ECHO Announces Second Quarter FY 2004 Results

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. 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.