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Fiserv, Inc. (NASDAQ:FISV)

Q2 2014 Earnings Conference Call

July 29, 2014 5:00 PM ET

Executives

Stephanie Gregor – Vice President of Investor Relations

Jeffery W. Yabuki – President and Chief Executive Officer

Thomas J. Hirsch – Executive Vice President, Chief Financial Officer and Treasurer

Mark A. Ernst - Executive Vice President, Chief Operating Officer

Analysts

Paul J Condra – BMO Capital Markets Corp.

Darrin D. Peller – Barclays Capital Inc

David Togut – Evercore Partners Inc.

Brett Huff – Stephens, Inc.

Ramsey El-Assal – Jefferies Group, Inc.

Operator

Welcome to the Fiserv Second Quarter 2014 Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer-session begins following the presentation. Today's call is being broadcast live over the Internet at fiserv.com and is being recorded for future reference. In addition, there are supplemental materials for today's call available at the Company's website. To access those materials, go to the Company's website and click on the link in the Events section of its Home page. 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 Stephanie Gregor, Vice President of Investor Relations at Fiserv.

Stephanie Gregor

Thank you, and welcome to our call. With me today are Jeff Yabuki, our Chief Executive Officer; Tom Hirsch, our Chief Financial Officer and Mark Ernst our Chief Operating Officer.

Our remarks today will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We will make forward-looking statements about, among other matters, expected operating and financial results and strategic initiatives. Forward-looking statements may differ materially from actual results and are subject to a number of risks and uncertainties. Please refer to our earnings release, which can be found on our website at fiserv.com, for a discussion of these risk factors.

You should also refer to our earnings release and the supplemental materials for today's call for an explanation of the non-GAAP financial measures discussed in this conference call and for a reconciliation of those measures to the nearest applicable GAAP measures. These non-GAAP measures are indicators that management uses to provide additional meaningful comparisons between current results and prior-reported results and as a basis for planning and forecasting for future periods.

With that let me turn the call over to Jeff.

Jeffery W. Yabuki

Thanks, Stephanie, and good afternoon, everyone. Results for the second quarter were solid, inline with our expectations and on-tract to achieve our full-year financial outlook. And as you saw in our press release we also moved up bottom end of our adjusted EPS guidance by $0.03.

Adjusted internal revenue growth in the quarter was 3% against our most typical revenue comparison of the year. Adjusted operating margin was 30.6% at increase of 10 basis points over the last year’s quarter and up 100 basis point sequentially. Adjusted earnings per share increased 8% over the last year second quarter. We feel very good about our results for the first half of the year.

Adjusted internal revenue growth through June 30, 4% compared to only 2% in the first half of last year. Adjusted earnings per share for the first six months is up 15% and free cash flow per share is up 16% both of which reflects our commitment to growth through high quality revenue. Sales through June 30 are up 5% of the same period last year. Our pipeline is growing at a strong clip and we are poised for stronger performance in the second half of the year.

Now let me update you on our enterprise priorities. As a reminder, our three focus areas for the year or first to continue building high quality revenue growth while meeting our earnings commitments. Second extend market momentum to deepen client relationships with a larger share of our strategic solutions; and third to deliver innovation and integration, which enhances results for our clients.

To our first priority we are building momentum through high quality internal revenue growth expanding margin and growing free cash flow per share. We delivered 3% adjusted internal revenue growth in the quarter against our toughest revenue comparison of the year and are now 4% for the first half. Payments that our internal revenue growth performance with 5% and 7% growth for the quarter and year-to-date respectively.

Adjusted EPS is up 15% year-to-date over the last year strong earnings result. Execution is solid across the business. Through June 30, we achieved a 60 basis point improvement in adjusted operating margin and 16% increase in free cash flow per share. All this as we continue to invest in your company. We are well on track to achieve our 29th consecutive year of double-digit adjusted earnings per share growth.

Our second priority is to extend market momentum to deep in client relationships with a larger share of our strategic solutions. We had over 4000 attendees Fiserv form, one of our two primary client conference in May. This event which is to become one of the largest in the entire FinTech industry is proving to be an important opportunity for clients to network with other industry leaders. Exchange ideas and gain insights into market and industry trends.

As important form is a great opportunity to showcase our market leading solutions and latest innovations to decision makers, prospects and industry pundits. At last year’s conference one of the solutions introduced to our clients was our ASP tablet banking solution, which enables financial institution to provide a differentiated experience to the more than 60 million tablet banking user in the U.S today. Since then 16% of our Mobiliti ASP clients have begun to offer the solution.

At this year’s event, we introduced Mobiliti business which goes live this year. This ASP solution allows our financial institution clients to provide their business customer with the compelling suite of mobile capabilities such as remote deposit capture, entitlements, payment initiation and approval. Interest is very strong across nearly 1200 institutions using our business online services today.

We are excited about helping our clients address the digital need to this strategically important customer segment. We expect to see meaningful revenue growth from this user based subscription offering over the next several years. During the quarter, we also signed an additional 72 institutions to Mobiliti for a total of nearly 1900 mobile clients. Mobiliti ASP subscribers have grown more than 175% year-over-year to 2.2 million subscribers which is also up about 15% sequentially.

Our third priority is to deliver innovation and integration which enhances results for our clients. In the quarter, Australia based Westpac bank were the largest financial institutions in the world, was recognized as having the leading online and digital design for its transformative digital platform built by Fiserv. This prestigious award known as the Good Designer Award evaluates technology- technologies across all industries not just banking and Westpac solution was selected as a winning design for 2014.

There are new corillian based online banking service branded as Westpac live is a one of a kind solution utilizing the state-of-the design principles coupled with modern technology to provide a consistent, simple, helpful and secured omni-channel customer experience through a single platform. We continue our focus on real-time money movement as a way to drive meaningful differentiation in client value. We are building a new type of payments ecosystem using several of our leading solutions to create a one of a kind network that allows end-user to simply and easily use payment speed to their advantage.

At our most investor day we presented a number of targeted strategies to accelerate growth outside the U.S over the next several year. Earlier this month we launched Agiliti, a cloud-based retail bank technology solution. This modularized account processing based solution is designed to enable new players as well as existing institution better mange their technology cost, rapidly bring products to market, enhance the digital experience and overall enable institutions to focus their effort on serving customers.

We've teamed up with Anthony Thomson, the co-founder and former Chairman of Metro Bank, and the Chairman and co-founder of the Financial Services Forum to combined UK-based expertise and credibility to this new powerful solution. In a very short period we've seen strong demand leading to commitments for multiple institutions including Think Money Limited to use our new solution. Agiliti as scheduled to go live in mid-2015.

With that, let me turn the call over to Tom to provide additional detail on our financial results.

Thomas J. Hirsch

Thanks, Jeff and good afternoon, everyone. Adjusted revenue was $1.2 billion in the quarter. Our adjusted internal revenue growth rate was 3%, solid results given the difficult prior-year compare and the strength of our first quarter’s performance. For the first half of the year adjusted revenue was $2.3 billion and adjusted internal revenue growth was 4% a meaningful acceleration over the prior year's growth rate up 2%.

Adjusted operating income in the quarter increased 4% to $360 million and for the first six months was up 7% to $702 million. Adjusted operating margin in the quarter was up 10 basis points over the prior-year to 30.6% an increase of 100 basis points sequentially.

For the first six months, adjusted operating margin is up 60 basis points compared to the prior year, driven primarily by growth in our scale businesses and operational efficiencies including open synergies. Adjusted earnings per share increased 8% to $0.81 in the quarter, and for the first half of the year is up 15% to $1.63, both compared to the prior year period.

Now, onto the segment results. Adjusted revenue in the payment segment increased 5% to $591 million in the quarter, and for the first six months increased 7% to $1.2 billion, with only $2 million of acquired revenue year-to-date. Strength in our larger recurring revenue businesses such as card services, bill payment and channels along with good performance from output solutions drove the majority of the revenue growth.

The decrease from the growth rate was primarily due to the more difficult second quarter compare, the annualization of a large client win at the end of the first quarter and a negative impact from the Biller headwinds, we shared with you earlier in the year, which stem primarily from client acquisitions. We signed 88 new bill payment clients in the quarter and 170 through June 30.

Bill payments transaction volume grew 3% in the quarter and 5% in the first six months. Strong new client growth was partially offset by the anniversary of our largest 2013 bill payment implementation in the first quarter and continued soft transaction volumes and our largest client.

We expanded a number of member institutions in the Popmoney network in the quarter. And now have over 2,200 institutions contracted to offer these services. Transactions were up 73% in the quarter and we continue to see important growth opportunities in particular, as clients enable real-time capabilities for their customers. We have a strong pipeline for Popmoney instant including notable opportunities with several top 50 financial institutions to join the more than 170 financial institutions signed today.

Debit transaction growth was 11% in both the second quarter and the first half of the year. We added 26 new debit clients in the quarter and assigned 56 for the first six month for the year. New sales better than market transaction growth and value added services combined to drive strong continued revenue growth in our card services business. Payment segment adjusted operating income was up 3% in the quarter to $185 million. And year-to-date adjusted operating income increased 6% to $365 million compared to the prior year periods.

Adjusted operating margin the segment increased 70 basis points on a sequential basis, to 31.3% in the second quarter, but down 70 basis points compare to the prior year, which was our highest overall margin quarter over the last four years. Through June 30, segment adjusted operating margin was down 30 basis points, the 30.9% over the prior years high watermark.

Margin performance was driven by was driven by operating leverage in our scale businesses, offset by continued investment in areas such as Mobiliti and biller advantage. The margin mix associated with higher revenue growth in output solutions and biller headwinds mentioned earlier.

Adjusted revenue in the financial segment increased 1% in the quarter to $596 million and as up 2% to 1.2 billion for the first six months for the year both compared with the prior year periods. The adjusted internal revenue growth rate in the segment of 1% in the quarter decline sequentially primarily due to lower growth from fee revenue, including license and termination fees and the expected weakness in our international business.

Adjusted internal revenue growth in the quarter and year-to-date was primarily driven by growth in our account processing businesses. Partially offset by the timing of larger International client implementations in 2013 which created a very difficult year-over-year comparison. Which should abate as we go through the second half of the year?

Our large core account processing implementations including open solutions are progressing well. We expect increased revenue from these new clients across a variety of our market-leading solutions towards year-end and even more as we move into 2015. Adjusted operating income in the financial segment was up to 6% in the quarter to $203 million and is up 9% to $388 million through June.

Adjusted operating margin expansion in the segment was stellar up a 170 basis points in the quarter to 34.1% and up 200 basis points to 33.1% for the 6-month comparable period. Results were driven by growth in our account processing businesses, benefits our operational efficiencies, higher termination fees partially offset by International headwinds. The adjusted operating launch in the corporate segment for the second quarter was $28 million the increase in expenses was primarily due to the implementation of a new HR system, rolling out during the second and third quarters of this year. Along with the time enough expenses associate with our spring client conference.

Our adjusted tax rate for the quarter was up 36% higher than the prior year’s adjusted rate, primarily due to the impact of the non renewal of the R&D tax credit in 2014. Through June 30 our effective tax rate of 33.1% was lower than the prior year with a difference driven by the timing of discreet tax benefits recorded in the first quarter of 2014.

We expect the adjusted effective tax rate in the second half of the year to be higher than the first half and that our full year tax rate excluding the tax impact from StoneRiver Capital transactions will be under 35%. We received a $45 million cash distribution from our StoneRiver joint venture in the quarter which is excluded from our free cash flow performance.

The year-to-date adjusted ratings contribution from StoneRiver decreased by $6 million or a $0.02 negative EPS impact as StoneRiver continues to opportunistically monetize its business portfolio. The performance of this equity investment has been exceptional; in fact since the formation of the StoneRiver venture in 2008, Fiserv has received total cash payments in excess of $850 million.

We continue to see attractive growth in free cash flow as one of the outcomes of our focus on high-quality revenue. Free cash flow for the first six months of the year reached nearly $400 million, increasing 10% over the prior year period. This performance again which does not include the $45 million from StoneRiver, translated to $1.54 in free cash flow per share, a very strong 16% increase.

Total debt at June 30 was $3.8 billion or 2.3 times our trailing 12 month adjusted EBITDA. We repurchased 3 million shares of stock in the quarter for $168 million. Through June 30, we have deployed $519 million repurchasing 9.1 million shares at an average cost of $57 per share. This is double the allocation of capital the share repurchase compared to the first half of 2013. At quarters end there were 249.1 million outstanding and 9.4 million shares remaining under our existing share repurchase authorization.

With that I will turn the call back over to Jeff.

Jeffery W. Yabuki

Thanks Tom. Sales for the quarter were a bit lighter following up on a very strong Q1; we attained 80% of our quota in the quarter and are now at 88% year-to-date. As you will recall, we have increased our sales targets in each of the last several years, importantly actual sales value through June 30 is still up 5% over last year’s level. Our sales results for the quarter were negatively impacted by the timing of several larger transactions that slipped out of Q2 and signed early in the third quarter.

As an example, we completed a large sale in July, with total contract value of more than $50 million to a top 10 financial institution to service a large share of their substantial consumer loan portfolio. We are excited about this new relationship and expect the solution to go live late in 2015. Our June 30 qualified pipeline is up 19% since the start of the year, the strength is coming primarily form continuing momentum in large account processing transactions.

Early traction in our focus international strategies and progressively larger transactions across our solutions, also DNA platform sales were again strong with six new clients signed in the quarter. Since we acquired the business last year, we have added 44 new clients to DNA and we fully expect that momentum to continue.

Integrated sales were $50 million in the quarter and totaled $102 million for the first half of the year. Card services, bill payment and Mobiliti led the integrated sales performance in the quarter. Through June 30, nearly 20% of our integrated sales a four fold increase over the same period last year have come from the DNA client base.

We are on track to achieve our $250 million integrated sales target for the year. We’ve also realized $37 million of operational effective in the saving in the first six months in the year or 62% of our $60 million annual target. The strong results are driven by Open Solutions cost synergy attainment and operational improvements.

Going forward, we expect the growth in the incremental savings associated with Open Solutions to slow as we h ave substantially completed our cost focused integration efforts beyond the data center consolidation. We remain well-positioned to meet our operational effectiveness objective for the year.

The environment continues to show stability in the quarter. There were non-regulatory actions in the period and 15 year-to-date, a decrease of 40% compared to the first half of last year. We are also seeing healthy M&A activity in the market which we view as a generally positive sign.

Technologies spend continues to be focused on cost effectiveness, digital experience and regulatory compliance. While we do not expect overall technology spend for the year to increase over our original estimates. Institutions remain committed to their spending plans, which is an improvement over the trailing off we have seen over the last few years.

Lastly, we continue to see a strong interest by financial institutions in solutions that can help generate new revenue. As I mentioned up front, we are well on track to achieve our full year financial outlook. We continue to expect adjusted revenue to increase 4% to 5% and adjusted internal revenue to grow 4% to 4.5% for the year. And for reference we expect termination fees in the second half of the year to be about flat to last year’s level.

Based on the strength of our first half results and what we can see for the remainder of the year. We’ve increased the bottom end of our EPS range by $0.03 per share. We now expect adjusted EPS to grow in a range of 11% to 13% or $3.31 to $3.37 per share. We continue to expect adjusted operating margin to expand at least 50 basis points for the full year.

And finally, we expect free cash flow per share to increase by at least 10% or greater than $3.65 for the year. We're at a strong position as we entered the second half of the year. We are executing well in our core businesses and are extending our momentum in areas of new and existing market demand.

We are progressing on our journey to steadily increase our adjusted internal revenue growth rate through the addition of high-quality revenue. We are on plan for the year and believe our growth momentum will continue into 2015. Our achievements are not accidental. We have the benefit of 21,000 associates around the world who care deeply about clients, are meeting commitments and remain focused on delivering innovation and excellence each and every day.

With that, let’s open the line for question.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Paul Condra from BMO Capital Markets. Your line is open.

Paul J Condra – BMO Capital Markets Corp.

Hi, Great thanks for taking my call. Strong quarter.

Jeffery W. Yabuki

Thank you, Paul.

Paul J Condra – BMO Capital Markets Corp.

I thought I would ask first about the DNA implementation, I just wondered is there anything with timing that we should be paying attention to or any change to that rollout.

Jeffery W. Yabuki

No. I mean we are on-track on those implementations. We mentioned we've got 44 wins so far. We had right around 30 last year and those are tracking well and those will begin to go live really in the second half of this year and more towards the and then well into 2015 and at this pace we would expect that to continue beyond 2015. So it’s right on track.

The great news, Paul that I would add to that is it's not just the DNA implementations, but the amount of revenue uplift that we're seeing from surround solutions and in DNA base and the open base in particular, continues to be very positive. I think we mentioned in our prepared remarks that fully 19%, 20% of our add-on integrated sales in the quarter for the year-to-date have come from DNA client so we're quite pleased with that and we are just well on track.

Paul J Condra – BMO Capital Markets Corp.

Okay great to hear. Thanks. Just following up, I wonder if you could talk a little broadly just about margin expansion quarter was strong, but I'm wondering if you can talk about how you balance kind of the revenue growth with margin expansion. Is there anything we should be paying attention to as you move internationally as well?

Jeffery W. Yabuki

Yes, it a great question. I would say that we have been very, very disciplined on focusing our energy on what we describe as high-quality revenue and that we describe that revenue as being generally recurring revenue, revenue that fits into our model, its things that we do for clients on an everyday basis and it tends to come that revenue tends to bring along attractive margins and frankly very high free cash flow characteristics. And as we've thought – and that's been our model in the U.S. and frankly we buy us to that, we would prefer to grow a little bit more measured, but grow in that way as opposed to achieving growth for growth's sake.

And we've taken the same formula outside the U.S. and when we shared at Investor Day last year, the areas in which we were focused on growing this account processing cloud cloud-based solution that we talked about called Agiliti, right that’s outsourced account processing. We know how to do that we're building a scale, a scale model and we're focused on that and it's payments and channels which we define as mobile and online.

All things that we do today, things that we think have those “high quality” revenue growth characteristics and that's really where our focuses is has been and we will continue to be.

Paul J Condra – BMO Capital Markets Corp.

Okay, that’s it for me thanks a lot.

Jeffery W. Yabuki

Thank you.

Operator

Thank you. Darrin Peller from Barclays. Your line is open.

Darrin D. Peller – Barclays Capital Inc

Thanks, guys. Tom maybe can you give us some more specific color on the one-time moving parts around the quarter especially with regard to the re acceleration of growth versus the first quarter levels? If you could just list them for us maybe help us understand what impact they actually had on the payments and financial growth rates as well as maybe the margins in the quarter?

Thomas J. Hirsch

Yes, are you talking about one-time fees, Darrin?

Darrin D. Peller – Barclays Capital Inc

Yes, I guess I know there was a lot of noise around grow over right I think alluded to in your prepared remarks. So, that the comps were harder maybe just give us the components to that? And then may be if there's any other one-time items, how those impact at the growth rate and what those growth rates would be sort of more normalized for any segment?

Thomas J. Hirsch

I'll start with that then turn it back over to Jeff, but I think if you look at first quarter of 2013 we had 0% growth when you look back to last year and in the second quarter of last year, we actually had 4% growth, which was our strongest quarter last year in Q2. We had 7% growth in the payment segment and actually 2% financials. So, this is really when we look that the year, when we rolled out the year, this is our most difficult kind of comparison on a year-over-year basis.

So, we are very pleased with our second quarter results from a growth rate standpoint given that compare. We also have some annualization of our – like our largest bill pay client in the first quarter. We have difficult international comparisons in the first half of the year which will start rebating in the second half. And we have some momentum as we ended the second half and some of the larger core implementations.

In regards to what’s you mentioned around one-time fees, we have had year-to-date for the first six months of the year, license and termination fees are up roughly about $15 million, Darrin and about a $11 million or so that was in the first quarter and about $4 million of that in the second quarter.

So again, we are little bit more benefit in the first quarter from those and less in the second quarter and that contribute a little bit to the deceleration when you look at compared to the first quarter, but as you know those fees bounce around Jeff indicate in his prepared remarks in the second half, license termination fees are probably going to be flat to the prior year and that just generally where we see that right now. So that would be from a high level and Jeff I don’t know if you add anything to that.

Jeffery W. Yabuki

Yes, the only thing I would say Darrin is and we talk about this a lot in April when we shared our results from Q1. Maybe fully expected Q1 on a relative performance basis to be by far the strongest of the year, because as Tom mentioned we had zero compare. We expected this to be the hardest and so its worked out as we expected we are right on our internal plans and you know some of the significance of the performance delta that we had to get over versus last years Q2 and then the kind of the very strong Q1 makes it’s a little bit more difficult to see the underlying growth kind of the puts and takes on that.

But we feel like we are going to see the re acceleration in the second half of the year on the segments just given the compare differential on a regular basis and then we are going of course add on some of the additional implementation that we have been talking about. So, again to summarize we think the year is looking exactly the way we though it would when we gave guidance at the beginning of 2014.

Darrin D. Peller – Barclays Capital Inc

No, that’s helpful. Thanks Jeff and Tom. But I think when we – the reason I mean to your point the reason I was asking is really to get what the normalized growth rate underlying it’s really is and it sound like you know look in the first half of the year you are coming at 4% internal growth.

As you said of in your guidance is 4% to 4.5% but you are also looking for an acceleration as easier compares come about not to mentioned all the roll on from DNA and other businesses you won that are actually going to be generating revenue in the second half of the year.

So I guess just to that point your guidance being left of change 4% to 4.5%, when you are ready at 4% without the benefit of all these business that have yet – that are yet to roll on, is that some conservatism in our outlook are is there any sort moving parts, because it seems like that should add a fair amount of revenue versus the first half levels.

Jeffery W. Yabuki

Yes, I would say there is one other thing we had talked in your member this well Darrin, we had talked at the beginning of the year that we would have headwinds coming from our Biller businesses and while we had some of those in the first half, we actually think that will actually grow a bit in the second of the year and trotting some of the growth that we would otherwise see flowing through to the bottom line.

But we would also if we talked about in terms of the elements of 15 we've got the large implementations that we talked about both in the core and on the bill payment side; we've got the benefits coming from open solutions, the International performance that Tom talked about in terms of that moderating life of Agiliti. Now again Darrin, I'm talking about going into 2015.

We are going to have those benefits – we've been quit pleased with how our pipeline has grown up 19% so far this year next coming on the heels of a number of – as you remember a number of large deals at the end of last year and a very, very strong first quarter. And then we also think we are going to have some benefits come through in 2015 relative to EMV.

There is been more discussion going on in EMV, we expect to have those benefits there and then we would hope that all of that or we would expect that all of that would turn into accelerated growth in to 2015 and an actually we believe that we will probably see our free cash flow move up to a little bit north of $1 billion next year, so again focused on growth acceleration in high quality way.

Darrin D. Peller – Barclays Capital Inc

Okay that’s helpful, just one last question I’ll turn it back to the queue, on the margin side I mean you have very good expansion on the financial segment, the payment side was obviously down and not sure I quite caught the reason for that maybe it was due to some of these one time issues or maybe not, but just understanding the – maybe if you could answer that in the second half of the year, the margin again I mean when you roll on new business such as the DNA businesses that we've talked about, are those – how accretive is that to your margin when you actually start to execute and implement the business and start to generate revenue off of the work you have done over the past six months?

Thomas J. Hirsch

Its high Darrin from a standpoint of again the scale that we have in those businesses, especially in our card services bill payments related businesses, so things that we had this year which we talked about briefly was we are investing more in areas like Mobiliti, Jeff mentioned a number of different – our tablet offering our Mobiliti business offering.

We also have Biller Advantage which was something that we acquired in our biller business that’s we've invested in and then we've had a little higher growth associated with our output solutions business which has a little lower margin mix for that and also we talked a little bit about our biller headwinds, those are kind of hitting us here in the second quarter, in the second half a little bit from a standpoint of some client acquisition that we had and that’s also impacting our margins.

So we have very good growth from a scale standpoint in those businesses as that revenue goes on, we have some investments that we are making in a number of different areas and that we have a little mixed differential of output and then that the biller had one that we kind of talked about to client acquisition. So that gives you a little flavor for what is going on.

Darrin D. Peller – Barclays Capital Inc

Okay. Thanks very much guys.

Jeffery W. Yabuki

Thanks Darrin.

Operator

Thank you, David Togut from Evercore. Your line is open.

David Togut – Evercore Partners Inc.

Thanks good afternoon Jeff and Tom.

Jeffery W. Yabuki

Hi David.

Thomas J. Hirsch

Hey David

David Togut – Evercore Partners Inc.

I apologize I joined the call a little from another call, but maybe you could just dig in a little bit on DNA, the uplift you are seeing in bookings to what extent do you think that’s lets say an improvement in market demand versus share gains and to the extent it is share gains if you could give us some insight perhaps that you are head-to-head competitive win rates versus Scimitar which has long been your strongest competitor in the large credit union market.

Jeffery W. Yabuki

So I would say that it is share gains in terms of we are winning more than our fair share of new clients, in fact DNA has quite strong win loss ratio when it’s out – when we are out there competing against the market. For the most part we are not winning at the level certainly we would like to versus Scimitar we are winning more form other competitors and but you can be sure that we are very focused on what are the right ways for us to make sure that we win against all clients that are out there.

Frankly I would say David that we've won a lot of business, we are at in a roughly 44 wins on the DNA platform to-date since the time of acquisition. And frankly that’s a lot of new business and there are clients that we know that are waiting on the side line waiting for us to have these clients go live and waiting for us to --- not waiting for us but waiting to see that we are able to service this significant demand.

So that is a very important element of how the competitive dynamic will play moving forward. We are very focused on operationally making sure that we get these clients live that they are happy and redeemable on day one, but the other thing that I would say that’s quite important is DNA is not just a Credit Union platform, it is a very well respected platform on the bank side as well as on the Credit Union side.

In fact, you will remember that in Q1 we won a very large transaction called Washington Federal Bank which is now a $13 billion bank in the Pacific Northwest who bought the DNA platform and then bought basically our entire suite of surround. We are having a lot of success on the bank side as well as on the Credit Union side. So I'm actually quite confident that we will see both of those sides of the charter wars, we’ll seen big wins coming – our big fair gains coming on both sides of that. And we believe we are the only provider in the industry who can offer a variety of platforms that meet the needs of individual institutions.

So DNA is not always the right platform and XP systems may not always be the right platform and Premier may not always be the right platform and premier may not always be the right platform or signature. We have platforms it meet the needs of the institution that can help them grow as they decide in terms of what is their strategic plan and how they prefer to do business.

David Togut – Evercore Partners Inc

That’s very helpful, thanks for that. If I could just segway into your operational effectiveness performance 62% year-to-date, are you signaling that you are going to significantly outperform on that $60 million cost takeout target for this year?

Jeffery W. Yabuki

Now, we continue to be on track, towards that David will continue to execute well. We knew the first half of its going to be a little stronger just in the standpoint of the open synergies were well on track to slightly exceed that target on a separate basis. So we are pleased with that and first half is going to be a little stronger because of those open synergy. So we are well on track for the year ago.

David Togut – Evercore Partners Inc

Got it and just a quick final question on the 88% quota payment for the year, where you expect to end up for 2014 is a whole?

Thomas J. Hirsch

100% I mean we expect the right on target, the pipeline is quite strong and we mentioned that we had – we really just had a couple of deals slip from the end of Q2 into Q3 we indicated that we had $50 million transaction close in July. So we are feeling quite good about that.

David Togut – Evercore Partners Inc

Right thank you very much.

Thomas J. Hirsch

Thank you.

Jeffery W. Yabuki

Thanks David.

Operator

Thank you. [indiscernible] from Robert W. Baird & Co., your line is open.

Unidentified Analyst

Hi, guys thanks for taking my question. Nice quarter.

Jeffery W. Yabuki

Sure, thanks Adam.

Unidentified Analyst

I think most of my questions have been answered, maybe if I could just ask about the bill pay transactions I know you called out the anniversary of the large client kind of contributing some of that deceleration, is it fair to look at this 3 percentage kind of a normalized run rate or with that client acquisition is that a headwind that might a floor that a little bit and then maybe if you could just talk about how revenue growth is kind of trending relative to the transaction growth.

Jeffery W. Yabuki

Yeah, sure Adam thanks. Let me start and Tom remark you can add to it. We do not believe the 3% would be the normalize run rate we have couple of things going on the quarter that Tom talk about we had this the annualization of our very large implementation last year, which has a little bit of a growth rate impact.

We have some trailing off of transactions again in the second quarter as we saw in the first quarter from our largest client and so that’s going to have an impact. That’s said we also have a serious of new clients that have been going alive we’ve got a couple of larger implementation that I will go alive in the second half of the year buy us more toward Q4 and so we are excited about that – for that business when you look in the underlying – the underlying numbers, we had a number of clients that went live in the last year and a half or so, they are growing very nicely.

We've got a variety of different growth drivers around the industry and we are quite pleased with some of the expedited payment focus areas that we have, that we see accelerating growth. We got the integration between digital and our transactional capabilities, so we're happy with that as well.

And, as we talked about and Investor Day last year, this mid-market area we're really focused on in terms of bringing a combination of channels capability and payment capabilities to market really penetrating this odd segment of the market where we have not we're kind of below our level of market share. So we do know that in order for us to grow we got to be able to win, win transactions and also we're working on several things from a platform perspective that we believe will increase transactions.

And we hope I am sorry, we expect that transaction growth will end up increasing. We think it should be and it should follow consumer household transactions, that's an important element of our growth strategy and frankly our use and adoption strategy that we've articulated at our last Investor Day.

Unidentified Analyst

That’s truly helpful, and then maybe a little bit on revenue growth in this area is that sort of inline with transaction growth or some of these large clients maybe making that a little bit lower?

Thomas J. Hirsch

No, I would say overall we don't comment on kind of revenues for specific business, but it's – it can be a close approximator kind of indicator from that standpoint but there are many things that we work on to clearly maximize our revenue per transaction in our businesses and continue to focus on that. So I would say overall period of time is an indicator clearly and just one of those indicators, but that business continues to grow nicely for us.

Unidentified Analyst

Great thanks guys.

Jeffery W. Yabuki

Thanks you.

Operator

Thank you. Brett Huff from Stephens Incorporated. Your line is open.

Brett Huff – Stephens, Inc.

Good afternoon guys.

Jeffery W. Yabuki

Hey Brett.

Brett Huff – Stephens, Inc.

Two questions, one on Popmoney, can you give us a sense? I know it's still a small piece of revenue and I know it's growing rapidly, but can you give us a sense of how much – is it enough yet to be a meaningful part of the growth like can we talk about it being 50 basis points of growth? I mean anything like that or are we not there yet?

Jeffery W. Yabuki

I would say that to your point it is growing rapidly it is scaling up, but I would say that it's still early to talk about it in terms of the direct “Popmoney” impact. We're actually seeing a lot very intriguing impacts on the real-time aspect of Popmoney, so we’re seeing pretty intriguing changes in revenue per transaction and so a little bit to the last piece of the discussion. We’ve got transaction growth and we also have rev for trend that's looking pretty interesting. But, I would say it's still early and it's premature in the scope of all of Fiserv just because of the sheer size of magnitude of the overall company.

Brett Huff – Stephens, Inc.

And given, sort of second part of the question I forget what you said about how many you have installed and how many you have contracted to be installed. When you do that math and assume some average run rate of the kind of transactions in ARPU you see now on Popmoney and translate that into what is contracted and yet to installed after those installations happen does it reach I presume that will happen over the next year or however long they will, at that point does it reach enough of a threshold to start impacting sort of total company basis points growth that we could talk about?

Thomas J. Hirsch

Yes, I mean, I think I would anticipate that if it's not 2015 it will be 2016, but I do think at that stage there will be enough momentum in the solution that it will then start to be breaking that out. And that's one of the things that we talked about as kind of a little bit of an optionality element to the Fiserv to a share of Fiserv stock.

Right now, it’s not having any meaningful impact on our growth rate. But we do expect, going into 2015, certainly into 2016, with a combination of Popmoney the number of call it 2200 institutions as well as the real-time aspects, we do believe at that point we will see meaningful impact coming from that solution. And again, Brett our belief is that it won't be linear. Right that in fact that solution will grow, it will hit a tipping point and you'll see some significant growth come it, for a few years not unlike what you saw happened with our XP back in the day.

Brett Huff – Stephens, Inc.

And then, just one last one on this any change in behavior on those institutions that have offered this relative to bill pay? Are we still paying some things in bill pay as a consumer and some in Popmoney? Are the use cases overlapping or are they remaining separate?

Thomas J. Hirsch

The use cases are overlapping, but the way that the institutions are for the most part, presenting the capability, requires a little bit about siloed behavior.

Brett Huff – Stephens, Inc.

Okay.

Thomas J. Hirsch

But, the use case is Popmoney looks more or like a bill pay technology than it does a splitting dinner tab technology in terms of how the money is used. I mean we're working on a series of different use cases that we think intermediate those solutions and ways that we can make it easier for consumers to access that and we'll talk a little bit more about that into next year but, the manner in which it is presented to consumers does not way consumers use that technology today through their financial institution.

Brett Huff – Stephens, Inc.

Great thanks for the detail guys I appreciate it.

Jeffery W. Yabuki

Thank you.

Operator

Thank you. Ramsey El-Assal from Jefferies. Your line is open.

Ramsey El-Assal – Jefferies Group, Inc.

Thanks I guess is a follow up to that last sort of line of questioning, on the real-time payment capability I mean when you're selling in Popmoney to a new customer is there, is real-time something that is sort of can be backed into the sale or is it’s a separate sales cycle and I guess is it also more complicated implementation real-time versus just sort on Popmoney?

Jeffery W. Yabuki

So it’s a good question. Back in the day, you may remember when we first started selling B2B we were really focused on building the networks so let get’s that network as biggest as we can get as many institutions as we can and that's predated real-time. So now, we are needed to go back in and for institutions that have made there, Popmoney selection we're looking at adding real-time and today we have about wondered 170 different in Popmoney instant we call it Popmoney instant installations and that ranges from institutions in the top five down to institutions that are in the average community based institution.

So that is quote resale, when we are selling a new institution today and we are still selling may new institution today we look at bundling it together. So take Popmoney add-on Popmoney instant and by the way why you're doing that because you are in fact CheckFree RXP user, we would to make sure we add expedited payments in the bill pay.

In fact today we still only have, of our probably close to 3500 to 4000 institutions we still only have about 1600 of those institutions live on expatiated bill payment today. All of those kind of add-ons increased value that the financial institution is able to deliver their consumer and also changes the fees and which we're able to get paid. So, the bank gets paid and we get a slice of what that bank has paid. So we are really excited about that, because we see this intersection between bank or financial institution value consumer value and fee to us.

The second part of your question I believe was around is it a harder install? It’ not a harder install, but it is an additional install and the institutions have to decide how do they want to take real time. Do they want to use card rails for rider do they want to use PEP+ or ACH technology on a real-time basis, do they want to do all of that.

Do they want differences and so that's the decision that the institutions are making and we're seeing institutions pick and choose based on how they are currently looking to basically wire the solutions together. I think by the middle of next year, the institutions wont be making those decisions, we will be providing them this real-time network, this real-time ecosystem that we talked about in our prepared remarks. We’ll be routing those transactions in the way that makes the most sense for that financial institutions.

So we’re very, very bullish about that activity, because not only are we bringing the real-time capability to bear, but we've got the actual application Popmoney, bill payment, TransferNow, all kinds of different products that consumers are able to very simply and easily initiate that payment transaction. And we aspire to have us an experience where it's really about the consumer making the choice of speed and not needing to do anything else, and write to their financial institution.

Ramsey El-Assal – Jefferies Group, Inc.

Okay, got it. One quick follow-up for me. You mentioned bill pay performance that your largest client, still a bit softer than expected. I mean can you comment a bit on your expectations for maybe kind of turning that around are there any potential catalysts or any kind of mitigating factors or techniques that you can apply to kind of get that business moving in the direction you sort of expected?

Thomas J. Hirsch

Yes, there are, you know we’ve got a couple of issues going on in that client. You have that client in some cases, shedding branches or shedding accounts so it's difficult to do anything around that so you’ve got a little bit of an organic loss that you have to deal with, but that client is very good at deciding it's going to push on bill payment and really extend bill payment into their base. And, we believe we’ll have some opportunities to do that later on this year and we would expect that that would be another one of those tailwinds that are help push our growth rate up as we move through 2014 and into 2015.

Ramsey El-Assal – Jefferies Group, Inc.

Great, thanks that's all for me.

Thomas J. Hirsch

That’s great. Thank you everyone. We appreciate you joining us today, if you have any questions or follow-ups, please don't hesitate to contact our Investor Relations team. Have a great day.

Operator

Thank you. That does conclude today’s conference. Thank you for your participation. You may now disconnect from the audio portion.

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Source: Fiserv's (FISV) CEO Jeffery Yabuki on Q2 2014 Results - Earnings Call Transcript
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