Have you been paying attention to the press releases from the Internet banking vendors, GonzoBankers? Neither have I, but I did check out their earnings releases for June and it seems… drum roll please… that the adolescents of the bank technology industry have moved full swing into the pubescent throes of pimply-faced profitability. You heard me – black ink at the bottom of the page for most of the Internet players that have survived through 2Q04.
I’m not talking profitable like the Internet players used to report it. Remember the days when they with great pride reported positive EBITDAOE (Earnings Before Interest, Taxes, Depreciation and All Other Expenses) and waited for their stock prices to climb? Well, now that the Internet players are enjoying a taste of the real stuff, the once useful accounting smoke and mirrors doesn’t seem so necessary.
Let’s take a walk through a few of the bigger names out there:
Digital Insight – DI is the most surprising story of newfound profitability. For the first six months of 2004, DI’s revenues grew to $92.5 million, an increase of 27 percent over the same period in 2003. Over the same period, the firm’s profitability grew from $6.4 million to $8.7 million, an increase of 36 percent. I am impressed with DI’s ability to continue to bring some improving and semi-respectable numbers (good trend, average margins at best) despite many analysts being so decidedly down on the company.
What would concern me as a client or potential client of DI follows:
DI is the most visible Internet banking company going, but I’d feel a lot more comfortable as a potential buyer or an existing customer once this company develops a viable in-house solution (to help offset what is bound to be a continuing, significant margin crunch for ASP delivered services), learns to successfully sell Magnet to the upper end of the cash management market, and completes its online lending offering with some kick-butt success stories to brag about.
Corillian – Emboldened by the headline-grabbing Wachovia signing, Corillian improved six-month revenues for 2Q04 to $24.1 million, an 8 percent increase over the same period last year. Through the first six months of 2003, two Corillian customers represented a combined 25 percent of revenues. The bad news is that for the same period in 2004, two customers comprised a combined 38 percent of revenues. This kind of customer concentration would scare the holy bejeezus out of me if I was not one of the two customers who hold the company by the, uh, neck.
But Corillian continues to cut costs and improve margins. Six month net income for June 2004 was reported at $4.1 million, a $2.7 million (193 percent) improvement over the same period in 2003. While the percentage increase is impressive, this is a firm that is just now beginning to show signs of being better than a break-even company. The fact that a platform upgrade for an existing client (though a significant one in $21B Hibernia NB) was the second highlighted bullet point in Corillian’s 2Q04 earnings press release was telling, to say the least. When I see a renewal or upgrade for an existing customer highlighted in a press release, right or wrong I think pipeline problem. It’s like bragging to your poker buddies about scoring with your wife.
Our clients and associates who use Corillian report rich functionality and some serious ability to customize to the nth degree, but don’t hold your breath or close your checkbook when it comes to implementation. The Wachovia implementation could take this company a long way in proving or dispelling this reputation.
S1 – After losing what in 2003 was $43 million in revenue from Zurich Insurance Company and the reduction of revenues from its other major customer, State Farm, S1 reported revenues of $119 million for the first six months of 2004. This represents a decrease of $14 million, or 11 percent, during the same time period in 2003. Most of this reduction came in the form of lower license and data center fees. (The only major revenue line item to grow comparatively over the first two quarters of the year was support/maintenance.)
However, the resulting reduction in direct professional services and data center costs and the near elimination of the company’s infamous merger/restructuring and intangible asset amortization costs rallied to leave the company at slightly better than break even for the first half of the year. S1 reported a net profit of $1.1 million for the first six months of 2004, versus a net loss of $35 million through 2Q03.
In my last review of S1, I slammed the company for the announcement that it was going to capsize the old Q-Up product in favor of a dumbed-down version of its large bank Internet banking product. Let me now applaud S1 for reversing this decision (and at the same time acknowledge that my criticism of S1 had less than nothing to do with its decision!).
S1 is putting a lot of eggs into its S1 Enterprise Platform basket, with the goal of truly integrating through a common platform all of an institution’s Internet banking, small business cash management, corporate cash management, and branch automation functions. While the company has begun to sell items off of the Enterprise menu and has announced a new version of the platform this summer, S1 does not yet have a poster child for utilizing all of the pieces of the Enterprise puzzle. What this company truly needs is a glowing success story, full of measurable and sustained benchmark data, that a high profile bank executive will attribute to implementing the Enterprise Platform. It will take some time for such numbers to carry much credibility, but S1 has proven time and again that it is nothing if not patient.
Online Resources (ORCC) – Despite losing big name customers Cal Fed and First Virginia Bank to acquisition in 2003, ORCC managed to keep revenue for the first two quarters of 2004 ($19.8 million) roughly equal to that of the first half of 2003 ($19.4 million). ORCC was the first of the major Internet players to realize profitability, and it remain profitable today, though marginally less so than in the past. ORCC reported net profits through 2Q04 of $1.62 million versus $1.98 million through 2Q03, an 18 percent contraction.
ORCC decided to fix price its Internet banking services and bank on the revenue increase from increased bill payment usership. The result was a 31 percent drop in Internet banking revenues from $2.3 million in the first half of 2003 to $1.6 million for the first two quarters of 2004. However, bill payment revenue jumped 40 percent to $13.1 million during the same time period.
Based on sheer scale, the drop in revenues for existing Internet banking customers should lag the increase in revenues from the signing of new end users in bill payment and net new signings at banks that are attracted to the company’s fixed pricing on Internet banking. With Internet banking such a relatively small portion of its revenues, ORCC could likely give away Internet banking and live nicely on bill pay growth if bill pay margins stay flat or go up. The problem is, we all know in which direction bill pay margins are likely to head as banks and credit unions are increasingly pressured to provide bill payment services to their customers at no charge.
Not a single one of these vendors is out of the woods yet. Not by a long shot, Chachi. But it is time we acknowledge the profitability that the Internet banking crowd has begun to enjoy, a success that many, including myself, felt would not happen this soon or in such a widespread manner across the specialty vendors.
That said, the Internet banking vendors would be wise to turn their attention from their small group of specialty players and focus on the group that truly threatens their long term viability – the core players. The core players have developed their own Internet banking systems that are functionally viable, relatively inexpensive and tightly integrated. How many of the Internet specialists can truly boast even two of those three attributes?