Official Payments: Internet Value Play?

Last week, the worst nightmare struck Official Payments (OPAY).
Not only did the company miss its quarter — but did so by a huge margin. In
an environment that is hostile to Net stocks, it was no surprise that
Official Payments plunged, falling $11-1/2 to $5-1/4.

Yesterday, I met with the CEO, Tom Evans. His company allows people to make
government payments (such as for income taxes, property taxes, parking
violations and so on) using credit cards.

Of course, the big question was: What the heck happened last quarter? As is
the case with any of these types of events, there were many reasons.

However, there is one reason that explains much of it. In terms of the IRS
returns, there were over 160,000 transactions processed by Official
Payments. This amounted to over $500 million in payments and $13.7 million
in revenue to Official Payments. Basically, this was below analyst
estimates.

Then again, these estimates were based on a pilot program from last year.
Given the fact that Official Payments is in a pioneering business, it is
exceedingly difficult to make good projections.

In light of this, the most important question is: Does Official Payments
represent a good investment at its current price? I think it does.

First of all, the service is very attractive to governments. They get paid
and it is done electronically, which is very cost-effective. What’s more,
governments do not need to build the infrastructure to carry out the
transactions. Think of it as an Application Service Provider (ASP) for
governments.

Speaking of infrastructure, Evans says that “We already have made those
investments. Now it is a matter of scaling the business.”

In fact, the company does not require a high burn rate. For example,
advertising is not critical. Why? Because partners will advertise for the
company. The IRS placed contact information for Official Payments on 140
million instruction booklets. It was free. Or, take American Express. The
company sent out 16 million bill stuffers with Official Payments
information.

Actually, credit card companies love Official Payments. After all, are you going to stiff Uncle Sam by
paying taxes using your credit card?
Very few people do.

Official Payments’ contract with the IRS required a tremendous amount of
work. The IRS has strenuous qualifications, such as for security,
scalability and cost-effectiveness. By meeting these standards, Official
Payments has few problems meeting the requirements with state and local
governments. Further, the IRS contract gives Official Payments a high-degree
of credibility. For example, in the last quarter, the company increased its
customer count to 496, which is up from 344 in March of last year.

It would also not be surprising to see Official Payments strike deals with
key partners. These would include such companies as Intuit and H&R Block, as
well as portals.

All in all, it’s a model that makes lots of sense. Interestingly enough, the
company has $3.5 of cash per share. So, the company’s operations are being
valued at $1.5 per share. It definitely looks like a bargain.


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