Electronic Clearing House (ECHO) Announces First Quarter Fiscal 2006 Results

Electronic Clearing House, Inc., a leading provider of electronic payment and transaction processing services, today reported financial and operating results for the three months ended December 31, 2005.

“We are very pleased with our first quarter results which benefited from record growth in both our bankcard and transaction services and check-related businesses,” said Joel M. Barry, Chairman and Chief Executive Officer of Electronic Clearing House, Inc. “The unique value proposition ECHO brings to its customers provides us with a great opportunity from which to build an even stronger, more competitive payment processing platform.

“By successfully implementing our growth plan while also focusing on completing several infrastructure enhancements that will help improve our operating leverage, we feel confident that we can deliver above-average growth and improved shareholder value.”

Fiscal 2006 First Quarter Financial Highlights
Total revenue for the first quarter of fiscal 2006 was $16.9 million, an increase of 32.6%, versus $12.8 million in the prior year quarter and an increase of 11.4%, as compared to $15.2 million in the fourth quarter of fiscal 2005. The increase in total revenue was primarily attributed to a 47.9% bankcard processing volume growth and check services revenue growth as compared to the same period last year.

Revenue from bankcard processing and transactions grew 37.0% from $9.2 million in the first quarter of fiscal 2005 to $12.6 million in the first quarter of fiscal 2006, as compared to $11.5 million in the fourth quarter of fiscal 2005. The increase in the Company’s bankcard processing and transaction revenue resulted from a mix of organic growth and from enhanced marketing initiatives. Bankcard processing and transaction revenues accounted for 74.3% of total Company revenues in the first quarter of fiscal 2006.

Check-related revenues increased 21.5% to $4.3 million for the three months ended December 31, 2005, versus $3.6 million in the prior-year quarter and grew 16.8% from $3.7 million for the three months ended September 30, 2005. The increase in the Company’s check-related revenue resulted from a 15.2% increase in Automated Clearing House (ACH) processing revenue, a 22.0% increase in check verification revenue, and a 72.8% increase in check collection revenue. The Company processed 9.8 million ACH transactions in the first quarter of fiscal 2006. Check-related revenues accounted for 25.7% of the Company’s total revenues in the first quarter of fiscal 2006.

Gross margin declined to 34.2% in the first quarter of fiscal 2006, compared to 36.0% in the same quarter last year, but increased slightly from 33.6% in the fourth quarter of fiscal 2005. The year-over-year decrease in gross margin was primarily related to the presence of several high-volume merchants in the Company’s revenue mix which receive better pricing in exchange for ECHO’s support of a higher volume of transactions.

Other operating costs increased slightly, from $1.33 million, or approximately 10% of total revenues, in the first quarter of fiscal 2005, to $1.34 million, or approximately 8% of total revenues, in the same quarter of fiscal 2006.

Research and development expenses increased to $479,000, or 3% of total revenues, for the quarter ended December 31, 2005, compared to $448,000, or 4% of revenues, for same period last year. The Company anticipates a similar level of R&D investment throughout fiscal 2006.

Selling, general and administrative (SG&A) expenses increased 6.7% from $2.7 million, or approximately 21% of total revenues, in the first quarter of fiscal 2005, to $2.9 million, or approximately 17% of total revenues, for the first quarter of fiscal 2006. The increase in SG&A expenses on an absolute dollar basis was primarily attributable to an increase in stock-based compensation expense, higher cash compensation expense and increased legal expense related to the Company’s ongoing patent litigation claim, which is expected to go to trial in April 2006.

As a result of the adoption of SFAS No. 123R effective October 1, 2005, ECHO reported a stock compensation expense of $218,000 in the first quarter of fiscal 2006. The Company’s stock compensation expense was not material in the first quarter of fiscal 2005.

Operating income for the quarter ended December 31, 2005 was $1.1 million, versus $87,000 in the same period last year and $651,000 in the fourth quarter of fiscal 2005. The Company reported net income of $592,000, or $0.09 per share on a fully diluted basis, in the first quarter of fiscal 2006, versus $52,000, or $0.01 per share on a fully diluted basis, in the first quarter of fiscal 2005. In the fourth quarter of fiscal 2005, ECHO reported net income of $404,000, or $0.06 per share on a fully diluted basis.

ECHO’s balance sheet remains healthy, with $6.9 million in unrestricted cash and cash equivalents, $9.4 million in working capital, $657,000 in long-term debt and capital leases and $18.9 million in stockholders’ equity at December 31, 2005.

Business Outlook
As detailed in its January 18, 2006 press release, the following estimates are based on ECHO’s current expectations for the 2006 fiscal year ending September 30, 2006. These statements are forward-looking and actual results may differ materially as a result of factors referenced in the safe harbor section at the end of this press release.

For the 2006 fiscal year, ECHO is targeting total revenue growth in the 17% to 24% range, driven by 18% to 25% growth in its bankcard business and 15% to 22% growth in its check processing business. The Company said that it believes its fiscal 2006 revenues will be at the high end of the previously mentioned range. The Company also reiterated that fiscal 2006 margins will likely be impacted by the revenue contribution from card-not-present transactions, offset by ECHO’s new third-party reseller strategy.

Net income in fiscal 2006 is expected to range from $1.5 million to $2.5 million. This estimate includes an anticipated stock compensation expense of approximately $900,000 as a result of the Company’s adoption of SFAS No. 123R and expected legal expense of approximately $1.0 million.

Conference Call
The Company will host a conference call at 1:30 p.m. PST (4:30 p.m. EST) today to discuss first quarter fiscal 2006 results. To participate in the conference call, please dial the following number five to ten minutes prior to the scheduled conference call time: (800) 218-8862. International callers should dial (303) 262-2125. There is no pass code required for this call. This conference call will also 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.