Fiserv Q3 2006 Earnings Call Transcript

Oct.24.06 | About: Fiserv, Inc. (FISV)

Fiserv Inc. (NASDAQ:FISV)

Q3 2006 Earnings Call

October 24, 2006 5:00 pm ET

Executives

Jeffery W. Yabuki - President and CEO

Norman Balthasar - Senior Executive Vice President and COO

Thomas Hirsch - Executive Vice President, Chief Financial Officer

Analysts

John - Prudential

Eric Schmidt - Robert W. Baird & Co.

Patrick Burton – Citigroup

Kartik Mehta - FTN Midwest Securities

Chitra Sundaram - Cardinal Capital

Paul Bartolai - Credit Suisse

Charles Murphy - Morgan Stanley

Operator

Welcome to the Fiserv Q3 Earnings Conference Call. [Operator Instructions]. Today’s call is being recorded and is also being broadcast live over the Internet at www.fiserv.com. The call is expected to last about an hour and you may disconnect from the call at any time.

Now I’ll turn the call over to Mr. Jeff Yabuki, President and CEO of Fiserv. Sir, you may begin.

Jeffery W. Yabuki - President and CEO

Thank you and good afternoon everyone. Joining me on the call today to discuss our Q3 results are Norm Balthazar, our Chief Operating Office and Tom Hirsch, our Chief Financial Officer.

Our remarks today will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. There are a number of factors that could cause Fiserv’s results to differ materially from current expectations. Management will make forward-looking statements about among other matters revenue growth, earnings per share, operating margins, cash flow targets, sales pipelines, acquisition prospects and our strategic review process. Forward-looking statements may differ from actual results and are subject to a number of risks and uncertainties. Please refer to the our Q3 earnings release which can be found on our website at www.fiserv.com, for a discussion of these factors and a reconciliation of our non-GAAP financial measures discussed in this conference call.

Before we talk about our result, I would like to thank those of you who were able to join us for our recent Investor Day. During that conference we shared our vision for the company which we branded Fiserv 2.0. It’s our intent that Fiserv 2.0 will bring increased value opportunity and growth for our key stakeholders. We will provide a brief update today and share our progress with you in the future. We are pleased with our strong performance for the quarter. Our business has delivered high quality results, organic revenue growth, margin expansion and solid earnings. Thanks go to all of our employees for their focus and dedication in achieving these results. This quarter’s result together with our strong first half performance keep us on track to achieve our full year targets and build momentum for 2007.

Revenues for Q3 were up 14% to $1.2 billion and included increases across each of our business segments. Overall adjusted organic revenue growth was a solid 5% both for the quarter and year-to-date in line with our mid single digit growth guidance for the year. The financial segment adjusted organic revenue growth accelerated to 6% for the Q3 and is also 6% for the year. The revenue strength in the quarter came from a number of areas including our payments businesses, industry products and core bank processing. Termination fees for the quarter was $6.8 million up $2.4 million over Q3 2005. However, termination fees for the year remain sharply down at $10.1 million, a 38% reduction versus the $26.4 million in the prior year. While the reduction in termination fees creating more difficult annual comparison, it’s a positive indicator for 2007 revenue.

Our year-to-date sales performance remains strong. Sales quota attainment during September 30th was up 11% over the prior year and on track versus plan. These results compare favorably to a very strong second half of 2005, which was the highest sales quarter period ever attained within Fiserv. We have a strong pipeline and believe we are on track to achieve our sales goals for the year. Q3 earnings per share from continuing operations were up 13% to $0.63 per share, versus adjusted earnings per share of $0.56 in the prior year quarter. Through September 30, earnings per share from continuing operations were up 15% to $1.89 per share compared with adjusted earnings of $1.65 per share in the prior year.

Operating income and margin were particularly strong in the quarter, especially in the financial segment. Overall operating income was $186 million in Q3. Adjusted operating margin was 21.9% up 70 basis points over the Q3 of 2005 driven by very strong results in our financial segment. As a reminder we define adjusted operating margin to exclude pass-through expenses and prescription costs and include share based compensations in both years. Financial segment operating income for the quarter was $165 million an increase of 16% over the same period in 2005. Adjusted operating margin in the financial segment was 23.9% 150 basis points higher than the 22.4% in the prior year period. The strong margin performance was driven by a number of factors including an increase in higher margin revenues in our payment and core bank processing businesses along with gains in operational efficiencies.

For the year adjusted operating margin was up 40 basis points to 24% compared to 23.6% in the prior year. We are very pleased with the financial segment’s strong margin performance. As we shared with you at our Investor Day, we believe we can sustainably increase operating margins over the next several years. Our results in the Q3 and the year continue to increase our confidence in this attractive area. Health segment, financial performance for the quarter was down due to the impact of investments that we are making to spur growth over the mid to long term. These investments are being made in several high growth areas including consumer directed healthcare. Operating income for the quarter was down to $15 million versus $20 million in the previous year’s quarter. Our operating margin was also impacted by the incremental investments totaling $4 million in the quarter and $6.5 million for the year, which reduced adjusted margins in the segment by 340 basis points and 180 basis points respectively.

At the same time we are investing, we are also implementing operational enhancements in our health segment. As we mentioned last quarter the impact of these changes should provide savings in the range of $6 million to $12 million per year. The segment will experience some incremental benefit in the Q4 and the program should be fully implemented by the middle of 2007. Now let me turn the call over to Tom Hirsch, who will provide an update on cash flow and capital deployment.

Thomas Hirsch - Executive Vice President and Chief Financial Officer

Thanks Jeff and good afternoon everyone. Year-to-date cash flow from operations was up 15% over the prior year to $453 million, free cash flow for the year increased 7% to $303 million. We have continued to allocate our cash to fund internal capital needs, acquisitions and share repurchase. Through September 30th we have deployed $150 million on capital expenditures, $184 million in acquisitions and $421 million to share repurchase. Our debt loan was increased by $234 million for the year, leaving us with significant financial flexibility. For the year, our capital expenditures are up about $40 million over the same period in 2005. This increase is driven by increased spending related to new business growths and financing choices in our Output Solutions Division along with continued investments in our lending and health businesses.

At 6% of net revenues, the $150 million of capital spending this year is consistent with our historical trend of allocating between 5% and 7% of net revenues on capital expenditures. We’ve spent $184 million in acquisitions through September 30th compared to $495 million in the prior year. During the quarter, we acquired two businesses, the Jerome Group, which will bring new capability and incremental revenue to our Output Solutions Division and InsureWorx a provider of core workers’ compensation insurance, processing software solutions, which will enhance our property and casualty insurance solutions. We will continue to pursue acquisitions that we believe are in line with our overall growth strategies and represent returns that are commensurate with our other capital deployment options. As we have all seen, the acquisition market is very active. As a strategic buyer, we are being disciplined in the type of assets that we may acquire and also the price we are willing to pay.

We also repurchased 1.6 million shares of our stock in the quarter for $72 million. Through September 30th we had repurchased 9.8 million shares for $421 million and had 3.2 million shares remaining under our current share authorization. We expect to complete the remaining authorization in the near term. Finally, let me make a couple of comments on our income tax rate for the quarter and the year. Our effective tax rate for the quarter was 37.4% slightly higher than our year-to-date rate of 37.3%. On a comparable basis, the 37.4% rate in Q3 was 240 basis points higher than Q3 of 2005, which benefited from several one time items. We are forecasting 38% effective tax rate in Q4. Now let me turn the call back to Jeff, who will give you an update on our 2006 guidance and Fiserv 2.0.

Jeffery W. Yabuki

Thanks Tom, given our strong quarter and year-to-date operating results we are updating our full year operating earnings guidance range to $2.51 per share to $2.54 per share. As we shared at our investor conference in September, we are in the process of evaluating our ability to continue several business line investments which are in a range of $10 million to $20 million. We continue to evaluate these investments and believe we will be in a position to make a final decision by year end. Our 2006 earnings guidance has not factored in any negative impact that could result from this evaluation and subsequent decision. We expect full year adjusted organic revenue growth in the mid single digits for the company and the financial segments. In the health segment we expect adjusted revenue growth to be in the low single digits. Also we believe free cash flow will be at the lower end of our previously communicated full year range of $450 million to $480 million.

We continue to focus on improving performance in our Australia check processing operation. We are focused on two key areas to improve operations. First we are implementing a series of initiatives to get our expense structure more in line with the current environment. Second, we are working very closely with our banking partners to realign the contract economics to better reflect the spirit of the arrangement. We are working very diligently to resolve this issue by year end. As we look ahead, we want to pass on a reminder about two events that occurred in last year’s Q4 which we believe may impact the comparison of results.

First, we recognized $16 million in flood claim revenue in Q4 of 2005 from hurricane Katrina. Currently we are not anticipating any material flood claim revenue in this year’s Q4. Also last year we received an unusually large $26 million termination fee resulting from the acquisition of one of our larger bank clients. We excluded that fee when calculating both our full year adjusted earnings per share of $2.19 in 2005 and our adjusted organic growth rate. Accordingly, we will exclude this fee from our 2006 revenue and earnings comparisons to be consistent with our 2005 treatment of this item.

Before we take your questions I want to spend a couple of minutes updating you on some of the Fiserv 2.0 items that we discussed at our investor conference. I’ll keep this discussion brief since it’s only been a short time since we spoke with you on this subject last.

There are five themes that provide the foundation for executing this strategic vision behind Fiserv 2.0, all with an eye towards enhancing the value that we deliver for clients.

1. Portfolio management, actively and continually reviewing business performance and fit of our businesses to deliver shareholder value.

2. Enhancing client relationship value, delivering highly differentiated integrated solutions which provide our clients as well as us with marketplace advantage.

3. Operational effectiveness, optimizing our expense structure to enhance our competitive position and increase our capacity to invest in future growth.

4. Capital allocation, maintaining discipline and rigor in allocating our cash flow to deliver superior returns for shareholders.

5. Innovation inside, delivering on new product and market opportunities that build our value proposition for clients and prospects.

As Tom has already updated you on our capital allocation activity in the quarter, I will focus on a few of the others. An integral element of our plan is to enhance the value of our client relationships. We are focused on the opportunities that we believe are lowest risk and should result in incremental annual revenue of approximately $360 million by 2012. We are working through the steps that we must take for our plans to take hold in 2007. These changes are primarily around organization structure, reward and incentive systems and a limited amount of product integration.

We are making good progress and anticipate that the majority of the changes will be in place by year end. We see an important opportunity to use operational effectiveness as a way to both increase earnings and enhance our ability to invest in future growth. Currently our expense base is about $2.6 billion excluding pass-through expenses and prescription costs.

At our investor conference we described the benefits which resulted from the first days of our review where we examined about $850 million of our total expenses. As a result of that review, we said we would reduce our cost base by $125 million over five years, net of one time cost. We are continuing to examine our remaining cost base to determine what additional efficiencies may be available. We anticipate that we will complete our evaluations over the next 12 to 18 months. In terms of innovation, we continue to make good progress with the Fiserv Clearing Network or FCN. It’s the way we are meeting the needs of our clients to respond to the requirements of Check 21 and image exchange. FCN leverages are item-processing capabilities and lets us provide high quality paper and imaging services to existing and new bank clients at a superior value that’s saves them money and requires little upfront capital investment.

We signed 81 new FCN clients in the Q3. We now have 425 clients signed up for this service nearly double of the 220 clients we have singed up at the end of 2005. We continue to believe FCN is $100 to $150 million annual revenue opportunity. We are currently examining ways we can both accelerate our implementation capability and increase sales capacity to take advantage of this great opportunity. We continued to be bullish about Fiserv 2.0 and our prospects for the future. At the same time you can be sure your management team is focused on delivering value each and every day. We will continue to update you on our progress on both fronts. Now I would like to turn the call back to the operator for questions.

Question-and-Answer Session

Operator

[Operator instructions]. Our first question comes from Bryan Keane with Prudential, sir your line is open.

John - Prudential

Hi, this is John (inaudible) stepping in for Bryan.

Thomas Hirsch

Hi John, how are you?

John - Prudential

A quick question on the cost cutting initiative. Is there any way you can break down what percentage you are planning to get from labor managements, supply chain management may be shared services?

Thomas Hirsch

No, I mean at this stage it’s really three buckets of opportunity at the same time. We see a number of factors that could cause those allocations to change again I think what's most important is the $850 million -- was a phase one review and we are going to continue to look at all of those opportunities through out the different phases to make sure that we are capturing all that we can. We had indicated at the investor conference for example that labor cost was about $400 million in the bucket and -- but we are not going to give the detail on how much is coming out of that.

John - Prudential

Okay fair enough. Just one quick follow up on that, just so I understand this. The first $125 million is over the course of five years, is that correct?

Thomas Hirsch

Yes.

John - Prudential

Okay, and then so the remainder would be over the additional years the remainder of $850 million?

Thomas Hirsch

Well, let me clarify that John. Of the $850 million that is part of our expense base, the $125 million is the actual save amount net of any one time cost. So what we said is out of that $850 million we will save $125 million, so the $125 million is what we are trying to is the goal that we are trying to achieve not the $850 million.

John - Prudential

Got it, thank you very much.

Jeffery W. Yabuki

Thank you.

Operator

Our next question comes from Eric Schmidt with Robert Baird, your line is open sir.

Eric Schmidt - Robert W. Baird & Co.

Yeah, I guess the first question is around the healthcare margins. I was curious to know you had the $4 million investment this quarter that was a drag, but kind of as we look in to ’07, ’08, can we think about the margin that business you know, ex the prescription cost. Can we see that back in the mid teens? Is that how we should think about it or can you talk about these growth areas you are investing and how we should think about the margins around those?

Thomas Hirsch

Yeah, Eric this is Tom. I would say just what you stated at least and the question as what we are looking at. Today as you can see in the quarter it’s primarily in a consumer directed healthcare area with our acquisition of CareGain that we are investing a lot of incremental dollars. And when you net out the prescription costs, those have a pretty significant impact as far as those additional investments in our margin and the quarter.

We will hope to a number I think is one, the savings in the TPA, which we talk about the consolidation savings that are going to start to ramp up during the Q4 and then to next year. That is a fixed $12 million, we plan some reduce spending in ‘07 and regards to our investment initiatives. We also signed some larger pharmacy contracts that started up during the Q3 and on a net basis, we did have some incremental start up costs and regards to that is the Q3. So, well we are not going to give official guidance in the ‘07 and ‘08 at this particular time, we envision as those margins will trend upwards as we continue to move forward.

Thomas Hirsch

Yeah Eric, we believe in a year where we are not making the significant investments that we are marking right now that natural margins for that business are kind of mid teens plus and so we would expect to see those kinds of margins certainly by a way, but we would definitely look for improvements in 2007.

Eric Schmidt - Robert W. Baird & Co.

Okay, improvement from the mid teens that when you backup the investments, correct?

Thomas Hirsch

Yes.

Eric Schmidt - Robert W. Baird & Co.

Now there is one -- another question here is kind of a high level question on competition, you talked about a low level of termination fees this year versus last year. I am curious if its your thoughts around and it would seem Fidelity in the market for quite nine, ten months, a year and we saw the reason open, you know going private transaction. Do you think that has any, you know any impact on why you are seeing a lower level of termination fees or is that just the natural lumpiness going on there?

Jeffery W. Yabuki

You know that we will all -- I am sure help out on this answer a bit. The termination fees frankly have much less to do with what’s going on in our competitive environment than it does what’s going on in our client’s competitive environment. So as more banks are more active acquiring other institutions there was a choice made on the core processing system at that time and its either our system that’s chosen or if we are involved in a competitive system.

At this point the way we would read this activity this year I believe is to say that our banks if they are being acquired we are prevailing as the system of choice to the extent that the other possibility is that our banks are just not being acquired very often, and so therefore we are not having termination fees. From our perspective we think that it’s a very good think for future revenue as you know we had to grow over a number of large termination fees this year and not necessarily just in terms of the termination fees themselves, which obviously create lumpiness but most importantly you loose that underlying stream of recovering revenue.

Se we are most satisfied with the fact that it will make the growth challenge a little bit easier in 2007 at least when you make it on a relative comparison to 2006 but let me put out to Tom and Norman to see if they can add some more color.

Thomas Hirsch

I will just say that they can be lumpy depending on just the nature of the customer that’s been acquired. If they are being acquired early in the contract term, we get a larger fee, later in the contract term a smaller fee. The other thing I would highlight is that in the current year these fees have just ranged each quarter from maybe $4 million to $6 million on our base revenue and the financial segment of about 700 million of orders. So they are fairly small in relation to the total revenue that we have in that particular segment.

Norman Balthasar

Yeah, this is Norman. You know as far as the day-to-day competition in core banking, it’s certainly a very competitive market but we don’t see any appreciable differences regarding the kind of acquisition merger activity within the competitors themselves. The folks on the street that are selling are pretty well dedicated as they have been all along.

Eric Schmidt - Robert W. Baird & Co.

Great, thanks a lot.

Thomas Hirsch

Thank you.

Operator

Our next question comes from Pat Burton with Citigroup, your line is open.

Patrick Burton - Citigroup

Hi, congratulations on the quarter. I would like to actually follow-up on the previous question about Open Solutions going private and you have also obviously had the SunGard transaction and Fidelity information has done some things in the past using debt. What is the company’s view of an appropriate leverage ratio especially given that now a number of your competitors are highly leveraged and do you have a competitive advantage with the less leveraged balance sheet and then I have a follow up question, please.

Jeffery W. Yabuki

Thanks for the congratulatory comment on the quarter, Pat.

Patrick Burton - Citigroup

Yes.

Jeffery W. Yabuki

It is obvious that there is a lot going on in the marketplace and I won’t go through it again. Our take is that the private equity activity and that type of activity is only one step in whether it would be a larger consolidation but a change in the industry dynamic right now. And so we actually, when we sit back thinking about how do we approach the marketplace at some point, these assets are going to have to move from what you could call a holding point in the private equity world or in the hedge fund world wherever they are sitting in this middle ground.

They are going to end up having to be somewhere whether that be spun out as a public company or sold to a strategic buyer. Tom made some comments about how we’re thinking about the world from a strategic buyer perspective. And we are trying to kind of keep as much flexibility as we can when there is either an event in the marketplace that has some of these assets free up or at such point where some of these current owners need to turn their investments.

So from our standpoint we are going to maintain that flexibility so long as we believe that is the right formula for delivering shareholder value. We spent a lot of time back in September talking about people querying us on should we take more debt for purposes of buying shares. And we said we really like that flexibility and for right now at least we have come down on the point of more flexibility is best and last.

Norman Balthasar

Yeah. I think just to add to that regard in our debt capacity, as you are aware Pat, we are fairly under leverage today. Our leverage ratio is probably 0.8 to 1 as far as debt to EBIDTA. We have increased out debt levels a little bit this year by a couple of hundred million dollars, and we will in the future continue to have share repurchases one of our capital deployment options but we like the flexibility that we have to be able to react to those opportunities that happen in the marketplace when they do. So we will continue to be disciplined with our capital allocations but know that we have that flexibility.

Patrick Burton - Citigroup

Thanks, my follow up was on the Australian contract. How easy will that be to effectively renegotiated or from the outside what kind of milestone should we look for? And thanks and congratulations on the quarter.

Jeffery W. Yabuki

Sure thanks again Pat. It’s never easy to go in and restructure and renegotiate an agreement. We take a lot of comfort in the fact that when we entered into this joint venture, we entered into this with the parties believing that they were set of economics and each of the parties were entitled to and at least our belief is that all the parties at least right now understand that we may not be getting all the economics list we had bargained for originally. So from our perspective we are relying on that as part of our equation and then on the other half of the equation is frankly we are being very aggressive in how we align our cost structure with that current economic reality.

We are taking steps in that area, we are very comfortable that we are going to make those moves that we need to do to better align our cost structure and I think it will be a bit of a battle but we feel confident that we’ll get it done and get to the finish line and from a metrics we’ll keep you updated on it. We think it’s a big enough and sizeable enough venture that we’ll just update you each quarter on how we are doing on that initiative overall, Norm?

Norman Balthasar

No, the only thing I would say is from a process standpoint, we have identified with our Australian clients certain steps to take and we are tracking quite well on those.

Patrick Burton - Citigroup

Thank you.

Jeffery W. Yabuki

Thank you.

Operator

Our next question comes from Kartik Mehta with FTN Midwest, your line is open.

Kartik Mehta - FTN Midwest Securities

Good afternoon, Jeff, quick question on internal growth. I guess what I’m trying to find out is how predictable is internal growth so you have had a great one run at some new sales or sales and how much of an impact will that have in your ability to predict internal sales for financial institution segment?

Jeffery W. Yabuki

Well, you know one of the nice things about Fiserv is much of our revenue base is installed on the basis of longer term contracts, pretty stable revenue so that’s good news. We are obviously able to predict with some degree of certainty what’s going to come out of our sales efforts and so that helps. But each year we go into the year with some level of what we would call uncommitted revenue and our goal is to close that delta each year.

The challenges that we had in 2006 is we had to replace two fairly sizable ventures. We had to replace the Canadian entry venture and then we also had to replace the revenue associated with the unusually large $26 million term fee that we got in Q4. Now there was a bit of an offset because flood claim revenue was quite high in Q1 of this year. And all indications are thankfully for the communities that were affected, that won’t recur.

But we will have a bit -- we think we’ll actually have a bit of an easier grow over challenge this year and we are working hard to deliver additional products, highly valued products to clients to be able to continue to grow and close that uncommitted delta. Now that’s a long winded way of saying its easier in our business than others that I have seen, but its still a challenge and I don’t think we can sit here today and give an exact number of what our ’07, ’08, ’09 growth is going to be. But we do know what’s contracted and what’s on committed at this point.

Thomas Hirsch

I think just to add one quick comment to that Kartik is that you know in 2005 our organic revenue growth adjusted was roughly 6% I believe in the financial statement and through nine months we were at 6% also. So, Given the fact that it is lumpy and we do have you know, flood claims or termination fees that impact that and the quarters over quarters of fluctuate depending on sometime software licenses, I think when I look at over an extended period of time we kind of hit the guidance that we have given to the street, which is been this mid single digit and around this 5% to 6% at least in the financial segment area.

Kartik Mehta - FTN Midwest Securities

And one last question, Tom I think you said the acquisition market looks really strong. You want to be obviously a disciplined buyer. So Jeff, as you look at what’s happening in the acquisition market is it just the matter of -- there are opportunities which you really like and they are just too expensive or is it that the acquisition market is strong, but there just not businesses that you would want.

Jeffery W. Yabuki

Yeah, my take right now is it’s more the former than the latter. But I wouldn’t say they are necessarily too expensive. I do think that we are being very prudent and pragmatic and how we evaluate acquisitions to fit into the strategies that we laid out around Fiserv 2.0 and so we are really looking at where can we take that capital to be able to add more to our value proposition. To me that’s far more important than buying revenue. I am much more interested in making sure that the acquisitions that we are considering are going to add real breadth to how clients view us, as oppose to the addition of revenue. And that’s a bit of different tact for the company and one that Jim Cox is doing a nice job of running for us, but we are all learning at the same time.

Kartik Mehta - FTN Midwest Securities

And Tom if I may, just one last question. For Q4 what type of acquisition revenue would you anticipate?

Thomas Hirsch

I am sorry Kartik, what do you mean by that?

Kartik Mehta - FTN Midwest Securities

Well, a dollar amount of revenue that you get from acquisitions in the Q4.

Thomas Hirsch

It really depends but I think you know, given our run rate I think we disclose the -- most of the big acquisitions we did last year (inaudible) but we’ll have and I have to get back to the exact number but I think in the range of $20 to $25 million across the group but I always -- let me get back to you on that Kartik, as far as that impact goes.

Kartik Mehta - FTN Midwest Securities

Okay, thank you.

Thomas Hirsch

That should be in a rough range, I don’t think it should be much different that what we have in the Q3.

Kartik Mehta - FTN Midwest Securities

Thank you very much.

Jeffery W. Yabuki

Thanks Kartik.

Operator

Our next question comes from Julio Quinteros with Goldman Sachs, your line is open sir.

Julio Quinteros - Goldman Sachs

Hi, guys real quickly, just on the tax rate benefits for this year we had seen about $0.2 in the Q2 and looking like another $0.1 to $0.2 this quarter and then if you factor in the buy back activity for rest of the year and then going back to the guidance change which is about $0.3 to flat on the top end. What exactly is the benefit that we are seeing I guess from the buy back in the Q4 and as you look at the tax rate benefit, if you were to strip that out of, where would our estimates actually end up for the current calendar year.

Jeffery W. Yabuki

There are lots of questions in there Julio, so I will --

Julio Quinteros - Goldman Sachs

Yeah, it was one question in part, sorry.

Jeffery W. Yabuki

Yeah, that’s right – while the number is playing around.

Julio Quinteros - Goldman Sachs

I guess just real quick, the tax rate benefit that we have seen for this year and then secondly, the buy back benefit that we should see into Q4 and then just kind of relate that back to the guidance change, which, you know, when you look at it doesn’t really seem to be moving too much.

Thomas Hirsch

Yeah I mean -- first of all I guess on the tax rate. What I would say is that, you know, I always look at things that you are comparing that now we are doing on a year over year type basis. You know our affective tax rate for the full year, which I’m looking that last year in 2005 when we reported, adjusted earnings to 219 was 37.5%. And I think on the year to day basis this year the effective rate is 37.3%. So you are just talking, fairly it is down over our history back going back year and half, two years, but from a standpoint of the year over year comparison standpoint, they are basically roughly in line on a year over year basis.

Julio Quinteros - Goldman Sachs

When I looked at the notes for the beginning of the year, I think you guys had suggested 38.7% so I’m just trying to understand what that delta is?

Thomas Hirsch

Yeah, you know that is at the beginning of our forecasted rate. We have had a number of items that have driven our tax rate down and you know those have continued over the quarters that we have had. And I’m fairly conservative with the guidance that I sent out and we do give a Q4 forecast as 38% as far as that effective tax rate goes.

Julio Quinteros - Goldman Sachs

Okay.

Thomas Hirsch

Going forward as far as our earnings guidance goals, we have given, timed up our range from where we were at our last from 248 to 254 up to 251 to 254. You can do the math as far as what that means for Q4. And we indicate we are going to do share repurchase in the near term so that’s really we are wrap for the year.

Julio Quinteros - Goldman Sachs

Great thank you.

Thomas Hirsch

Thank you.

Operator

Our next question comes from Chitra Sundaram with Cardinal Capital, your line is open.

Chitra Sundaram - Cardinal Capital

Thank you, congratulation for nice quarter, just had a quick question on the free cash flow. Just to confirm the definition as far as the operating cash flow less CapEx right, when you say $450 to $480 million?

Thomas Hirsch

That’s correct.

Chitra Sundaram - Cardinal Capital

It looks like it’s been pretty good year to date and I’m just wondering even CapEx that’s going to be the key driver of bringing to the low end or is it operations?

Thomas Hirsch

I think it will be a combination of working capital improvements and consisting CapEx into Q4 for us to hit the lower end of that range which is -- what we indicated on the call.

Chitra Sundaram - Cardinal Capital

Yeah, very good thank you.

Thomas Hirsch

Thank you.

Operator

Our next question comes from Paul Bartolai with Credit Suisse, sir your line is open.

Paul Bartolai - Credit Suisse

Thanks, good afternoon guys. First question you know maybe is it possible to quantify or at least provide some of the timing around the larger client loss that you had last year. So we can try and get a sense of one more anniversary there and what the impact might be?

Jeffery W. Yabuki

Most of the clients that we ended up as far as the impact in the current year running through Q4, one of those will run through the full year because it went up actually in December of last year. And the other one went up also in the middle point of Q4. So those things should pretty much annualized through the end of the year and that was to be pretty good shape going into 2007.

Paul Bartolai - Credit Suisse

Great, any rough quantifications there is -- one to two points of growth in FY0?

Thomas Hirsch

I think what we disclose last time around those customers was around to 180 basis point somewhere in that range as far as the negative impact in the current year.

Paul Bartolai - Credit Suisse

Okay great and then again stick with that by your growth, I mean, you know, as you mentioned kind of been in that 5%, 6% range for a few quarters now. You know which I think is kind of towards the low end of what you guys expect going forward. What do we need to see here, is it macro-driven or stuff you guys have with Fiserv 2.0 to get us towards in the higher end of that range?

Jeffery W. Yabuki

Yeah, Paul it is a combination of -- in continuing to make sure we are executing as well as we can with what we have. We are -- I think we’ll continue to make some progress there. And then secondly, it really is the benefit of capturing that $360 million that we talked about at our investor day, which is to some extent contingent upon us, reshaping our organization, making sure our incentive structures are aligned and then to some extent doing some limiting integration. It’s far more around the first two than it is on the third and we are working those.

We expect to have them in place so that very early in 2007 will beginning to execute against that. I would also say that while been at 6%, been a lower end of our revenue guidance. We see that to be basically an outlook over time and that we will accelerate into that range. And that there will be years when we will actually be below that range and there will be years when we will be above that range. But from a modeling and from a planning perspective we provided that outlook data to basically say here is what we think you can expect from us given by Fiserv 2.0.

Paul Bartolai - Credit Suisse

Great, I got to stick one more in that, switching on the health. You know extra prescriptions cost, organic growth of 2% again we kind of stuck at that level for a few quarters here. I think you’ve talked about some of the client wins, when should we expect to see that accelerator? What is holding that back, I guess?

Jeffery W. Yabuki

Yeah, I mean we are still working through some client losses within the TPA space, the HPA space and as we work through them, unfortunately it takes -- losing a couple of those clients will wipe out a bunch of progress that we are making on what we would call the additional products or add on higher value products. But we are moving through the process and we believe that we -- well we’re not going to give 2007 guidance right now that next year we’ll begin to see some fruit bearing from our efforts.

Paul Bartolai - Credit Suisse

Okay thank you.

Jeffery W. Yabuki

Thank you.

Operator

Our next question comes from Charles Murphy with Morgan Stanley your line is open sir.

Charles Murphy - Morgan Stanley

The $10 million to $20 million of internal investment you are currently making, what keeps you in the know, you know, how does it help the firm and then what revenue do those investment generate?

Jeffery W. Yabuki

Charlie, can you just repeat that one more time?

Charles Murphy - Morgan Stanley

You talked about your currently valuating $10 million to $20 million annual investments. What are they tied to? Why are you doing them now and what revenue on an annual basis that those investments generate?

Jeffery W. Yabuki

We are not going to go into that much detail; I know those are couple of business line investments which we want to make you aware of it we did in September that we are taking a look at as far as what we are going to do in the future. So we will have that results here by the end of the year and we will communicate that appropriately in January.

Thomas Hirsch

Charlie, one of the things that we -- one of the pieces of our review process was to go kind of deep on all the different business lines that we have. Looking at what they are doing and what investments are been made either within an entire business line or in investment that is part of our product within the business line.

As we went through that process not surprisingly there were some items that pop up where we had to question did it make sense to continue in that investment. Those are the kinds of things that we are looking at. And it’s a long process and we want to make sure that we are being pragmatic and prudent. But the point is we are committed to doing it making those decisions by the end of the year.

Charles Murphy - Morgan Stanley

Okay, great. And then EFT debt business what are the key reasons why a Fiserv bank would switch from another debit network to the Fiserv network, and could you describe how fast the payments business is growing year-over-year in Q3?

Jeffery W. Yabuki

Norman?

Norman Balthasar

Sure. There is a lot of advantages in the economics as well as -- obviously we have the co-relationships so that the debit transactions, the flow of the funds works quite a bit better. And would you repeat the second part of your question, please?

Charles Murphy - Morgan Stanley

The payments business, I want to get a feel for if that business is growing above or below the organic growth rate of FY0?

Norman Balthasar

I would say majority of the aspects for that especially on the electronic side are on a high growth side. We see a lot of activity both in new clients and also in volume growth, transaction growth within existing product line. So that’s an area that we feel very strong about is payments in the future as well.

Norman Balthasar

Yeah, Charlie, one of the things that we indicated in our prepared remarks is that one of the drivers of our stronger growth this quarter was our EFT and our payments businesses in general. So we are seeing good growth from those businesses and we expect to continue to see good growth from those businesses.

Charles Murphy - Morgan Stanley

Thanks very much.

Norman Balthasar

Thank you.

Operator

Chitra Sundaram with Cardinal Capital, your line is open.

Chitra Sundaram - Cardinal Capital

Thank you. Could you help me understand the seasonality if there is any working capital usage and generation, because the two main items clearly are receivables and account stable, I’m thinking?

Norman Balthasar

Yeah, there is some timing that fluctuates from quarter to quarter depending on the businesses. If we get some in our Output Solutions Division depending on when that growth occurs they can kind of fluctuate on a quarter-to-quarter basis just due to timing.

Chitra Sundaram - Cardinal Capital

I see.

Norman Balthasar

But over the years, our working capital, if you look back at last year’s it have been fairly -- it was a little negative last year but its been fairly flat as far as the positive or negative. And so we can continue to work our receivables and that’s really doing major item typically that kick and move around.

Chitra Sundaram - Cardinal Capital

And I guess as a follow up, when you look it on a quarterly basis it does seem to turn strongly positive in Q4, sometimes in Q3 itself. That’s just part of the cost cycle or something, is it the --?

Norman Balthasar

Yeah, just to take you back to the first couple of quarters. What we generally have there is we do have some -- in Q2 we have some larger tax payments. We also typically paid out our profit sharing, our 401K match type payments in Q1 of the year. So over the last couple of quarters, that kind of built. The other thing I would say is the Q4 growth which historically, if you go back even into 2004, we have had free cash flow around $149 million, I think last year in Q4 it was around 150. And that’s generated by customer deposit that we get generally in Q4. Our deferred revenue does a little bit better than what it does in the other quarters. And so that’s been another aspect to that.

Chitra Sundaram - Cardinal Capital

Okay, great. Thank you so much.

Norman Balthasar

Thank you.

Operator

I would now like to turn the call back over to Mr. Yabuki for closing statements.

Jeffery W. Yabuki

Thanks for joining us everyone this afternoon, we appreciate it. If you have any further questions, please don’t hesitate to contact our Investor Relations team. Thanks for your support and we’ll talk to you next quarter.

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