We believe we have the scale and invested technology value to compete advantageously in the market.

Price will remain a focus for the market, particularly the biggest banks, where the resources and political motivation are the strongest. As paying bills online becomes increasingly pervasive, I think it's likely that some clients will take aspects of these operations in-house over the next several years.

It's also very likely we'll win new business in the same time frame. We've been consistent in pointing out the different components of what CheckFree provides in electronic billing and payment are separable.

In the near future, as we add Internet banking components and integrate additional higher value service components, the service and technology levels that banks choose from CheckFree will vary even more greatly. I believe CheckFree will be well positioned to manage this required flexibility.

Investment Services' new EPL platform is designed to give us similar flexibility to reduce operating costs as it scales, and to provide significantly greater and higher value vertical service integration for the managed accounts market.

On another note, we've been asked several times if our recent acquisitions are driven by a concern that the market in electronic banking, in particular, is slowing down. The evidence we have is that consumers are, in fact, increasingly committed to leaving paper and manual process in preference for electronically managing their finances.

We think with better services, easier onboarding, transaction services, integrated seamlessly with core information and customer care, that consumers will expand their online usage. That is, however, a service that is primarily being given away by banks right now, and we are in a cycle where banks are highly focused on near-term costs, so getting banks to do development work is tough right now.

The banks aren't going to increase their budgets right now to build these advanced services, so we are going to take the lead in building them. We believe we can increase the profitability of online banking for our clients even as we continue helping them reduce costs. We don't see a slowdown cycle in consumer behavior.

We do expect bank marketing to remain reduced in this area for the next 12 months. If we can prove increased profitability for online services for our banks, we can reverse that by showing a directly positive ROI for promoting their online services.

Right now, we need to hit our acquisition integration targets, and we need to improve our execution from sales through to implementation. We like our market position, and we believe we have ample room to grow.

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

Question-and-Answers Session

Operator

Thank you, Ladies and gentlemen, the floor is now open for questions. (Operator Instructions) Our first question is coming from Elizabeth Grausam. Your line is live.

Julio Quinteros - Goldman Sachs

This is Julio sitting in for Liz. A quick question on the sales numbers. Do you have any sense of when the E-Commerce sales and the Software sales are going to recover, are you going to see a pick up in 2008?

Dave Mangum

I think a couple of answers to that question. In terms of software, directly in reverse order, we don't expect to pick the sales back up in Q4. We do expect the same customers to perhaps close over the course of 2008, but we'll stick with where we are in fiscal 2007.

We're not going to close the same deals. I think the key to the EC new sales lies in the comments Pete made about the integration of the technology platform from online banking through electronic billing and payment and delivering those additional product sets through that strategy.

Julio Quinteros - Goldman Sachs

Thank you. And given that Corillian is going to close in the fourth quarter of fiscal year 2007, are you anticipating any share repurchase in the fourth quarter?

Dave Mangum

Right now as we look out at taking on the cost of closing that acquisition, no, I am not anticipating any share repurchases in Q4.

Julio Quinteros - Goldman Sachs

Okay. Thank you very much.

Dave Mangum

Thank you.

Operator

Our next question comes from Andrew Jeffrey. Your line is live.

Andrew Jeffrey - SunTrust Robinson Humphrey

Hi, good afternoon. I would like to dig in a little bit more around E-Commerce sales. It sounds like part of what you're saying is that the disappointing E-Commerce sales is a function of cyclicality, but given the volatility in sequential transaction growth we've seen this year, and then now your view that sales are going to be slower, I mean, what are the odds that what we're seeing is a secular shift in bank demand, and/or a change in consumer behavior such that the consolidator model is no longer in the ascendancy, and in fact we're going to see transaction growth as a function of slower E-Commerce sales drift from the mid-20s or on the CSP side down to the teens and so forth, I mean, just how do we get conviction that we're not seeing this market rolling over on a secular basis?

Pete Kight

So I would separate those out in fairly straightforward fashion. I think the secular view is best served by following the transaction flow, which represents consumers both coming online and processing transactions, and I would describe that growth as right on target.

In terms of the new product sales that we're behind, they actually have very little to do, they actually have nothing to do with consumer acceptance. They're 100% have to do with us being able to sell new products through the banking channel.

And of the six new products that we introduced over the last two quarters, one is clear success. That's one that we'll continue to run fully in its existing form, although we'll obviously try to add to it with ongoing expanded strategy. That's our fraud net capability.

Four of the remaining five are all products that we wanted to sell as higher cost add-ons to increase value that banks would provide through their platform to their customers, and in all four of those cases, the banks either weren't interested in adding cost to the platform, or they weren't interested in our sales people's approach to it.

All of those products are currently either already integrated in a part of the Corillian platform, or we had already begun working on plans to be able to integrate them in. So in all of those cases I would say it's clearly a case of the banks not wanting to spend additional money, and have to spend additional integration costs in getting these products online with their customer base. They are all bank-based decisions, not consumer acceptance decisions.

That said, it's clearly a part of the cyclicality of the banking industry. There's no question the banking industry right now is notably more focused on near-term costs, even when we can point out what we think is a pretty solid ROI on a new consumer product. There are tight budgets out there, and we have to got to sell through those.

Andrew Jeffrey - SunTrust Robinson Humphrey

Maybe I don't understand your business as well as I thought I did. When I look specifically at CSP transactions, I think about those being driven by an installed base of online banking, bill pay financial institutions, your CSP channel.

It almost sounds, Pete, as though you're beginning to tie the growth rate and transactions to your ability to sell some of these other products. Am I hearing you say that, or are we still talking about two sort of intrinsically different things. On the one hand, bill pay revenue is being driven by transactions and these ancillary sales of other e-commerce functionality?

Pete Kight

It's a fair complexity. They are two very separate, I would say, market lines, but I wouldn't say that they are not related. Clearly, we don't believe that bill payment, stand alone by itself is the long-term product. As you've heard me say for a long time, at minimum the first conceptual stage is bill payment was always electronic billing delivery and payment.

So electronic bill delivery is an integral part of bill payment, although bill payment is clearly more dominant than electronic bill delivery, but the two clearly affect each other, and I would tell you our goal all along has been that within a reasonably short time frame, there isn't any difference in our discussion between electronic billing payment. It's all part of the same round trip transaction. So even in bill payment, I would argue there's a little bit more complexity than just the current transaction flow.

That said, then the other side are these products. To give you an example, the products are things like what we call financial view, which is a budget, for lack of a better term, Quicken light-like product, that is integrated with online banking platform.

We think it is something that is a great value add service for the consumer, and that in fact provides a foothold for us and the providing banks to be able to add on additional new profit point capabilities for additional services. We have small business, which we are continuing to add value to that we believe the banks can charge more for, account to account, open account online, m-commerce, which is the ability to be able to access your home banking and bill pay capability via mobile phone.

Those are all products we thing are important. Those are all products we think that it is important to build vertically into our transaction services, but overall, you now hear me talking about, very clearly, we want to integrate this service capability in with a much deeper and a much more seamless integrated fashion with the core online banking platform itself, so that the information flow from onboarding all the way through information flow usage, service, is all captured, it all becomes part of the whole value added process of providing financial services online at an increasingly better profit point for our bank clients.

So we clearly believe that bill pay transaction is the starting point. What we're trying to do is build very directly an increasing profit capability for the overall online platform.

Andrew Jeffrey - SunTrust Robinson Humphrey

Okay. Thanks.

Operator

Our next question comes from Tien-tsin Huang. Your line is live.

Tien-tsin Huang - J.P. Morgan

I guess I'll start by asking a question about the legacy full-service bill pay model. I am just trying to -- something maybe, Pete, you can help us unbundle and define the key services that could be separable, I think, as you called it. I think about a payment warehouse, remittance services. front-end user interface, call center, just trying to get a better feel for what exactly is separable under the old full-service model?

Pete Kight

That's a pretty good start. You have user interface, which is clearly separable, and in fact today we have a number of banks where we provide what we describe as full service, but we're not actually driving the user interface.

You have different components for payment warehouse, means different things to different people, but clearly payment warehouse where the data is actually stored. Can be on a database inside the bank. It can be on a database that’s housed in our infrastructure.

Can be a database the banks build themselves, can be one they buy from us, can be one they buy from us after we close the Corillian deal, can be one they buy from someone else, and the degree with which the service integration between the internal payment warehouse integrates and provides additional services, provides a pretty big, then, I would say path to what the additional separable components are.

Customer care is a very big one. There are several different layers of customer care from us answering the phones for the institution, to us answering the phones only in complex situations, and having the hand-off from the bank, all the way to us providing a full customer care information platform capability, to the banks own customer care reps, all the way us to supplying raw data back to the bank and them performing all of their own customer care.

So those are the separable components today. After the Corillian integration, I think you'll see those separable components probably double in terms of number.

Tien-tsin Huang - J.P. Morgan

Right, but when we think about, is there any way we can think about the relative profitability of some of those core services, and maybe the challenge of the in-house versus outsource solution? Obviously, across all payments some pieces are very commoditized and it makes sense to outsource, but others are closer to the core, so just trying to understand sort of the balance between the two sides.

Pete Kight

Yes. So that's, of course, a very key question, one that's very key to us, because clearly what we would like to drive is, we could would like to drive those separable components that we don't think we add a significant or as much value in.

We would like to drive those in-house, we would like to keep the ones that we think we add significant value so we can continue to differentiate. But I wouldn't be in a position where I would complicate my negotiations or strategy by sort of publicly isolating those different components.

But I'm sure you have a reasonable idea of just in going down to those lists, some clearly are reasonable commodities, you combine a number of places. Others, I wouldn't underestimate how complex it is to provide something as simple as a customer service transaction when it involves payment, settlement, and clearing.

Tien-tsin Huang - J.P. Morgan

Okay. Fair enough. I guess just to move a little bit away from that, I guess, what's driving the delay if the new client conversions on the bill pay front? I didn't catch that.

Pete Kight

I think it, again, is a component of the fact this is a very tough budget cycle this year in banking, so there's no question that we're seeing the things get pushed off as, and we hear a lot from, of course, the people we work with, who have to get this work done on their budgets tightening.

I think we can execute better. You know, we've made changes here, because, quite frankly, I don't think we're executing as well as we should be. And it's really, I think, a combination of those two things.

Tien-tsin Huang - J.P. Morgan

Okay, and if I can just sneak in one more on Carreker. How should we think about the seasonality of that business, and I guess the mix of license and maintenance revenues going forward?

Dave Mangum

Yeah, I think, Tien-tsin, you're going to have to let us get started with that business. You'll see over time it begin to shape a bit like the seasonality you see in our core software business. It's the nature of our fiscal year end, kind of having a calendar year end where our customers have their end of year and then our own June year end.

If you want to look at the components of what makes up sort of underlying revenue as we go forward, think of that as a very small amount of licenses we get started in Q4, and then split maintenance and other revenue, services revenue, as you build your model for this quarter, and we'll have more to talk about probably after year end.

Tien-tsin Huang - J.P. Morgan

Thank you.

Dave Mangum

Thanks, Tien-tsin.

Operator

Our next question comes from John Kraft. Your line is live.

John Kraft - D.A. Davidson

Good afternoon, guys. Pete, I just wanted to follow up on a previous question. Is it fair to summarize, you are talking about these add-on products like financial view and some of that. Is it fair to just sort of summarize those value-added services as an offset to some of the organic pricing declines that you've got?

Pete Kight

I take it you didn't think I provided a very simple answer to that question, which I have to agree. I wasn't impressed with my own simplicity myself. I wouldn't argue with that, with saying that's part of it.

There's no question that we don't want to be just a bill pay company, and there's no question that electronic bill into payment is a powerful value-add component to the whole online consumer experience, but it's one of the components in the online banking experience.

We think the integration between online banking and the transaction services that we supply, and then the information advantages that can be gleaned from being able to deeply integrate those capabilities and build additional products off of both the consumer behavior experience and the information flow we think is a significant opportunity.

You know, no question that I would love to increase the value proposition so that we can both collect more ourselves in creating additional profit capability for the bank. Certainly a part of that strategy would be that would help offset continued declines in pure transaction processing, but I also think it's bigger than that, but I wouldn't disagree with that being a key component.

John Kraft - D.A. Davidson

Okay. And then can you remind us of the other incremental warrant-related hurdles that your large bank there may achieve at some point?

Dave Mangum

Yes, would be happy to, John. This is Dave again. It's at $7.5 million and $10 million active electronic billing and payment users, and it's at $5 million electronic bills delivered per month, and $10 million electronic bills delivered per month, each of which -- $1 million warrants is ascribed to each one of those performance milestones.

John Kraft - D.A. Davidson

Okay. And then speaking of the e-bills. Actually in a couple of areas, the e-bills and the non-CSP, your price per transaction was able to move up. Can you talk about what's going on there to enable you to raise that price?

Dave Mangum

Yes. It's really two slightly different answers. On the non-CSP transactions, it's more phone-based payments. Remember, that's the telephone and IVR-based payments that often go to credit card. There the price is actually going up.

Some of that is consumer choice, some of that is where the billers are driving those transactions. On the e-bill side, it's sort of really mix at the margin more than anything else, John, there's no fundamental change in the pattern of the prices in that piece of the business.

John Kraft - D.A. Davidson

Okay. And then some of the other things you've been talking about, like expedited payments, what's the status of that?

Dave Mangum

Expedited payments, along with some of the other related initiatives we talked about, are really '08 deliverables for us, so we'll have more to talk about on those as we go forward.

John Kraft - D.A. Davidson

Okay. And then last question about software and the weak margin. Is it fair to say that or, I mean, did you say, I didn't hear, that some of those software deals were pushed out and maybe pushed into Q4?

Dave Mangum

Yes, I think some of the deals are indeed pushed out into Q4. In fact, we've closed a couple of them. The challenge we have in Q4 is the sheer volume of closing business, and we don't think we'll be able to achieve the sales goals we had at the time we last spoke with you guys.

John Kraft - D.A. Davidson

Got it. Thank you, guys.

Dave Mangum

Thank you.

Operator

Our next question is coming from Nik Fisken. Your line is live.

Nik Fisken - Stephens Inc.

Hey, good afternoon, everybody. David, on the $937,000 of integration costs, was that spent on Carreker, and what's the outlook for additional costs?

Dave Mangum

That is Carreker. There's a tiny amount of Corillian perhaps in there. But that's 100% Carreker and the outlook for that is a similar number in Q4 right now, Nik.

Nik Fisken - Stephens Inc.

Will that be it after that?

Dave Mangum

For Carreker, that should be about it. We will have dribs and drabs into fiscal 2008, but as you know, that's the year where we begin to turn the pure financial performance around in that piece of the division.

Nik Fisken - Stephens Inc.

And then is Corillian about the same, $1 million for two quarters?

Dave Mangum

We'll talk more about Corillian when we close Corillian.

Nik Fisken - Stephens Inc.

Okay. And what exact products were light the Software Division?

Dave Mangum

The products that were light were mostly our operational risk management products, so that was our simply put our reconciliation products, I don't want to over simplify, but we were also a little light in securities and a little bit light in I-solutions, the electronic billing software, and it sort of spread evenly across those product lines. We were on target with our global treasury sales for the most part.

Nik Fisken - Stephens Inc.

So is fourth quarter going to be up year-on-year?

Dave Mangum

Is fourth quarter going to be up year-on-year where?

Nik Fisken - Stephens Inc.

In Software.

Dave Mangum

Without Carreker, of course?

Nik Fisken - Stephens Inc.

Right, yes, exactly.

Dave Mangum

Yes, we expect to it be up year-on-year, but at best modestly. It could actually be slightly down year-on-year.

Nik Fisken - Stephens Inc.

Okay. And last question, has BB&T delayed their move date?

Dave Mangum

I think, we certainly would not mention any banks by name. We'll stick with we have a couple of banks whose migrations have slipped just a little bit into early fiscal 2008.

Nik Fisken - Stephens Inc.

Great. Thanks so much.

Dave Mangum

Thanks, Nik.

Operator

Our next question comes from Wayne Johnson. Your line is live.

Wayne Johnson - Raymond James & Associates

Yes, good afternoon. I've got a couple of questions here. On the e-commerce division, this is regarding the fiscal third quarter just reported; subscribers were solid above our model. Volumes in line a little better, revenues in line, but operating margins were a little lighter than what we were looking for. Is there a cost of service increase that's flowing through e-commerce, and if so, what is driving that?

Dave Mangum

There are a couple things that drive a bit of a point change may be to margin, Wayne, versus your model. In our phone transactions, we did see more credit card interchange expense than we had forecasted. That's a little bit of it. In addition, and what we call our customer operations area, we invested a little bit more in parts of the back office there during some of the fundamental reconciliations in the servicing of a couple of our larger customers.

Wayne Johnson - Raymond James & Associates

Some of your larger customers for EBPP or…?

Dave Mangum

Yes, I'm sorry, Wayne, yes, for electronic billing and payment, exactly.

Wayne Johnson - Raymond James & Associates

Okay. And then would you say that that is going to trail off here, or is that going to be an increase? Should I expect that a permanent increase in that cost going forward?

Dave Mangum

Let me…

Wayne Johnson - Raymond James & Associates

For the back office EBPP? How should I think about that?

Dave Mangum

Yes, what I think about that is in the scheme of the greater division, it's a very modest step function, represents an investment we made in Q3. That increase will not recur in Q4. Doesn't mean the costs go away, but you won't see another X amount of increase happening again in Q4. Does that answer your question?

Wayne Johnson - Raymond James & Associates

Yes, that's helpful.

Dave Mangum

Okay.

Wayne Johnson - Raymond James & Associates

And then going back to the transaction volume guidance for -- this is again for e-commerce now for the quarter we are currently in, the fourth quarter of '07, can you talk at all about, we've got I'm assuming BB&T and Citizens is what's been delayed, but without Bank of America, there's still Washington Mutual, Wachovia, and Wells Fargo, can you talk at all about transaction in general terms, transaction volume growth from kind of the non-B of A customer base and how we should think about that going forward?

Dave Mangum

Yes, I would be happy to. So I would start by saying this expectation for Q4 is quite consistent with what we've called sort of our regression models of how transactions will flow given all the calendar-based conversations we've had with investors over the last nine months or so. So as you look at…

Wayne Johnson - Raymond James & Associates

So last quarter was weak in this, as everyone recalls in this particular metric, and you're guiding down to that seasonality?

Dave Mangum

That's correct. Now, the key to this for us, as we think about the business itself, is you're still seeing mid-20% overall growth from the bank channel.

Now to go to the second part of your question then, Wayne, that growth is driven by 25% to 30% growth in transactions this year from all of our CSP, or our bank customers, excluding our largest customer. Our largest customer then grows a little bit less than that, so the net for the entire bank channel is on the order of 24%, 23%, as you do your model at 1% to 3% sequential growth for Q4.

So the way I would point you, again to go back to your question about all the other banks, is very nice overall transaction growth from all the other banks, all the other brokerage firms and the portals who make up the rest of that CSP channel.

Wayne Johnson - Raymond James & Associates

And is Bank of America still tracking towards 300,000 EBPP subscribers per quarter?

Dave Mangum

Well, if you look back, I can only speak to what they publicly report, fortunately for our purposes they do publicly report this number; they added 180,000 consumers last quarter. So not the average of about 275,000 we've seen for the last four years or so.

Wayne Johnson - Raymond James & Associates

Right, but how they record it and it how you guys record it are two different things. If they record an online banking subscriber, that doesn't mean that that's going to convert in that quarter to an EBPP subscriber. There's usually a time lag?

Dave Mangum

Well, it's correct in saying their definitions are different from ours and there can be differences in timing, as well. The only thing I can speak to is what they report publicly themselves.

Wayne Johnson - Raymond James & Associates

I understand, okay, thank you for that. And last question is on Investment Services, the EPL, where do we stand on that rollout, and how should we think about the conversion from APL to EPL, and how does that impact expenses and revenues?

Dave Mangum

So I guess I misunderstood the question. You really mean directly as it rolls out from a tactical execution standpoint, and for that I guess I would say we continue to be on track to do some of what I call those pilot migrations later this calendar year, but you really don't see full migration begin until later in '08 and that will take us all the way through '09.

So I think what you're seeing in Investment Services, if you look at the current margins the business is delivering, it's very nice performance in a pretty complex year, in a pretty complex set of circumstances. A lot of that fueled by new services revenue we're driving, and fundamentally very nice account growth.

That complexity does not go away in '08, and probably still exists in '09 as we deal with migration, so we're still a ways away from the full return to mid-20s operating margin percentages that we've talked about before.

Wayne Johnson - Raymond James & Associates

Right. Right. Right. Okay. Thank you.

Dave Mangum

Thanks, Wayne.

Operator

Our next question is coming from David Parker. Your line is live.

Dave Parker

Hi. Good afternoon. Are you still looking at other acquisitions, or have you had your fill for the time being?

Pete Kight

We're pretty bullish on the marketplace. If we found opportunities that we thought significantly strengthened our position, we would still be open.

Dave Parker

Okay. And then with the close of these two acquisitions, can you just talk about the recurring revenue nature of your business at this point?

Dave Mangum

Yes, I would be happy to, David. This is David. So I'll speak to the one acquisition we've closed and continue to not comment on the pending acquisition.

With Carreker, it's a classic software sale, but the revenue recognition for Carreker historically has been all on what's termed percentage completion revenue recognition, which is where you actually take the entire value of a software deal, the license, the associated implementation services and the maintenance, and you take a look at that overall deal, and you recognize the revenue, particularly for license and services over the time it takes to implement the software.

So that could be, let's say six months, let's say a year. What that means is you have a software sale that creates effectively recurring fairly visible revenue. I wouldn't call it classic recurring revenue like our transaction processing business in Electronic Commerce, our account processing business in Investment Services, but it's fairly visible revenue when you take the percentage complete revenue out of a Carreker deal.

Dave Parker

Okay, thanks, guys.

Dave Mangum

Thank you.

Operator

We have a follow-up coming from Andrew Jeffrey. Your line is live.

Andrew Jeffrey - SunTrust Robinson Humphrey

Hi, Pete. I'm wondering if you would characterize the individual components when you look at the e-commerce business, the individual components of add-on functionality as being maybe less well differentiated than your core EBPP solution, but then maybe if you do succeed in integrating those or selling them and then further integrating them into the total solution, then all of a sudden that creates incremental barriers?

The reason I ask is it strikes me some of the things you're describing, some of the functionality you're describing is similar to functionality owned by some of your competition in the marketplace, and nominally, then, it would appear that you're leading with a high value product, and then maybe following up with a lower value-add kind of sale.

Pete Kight

I think that's an excellent description, significantly better and simpler than my earlier attempt. The only thing I would add to it is I believe that with the transactional services integrated into the same platform you have the opportunity to further differentiate value you can then build out into these additional service capabilities.

We're very impressed with how much we're learning about consumer behavior, what they want to do, what their current behavior indicates as what they might want to do in the future. There is a lot of value that we're gleaning from watching the behavior of consumers. We think there is an opportunity to productize that by integrating that information flow into the services platform.

Andrew Jeffrey - SunTrust Robinson Humphrey

Okay. Is it safe to say, though, that while we're in a period of transition, if you will, or an interim period where the uptake on some of those newer services or features is somewhat lagged, that it takes a while to get from Point A to Point B, maybe even longer than we have thought previously?

Pete Kight

Yes. I think that's what we're announcing in this quarter.

Andrew Jeffrey - SunTrust Robinson Humphrey

Okay.

Pete Kight

I think that's fair, probably a more positive way than I put it. I think we could have certainly executed a lot better, but there's no question that in the current budget cycle in particular, but I also think because we're only integrating these into our transactional side, we had a more difficult time closing the deals than we thought we would, but without question, we believe integrating them into a bigger online services platform is going to be a lot easier and a lot more compelling.

Andrew Jeffrey - SunTrust Robinson Humphrey

Okay. Great. Thanks a lot.

Dave Mangum

Thanks, Andrew.

Operator

Our next question assumes from Dan Perlin. Your line is live.

Daniel Perlin - Wachovia Securities

Thanks. I just have a couple of quick questions. Let me just preface this by saying, Pete, this is probably going to be hard for you to answer, but if you think about kind of the reverse of saying are there more acquisitions that you would like to look at, I am wondering are there other companies you would like to be a part of, and maybe you don't have to necessarily pick them out, I wouldn't expect you to, but a simple yes or no, I think, would be pretty interesting.

And then the second part of that is, as the founding kind of father of this company, knowing where you are in a transition period in a very difficult environment for banks to get excited about spending money, what would be your thoughts on private equity transactions, given that there's so much money kind of slosh around in that space to take this company private? Thanks.

Pete Kight

I will give you credit for opening by saying this will be a difficult question for me to answer. That's fair. I'll try to do a little bit better than saying no comment, though, because the only thing I would just remind everyone of is we have always had a long horizon in our vision of creating value in this business.

We have been the primary driver of building the first stage of this marketplace. I would describe what we're working on now as nothing less than the next stage of this marketplace. And I am pretty positive on it, but I will clearly agree that there is a transition from here to there. We're going to do the best possible job, and I would say that transition is already underway.

We have been at work on this, the acquisition clearly calls out more directly some of the bigger steps we're making, but we have been at work on this. We've known that making different components separable is important, and we have been doing that for more than 18 months now.

There's no question that we have a lot to build out in order to do this. You know, I meant it when I said; we recognize that originally we thought the banks would build out a fair amount of this additional value-add capability. That is not going to happen. We're going to build it out.

And as a part of the Corillian acquisition, there's components in that, in the Carreker acquisition, we have to get that done, and it's fair to say we have spent money and will continue to spend money and investing to do that. I think it's going to provide an improved return on top of our transaction business, but we've got to prove we can execute on that, and we have to prove we can do it in a reasonable time frame.

I am a pretty big shareholder in the business, have been from the beginning, continue to remain so. I care lot about my family's investment in this business, so the horizon on which we build out this added value is important to me as a shareholder, not just as a CEO. I take the responsibility of being a public CEO very seriously from the day we went public.

I took it seriously in understanding we're not an owned company anymore, we're a public company now, and that is absolutely our priority, and so there's an underlying question to your point, which is what is the horizon in which you look to build out value, that is a fair question that we have to serve.

Daniel Perlin - Wachovia Securities

The other question I had, and thank you for that, I appreciate it, is do you feel like because you've made these recent acquisitions, that you're end market customers are maybe taking it a little slower with you to see what the ultimate kind of package of goods that you're selling is going to be, and then, therefore, there will be maybe an acceleration potential?

Pete Kight

So I absolutely have received market feedback that the market is wanting to understand our full capabilities before they make further decisions. So there's no question, and there's no question we're trying to get information out as fast as we can to encourage that position in the market, because we think we have a compelling advance in the market place.

But of course we're limited in what it is that we can do until we close that deal. So there's no question that we're seeing that in the market place, and we're trying to drive it. In terms of the opportunity to grow faster on the other side of that, we wouldn't be making the acquisitions if we weren't betting on that.

Daniel Perlin - Wachovia Securities

Understood. And then the last question I have is one of the challenges you've always had to deal with, I think, is really the control over the end market, and we're see something of that now.

I am wondering if you can just kind of maybe quantify how much more control over the end market do you think that these two companies that you're acquiring, and maybe even others potentially down the road, will allow you to have?

Pete Kight

Yes, so there is two components to control over the end market. It's obviously a pretty significant issue that we don't get to sell directly to the consumer. You know, quite frankly, I think, would have a -- made the decision to invest in the integrated platform and deliver on a higher value integrated online financial service platform earlier, if we had been directly in front of the consumer.

That's not what we positioned the company to do. The fact that the bank brand is just an absolute dominant preference for consumer safety, security, where they want to receive these services, that meant we were not going to be serving the consumer directly.

There is absolutely inherent in our belief that being in the online platform business means we'll have more access to consumer information for our ability to be able to serve the bank. We're not going to use that information to do something else.

We're going to use it directly into integrating back into the banks own services that will get built out on the platform, enhancing the bank's ability to be able to profit from their online customer base. So no question we're getting a full step closer to the end market in terms of the consumer information flow.

There's also a frustration in the banking industry that right now the banks are the people that come in and meet with us, value what it is that we can do. They are excited, they are interested, they went to know a lot about faster than we are able to give it to them, what this integrated capability can do, what their opportunities are.

But without question, what they are being charged with right now is to control costs. Even when we bring in discussions on ROI, on profit enhancing capabilities, right now their walking orders are politically I've got X-cost targets, and I am not sure that I get as much value, and I'll have to go back and try to sell that up.

There's no question that right now cost is ahead of the focus on increasing profits. We need to change that. And so that's obviously another area of wanting to change that part of what I describe as the bank end market, and we're driving to change that.

Daniel Perlin - Wachovia Securities

Excellent. Thank you very much.

Dave Mangum

Operator. We have time for one more question.

Operator

Okay. Our final question comes from Tien-tsin Huang. Your line is live.

Tien-tsin Huang - J.P. Morgan

Thanks for taking my follow-up. I just had a quick question on walk-in bill payment and telephone bill payment. How did revenue and transaction trends look in the quarter?

Dave Mangum

Transaction trends were what we expected. We had reasonable performance in terms of growth from each of those two. We saw actually a little bit more revenue per transaction than we expected from the phone channel, which drives that increase in overall revenue per transaction, but essentially those two product lines were in line with expectations for the quarter.

Tien-tsin Huang - J.P. Morgan

The positive revenue growth for both those?

Dave Mangum

Yes.

Tien-tsin Huang - J.P. Morgan

Thank you.

Dave Mangum

Thanks, Tien-tsin.

Pete Kight

All right. I want to thank everybody for giving us this much time late in the day. We'll talk to you in a quarter. Thank you.

Operator

Thank you, ladies and gentlemen, 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 participation.

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