Electronic Clearing House Announces Fiscal Q2 2007 Result

Electronic Clearing House, Inc. reported financial and operating results for the three months ended March 31, 2007.

Second Quarter Highlights:

Financial highlights for the second quarter of fiscal 2007 as compared to the same period last year are as follows:

• Total revenue increased 4.0% to $20.0 million from $19.2 million
• Gross margins from processing and transaction revenue decreased to 30.2% from  32.8%
• Operating loss was $3.2 million, due to a number of one-time expenses 
• Diluted net loss per share was $0.29 as compared to diluted net income per share of $0.06
• Bankcard and transaction processing revenue increased 11.5% to $16.4 million
• Bankcard processing volume increased 13.3% to $525.4 million
• Check-related revenue decreased 20.1% to $3.6 million
• ACH transactions processed decreased 23.6% to 6.9 million

“During the second quarter, ECHO management dedicated a substantial amount of time and resources to issues that diverted our attention from furthering our core business, namely our terminated merger with Intuit and our participation as a witness in the federal investigation related to our Internet wallet business,” said Joel Barry, Chairman and Chief Executive Officer of Electronic Clearing House, Inc. “This impeded our progress in implementing operational initiatives and developing our new business pipeline. Additionally, we incurred substantial expenses in the quarter related to these issues which affected our bottom line results.
 
“We’re pleased that in spite of the issues we faced in the second quarter, our revenue increased 4% year-over-year. The fundamentals of our business remain solid and we have resumed our focus on growing our core business. We expect it will take a couple of quarters to regain momentum.  Our strong balance sheet and our comprehensive payment processing solutions position us well to capitalize on our long-term growth opportunity.” 

Fiscal 2007 Second Quarter Financial Results

Revenue
Total revenue for the second quarter of fiscal 2007 increased 4.0% to $20.0 million from $19.2 million for the same period last year.  Bankcard revenue increased 11.5% to $16.4 million from $14.7 million in the second quarter of fiscal 2006 due to organic growth from existing merchants and several new merchants with high volume processing. This increase was offset by a 20.1% decline in our check services business, primarily reflecting the wind-down of our Internet wallet business.

Gross Margin
Gross margin declined to 30.2% for the quarter from 32.8% for the same period last year, due primarily to a 20.1% decrease in check-related revenue which generally has a higher gross margin than bankcard revenue.

Expenses
Total operating expenses increased 25.6% to $23.2 million in the second quarter of 2007 as compared to $18.4 million for the comparable 2006 quarter.  Included in the operating expenses are approximately $4.1 million of one-time expenses.

Processing and Transaction Expenses: Processing and transaction expenses were $13.9 million in the second quarter of 2007 as compared to $12.9 million in 2006, primarily due to increased bankcard processing revenue.

Selling, General and Administrative Expenses: Selling, general and administrative expenses increased 27.8% to $3.5 million from $2.8 million in the second fiscal quarter of 2006.  This was primarily attributable to increased salaries and bonuses of $291,000; an increase in stock compensation expenses of $97,000; and a non-recurring expense of $602,000 to investigate and respond to a security incident.  The investigation involved unauthorized online system access and concluded that no files had been downloaded during the incident. 

Other Operating Costs: Other operating costs increased 8.5% to $1.6 million for the current fiscal quarter from $1.5 million in the second quarter of 2006.   

R&D Expenses: Research and development expenses increased to $542,000 in the current year quarter from $394,000 for the quarter ended March 31, 2006.  The Company anticipates making continued investments in its IT initiatives and expects research and development expenses to remain at current levels for the remainder of the 2007 fiscal year.

Legal Settlements: The Company also incurred approximately $2.9 million in one-time legal settlement expenses during the quarter.  These include a $2.3 million civil disgorgement payment made in connection with a government non-prosecution agreement and $589,000 in legal expenses associated with the resolution of this matter.  

Merger Related Costs: The Company incurred approximately $620,000 in non-recurring legal, professional and other fees and expenses related to its proposed merger with Intuit which was mutually terminated on March 26, 2007. 

Operating Loss
Operating loss for the quarter was $3.2 million as compared to operating income of $781,000 in the same period last year, primarily due to the increases in general and administrative expenses, legal settlements and merger related costs incurred during the quarter. 

Net Loss per Share
Net loss was $0.29 per diluted share for the second quarter as compared to net income of $0.06 per diluted share for the same period last year. 

Balance Sheet Summary
ECHO’s balance sheet remains strong, with $9.8 million in cash and cash equivalents, $1.2 million in restricted cash, $10.8 million in working capital, only $302,000 in long-term debt, and $21.8 million in stockholders’ equity at March 31, 2007.