CheckFree bounces back

CheckFree, which offers financial institutions an outsourcing service for online transactions, also pulled a secondary stock offering today designed to raise $50 million, saying market conditions had worsened.

The stock was up 0.9375 to 29.6875 in early trading after having rebounded to 34 shortly after the opening bell. Before the market opened today, Deutsche Banc Alex. Brown raised its recommendation to "strong buy."

Nonetheless, yesterday's stock drop prompted some analysts to question CheckFree's business model, noting that as online banking becomes more critical, major banks may choose to bring services in-house, eliminating their long-term need for companies like CheckFree.

CheckFree's management was caught by surprise by news that Wells Fargo, Chase Manhattan, and First Union would form a new company to let major utilities, credit card firms, and other big billers to present bills online rather than through the mail. (See related story)

"Banking is bringing [online bill] presentment and payment services in-house," E*Offering bank analyst Gary Craft told investors today. "As seen in many processing markets, when business economics, transaction volume [or both] get big enough, there is every incentive to bring these services in-house."

Not all analysts are so pessimistic.

"It's clearly a negative for CheckFree, but not something that should have taken 10 points out of the stock," said Steve Olson of Pacific Growth Equities, who has had a "buy" recommendation, his second highest, on CheckFree since February.

But even CheckFree chief executive Pete Kight admitted the new venture, dubbed the Exchange, competes with his company's online bill-delivery service.

"They did not give any advance notice of the announcement, and it will compete," Kight said on a hastily called teleconference following yesterday's news. "We expect to continue to compete quite successfully."

He said the three banks accounted for less than 20 percent of CheckFree's revenues.

So far, the online bill-delivery market is long on promise and short on actual business. Kight said CheckFree has booked only $10,000 in online bill-presentment revenue in the last nine months. Total revenues were $145.4 million for that period.

But CheckFree's bread-and-butter business, letting consumers pay their bills online either directly through CheckFree or through their banks, who outsource through CheckFree, could be at risk once the Exchange banks' bill-delivery system is set up.

Industry analyst Avivah Litan of Gartner Group thinks the Exchange will eventually add bill-payment capabilities of their own. In the meantime, those banks still need CheckFree for a online payments.

CheckFree spokeswoman Laurinda Wilson said the Exchange has its work cut out for them. "It's much more complicated than credit card processing," she said of processing bills online.