Electronic Clearing House, Inc. reported financial and operating results for the second fiscal quarter ended March 31, 2004.
Second Quarter Highlights:
Financial highlights for the second quarter of 2004 as compared to the same period last year were as follows:
— Revenue increased 20.5% to $11.8 million
— Check-related revenue increased 34.8% to $2.7 million, or 22.6% of total revenue
— Bankcard processing volume increased 15.5% to $272.9 million
— ACH transactions processed jumped 320.6% to 5.4 million transactions
— Gross margin from processing and transaction revenue improved to 36.2% from 33.8% in Q2 FY 2003
— Operating income rose to $0.7 million, up from $0.5 million in Q2 FY 2003
— Diluted earnings per share increased to $0.17 from $0.05 in Q2 FY 2003
Revenue for the second quarter of fiscal 2004 was a record $11,766,000, an increase of 20.5%, as compared to $9,767,000 in the prior year quarter.
Bankcard processing and transaction revenue increased 16.9% to $9,110,000 in the second quarter of fiscal 2004 from $7,796,000 in the prior year quarter. This increase was primarily due to strong organic growth in bankcard processing volume from existing merchants and from new merchants generated by our marketing programs.
Check-related revenues increased 34.8% to $2,656,000 for the three months ended March 31, 2004, compared with $1,971,000 in the prior year quarter. This increase was primarily due to strong growth in both the Visa POS Check Service program and an increase in ACH and check conversion revenue.
The Company recorded net income of $1,206,000, or $0.17 per share on a fully diluted basis, in the second quarter of fiscal 2004, as compared to $268,000 or $0.05 per share in the same period last year. Second quarter results were favorably affected by a pre-tax gain on sale of $1,319,000 resulting from the sale of the building that formerly held the Company’s principal executive offices. After the sale, the Company used a portion of the proceeds to pay off two loans totaling $1,524,000, which was collateralized by the building.
“We are very pleased with our strong results during the second quarter,” said Joel M. Barry, Chairman and CEO of Electronic Clearing House, Inc. “The positive effects of the strategies we have implemented over the past two years are materializing in our financial results. During the second quarter 2004, both our check services and bankcard businesses grew rapidly, while gross margins remained well above last year’s levels. Additionally, we continued to build our customer base for the Visa POS Check Service program, with several thousand new merchant locations expected to come on line in the second half of the year.”
Gross profit from processing and transaction revenue rose to $4,243,000 from $3,278,000 in the prior year quarter. This translates to a gross margin of 36.2% in the second quarter of fiscal 2004, up from 33.8% in the year-ago quarter. Gross margins declined from the prior quarter (Q1 2004) as a result of an interchange fee increase implemented by the card associations in February 2004. The Company began passing the fee increase to merchants in April and expects this fee increase to positively increase gross margins in the third quarter of 2004 and beyond.
Other operating costs as a percentage of total revenue increased to 11.2%, from 10.7% in the second quarter of fiscal 2003. The Visa POS Check Service required a substantial increase in personnel costs to undertake training and program implementation for the various financial institutions that have chosen ECHO as their Third-Party Processor. In addition, the Company hired additional risk management and customer support staff to support the Visa POS Check Service.
Selling, general and administrative expenses were 16.4% of revenue in the second quarter of fiscal 2004, compared with 15.2% in the second quarter of fiscal 2003. This increase was primarily attributable to increases in sales and marketing expenses, in employee salaries, bonuses and benefit costs, and in rent expense as the Company moved its principal executive offices to a new corporate location in October 2003.
Operating income rose to $706,000, or 6.0% of revenues in the second quarter, from $465,000, or 4.8% of revenues in the year-ago quarter. The improvement can be primarily attributed to strong revenue growth and expansion in the gross profit margin over the prior year quarter. The Company anticipates continued improvement in operating income as the gross margin increases in the coming quarters.
The Company used $3,931,000 of cash in its operating activities in the three months ended March 31, 2004, as compared to generating $785,000 of cash in the same period last year. However, excluding settlement fees payable, which vary from quarter to quarter depending on the timing of the receipt and payout of funds, operating cash flow was a positive $364,000 for the three-month period ended March 31, 2004.
Mr. Barry commented, “ECHO’s balance sheet is very strong, with $10,802,000 in cash, $7,733,000 in working capital, $1,093,000 in long-term debt, and $14,930,000 in stockholders’ equity as of March 31, 2004. Additionally, we are internally generating the cash necessary to continue building our check services business.”
“As we move through the third quarter of fiscal 2004, we believe the growth in both our check services program and our bankcard and transaction processing services will drive continued double digit revenue growth. In the second quarter, several additional financial institutions have signed on to the Visa POS program. Additionally, in April, Global Check Services began rolling out ECHO’s Visa POS Check Service to 5,000 of its merchant locations. Altogether, we anticipate adding more banks and their retailers to our Visa POS program in the coming quarters,” said Mr. Barry.
“Therefore, for the full fiscal year 2004, we are raising our prior guidance of revenue growth from 15-20% to 16-22% and maintaining gross margin guidance between 36-38%. Given the enhancements we have made to our management team and anticipated continuing higher level sales and development expenses related to the Visa POS program, we still expect that our operating margin for the fiscal year 2004 will run between 7-9%,” Mr. Barry concluded.
About Electronic Clearing House, Inc. (ECHO)
Electronic Clearing House, Inc. provides a complete solution to the payment processing needs of merchants, banks and collection agencies. ECHO’s services include debit and credit card processing, check guarantee, check verification, check conversion, check re-presentment, and check collection.
For more information about ECHO latest quarterly performance visit CardData ([www.carddata.com]).