Electronic Clearing House (ECHO) Sees Earnings Slip in Fiscal Q3

CAMARILLO, CA – Electronic Clearing House, Inc. (NASDAQ: ECHO), a leading provider of electronic payment and transaction processing services, yesterday reported financial and operating results for the three months ended June 30, 2005.

Third Quarter Highlights:

• Total revenue increased 15.6% to $14.3 million
• Bankcard and transaction processing revenue advanced 11.1% to $10.6 million
• Check-related revenue grew 30.5% to $3.7 million
• ACH transactions processed increased 29.5% to 7.9 million transactions
• Gross margin from processing and transaction revenue was 36.3% for the current quarter, versus 36.5% for the same period last year
• Diluted EPS of $0.06, as compared to diluted EPS of $0.09 in third quarter (Q3) 2004

“Overall, we are pleased with our two primary business segments’ performance at this stage in the fiscal year,” stated Joel M. Barry, Chairman and CEO of Electronic Clearing House, Inc. “However, abnormally high legal and regulatory compliance costs continued to impact ECHO’s profitability, but we expect that legal expense related to a patent lawsuit will decrease in the second half of calendar 2005.

“Our main corporate priority for the balance of this year remains focused on revenue growth, which we believe will lead to enhanced profitability once legal and regulatory costs normalize and the Company’s ongoing IT initiatives are implemented to reduce processing costs for our card-based transactions.

“As we expected, ECHO’s bankcard business returned to its historical pace of growth in the third quarter, which we plan on maintaining going forward. We believe that the additional sales resources devoted to the division and more targeted marketing efforts brought its performance back in line with our internal plans.

“Our check business continues to experience good growth. The Visa POS Check Service program now connects to upwards of 40% of personal checking accounts in some parts of the nation. Combining this fact with the positive, empirical feedback that we are receiving from current program participants on the overall value of the program, we believe Visa’s increased connectivity and ECHO’s proven performance will become very compelling reasons for major retail chains to participate in the Visa POS Check Service program.”

Third Quarter Financial Highlights
Total revenue for the third quarter of fiscal 2005 (Q3 2005) was $14.3 million, an increase of 15.6%, versus $12.4 million in the prior year quarter. The increase can be primarily attributed to the 11.1% growth in bankcard processing revenue and 30.5% revenue growth in the check services business segment as compared to the same period last year. This growth has occurred organically from our existing merchants and from other marketing initiatives.

Bankcard processing and transaction revenue was up by 11.1% from $9.5 million for the prior year quarter to $10.6 million in Q3 2005. This revenue increase was mainly attributable to organic growth and new merchants generated from other marketing programs.

Check-related revenues increased 30.5% to $3.7 million, or 25.9% of total revenues, for the three months ended June 30, 2005, compared with $2.8 million, or 23.0% of total revenues, in the prior-year quarter. This was attributable to the increase in ACH processing, which advanced 29.5% for a total of 7.9 million transactions in the quarter ended June 30, 2005, as compared to 6 million in the prior year quarter.

Gross margin from processing and transaction services remained relatively consistent at 36.3% for the current quarter as compared to 36.5% for the same period last year. This slight decrease was from a higher commission expense that was offset by relatively fixed data center processing costs.

Other operating costs, such as personnel costs, telephone and depreciation expenses increased 20.4%, from $1,240,000 in the third quarter of 2004 to $1,493,000 for the current fiscal quarter as a result of the increase in personnel costs and telephone expenses.

Research and development (R&D) expenses remained relatively constant for the quarter ended June 30, 2005 at $354,000 as compared to $363,000 for the same period last year. We anticipate that this level of investment will continue throughout the remainder of this year.

Selling, general and administrative (SG&A) expenses increased 42.6% from $1,880,000 in the third fiscal quarter of 2004 to $2,680,000 for the current fiscal quarter. This $800,000 increase was primarily attributable to: 1) $518,000 of legal expense primarily related to a patent litigation claim; and 2) approximately $100,000 in one-time professional service expenses. As a percentage of total revenue, selling, general and administrative expenses increased from 15.2% in the third fiscal quarter of 2004 to 18.8% in the quarter ended June 30, 2005. As a result of the completion of the discovery and deposition phase of the patent lawsuit in July 2005, legal expenses related to the patent lawsuit should decrease for the second half of 2005, until the case gets closer to trial in April 2006.

Operating income for the quarter ended June 30, 2005 was $703,000 as compared to operating income of $1,082,000 in the same period last year. The decrease in operating income was primarily due to the increase in SG&A expenses.

The Company reported net income of $433,000, or $0.06 per share on a fully diluted basis, in the Q3 2005, as compared to $144,000, or $0.02 per share, in the second quarter of fiscal 2005, and $651,000, or $0.09 per fully diluted share, in the third quarter of fiscal 2004.

“ECHO’s balance sheet remains strong, with $6.8 million in cash and cash equivalents, $7.6 million in working capital, $766,000 in long-term debt and capital leases, and $17.3 million in stockholders’ equity as of June 30, 2005,” emphasized Mr. Barry.

Business Outlook
“For the fourth quarter and full-year of fiscal 2005, we maintain our prior forecast of double digit revenue growth in both of our business segments,” concluded Mr. Barry.

Conference Call
The Company will host a conference call at 1:30 p.m. PDT (4:30 p.m. EDT) today to discuss third quarter FY 2005 results. To participate in the conference call, please dial the following number five to ten minutes prior to the scheduled conference call time: (800) 399-7496. International callers should dial (706) 634-6508. There is no pass code required for this call. This conference call will be broadcast live over the Internet and can be accessed by all interested parties on the Investor Relations section of ECHO’s website at www.echo-inc.com.

About Electronic Clearing House, Inc. (ECHO)
ECHO (www.echo-inc.com) 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.