CKFR Checkfree Corp (MM)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number: 0-26802

4411 East Jones Bridge Road, Norcross, Georgia 30092
(Address of Principal Executive Offices, Including Zip Code)

(678) 375-3000
(Registrant’s Telephone Number, Including Area Code)

Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. YES þ NO o

     Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of an “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act). (Check one):

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

     Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 88,435,662 shares of Common Stock, $.01 par value, were outstanding at October 31, 2007.

 

 

FORM 10-Q

CHECKFREE CORPORATION

Table of Contents

		Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets as of September 30, 2007 and June 30, 2007			3
Unaudited Consolidated Statements of Operations for the Three Months Ended September 30, 2007 and 2006			4
Unaudited Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2007 and 2006			5
Notes to the Interim Unaudited Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 3. Quantitative and Qualitative Disclosures About Market Risk			30
Item 4. Controls and Procedures			31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			32
Item 6. Exhibits			33
Signatures
EX-31A
EX-31B
EX-32A
EX-32.B

Part I. Financial Information

See Notes to the Interim Unaudited Consolidated Financial Statements

See Notes to the Interim Unaudited Consolidated Financial Statements

CHECKFREE CORPORATION

2007 and June 30, 2007, we had approximately $46.0 million and $111.4 million in auction rate securities, respectively.

     In the three month periods ended September 30, 2007 and 2006, available-for-sale investments matured in the amount of $75.7 million and $175.6 million respectively. We incurred no gross gains or losses on these sales during the three month periods ended September 30, 2007 and 2006, respectively.

3 . Goodwill and Other Intangible Assets

     As of September 30, 2007, our only non-amortizing intangible asset is goodwill. The changes in the carrying value of goodwill by segment from June 30, 2007, to September 30, 2007, were as follows (in thousands):

The majority of the above purchase price adjustments are reallocations between our goodwill and intangible accounts. These changes occurred as we continued our valuations of our acquisitions of Upstream Technologies, LLC, Corillian Corporation, and Carreker Corporation all of which occurred in the fourth quarter of our fiscal year ended June 30, 2007.

     The components of our various amortized intangible assets are as follows (in thousands):

     For the three month periods ended September 30, 2007 and 2006, amortization of intangible assets totaled $14.1 million and $11.6 million, respectively.

4. Reorganization Charges

     During our fiscal year 2007, we made three acquisitions. We are committed to a plan of integration of certain activities with these acquisitions. These activities are accounted for in accordance with EITF 95-3, “Reorganization of Liabilities in Connection with a Purchase Business Combination.” These activities include primarily employee severance and related costs. In connection with those acquisitions, we accrued reorganization charges totaling approximately $10.3 million in fiscal year 2007. A charge of $6.1 million was recorded in our fiscal year 2007 Statement of Income as a result of severance and related costs associated with termination of a number of our associates in connection with our integration plans. The balance of the costs was included in the determination of the purchase price as it related to the acquired companies’ associates.

     A summary of activity in the accrual related to our integration and reorganization activities is as follows: (in thousands):

5. Sale-Leaseback

     On August 20, 2007, we sold our Dublin, Ohio facility for $22.2 million. Simultaneously, we entered into a twelve-year lease with the facility’s new owner. The lease on the facility qualifies as an operating lease. The gain on the transaction was $7.5 million. The profit on the sale is less than the present value of the minimum lease payments over the lease term and therefore the entire amount of the gain was deferred and will be recognized ratably over the lease term as a reduction in rent expense. Of this amount, approximately $52,000 was recognized in the first quarter of fiscal year 2008.

     The obligations for future minimum lease payments as of September 30, 2007 and the amortization of the remaining deferred gain are (in thousands):

6. Common Stock

     On August 1 and November 6, 2006, we announced that our board of directors had approved separate stock repurchase programs under which for each program we could repurchase up to $100.0 million of our common stock through August 1, 2007. During the quarters ended September 30, 2006 and December 31, 2006, we repurchased a total of 2,637,747 and 1,273,807 shares of common stock for aggregate prices of $100.0 million and $50.0 million, respectively. The repurchased shares were immediately retired and cancelled.

7. Equity-Based Compensation

     On July 1, 2005, we adopted, SFAS 123(R), “Share Based Payment” (“SFAS 123(R)”) using the modified

prospective method. SFAS 123(R) requires all share-based payments to employees to be recognized in the financial statements based on their fair values and did not change the accounting guidance for share-based payment transactions with parties other than employees provided in SFAS 123, “Accounting for Stock Based Compensation” (“SFAS 123”), as originally issued and Emerging Issues Task Force (“EITF”) 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” (“EITF 96-18”).

     In November 2002, our stockholders approved the 2002 Stock Incentive Plan (the “2002 Plan”). Under the provisions of the 2002 Plan, we have the ability to grant incentive or non-qualified stock options, stock appreciation rights (“SARs”), restricted stock, performance units or performance shares for not more than 6,000,000 shares of common stock (such shares to be supplied from the 12,000,000 shares approved for the 1995 Stock Option Plan (the “1995 Plan”)) to certain of our key employees, officers and non-employee directors. The terms of the options, SARs, restricted stock, performance units or performance shares granted under the 2002 Plan are determined by a committee of our Board of Directors, however, in the event of a change in control as defined in the 2002 Plan, they shall become immediately exercisable. At September 30, 2007, there were 2,592,599 additional shares available for grant under the 2002 Plan.

     In the event that shares purchased through the exercise of incentive stock options are sold within one year of exercise, we are entitled to a tax deduction. The tax benefit of the deduction is not reflected in our consolidated statements of operations but is reflected as an increase in additional paid-in capital.

     As of September 30, 2007, we have three types of share-based payment arrangements with our associates; stock options, restricted stock and associate stock purchase plan.

      Stock Options

     The following table summarizes the activity of stock options under our 1995 and 2002 Plans, from July 1, 2007 to September 30, 2007:

     The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. We did not have any options granted during the three month period ended September 30, 2007.

     In the three months ended September 30, 2007 and 2006, we recognized equity-based compensation expense of approximately $0.6 million and $1.2 million related to the vesting of stock options. As of September 30, 2007, we had approximately $2.9 million of unrecognized compensation related to non-vested stock options, which we will record in our statement of operations over a weighted average recognition period of approximately 2 years.

     In the three months ended September 30, 2007 and 2006, we recognized equity-based compensation expense of approximately $2.2 million and $2.3 million, related to the vesting of shares of restricted stock. As of September 30, 2007, we had approximately $20.2 million of unrecognized compensation related to non-vested shares of restricted stock which we will record in our statement of operations over a weighted average recognition period of approximately five years.

8. Earnings Per Share

     The following table sets forth the calculation of basic and diluted earnings per share in accordance with SFAS 128 (in thousands, except per share amounts):

     The weighted-average diluted common shares outstanding for the three month periods ended September 30, 2007 and 2006 excludes the effect of approximately 0.4 million and 0.8 million out-of-the-money options and warrants, respectively, as their effect would be anti-dilutive.

9. Comprehensive Income

     We report comprehensive income in accordance with SFAS 130, “Reporting Comprehensive Income” (“SFAS 130”). SFAS 130 requires disclosure of total non-shareowner changes in equity and its components. Total non-shareowner changes in equity include all changes in equity during a period except those resulting from investments by and distributions to shareowners. The components of accumulated other comprehensive loss, which is a component of stockholders’ equity on our consolidated balance sheet, applicable to us are (i) unrealized gains or losses on our available-for-sale securities and (ii) unrealized foreign currency translation differences. As a result, we are required to report the components of our comprehensive income, which are as follows (in thousands):

10. Supplemental Disclosure of Cash Flow Information (in thousands)

11. Business Segments

     We operate in three business segments — Electronic Commerce, Investment Services, and Software, along with a Corporate segment. These reportable segments are strategic business units through which we offer different products and services. We evaluate the performance of our segments based on their respective revenues and operating income (loss). Segment operating income (loss) includes the impact of purchase accounting on deferred revenue and excludes purchase accounting amortization, costs associated with mergers and acquisitions, and the SFAS 123(R) equity-based compensation expense related to stock options granted before the implementation of our current incentive compensation philosophy beginning July 1, 2004, which significantly reduces overall participation and focuses on restricted stock awards with limited stock option grants.

     The following sets forth certain financial information attributable to our business segments for the three months ended September 30, 2007 and 2006 (in thousands):

12 . Income Taxes

     We adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), on July 1, 2007. As a result of the implementation of FIN 48, we recorded approximately $16.0 million as a reduction in our opening accumulated deficit. Our total gross balance of unrecognized tax benefits as of July 1, 2007 was approximately $21.0 million. Of this total, $19.8 million (which reflects federal benefits of state taxes) represents the amount of unrecognized tax benefits that, if recognized, would favorably impact our effective tax rate.

     We recognize interest and penalties accrued related to unrecognized tax benefits as a component of our income tax provision. As of July 1, 2007, we had approximately $5.2 million accrued for the payment of interest and penalties, which does not include the federal tax benefit of interest deductions, where applicable.

     We file income tax returns in the U.S. federal and various state, local and foreign jurisdictions, and with few exceptions, are no longer subject to examinations by tax authorities in these jurisdictions for years prior to fiscal year ended June 30, 2004. The Internal Revenue Service (“IRS”) has completed its audit of the income tax returns for the fiscal years ended June 30, 2004 and 2005. No significant adjustments were made as a result of the fiscal year June 30, 2004 examination. The IRS has issued a proposed assessment of approximately $15.4 million for the fiscal year ended June 30, 2005 examination related to a strategic transaction we entered into in fiscal year 1999; we are pursuing an IRS Appeal related to this issue and it is not expected that a settlement with the IRS will be reached within the next 12 months.

     It is reasonably possible that the amount of unrecognized tax benefits will decrease in the next twelve months, upon issuance of the IRS’s final examination report for the fiscal year ended June 30, 2005.

13. Pending Acquisition

     On August 2, 2007, we entered into an Agreement and Plan of Merger (“Merger Agreement”) pursuant to which Fiserv, Inc. (“Fiserv”) will acquire all of our outstanding shares of common stock for $48.00 per share in cash. Fiserv is a publicly traded Nasdaq company headquartered in Brookfield, Wisconsin and is a provider of technology solutions. On October 15, 2007, we were notified that the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice granted early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 in connection with Fiserv, Inc.’s pending acquisition of our company. On October 23, 2007, at a special stockholders meeting, our stockholders adopted the Merger Agreement with the affirmative vote of approximately 78.96% of the shares entitled to vote at the stockholders meeting. We expect the acquisition to close by December 31, 2007, subject to the receipt of other required regulatory approvals and customary closing conditions.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

     CheckFree was founded in 1981 as an electronic payment processing company and has become a leading provider of financial electronic commerce products and services. Our current business was developed through the expansion of our core electronic payments business and the acquisition of companies operating similar or complementary businesses.

     We operate our business through three independent but inter-related divisions:

	•		Electronic Commerce;
	•		Investment Services; and
	•		Software.

     Our Electronic Commerce Division products enable consumers to:

	•		review bank accounts,
	•		receive and pay bills over the Internet, and
	•		pay billers directly through biller-direct sites, by telephone or through our walk-in retail agent network.

For the quarter ended September 30, 2007, we processed more than 351 million payment transactions and delivered approximately 64 million electronic bills (“e-bills”). For the year ended June 30, 2007, we processed more than 1.3 billion payment transactions and delivered approximately 226 million e-bills. The number of transactions we process and the number of e-bills we deliver each year continue to grow. Our Electronic Commerce Division accounted for approximately 73% of our consolidated revenues in the quarter ended September 30, 2007.

     Through our Software Division, we provide software, maintenance, support and consulting services, through four product lines. These product lines are global treasury, reconciliation and exception management, transaction process management, and electronic billing. Our Software Division operates both domestically and internationally, and accounted for approximately 15% of our consolidated revenues in the quarter ended September 30, 2007.

     Through our Investment Services Division, we provide a range of portfolio management services to help financial institutions, including broker dealers, money managers and investment advisors. As of September 30, 2007, our clients used the CheckFree APL ^SM portfolio management system (“CheckFree APL”) to manage nearly 2.8 million portfolios. Our Investment Services Division accounted for approximately 12% of our consolidated revenues in the quarter ended September 30, 2007.

Executive Summary

     On August 2, 2007, we entered into an Agreement and Plan of Merger (“Merger Agreement”) pursuant to which Fiserv, Inc. (“Fiserv”) will acquire all of our outstanding shares of common stock for $48.00 per share in cash. Fiserv is a publicly traded Nasdaq company headquartered in Brookfield, Wisconsin and is a provider of technology solutions. On October 15, 2007, we were notified that the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice granted early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 in connection with Fiserv, Inc.’s pending acquisition of our company. On October 23, 2007, at a special stockholders meeting, our stockholders adopted the Merger Agreement with the affirmative vote of approximately 78.96% of the shares entitled to vote at the stockholders meeting. We expect the acquisition to close by December 31, 2007, subject to the receipt of other required regulatory approvals and customary closing conditions.

     Recent acquisitions have had an impact on our results between the quarters ended September 30, 2006 and September 30, 2007:

	•		Our acquisition of Corillian Corporation (“Corillian”) for $245 million in cash in May 2007;
	•		Our acquisition of Carreker Corporation (“Carreker”) for $206 million in cash in April 2007; and
	•		Our acquisition of substantially all of the assets of Upstream Technologies LLC (“Upstream”) for $28 million in cash in May 2007;

     Due to growth in all of our business segments, including the positive impact of the acquisitions identified above, our consolidated revenue grew by more than 24% from the quarter ended September 30, 2006, to the quarter ended September 30, 2007. We earned income from operations of $49.0 million in the quarter ended September 30, 2007, an increase of about 2% over the $48.2 million earned during the same period of the prior year. Excluding the impact of acquisition and integration costs of $5.3 million in the quarter ended September 30, 2007, income from operations would have increased by 12%. We generated $33.9 million of free cash flow for the quarter ended September 30, 2007, compared to $37.1 million for the quarter ended September 30, 2006. We define free cash flow as net cash provided by operating activities, exclusive of the net change in settlement accounts, less capital expenditures, plus data center reimbursements and plus the impact of an operating account conversion. See “Use of Non-GAAP Financial Information” in this Management’s Discussion and Analysis for further discussion of this measure.

     Revenue in our Electronic Commerce Division of $206.8 million in the quarter ended September 30, 2007, represents growth of 21% over the same period in the prior year. The Corillian electronic banking business and the Carreker revenue enhancement (“RevE”) consulting practice combined to provide nearly 14% of our quarter over quarter growth, before the impact of purchase accounting on their related deferred revenues. The remainder of Electronic Commerce revenue growth was driven primarily by 13% growth in total payment transactions processed and 23% growth in the volume of e-bills we delivered.

     Successful efforts to improve efficiency and quality have resulted in lower cost per transaction, allowing us to share scale efficiencies with our customers through volume-based pricing discounts. When combined with relatively lower margins within the aforementioned businesses we acquired from Corillian and Carreker, our operating margin within Electronic Commerce has remained fairly steady at nearly 35%. See “Segment Information” below for a presentation of financial information by segment, including a discussion of segment operating margin.

     Revenue in our Software Division of $43.2 million for the quarter ended September 30, 2007, represents growth of nearly 55% over the same period of the prior year due to our acquisition of Carreker. Quarter-over-quarter revenue in our legacy Software businesses remained relatively flat during our seasonally low first quarter of the fiscal year in both periods. Relatively low Carreker operating margins resulted in a decline in our overall operating margin in Software from nearly 23% for the quarter ended September 30, 2006 to nearly 13% for the quarter ended September 30, 2007.

     Revenue in our Investment Services Division of $34.7 million for the quarter ended September 30, 2007, represents growth of 17% over the same period last year. We generated 20% quarter-over-quarter growth in portfolios managed to nearly 2.8 million as of September 30, 2007, from more than 2.3 million for the same period in the previous year, despite the expected loss of 0.1 million low priced reporting accounts in the quarter ended March 31, 2007. We continue to invest in the rewrite of our CheckFree APL operating system. We expect this investment to provide us the opportunity to expand our services into the rapidly growing separately managed accounts (“SMA” and “SMAs”) market. In May 2007, we purchased substantially all of the assets of Upstream, which provided nominal incremental revenue and operating income in the quarter ended September 30, 2007. Although we had an unusually large contract in the September 2007 quarter that temporarily raised our operating margin to 29%, with steady underlying portfolio growth, we expect our operating margin in Investment Services to remain around the upper teens to lower twenty percent range until we complete our system rewrite and the related migration of our customer base to the new operating platform.

     The following table sets forth as percentages of total revenues, consolidated statements of operations data:

Results of Operations

     The following table sets forth our consolidated revenues for the quarters ended September 30, 2007 and 2006, respectively:

Total Revenues (000’s)

		September 30,								Change
		2007				2006				$				%
Quarter ended		$	284,664			$	228,619			$	56,045				24.5	%

     Our growth in total revenues of 24.5% was driven by 21% growth in our Electronic Commerce business, nearly 55% growth in our Software business and 17% growth in our Investment Services business.

     Quarter-over-quarter growth in Electronic Commerce revenue has been driven primarily by the RevE consulting practice from our acquisition of Carreker in April 2007 and the Corillian electronic banking business acquired in May 2007. On a combined basis the acquisitions accounted for approximately 14% of our quarter-over-quarter revenue growth within Electronic Commerce. The remainder of our revenue growth in Electronic Commerce was driven primarily by growth in payment transactions processed and the volume of e-bills we delivered.

     Total transactions processed grew by nearly 13%, from 311.7 million for the quarter ended September 30, 2006 to 351.6 million for the quarter ended September 30, 2007, composed of approximately 20% growth in consumer service provider (“CSP”) based transactions and a decline of approximately 9% in non-CSP based transactions. Revenue growth from CSP based payment transaction growth was offset by tier-based volume pricing discounts which resulted in a $0.04 quarter-over-quarter decrease in average revenue per CSP transaction. Growth in relatively high-priced phone-based payments in our non-CSP category was more than offset by a decline in walk-in payments where our customers have been shifting to a consumer fee-based pricing model, which provides us with fewer, but more profitable, transactions and a decline in payments made directly at biller websites. The change in the mix within the non-CSP area resulted in a $0.08 quarter-over-quarter increase in average revenue per non-CSP transaction. We delivered 63.9 million e-bills during the quarter ended September 30, 2007, representing growth of 23% over the 51.8 million e-bills delivered in the same period of the prior year. Although revenue per e-bill had remained relatively consistent at $0.16 over the past few years, during the second half of fiscal 2007, revenue per e-bill increased to $0.17 due to our decision to reduce the delivery of screen scraped bills that generated no revenue.

     Growth in Software revenue was due to our acquisition of Carreker in April 2007. The September quarter is our seasonally lowest period within our legacy software businesses, which reported relatively flat quarter-over-quarter revenue.

     Quarter-over-quarter revenue growth within Investment Services was primarily due to a 20% increase in portfolios managed, from more than 2.3 million as of September 30, 2006 to nearly 2.8 million as of September 30, 2007. We continue to provide incentives for our customers to sign multi-year contracts and continue to experience a business mix shift to lower priced services, both of which have resulted in a modest reduction to our revenue per average portfolio managed. Our acquisition of Upstream in May 2007 had only nominal impact on our revenue growth.

     The following tables set forth comparative revenues, by type, for the quarters ended September 30, 2007 and 2006, respectfully.

Processing and Servicing Revenue (000’s)

		September 30,								Change
		2007				2006				$				%
Quarter ended		$	218,114			$	195,478			$	22,636				11.6	%

     We earn processing and servicing revenue in both our Electronic Commerce and our Investment Services businesses. Quarter over quarter revenue growth was driven primarily by growth in payment transactions processed and e-bills delivered within Electronic Commerce as well as portfolio growth within Investment Services. Total payment transactions increased by nearly 13%, from 311.7 million for the quarter ended September 30, 2006 to 351.6 million for the quarter ended September 30, 2007, composed of approximately 20% growth in CSP based transactions and a decline of approximately 9% in non-CSP based transactions. Revenue growth from CSP based payment transaction growth was offset by tier-based volume pricing discounts which resulted in a $0.04 quarter over quarter decrease in average revenue per CSP transaction. Growth in relatively high-priced phone-based payments in our non-CSP category was more than offset by a decline in walk-in payments where our customers have been shifting to a consumer fee-based pricing model, which provides us with fewer, but more profitable, transactions and a decline in payments made directly at biller websites. The change in the mix within the non-CSP area resulted in a $0.08 quarter over quarter increase in average revenue per non-CSP transaction. We delivered 63.9 million e-bills during the quarter ended September 30, 2007, representing growth of 23% over the 51.8 million e-bills delivered in the same period of the prior year. In our Investment Services business, we experienced approximately 20% growth in portfolios managed, from more than 2.3 million as of September 30, 2006, to nearly 2.8 million as of September 30, 2007. Finally, incremental revenue from our acquisitions of Corillian and Upstream in the quarter ended June 30, 2007 provided approximately 2% of our quarter over quarter growth in processing and servicing revenue.

License Fee Revenue (000’s)

		September 30,								Change
		2007				2006				$				%
Quarter ended		$	15,412			$	9,074			$	6,338				69.8	%

     License revenue has traditionally been derived almost exclusively from product sales within our Software Division. However, with our May 2007 acquisition of Corillian, we have begun to reflect license revenue in our Electronic Commerce Division. Our April 2007 acquisition of Carreker also provided license fee revenue. On a combined basis, approximately two-thirds of our quarter-over-quarter growth in license fee revenue resulted from the Carreker and Corillian acquisitions. The first fiscal quarter is a seasonally slow period in our core software businesses which provided the remaining growth.

Maintenance Fee Revenue (000’s)

		September 30,								Change
		2007				2006				$				%
Quarter ended		$	21,988			$	11,530			$	10,458				90.7	%

     Maintenance fees, which represent annually renewable product support for our software customers, primarily relate to our Software Division, and tend to grow with incremental license sales from previous periods. Our traditional maintenance base continues to grow as a result of recent license sales, high annual customer retention, and moderate price increases across all of our Software businesses. However, on a combined basis, approximately 85% of our quarter-over-quarter growth in maintenance fee revenue resulted from our acquisitions of Carreker and Corillian in the quarter ended June 30, 2007. We recognize maintenance fees ratably over the term of the related contractual support period. Based on the nature of maintenance fees, we would expect minimal future growth without continued incremental license sales.

Professional Fee Revenue (000’s)

		September 30,								Change
		2007				2006				$				%
Quarter ended		$	29,150			$	12,537			$	16,613				132.5	%

     Professional fee revenue consists primarily of consulting and implementation fees across all three of our divisions. Our expanded product lines over the past several years, including our acquisitions of Carreker, Corillian and Upstream in the quarter ended June 30, 2007, have provided us additional opportunities to offer services to our customers. On a combined basis, the addition of Carreker, Corillian and Upstream provided quarter-over-quarter growth in professional fee revenue of approximately 139%. An unusually large consulting engagement in our Software Division in the prior year resulted in a quarter-over-quarter decline in our legacy professional service fee revenue. Professional fees are typically project oriented and they tend to fluctuate from period to period.

Cost of Processing, Servicing and Support (000’s)

     On a combined basis, approximately 85% of the dollar growth in cost of processing, servicing and support is due to our acquisitions of Carreker and Corillian in the quarter ended June 30, 2007. Cost of processing, servicing and support, as a percentage of revenue, has increased by nearly 1% on a quarter-over-quarter basis due primarily to the lower gross margins of the consulting services and customer support components of Carreker and Corillian, offsetting cost efficiency gains in our legacy businesses. In both Electronic Commerce and Investment Services, we continue to focus investment on additional efficiency and quality improvement within our customer care processes and our information technology infrastructure, and are leveraging a significantly fixed cost infrastructure to drive improvement in cost per transaction processed and cost per portfolio managed. Within Electronic Commerce, our electronic payment rate is currently 84%. Electronic payments carry a significantly lower variable cost per unit than paper-based payments and are far less likely to result in a costly customer care claim. With our current mix of businesses within Electronic Commerce, it is difficult to raise the electronic rate above the 84% level as it takes an increasing number of relatively small merchants to sign up for electronic payment receipt to improve the ratio by a single percentage point. Also, a portion of the pay by phone transactions are credit card payments, carrying interchange fees, which place negative pressure on gross margins for that part of our business. Relatively high growth in credit card payments in the future could place downward pressure on the gains we expect from continued

Six Sigma-based process improvements within our Electronic Commerce business. Looking forward, we expect some near-term pressure on our gross margin as we invest in resources to support our data center and high-availability disaster recovery efforts. These efforts began in earnest in the quarter ended June 30, 2006, and we expect continued investment in this area well into fiscal 2008.

Research and Development (000’s)

     We continue to invest in product enhancement and productivity improvement initiatives in all of our core businesses, including the rewrite of our operating system within Investment Services, named CheckFree EPL ^SM (Enhanced Portfolio Lifecycle). Testing of EPL is ongoing, and we are scheduled to begin initial customer migrations in the next few months. Incremental research and development costs from our acquisitions of Carreker, Corillian and Upstream in the quarter ended June 30, 2007, exceeded our quarter-over-quarter decline in research and development, as lower costs in our Software Division resulted from the timing of certain software development projects.

Sales and Marketing (000’s)

     Nearly all of the quarter over quarter increase in sales and marketing expense is the combined result of our acquisitions of Carreker, Corillian and Upstream in the quarter ended June 30, 2007. Sales and marketing costs as a percentage of revenue within both Carreker and Corillian are higher than our legacy businesses, but are consistent with a software business model that supports a direct sales force and incurs variable sales commissions on product sales.

General and Administrative (000’s)

     Our pending merger with Fiserv and our recent acquisitions of Carreker, Corillian and Upstream have resulted in approximately $5.3 million of merger related fees and integration costs in the quarter ended September 30, 2007. Additionally, although acquisition related synergy actions were announced in the quarter ended June 30, 2007, certain of the associates within general and administrative areas will remain well into the current fiscal year to ensure an effective migration of internal systems. Absent these merger related costs and carryover costs, we have largely been able to leverage our general and administrative costs.

     Depreciation and amortization expense resulting from the purchase of operating fixed assets and capitalized software development costs increased to $13.1 million for the quarter ended September 30, 2007, from $10.8 million for the quarter ended September 30, 2006, due primarily to fixed asset additions resulting from the acquisitions of Carreker, Corillian and Upstream in the quarter ended June 30, 2007. The remainder of our depreciation and amortization expense represents purchase accounting amortization, which has also increased due to the aforementioned acquisitions. Over the past six quarters we have capitalized approximately $47.9 million in property, plant and equipment related to construction-in-progress for the addition of a data center facility. We expect a fairly substantial increase in depreciation expense as the data center becomes operational, which is expected to happen during the quarter ending December 31, 2007.

Equity in Net Loss of Joint Venture (000’s)

     In April 2004, we announced a joint venture, OneVu Limited (“OneVu”), with Voca Limited (“Voca”), to create an integrated electronic billing and payment network for billers and banks in the United Kingdom. We have an equity interest of approximately 46.6% in OneVu and, therefore, we account for our interest in OneVu under the equity method of accounting. We provided 100% of OneVu’s necessary working capital requirements during its formative stage and, therefore, the equity in net loss of OneVu represented 100% of losses incurred by OneVu through March 31, 2006. In March 2006, we entered into an additional funding arrangement with Voca related to OneVu whereby both joint venture partners contributed approximately $830,000 in exchange for a security interest in OneVu subordinate to our previous funding. OneVu obtained a line of credit facility from a bank in the amount of approximately $2.7 million and we have guaranteed the credit facility. Accordingly, beginning in April 2006, we continued to record the operations of OneVu on the equity basis of accounting now recognizing 46.6% of the results of operations of OneVu. Because of our debt guarantee, our portion of the operating losses has caused the carrying value of our investment in the joint venture to fall below zero, becoming a liability in the quarter ended September 30, 2006. The liability will continue to increase as long as the joint venture incurs losses and will be reduced by our share of any profits.

Net Interest Income (Expense) (000’s)

     Cash flow provided by operating activities during the year ended June 30, 2007 was used to fund a $150 million share repurchase program and a significant portion of our acquisitions of Carreker, Corillian and Upstream. The related decline in quarter-over-quarter average invested assets resulted in lower interest income. The remainder of our acquisition funding was provided through draws against our revolving credit facility in the quarter ended June 30, 2007. As of September 30, 2007, the outstanding balance on the revolving credit facility was approximately $122 million, down from $204 million as of June 30, 2007. The increase in interest expense is due primarily to the debt service on the revolving credit facility. Our data center financing agreement accumulated a balance of $47.9 million as of September 30, 2007; however, construction period interest expense related to the data center credit facility has been capitalized to construction-in-progress and interest expense from this credit facility will not impact our income statement until the data center is placed in service, which is expected to happen during the quarter ending December 31, 2007.

Income Tax Expense (000’s)

     Our overall blended statutory rate (federal, state and foreign combined) approached 38.5%. Our effective rate of 37.7% and 38.8% for the quarters ended September 30, 2007 and 2006, respectively, differs from our blended statutory rate due to tax free municipal interest income earned on our investment portfolio, earned research and development tax credits and differing income tax rates in the various tax jurisdictions in which we operate, net of certain valuation allowances against net operating losses in certain tax jurisdictions that we do not anticipate using in the future.

     We adopted the provisions of FIN 48 effective July 1, 2007; however, the adoption of FIN 48 had no material impact on our quarterly operating results or effective tax rate for the three months ended September 30, 2007.

Segment Information

     We evaluate the performance of our segments based on total revenues and operating income (loss) of the respective segments. Segment operating income (loss) includes purchase accounting amortization related to various business and asset acquisitions, the impact of purchase accounting on deferred revenue, costs associated with mergers and acquisitions, and the SFAS 123(R) equity-based compensation expense related to stock options granted before the implementation of our current incentive compensation philosophy beginning July 1, 2004, which significantly reduces overall participation and focuses on restricted stock awards with limited stock option grants.

     The following sets forth certain financial information attributable to our business segments for the quarters ended September 30, 2007 and 2006 (in thousands) in accordance with Note 11 to our consolidated financial statements included in this Quarterly Report on Form 10-Q and SFAS 131 “Disclosures about Segments of an Enterprise and Related Information”:

Electronic Commerce Revenues — Gross (000’s)

		September 30,								Change
		2007				2006				$				%
Quarter ended		$	214,216			$	171,029			$	43,187				25.3	%

     Quarter-over-quarter growth in Electronic Commerce revenue was been driven primarily by the RevE consulting practice from our acquisition of Carreker in April 2007 and the Corillian electronic banking business acquired in May 2007. On a combined basis the acquisitions accounted for approximately 16% of our quarter over quarter gross revenue growth within Electronic Commerce. The remainder of our growth was driven primarily by growth in payment transactions processed and the volume of e-bills we delivered.

     The following tables provide an historical trend of revenue, payment transaction metrics, e-bill delivery metrics and subscriber metrics for our Electronic Commerce business over the periods presented.

		Three Months Ended
		9/30/07				6/30/07				3/31/07				12/31/06				9/30/06
		(in millions, except revenue per transaction and revenue
		per e-bill delivered)
Transactions
CSP:
Revenue (1)		$	125.3			$	123.8			$	122.5			$	116.8			$	114.2
Revenue per transaction		$	0.44			$	0.45			$	0.45			$	0.46			$	0.48
Transactions processed			282.4				275.3				269.6				251.5				235.7
Non CSP:
Revenue		$	38.6			$	38.6			$	39.6			$	38.3			$	36.2
Revenue per transaction		$	0.56			$	0.57			$	0.56			$	0.54			$	0.48
Transactions processed			69.2				68.3				71.2				70.5				76.0
Total Transactions
Revenue		$	163.9			$	162.4			$	162.1			$	155.1			$	150.4
Transactions processed			351.6				343.6				340.9				322.0				311.7
e-bill Delivery
Revenue		$	10.8			$	10.4			$	9.8			$	8.7			$	8.5
Revenue per e-bill delivered		$	0.17			$	0.17			$	0.17			$	0.16			$	0.16
e-bills delivered			63.9				60.5				58.7				54.9				51.8
Other Electronic Commerce (2)
Revenue		$	39.5			$	31.8			$	12.8			$	12.6			$	12.1

     Total transactions processed grew by nearly 13%, from 311.7 million for the quarter ended September 30, 2006 to 351.6 million for the quarter ended September 30, 2007, composed of approximately 20% growth in CSP based transactions and a decline of approximately 9% in non-CSP based transactions. Revenue growth from CSP based payment transaction growth was offset by tier-based volume pricing discounts which resulted in a $0.04 quarter-over-quarter decrease in average revenue per CSP transaction. Growth in relatively high-priced phone-based payments in our non-CSP category was more than offset by a decline in walk-in payments where our customers have been shifting to a consumer fee-based pricing model, which provides us with fewer, but more profitable, transactions and a decline in payments made directly at biller websites. The change in the mix within the non-CSP area resulted in a $0.08 quarter-over-quarter increase in average revenue per non-CSP transaction.

     We delivered 63.9 million e-bills during the quarter ended September 30, 2007, representing growth of 23% over the 51.8 million e-bills delivered in the same period of the prior year. Although revenue per e-bill had remained relatively consistent at $0.16 over the past few years, during the second half of fiscal 2007, revenue per e-bill increased to $0.17 due to our decision to reduce the delivery of screen scraped bills that generated no revenue.

     The quarter-over-quarter increase in Other Electronic Commerce revenue is due primarily to the previously mentioned additions of our Corillian electronic banking business and the Carreker RevE consulting practice in addition to growth in our Health & Fitness business.

Electronic Commerce Operating Income (000’s)

		September 30,								Change
		2007				2006				$				%
Quarter ended		$	74,053			$	59,680			$	14,373				24.1	%

     Based on gross revenues, our quarter-over-quarter operating margin has remained fairly consistent at nearly 35%. Our ongoing efforts to improve quality and efficiency in our operations, combined with a substantial electronic versus paper payment rate of 84% and our ability to leverage our fixed cost base, have resulted in a lower cost per transaction, and have offset volume-based pricing discounts inherent in our business. Relatively lower margin revenue added from our Corillian electronic banking business and the Carreker RevE consulting practice have had limited impact on our overall operating margin.

Software Revenues — Gross (000’s)

		September 30,								Change
		2007				2006				$				%
Quarter ended		$	47,567			$	27,968			$	19,599				70.1	%

     Growth in Software revenue was due entirely to our acquisition of Carreker in April 2007. The first fiscal quarter is our seasonally lowest period within our traditional software businesses, which reported relatively flat quarter-over-quarter revenue.

Software Operating Income (000’s)

		September 30,								Change
		2007				2006				$				%
Quarter ended		$	5,988			$	6,354			$	(366	)			-5.8	%

     Our operating margin decreased from nearly 23% for the quarter ended September 30, 2006 to nearly 13% for the quarter ended September 30, 2007. The decline in margin is due primarily to the addition of relatively low margin revenue from Carreker.

Investment Services Revenues — Gross (000’s)

		September 30,								Change
		2007				2006				$				%
Quarter ended		$	34,667			$	29,622			$	5,045				17.0	%

     Quarter-over-quarter revenue growth within Investment Services was primarily due to a 20% increase in portfolios managed, from more than 2.3 million as of September 30, 2006 to nearly 2.8 million as of September 30, 2007, and a large customer contract signed in the quarter ended September 30, 2007, which generated high margin license and service fee revenue. We continue to provide incentives for our customers to sign multi-year contracts and continue to experience a business mix shift to lower priced services, both of which have resulted in a modest reduction to our revenue per average portfolio managed. Because of the one time contract, we expect that our operating margin will drop back to the low 20% range for the remainder of fiscal 2008. Our acquisition of Upstream in May 2007 had only nominal impact on our quarter-over-quarter revenue growth and we remain cautiously optimistic about the opportunity for continued portfolio growth through fiscal 2008.

Investment Services Operating Income (000’s)

		September 30,								Change
		2007				2006				$				%
Quarter ended		$	9,930			$	5,528			$	4,402				79.6	%

     Our operating margin in Investment Services has improved to 29% for the quarter ended September 30, 2007, from nearly 19% for the quarter ended September 30, 2006, due primarily to the execution of a large contract in the quarter ended September 30, 2007, that resulted in higher margin license and services revenue. We continue to incur significant spending on the enhanced operating system project, CheckFree EPL, and we continue to invest in resources designed to improve future operations quality. We expect to begin customer migrations to EPL in the next few months. Our acquisition of Upstream in May 2007 had a nominal impact on our quarter over quarter operating income and related operating margin.

Corporate Operating Loss (000’s)

		September 30,								Change
		2007				2006				$				%
Quarter ended		$	(9,973	)		$	(11,688	)		$	1,715				-14.7	%

     The reduced loss during the quarter ended September 30, 2007 was due primarily to a one time state tax refund in the quarter ended September 30, 2007 and unusually high legal expenses incurred in the quarter ended September 30, 2006. Otherwise, we have been able to successfully leverage corporate costs during a period of both organic and acquisition related growth.

Purchase Accounting Amortization (000’s)

		September 30,								Change
		2007				2006				$				%
Quarter ended		$	13,727			$	10,967			$	2,760				25.2	%

     Purchase accounting amortization represents amortization of intangible assets resulting from our various acquisitions and negatively impacts our operating income in our Electronic Commerce, Investment Services and Software segments. The quarter-over-quarter increase of $2.8 million is due to the amortization of intangible assets resulting from our acquisitions of Carreker, Corillian and Upstream in the quarter ended June 30, 2007.

Segment Level Purchase Accounting Amortization (000’s)

     Incremental purchase accounting amortization from our acquisition of Corillian is included in our Electronic Commerce Division. Incremental purchase accounting amortization from our acquisition of Carreker is included in our Software Division. Incremental purchase accounting amortization from our acquisition of Upstream is included

in our Investment Services Division and the quarter-over-quarter decline is due to intangible assets from prior acquisitions that fully amortized during fiscal 2007.

Impact of Purchase Accounting on Deferred Revenue (000’s)

		September 30,								Change
		2007				2006				$				%
Quarter ended		$	11,786			$	—			$	11,786				—

     Accounting rules, in particular EITF 01-3 “Accounting in a Business Combination for Deferred Revenues of an Acquiree” and EITF 04-11 “Accounting in a Business Combination for Deferred Postcontract Customer Support Revenue of a Software Vendor,” required us to reduce the value of deferred revenue on certain Carreker and Corillian contracts that we assumed with no expected future performance obligations on the date of the acquisitions. While these acquisitions took place in the quarter ended June 30, 2007, our revenues during the quarter ended September 30, 2007 have been impacted by the reduced deferred revenue recorded in purchase accounting. We expect continued impact from these adjustments through fiscal year 2008. The impact will be greater early in the year and will decline as these contracts expire over the remainder of the fiscal year.

Segment Level Impact of Purchase Accounting on Deferred Revenue (000’s)

     Deferred revenue adjustments from our acquisition of Corillian and the RevE consulting practice from Carreker impact our Electronic Commerce Division. Deferred revenue adjustments from our acquisition of Carreker, excluding RevE, impact our Software Division.

SFAS 123(R) — Options Issued Before July 1, 2004 (000’s)

		September 30,								Change
		2007				2006				$				%
Quarter ended		$	137			$	704			$	(567	)			-80.5	%