Metavante Technologies, Inc. Q3 2008 Earnings Call Transcript

| About: Metavante Technologies, (MV)

Metavante Technologies, Inc. (MV) Q3 2008 Earnings Call October 28, 2008 8:30 AM ET

Executives

Kirk Larsen - Treasurer and VP of IR

Frank Martire - President and CEO

Mike Hayford - COO

Tim Oliver - CFO

Analysts

Greg Smith - Merrill Lynch

Dave Koning - Robert W. Baird

Brett Huff - Stephens Incorporated

Tim Willi - Avondale Partners

Tien-Tsin Huang - JPMorgan Securities

John Kraft - D.A. Davidson & Co.

Operator

Thank you for holding and welcome to the Metavante Technologies quarterly conference call. I need to remind everyone that today’s conference call is being recorded. Later in the call, we will open up the lines for questions. (Operator Instructions)

At this time I would like to turn the call over to Kirk Larsen, Metavante Technologies Treasurer and Vice President of Investor Relations. Mr. Larsen, please go ahead.

Kirk Larsen

Thank you, [Kanisha]. Good morning and thank you all for joining us for Metavante Technologies third quarter earnings release conference call. Our results were released earlier this morning and have been posted into our website at www.metavante.com. A webcast of the audio portion of this call and all the charts that we reference during the call are available on that website. They will remain there for the next month.

With me today are Frank Martire, President and Chief Executive Officer; Mike Hayford, Chief Operating Officer; and Tim Oliver, Chief Financial Officer. Our agenda includes opening remarks by Frank, and then Tim will review the third quarter results for 2008. We will give ample time at the end of the call to take your questions and ask that you self-limit to two questions to allow broader participation.

As a reminder, our comments today will include statements related to the expected future results of Metavante and are therefore forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.

Our actual results may differ materially from our forecasted projections due to a wide range of risks and uncertainties that are described in our earnings release and detailed in all of our SEC filings.

In addition to customary GAAP measures, our presentation also includes certain non-GAAP financial measures. All information should be read in conjunction with our SEC filings.

With that, I will turn the call over to Frank.

Frank Martire

Thank you, Kirk and thanks to those of you, who are joining us on the phone. I will keep my remarks brief to make sure that we leave plenty of time for Tim to walk you through the quarter and to then take your questions.

Our third quarter exceed our expectations in nearly every regard. We posted very solid operational results to sustain the momentum we have built over the last several quarters and allow us to deliver favorable year-over-year increases against our toughest 2007 comps. For the quarter, revenue increased by 4% and operating margins expanded by 1.8 percentage points.

For the fourth consecutive quarter as a separately traded company, we demonstrate the strength of the Metavante business model, a model that benefits from the revenue base that is both highly recurring and very diverse and from a scalable cost structure that generate strong incremental margins.

Through the first three quarters of 2008, revenue has grown by about $85 million or more than 7% with significant contributions from both of our reported segments. Higher transaction volumes and core processing revenues have been more than sufficient to offset flattish results in Professional Service and Software sales and profitability has also been strong.

The combination of volume leverage, diligent cost discipline and the success of last years cost actions at our Image business have all contributed to year-to-date operating income growth of 12% and margin expansion of 1.3 percentage points.

With three strong quarters already behind us and sufficient visibility into the remainder of 2008, we now expect to deliver a full year revenue growth of approximately 7% with organic growth of 6% which is at the very high end of our previous guidance. We also now expect to exceed the high end of our previous guided ranges for both EPS and cash EPS.

While, there is still about 60 days of hard work ahead of us to get the year closed out, it should be apparent that 2008 will be another good year for Metavante. This performance is particularly impressive, when considering the context of a persistent difficult and in many regards unprecedented market environment. It is a credit to the remarkable efforts of our employees and depth of our client relationships.

Our plan for 2008 has thus far correctly identified environmental challenges and included sufficient operational contingencies to allow us to meet our commitments to our investors. As we launched the planning process for 2009 we remain focused on two things helping our clients navigate a tough economic environment and driving long term value creation for our investors.

For our clients, we will continue to invest in our platforms to ensure consistency, reliability, and security. We will develop new products and capabilities that help them compete. We will further improve integration across our product portfolio. We will enhance our selling organization to make us easier to do business with and we will attract and retained a very best people to help us get all of this done.

For our investors, we will sell aggressively to gain share of wallet and market share. We will continue to drive costs productivity and we will develop contingency plans that allow us to adapt to changing market conditions, preserving profitability.

So, in summary, the environment is both challenging and dynamic and we do not expect that to change in the short run, but rather than try to predict things that are outside of our control we will continue to execute against those things that we can control.

The combined strength of our high recurring revenue business model, our diverse and loyal client base and our exceptionally capable employees gives me confidence that we will continue to deliver solid performance even in this economic down cycle.

With that, I will turn the call over to Tim, so he can walk you through some of the details for the quarter.

Tim Oliver

Great. Thank you, Frank, and good morning to all of you, who have called. My comments today will reference the charts provided on our website. These charts summarize the data provided as attachments to the earnings release and then have some analytics. Since Kirk has already reviewed the cautionary language on both Safe Harbor and Reg G, I will move right to slide one, titled Q3 Results Summary.

In general, our results for the quarter exceeded both our expectations and the qualitative guidance we provided to you last quarter. Three months ago, we warned that the combination of a particularly rich revenue mix and the timing benefits related to our separation transaction in the year ago third quarter would cause a very difficult year-over-year comparison.

We also reminded you that the absence of any seasonal uplift in Q3 would cause results to be down somewhat sequentially versus the first half of this year. Although the effects did all occur, persistently strong transaction volumes and a much better revenue mix than we planned allowed us to deliver strong results.

Walking down the P&L then, revenue in the quarter was $425 million, an increase of 4% compared to last years third quarter. Organic revenue growth is also 4% driven primarily by increased volume in payment transactions. The two relatively small acquisitions from earlier this year were not large enough to move the needle on our growth rate this quarter. Segment Operating Income was $123 million up 11% from last year. I will provide some color on the sources of margin expansion, when I get to the segment details.

Corporate and other costs were $34 million, which is about $8 million higher than our run rate this year and significantly higher than last year. $5 million of unrealized losses on our vested equity warrants in Temenos and higher external professional services expenses explain the increase. Because we were required to account for those warrants as a derivative, changes in Temenos stock price does inject some volatility into our P&L.

You will remember that last quarter; we recorded a benefit from these warrants equal to about $2.4 million. While the value of these warrants does represent some risk going forward, the remaining value on our books is only $2 million. Intangible amortization was up slightly due to additional intangibles that we added to our balance sheet for the acquisitions of Nomad and RepayMe.

The next line is transaction-related costs, which were generated by the separation last year from M&I. The amount in last years third quarter actually netted to a reduction of expense due to cost allocation adjustments between M&I and Metavante that were done in advance of a spin.

Interest expense increased $20 million from last year due entirely to our new more levered capital structure following our separation. The tax rate you will calculate is about 38% consistent with the year-to-date rate, but slightly higher than the rate in the third quarter last year. The rate was higher than the third quarter of 2007, as a result of the expiration of the research and experimentation credit.

As you will recall, our guidance had been assuming that the R&E credit would be extended during 2008, which would result in a full year rate of 37%. Our assumption was correct; the extension of the credit did occur in October and will result in a full year benefit being recognized in our fourth quarter.

Therefore by recording the full year benefit in one quarter to catch up our rate, the effective rate in Q4 will be significantly lower than the rate over the previous three quarters. Finally our share count for the quarter was 120 million shares. The resulting math generates GAAP EPS of $0.29 a share and cash EPS of $0.35 a share.

Moving to slide two, titled Third Quarter 2008 Net Income Walk. This slide is a graphical depiction meant to provide you some context, when thinking about net income relative to our prior year results.

This chart starts with GAAP reported results for 2007. The next three red bars size the impact of things that are unrelated to operational performance and their complicate comparisons.

They include the higher interest expense related to our more levered post-spin capital structure; the effect of a 38% tax rate as compared to 37% last year; and the absence of transaction-related costs related to our separation from M&I that were recorded in the third quarter last year and obviously did not recur this year.

After considering these adjustments, net income is down slightly. More than all of this decrease in income is attributable to the non-operating noise that went through the corporate line this quarter. As I said on the first slide, the contribution to net income provided by operations was actually up double digit.

Slide three, titled Q3 results Total Company, shows the revenue and adjusted EBITDA for the trailing five quarters. The chart on the left depicts a steady upward trend in revenue. As I described earlier, revenue in this quarter was up 4% compared to the third quarter of last year. Year-to-date revenue growth is 7%. EBITDA for the quarter was down 5% compared to the third quarter of last year due to the higher non-operating costs in the corporate line.

Slide four is titled Q3 Results: Financial Solutions Group. It shows the trailing five quarters of revenue and segment operating income for the Financial Solutions Operating segment. Revenue at FSG increased 1% compared to the third quarter of last year.

On a year-to-date basis, FSG has grown 5% a rate that we think is very solid. The relatively low growth rate for this quarter is due to the shape of last year’s revenue curve. The more linear performance of the unit in 2008 versus the backend loaded 2007 caused easy comparisons in the first half of this year and a much more difficult one in the second half. We do expect higher reported growth at this segment in successive quarters.

Segment Operating Income increased 12% compared to the third quarter of last year resulting in margin expansion of a very strong 2.6 points against a particularly low margin rate in the previous year. The increase in operating income is attributable to better revenue mix, which more than offset planned increases in discretionary spending for new product development and price.

On a year-to-date basis, margin rates are still about 80 basis points behind last year’s level. As revenue growth and productivity have started to offset the discretionary increases in growth spending, FSG has posted steady sequential improvement in margin rate that is now pushed rates back above 24% a rate more indicative of the average rate over the last couple of years.

Slide five, called Q3 Results: Payment Solutions Group. It provides the same data for other operating segment. PSG's revenue increased 7% compared to last year's third quarter. The revenue growth is primarily attributable to higher payment transaction volumes with 1 point of lift coming from the acquisitions of Nomad and RepayMe earlier this year.

Segment Operating Income increased 11% compared to last year, resulting in margin expansion of 1.2 points. This strong performance can again be attributed to two things, the benefit of actions taken in the second half of last year to improve the cost structure and performance in the Image business and operating leverage that typically accompanies top line growth in this business.

Slide six is titled Free Cash Flow Walk. It summarizes the drivers of our $124 million of free cash flow for the first nine months of 2008. Looking at the year-to-date, cash flow summary as compared to the last year, two items require explanation. The $19 million change in other non-cash items is due to unrealized losses on the Temenos warrants; higher non-cash stock based compensation expense; the amortization of our debt issuance costs; and a non-cash Firstsource gain in the first nine months of 2007.

The use of cash in the generically named changes in assets and liabilities and 2008 is the result of timing. Timing includes the calendarization of interest payments and tax payments, the runoff of deferred revenue and other accrued liabilities.

Capital expenditures for the first nine months of 2008 were relatively similar to the previous year level. Our year-to-date CapEx is well below our full year guided run rate; and while our CapEx budget is somewhat backend loaded, we now expect spending for the full year to be less than $150 million.

The net result is free cash flow for the first nine months of 2008 of $124 million or 115% of net income. The timing effect of other people’s money on our results was a benefit of about $12 million over those same nine months.

Slide seven, titled 2008 Outlook summarizes our current outlook and compares it to our previous guidance. Starting then with revenue, consistent with our performance for the first nine months and reflecting our current view of [to-go] revenue left for the fourth quarter, we now believe we will post approximately 6% organic growth for 2008, which is at the high end of our previous guided range of 4% to 6%.

Moving down to Segment Operating Income, we now expect margin expansion of more than one point. The first nine months, we delivered 1.3 points of margin expansion. Considering the combination of expectations for a solid fourth quarter, the $0.89 of GAAP EPS or the $1.06 of cash EPS for the first nine months that are already on the books and the income tax rate expense catch up that is coming in the fourth quarter, we do now expect to exceed the high end of our previous EPS guidance ranges.

Finally, full year free cash flow should still safely exceed the higher end of this net higher income result. While we do not give quarterly guidance, the math gets pretty easy when you are translating annual guidance with only one quarter to go. That being said let me give you some color on what we think the fourth quarter will look like.

The fourth quarter tends to be a strong quarter with some seasonal upside from transaction volumes, healthcare enrollment, year end processing and to a certain extent software and professional services revenue. In a more typical year, this results significantly higher revenue and our highest revenue quarter of the year. It would also result in a somewhat lower margin rates due to a slightly less profitable revenue mix.

In this environment, however, rather than ascribe any predictive value to history, we will rely on a recently completed bottom-ups review. This review suggests that operational results in Q4 should look a lot like Q3 with slightly higher revenue and slightly lower operating margins generating similar profit.

On the non-operating side, we expect the corporate line to return to a more typical run rate and we know that the R&D tax benefit will be booked in Q4. The eventual result of this outlook will be another good year in 2008 for Metavante that meets or exceeds all of the expectations we setout for ourselves and for our investors one year ago next week.

We began to identify difficult market dynamics in the middle of 2007 and we are consistently cautious in our outlook throughout 2008. We prudently planned for tighter capital budgeting and expense constraints at our bank customers that caused decision deferrals and implementation delays.

We correctly forecasted flattish revenue in both software and professional services for this year. We carefully monitored consumers' behavior to anticipate the impact on our transaction-based businesses. This appropriately conservative approach allowed us to proactively execute against our plan rather than react and then walk expectations lower.

Looking beyond the next 60 days, we are not yet ready to give guidance for 2009. We are right now in the heart of our planning process, a process that we will conduct in the same way we did last year. At this point, there is no reason to alter any of our assumptions that we used going into that process.

Our current view of the market environment suggests that the challenges will persist and that caution is prudent; but we have not seen any market deterioration in overall demand. Our recurring revenue base is, well recurring. Our clients continue to invest in technology and transaction volumes in aggregate continued to grow.

That concludes my prepared remarks. Thanks for listening. I think I have answered some of your questions, but I suspect you have others. So, we will open the phones now for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Greg Smith from Merrill Lynch. Please proceed.

Greg Smith - Merrill Lynch

Hi guys. Thanks for the results here.

Frank Martire

Thank you, Greg. Good morning.

Greg Smith - Merrill Lynch

Good morning. Can you just, I know, you are obviously only going to comment so much about '09. But there has been a number of transactions already out there that could potentially have some implications to you guys. Is there anyway to frame, how we should be thinking about, how some of the M&A out there might impact you in '09?

Mike Hayford

Yes, Greg, this is Mike. I'm assuming you are referring to Wachovia and Wells and that Citi deal. Let me just kind of put it in context. So, the large deals that are happening now as well as other deals obviously that happened throughout the year, we continually look at that relative to the impact on our business both current year and subsequent years.

So the one thing I can share is as we look at consolidation in the industry I think we have shared this over the years that is the one challenge we have in terms of organic growth. So, as we look at it ending '08 going into '09, while it’s always a challenge for us. We have had other years, where it's been a bigger challenge going into a budget cycle.

On the three specific deals that are out there, we don't know the outcome. We go into it fairly conservative, assuming we are going to loose some business. On the flip side, there is always opportunities and some of the entities, who are doing the acquiring, actually all the entities doing the acquiring have strong relationships with Metavante. And in some areas, we have relationships with both entities in similar product sets. We would expect obviously to retain that.

And in other areas, we think we will pick up business and in some areas, we expect to lose business. So on balance again, while we are looking at '09 and still going through the planning process, it’s not the worst year we have seen in terms of consolidation. But nonetheless it's going to be an impact, as it is every year heading into that budget process.

Tim Oliver

This is Tim. I mean, I think, where we sit right now relative to last years planning process, the expectations for losses due to consolidation are very similar, very close to one another. And both of those numbers will be well below, where we sat two years ago coming into 2007.

Greg Smith - Merrill Lynch

Okay. Well, that's encouraging.

Frank Martire

And Greg, we have strong relationships with all those clients. So as Mike said, sometimes the revenue mix changes overtime. But the reality is that strong relationship helps us to increase our penetration with each one of those banks.

Greg Smith - Merrill Lynch

And then, Frank, you mentioned, just being very diligent on costs and being able to be flexible if needed. Can you just give us some highlights of how you would approach cost cutting, if there are sort of greater revenue pressures than you might anticipated?

Frank Martire

Yes, I will say a little bit then Mike may add. But you know what? I think the whole key to it is just to be proactive, right? You can't get into defensive posture. But Tim mentioned in his remarks, we looked at the year; we felt it could be a little bit challenging this year, right? And we anticipated that.

So, you take appropriate action, where you need to and it could be many areas of your operating expenses. So you don't have to put yourself in a position, where you have to do something dramatically in a very short time frame. So, I think it’s just managing our expense base each and everyday and not waiting to a single point and time.

Mike Hayford

The key in our business, in a growing business is to not let costs be added before you see the revenue. So we are careful to meter out new spending as we see the revenue come in.

Greg Smith - Merrill Lynch

Okay. And then just on the M&I contract, does that have a termination fee consistent with all your other contracts?

Tim Oliver

Yes. I mean, M&I, we signed as you know last year, seven year deal and just like every other contract, it has termination fees for a early exit.

Greg Smith - Merrill Lynch

Okay. And then just last one for me, you guys didn't mention much on Temenos. You had a nice announcement this quarter. How are you feeling about that relationship and the prospects going forward for the product?

Tim Oliver

Well, we talked about this last time. We are still very excited about the future prospects for Temenos the next-generation core product that we have. The market, there is still a lot of interest in the product and the expectation that you have to go through and update your core systems is still very, very evident. The deal we signed, we signed as part of our T24 relationship with the bank that is introducing a new product into the US marketplace.

So it's a nice add-on for us. The only caution, I would say is the climate has changed and I think, banks are just kind of waiting now at the end of the year looking at, what does the near term future behold? So, while the discussions are going on actively at the IT level and at the organizational layers that are looking to the future those haven’t slowed down.

We do expect that banks might wait a bit for a decision. So, we are still engaged. But probably not quite as optimistic as we were coming out of the second quarter just based on what’s happening with the banks right now.

Greg Smith - Merrill Lynch

Sure, great. Thank you.

Frank Martire

Thank you, Greg.

Operator

And your next question comes from Dave Koning from Robert W. Baird. Please proceed.

Dave Koning - Robert W. Baird

Yes, great job, guys.

Frank Martire

Thank you, Dave.

Dave Koning - Robert W. Baird

And first of all, when we look back about a year ago, when you kind of started giving initial indications on '08, here we sit today with things actually better from an operational standpoint than what you have even expected back then. Certainly we have seen deterioration in the banks market, while your results have been better than expected?

Can you say that, if you didn't get to see externally everything that was going on in the banking environment, are you really get to see, where the invoice is being send out and collecting payments from the banks. Do you think, you could even tell operationally that there was something massively bad going on in the banking industry right now?

Mike Hayford

Well, David, because I think we have talked about this last call and even at the end of the first quarter call. Our customers had been very upbeat and positive and resilient throughout the year. And again, our customer base, we are pretty evenly split amongst large FIs mid tier and community institutions and then we have a fairly large percentage of non-bank revenues coming in.

So, it's a very diverse revenue stream. And as we talk to clients throughout the year, they continued to be not only spending money, but also upbeat. I think to your point, if we were simply sitting in our offices shooting out invoices and collecting the payments, we would say nothing has changed because that’s what we actually see.

We have been cautious throughout the year because like everybody else we are reading the newspapers and watching what’s going on in the world. I do think that the institutions now in particular, I think the biggest thing right now is they are all concerned about what’s going to go on with the government equity infusion into the industry and what that means to them individually, and quite frankly, they don't know yet.

But that’s probably the only thing that right now in the last 30 days, there has been a little bit of what’s going to go on? We still see a fair amount of, we see banks upbeat. We see them buying. I think, a lot of our clients, if you strip out the impact of the balance sheet they are delivering solid results on an operating basis. They are seeing deposits grow. They are seeing their assets grow. Their fee income is holding fairly steady. So yes, I think if you put the paper down and shut the CNN off, we would be pretty upbeat.

Tim Oliver

David you could probably extend that to all three things that really drive demand for us. It’s not just bank spending, is transaction volumes. And to the point earlier made on consolidation, if we turned off CNBC really all three of those phenomenon have been relatively consistent with where we were at the midpoint of 2007.

Dave Koning - Robert W. Baird

Yeah that’s certainly very encouraging. I guess the one other question; I wanted to ask was in the quarter, where there any abnormal license fees or term fees because the margins were so strong? And I am just wondering, can we still see margin progression especially in payments? It looks like payments is going to be up something like 300 basis points in terms of margin, 31% plus or so for the year is shaping up. Can that keep progressing going forward? I guess that was two questions in there?

Tim Oliver

Well, let me break it into even three questions, right? If you look at the shape of the margin curve at FSG, they spend a lot of money early in the year and have been kind of making nice progress back toward the 24% margin rate every quarter as we have gone. And while they had some lumpy performance in margin rate last year due mostly to the phenomenon you just described. They are now on track to post very respectable margins for the year and I think that a nice steady upward trend.

On the PSG side of the house, they have had some buyouts this year that have made their margin lines more lumpy. Now remember about 1.5 of their margin expansion this year will come from improvements at the Image business, right? We took a charge for that last year. We built that in and thus far they have exceeded our expectations for return on that investment.

So, the answer is no. There were buyouts this quarter much like the third quarter of 2007. It was the highest buyout quarter of the year. It will be the case again in Q3. And when we talked to you about Q3, 90 days ago, we thought some of those buyouts would occur in Q4.

So, there was $10ish-million, I'm rounding of buyouts in the 2007 quarter. There was a similar amount of buyouts in the 2008 third quarter that was about half of the buyouts in 2007 and it will be about 30%, 40% of the buyouts in 2008.

Frank Martire

David, as we have talked about for years now; until five years that I know, we continuously attempt to try to improve margins and we have been very successful. In earlier years, they were more quantity, they were larger.

Now we talked about being more modest margin expansions. We will continue to do that albeit maybe more modest. But it's important that we run efficiently and then we get the results in the margin expansion.

Tim Oliver

But to be clear, we always target modest margin expansion. The reason it’s more than modest this year beyond, I think, a little bit better performance than we would have anticipated was that restructuring charge taken in 2007 that’s made the Image business a much more profitable business

Dave Koning - Robert W. Baird

Great. That's great color. Thanks so much.

Tim Oliver

You are welcome Dave.

Operator

And your next question comes from the line of Brett Huff from Stephens Incorporated. Please proceed.

Frank Martire

Good morning, Brett

Brett Huff - Stephens Incorporated

Good morning, guys. Congrats on a nice quarter.

Frank Martire

Thank you very much.

Brett Huff - Stephens Incorporated

Two quick questions focusing on the environment. Can you talk a little bit about which products and the way the products are delivered in terms of what’s selling, what’s hot and what is not kind of?

Mike Hayford

Well I think you can probably expect that institutions, we saw this end of last year and we planned for it this year. We saw it continue throughout the year that the capital projects, the discretionary projects at banks are the one thing that they will evaluate with more scrutiny in a tougher economy.

So given that the things they look for, they look for products that are going to have an impact on their expense savings or they look for products that are clearly going to have an impact on their top line revenue or acquiring clients. So, the things that we are seeing fairly solid in the last 12 months. The Image products actually continue to have very good success.

We have got some products out there that the business case is very demonstratable and kind of a no-brainer. So, the institutions to the extent they can go out and get the capital have done that. We are continuing to sign some deals in that arena. Obviously the movement towards check image, as institutions now get beyond [op] centers and the merchant side and getting into the branches and start to eliminate movement of paper is an area that we continue to see spending.

Some of the branch renewals we see, again, focused on client management and opening new accounts and attracting deposits. So, institutions are still investing in branch infrastructure and the integration of branch front office to back office. The eBanking channel continues to be a pretty strong channel. You see some of the new things like mobile, which are taking off slowly but still institutions use those as a marketing tool and a way to attract a different segment to their clientele.

But you kind of look at it and every cycle, you have different products that lead. And as you can tell by our numbers, we have had fairly consistent across the board there is not a single product I would look at and say it’s just not selling anymore. They are all doing pretty good this year.

Brett Huff - Stephens Incorporated

Okay, that's helpful. And then, can you sort of answer the same question in terms of small, medium, and large banks in terms of your sale success or sort of what the health or the end market is for each of those groups because I know you have a pretty diverse group of customers?

Mike Hayford

I think the thing would be a little different in the smaller, medium institutions obviously our approach to that marketplace and how we sell and then how we manage those relationships and cross-sell it a little different. Obviously, we are in there trying to really take over the bulk of the relationship as the technology provider. So, we would like to get in the door and then up sell hopefully, to a core product or a large payment infrastructure and then cross-sell on top of that.

In the large banks, obviously we are going on the point solutions competing on each transaction. And then we compete on the transaction. Then we compete on relationships and that’s worked out well for us. I don't know that I would say that projects are different size; but Image is selling across the whole spectrum of institutions.

The small guys actually have a little bit of an advantage because they are not dealing with the number. So, they have probably been as aggressive as the large banks in moving to check image. We have seen kind of the inverse affect on risk and compliance, where the large banks have been installing that two, three, four years ago.

The smaller banks are pretty actively engaged in putting that product in. And we put up a hosted outsource version of our software and that is working quite well. So, the size of the projects are different. The large ones tend to be more capital intensive, larger projects. Those are the ones that get more risk of deferral and we have seen a little bit of that. But all in all, all spectrums of our client base are still buying from us.

Brett Huff - Stephens Incorporated

Great. I appreciate the color. Thanks, Mike.

Operator

And your next question comes from the line of [Ken Worlie] from Avondale Partners. Please proceed.

Tim Willi - Avondale Partners

Thanks. Good morning, it's Tim Willi.

Frank Martire

Good morning, Tim.

Tim Willi - Avondale Partners

Good morning. How are you?

Frank Martire

Good.

Tim Willi - Avondale Partners

I just want to follow-up on the last question there. Do you think that what’s going on with risk management and the regulatory environment, do you get any sense that as we go into next year priorities within the banking industry might shuffle a bit? Where regulators, boards of directors, etc., could demand more spending around risk management products, around the balance sheet or credit risk management?

I think, if we think back several years ago, there was a really big focus on stuff around the Internet and money laundering that I think seemed to preoccupy people. I was just curious if you thought that maybe the ground is sort of being laid for a period of time, where banks really address those kinds of issues. And if you think that, do you have products that are higher margin or higher ticket than maybe the typical cross-sell for a bank that would address that need?

Mike Hayford

Tim, this is Mike. I think right now the institutions; there is a lot of focus on day-to-day execution. There is a lot of focus on managing costs and that’s why we see some of the Image products continue to move pretty well. We see some of the customer-facing applications continue to do well.

A lot of our clients are seeing business improvement in their operational numbers because they are picking off customers from some of these large banks that have struggled or some of the large banks that have been involved in transactions. So, they are still very focused on growing their business and delivering solid results.

On the risk and compliance arena, I think, I would agree with the general premise. Although I don't think, we have heard or seen that yet. I think most institutions are waiting for, they are still three, four weeks into understanding the capital infusion that the government is providing and what it means to each of them and which ones are going to participate and which ones are not going to participate.

And then I think we will probably see some feedback later on in terms of what does that really mean for the institutions. But right now, I don't think, we have seen any marked change certainly on the compliance side. On the risk management side, I would expect that we will continue to see some interest or demands for better analytical information, better underwriting data.

And again, I think banks are still in the process of really focusing on day-to-day, month-to-month, quarter-to-quarter. But I think, your premise coming into next year more than likely we will see a little bit more of that.

Frank Martire

Yeah Tim, the reality is they may look for more information on the analytics side. And what are going to do is we will work closely with our clients, right? So, if they are looking to produce reports more often, more frequently, there is a high level of sensitivity or to create new reports that will help them, that’s what we will to in conjunction with them.

Tim Willi - Avondale Partners

Okay. And then if I could on the balance sheet, I apologize if you mentioned this in your earlier comments; I missed it. But could you just talk about sort of the uses of cash, the M&A environment, your thoughts around debt paid down versus trying to hold on to some dry powder for deals that may be out there or could come available. I guess and the timeframe you have some visibility around that topic?

Tim Oliver

Sure. This is Tim. First, let me touch on the debt. We have no inclination to pay our debt down more quickly than we are required to by our debt agreement. We have good money, good, cheap money in this environment; and we have always said that we hope to find ways to spend our cash on growth, looking at organic uses first, and then acquisitions second and that is still our expectation.

From an M&A perspective, I think, your focus in this environment has to go back to what has worked for us very long time, which is smallish bolt-on acquisitions. The average size in the $50 million type range that are easily integrated, that bring good technology , that get us access to customers that we may not have had access to before or a different kind of access and that catalyze our underlying growth objectives.

So we continue to have a very robust pipeline of acquisitions just like that. Technology rich; some of them are make-buy decisions that accelerate our efforts on the growth side. Valuations. I think expectations outside are getting more realistic there. They tend to be out of phase, right. People’s expectations for what their company is worth tend to come down a little bit less quickly than the actual stock price today.

But valuations do seem to be a little more realistic and we are pleased with our robust pipeline. I suspect, we will be able to get a few smallish things done here before the year is out.

Tim Willi - Avondale Partners

Great. Thanks a lot, guys.

Frank Martire

You are welcome.

Operator

And your next question comes from the line of Tien-Tsin Huang from JPMorgan Securities. Please proceed.

Tien-Tsin Huang - JPMorgan Securities

Thanks. Great job again on the quarter.

Frank Martire

Thank you, Tien.

Tien-Tsin Huang - JPMorgan Securities

Let me start. Let me ask a question on the payment side. Can you comment on payment transaction trends throughout the quarter? Specifically how did September maybe the early part of October look in relation to the rest of the quarter?

Tim Oliver

Rather than get that granular or I will give you the quarter end aggregate. We don't tend to micromanage these and we don't tend to be able to really gain much information from weekly data. But debit and bill pay transactions continue to grow nicely and their growth rates are holding up well.

The merchant business has started to show some weakness going into the holiday season and the closed loop prepaid business as well. And then in the government business, there is fewer people paying taxes and they are paying less taxes, and so the government payments to IRS has not grown as quickly as we would have anticipated. But debit and bill pay would probably be the stars.

Mike Hayford

Yeah. One thing you have to keep in mind is, so we are much more debit centric, debit, prepaid debit, bill pay, ACH servicing and also of DDA .And even in a little but of an economic downturn or even a large economic downturn, what we have seen in the past is the debit is more for necessity purchasing and not for luxury goods.

So I think to Tim's point, we have seen debit remained very, very strong throughout the year and we actually expect that to stay relatively strong through the end of the year. Merchant side, which is obviously taking the debit and credit payments, we expect that not to be as robust in the fourth quarter as it may have been in prior years.

And obviously, the closed loop, which is the gift card, we don't expect to be as robust. But the bulk of our payments on the debit side, we are still expecting to have a pretty solid year and solid fourth-quarter.

Tien-Tsin Huang - JPMorgan Securities

Okay, that's good color. Then on the pricing front any noticeable change in pricing on both renewals and new deals?

Tim Oliver

No. As w have talked all year long, we anticipate about 1 to 1.5 of price compression annually across the entire company. And we have said that’s at 1.5 or maybe skewing toward 2% this year primarily due to the fact that customers have come to us and asked us to pre-negotiate contracts before they concluded that mild headwind therefore may carry a bit into 2009.

But that really is what we have seen. And as I think Frank has said over and over again, price compression has a lot more to do with competition than the environment. We have been in a pretty competitive world for several years.

Tien-Tsin Huang - JPMorgan Securities

Right, okay.

Frank Martire

Yeah. I just think the price compression is what we have seen in the past and probably we will continue to see into the future. I mean, it’s real, it’s there, and it's still competitive environment.

Tien-Tsin Huang - JPMorgan Securities

Maybe if I can just sneak in one more, based on what you see today, any reason, why you can't achieve 4% to 6% organic revenue growth again in 2009?

Tim Oliver

Let me dance around a little bit and it will probably only be mildly helpful. We came in with a 4% to 6% target in 2008. We saw very much the same things we are seeing right now. And at the time, we came in with 4% to 6%, some of our competitors were slightly higher and we were cautious.

And when we were on the road in November talking about our new company, we got some pushback on that. I think it’s likely that when we come out with 2009 guidance, we take a very similar stance, meaning we will take everything that we know, including any headwind from consolidation, including the pricing you just spoke of and including the contract value that we have signed this year that we now have on the books. We will extrapolate forward, which is very important to us.

As you know, transaction volume growth rates are probably the most important determinant of our overall growth rate now that payments, is so large and give you guidance that we think is prudently cautious.

And I would say that the 4% to 6% is absolutely appropriate in 2008. From where we sit right now, most of the inputs into that model right now look very similar to where we were a year ago. So, I understand your math; and I would rather than front run my official guidance, I would just say it would be hard to argue with you.

Tien-Tsin Huang - JPMorgan Securities

Got it. I appreciate the careful conservatism. Thanks.

Frank Martire

You are welcome.

Operator

And your next question comes from the line of John Kraft from D.A. Davidson & Co. please proceed.

John Kraft - D.A. Davidson & Co.

Good morning, gentlemen. Nice work.

Tim Oliver

Thank you.

Frank Martire

Thank you. Good morning.

John Kraft - D.A. Davidson & Co.

Hopefully some easy ones here. You guys have I think in the past provided a recurring revenue percentage. Can you update us on that? And actually also I think you provided a percent of visibility you see going into each particular quarter?

Tim Oliver

We never have gone quarterly. We annually recalculate that number and it’s usually between 86% and 89%

John Kraft - D.A. Davidson & Co.

For the recurring revenue?

Tim Oliver

Correct.

John Kraft - D.A. Davidson & Co.

And what about visibility going into, I guess--?

Tim Oliver

Q4?

John Kraft - D.A. Davidson & Co.

Yes.

Tim Oliver

It doesn't vary very much. So, I mean I think as we just said for guidance for Q4, we still have some selling to get done on software and professional services. But from where we sit right now, it’s pretty easy to see we will have a good fourth quarter.

John Kraft - D.A. Davidson & Co.

Okay. And then can you update us or at least remind us on your thoughts regarding your investment in Firstsource?

Mike Hayford

Well, we talked about this last call. Firstsource, we made an equity investment and we also have a business partnership, where we remarket and resell their BPO services. So we can do an on offshore model for our institutions. And we still think there is opportunities in this climate. There maybe more opportunities to provide some of the BPO in an offshore model.

On the equity investment side, it’s been publicly announced we are looking at, is there a potential way to monetize that investment and take the cash out and use it elsewhere. So we have explored that. We don't have an answer today. But on the partnership side, we still think it's a very solid partnership.

John Kraft - D.A. Davidson & Co.

Okay. That's what I was looking for. Thanks a lot, guys.

Tim Oliver

Sure.

Operator

(Operator Instructions)

Tim Oliver

Looks like we have answered them all, it looks like.

Operator

We do have a follow-up question from Brett Huff from Stephens Incorporated. Please proceed.

Brett Huff - Stephens Incorporated

Hey guys sorry about that. But I might get one more in as long as there is an opening. I recall that going into '08 you guys have had a very successful kind of booking year, if you will and that I think helped drive your good numbers in terms of recognizing revenue all through the year. Do you see the same kind of the success in sales that gives you that confidence into '09? And maybe you can answer the question it’s similar or different than when you were putting guidance together back then?

Mike Hayford

Yeah. Without the benefit of a full year behind us, I can kind of give you, where it looks so far. So '07, we had a record year and I think we talked about very solid sales in '07, not only current year sales that we sold and booked in '07, but also backlog and [two] contract value, which drives future revenues. And obviously that has helped us in '08 bump up our organic growth from where it was last year by a couple of points.

Our sales in '08 have continued to be very strong. Year-to-date, we are tracking as well as we were in '07. The only caution there is '07 we had a very, very strong fourth quarter and if we can repeat that, we would be extremely delighted.

We expect to have a solid fourth quarter sales. So, we expect to have a very good selling year in '08. I don't know, if we will exceed '07, which again was a high watermark. Then we had some couple of very large deals, which tilted that. But we have been pleased by sales in '08 and to some degree a little surprised by how strong they have been during the year.

Frank Martire

Yeah. I think the key point there was Mike made, Brett is that we have actually been a little bit surprised how strong they have stayed up for the entire year.

Brett Huff - Stephens Incorporated

Okay. Thanks very much for the color. I appreciate it.

Frank Martire

Thank you.

Frank Martire

You are welcome.

Operator

At this time, there are no questions in queue. I would now like to turn the call over to Mr. Kirk Larsen.

Kirk Larsen

Sure. Thank you all for joining us and if there are any follow-ups, feel free to give me a call and have a great day.

Frank Martire

Thank you.

Operator

That concludes today's conference call. At this time, you may now disconnect. Thank you.

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